The Yao Conundrum: harder than the Pythagorean Theorem*

My mother routinely tells me that she glosses over the statistics I use to frame my arguments. So I can assure you, I will not take offense if the proceeding paragraphs remind you why you let that subscription to The Economist expire.

A quick primer: The NBA has a limit teams can spend on player salaries called a salary cap. Much like the national budget, this cap is routinely exceeded. To preserve the intent of the salary cap, the NBA has a luxury tax that assesses a dollar-for-dollar fine to teams in the amount they exceed it. The luxury tax does its job fairly well, but deep pocketed owners can be impervious.

Also, for your ‘glossing over’ pleasure:

  1. The 2010-11 NBA Salary Cap is $58,044,000 and the Luxury Tax Threshold is $70,307,000.
  2. For the 2010-11 season, the Rockets have player salary obligations totaling $72,319,761 (not including newly signed Eric Dampier).
  3. Yao Ming will make $17,686,100 this season, and his contract expires after this season.
  4. Shane Battier ($7,354,500), Jared Jeffries ($6,883,800), Aaron Brooks ($2,016,692), and Chuck Hayes ($1,972,500) also have expiring contracts – totaling $18,227,492.
  5. The Rockets have a total of $35,913,592 (#2 + #4) in expiring contracts, roughly half of which is attributable to Yao.
  6. The Salary Cap figure is stipulated by the Collective Bargaining Agreement (CBA), which the NBA (League Office, Teams, Players, etc.) has been operating since 2005.
  7. The CBA expires after this season, making the 2011-12 Salary Cap unknown.
  8. Current CBA negotiations between the Player’s Association and the League Office are moving slowly. The League Office wants to reduce player salaries thus instituting a lower salary cap.

So…Yao Ming…(insert horrible “you don’t even have to say there’s an elephant in the room because the dude is already huge” joke). Yao is the 8th highest paid player in the NBA, but the Rockets are only planning to play him 24 minutes a game. This almost makes him a safe entry as the fourth choice in the “would you rather be a MLB bullpen catcher, back-up NFL QB, or professional golfer?” question.

One might consider the Rockets lucky that Yao’s contract expires after this season as his salary would no longer count against the team’s salary cap. The Rockets could therefore use that space to acquire a healthier, 7’5”, dominantly skilled, immediately-marketable- to-a-nation-of-billions player. Except if that were the case, I would not have had the chance to mention my mother in the disclaimer above, and we would all lose out.

No, the Rockets will not immediately have Yao’s $17 million at their disposal. While that money is removed from the Rockets’ payroll, it is still applied to their salary cap at the end of the season in the form of a “free agent amount,” or cap hold.** Larry Coon is a little more technical in his explanation than me and my asterisk.*** Cap holds are a necessary pain as they close a loophole that would allow a team to circumvent the salary cap.****

Cap holds can follow teams around for a long time.

How long?

Good thing you asked or I would not have been able to drop this little nugget: Does the name LaSalle Thompson mean anything to you? Indiana’s cap has had his $854,389 clogging its system like a bunch of swallowed gum. The guy last played in the NBA during the year of the following events:

Princess Diana was buried, Bill Clinton was sworn in a second time, the Dow Jones first closed above 7,000, the Heaven’s Gate cult committed suicide, and my favorite episode of Seinfeld, The Voice, aired – “Attention Play Now employees, George Costanza’s handicapped bathroom is now open on the sixteenth floor to all employees and their families.”

Essentially cap holds go away when a free agent signs with a team, new or former, or is renounced by his former team. If a free agent resigns with his former team, the cap hold amount is replaced by his new contract amount. If the free agent signs with a new team, the cap hold is erased from his former team’s salary cap. The reason for the longevity of some cap holds, like Mr. Thompson’s, is explained here.

So the Rockets must first decide their plans for Yao and the players mentioned in #4, above, in order to begin to calculate the amount of money they will available under the salary cap next summer. But this is currently rendered impossible due to the Collective Bargaining Agreement expiring after this season.

The Rockets are able to plan ahead in a limited capacity as the fundamental purpose of the future CBA will remain unchanged from what is currently in place: namely that the NBA needs it to operate. Profits will still be divided amongst the players and teams, players will have contracts, teams will be able to draft, sign and trade players, etc.

Ideally, a team would not want to allocate 24% (30% of the cap) of its payroll to a player who is only going to play the league average of minutes per game. Yet, the Rockets have no choice this season. Which makes the following points of great interest to me: a) can Coach Rick Adelman incorporate Yao into a successful rotation; b) how will the front office assess Yao’s performance in order to understand his value going forward into future seasons; and c) how will (a) affect (b)?

We can evaluate the first point in terms of wins and losses. If Adelman pulls it off, the Rockets win more games. To evaluate the second point would require Dustin Hoffman’s character from Rainman and a book on actuarial sciences.

That is not to diminish Adelman’s role but to highlight that no one knows if Yao is going to be Rik Smits or Zydrunas Ilgauskas. Both were tall, both had issues with their feet (presumably due to their size), but only the latter recovered well enough to extend his career for a meaningful duration.

It is guess work on how much longer Yao can last. Likewise, no one knows what the exact terms of the new CBA will be or what next year’s salary cap will be. There are significant unknown variables that the Rockets must take into account when formulating a plan.

Ideally, Yao makes it through the entire season under the imposed time constraints. Ideally^2, Adelman effectively incorporates Yao into a winning rotation. Then, at the very least, the Rockets would have an idea of Yao’s future effectiveness and a foundation from which to negotiate a new contract.

Yao in a diminished role is still a valuable asset to keep on the team. I have no knowledge of the Rockets’ revenues, much less the amount above league average that is attributable solely to Yao/China. But according to Tad Brown, the Rockets’ CEO, five Chinese companies have courtside signs, and Anheuser-Busch and HP have signs in Mandarin at the team’s arena in Houston. While the Rockets must share the broadcast and merchandise revenue equally with the other teams, the team keeps 60% of revenue generated from its arena signage. At what cost does that figure justify keeping Yao?

*“Our offense is like the Pythagorean Theorem.  There is no answer.” – Shaq

**Yao Ming’s cap hold can be described in terms, very rough terms, as a situation that occurs when you are on a budget but are still taking your girlfriend out to a nice dinner at her favorite spot. Let’s pretend that you have a certain amount of monetary space on your credit card, which, if exceeded, will result in embarrassment leading to irreconcilable differences.

At the restaurant, you are waiting for your girlfriend to order what she wants so that you can make your order based upon how much of your budget her order eats up. But she tells the waiter to come back to her because she can’t decide. You don’t know what she is going to order, but have to book it as the max to accommodate her future decision. Until she makes that decision, your budget is restricted by the highest amount she could spend ordering.

Your budget has been slapped with a cap hold.

Cap holds, however, are league enforced. So instead of you getting to estimate her cost, the maître d’ remembers what she ordered on your last date, takes your credit card and bills her meal in advance, plus 5% more. (The percentage varies based upon the player’s previous contract. Yao’s dictates a 5% increase.)

*** “little more technical” = better

**** The loophole is created by the Larry Bird Exception (which allows teams to exceed the salary cap to resign its own free agents). Without the cap hold, a team could:

– let their expiring contracted players become free agents,

-sign other teams’ free agents with the cap space vacated by those free agents, and then

-use the Bird Exceptions to go over the Salary Cap to resign their own free agents.

in essays
  • Stephen

    You have some big errors in your revenue-sharing mention.
    Teams KEEP ALL their local media money,it’s the national money that is shared.
    Worse,from a small market teams’ perspective,the local media money is added in to League revenue for Salary Cap counting,player percentage,Lux Tax,minimum salary floor. A few yrs ago the Lakers new local TV deal was so huge it bumped up Salary Cap by $3mil or so,but only the Lakers got the media money.(The local media money is why Buss and family are able to make @ $30-50mil a yr on Lakers,even tho they are far,far into Lu Tax.)
    The home team keeps local gate,unlike in NFL or MLB. National licensing and merchandising is shared,local is not. Those Mandarin signs-the Rockets keep all the revenue from that.
    The League’s revenue sharing comes from National media,Lux Tax funds and recently the major income teams contributed a few million to sharing pot. @ 20-25% of NBA revenues are from revenue sharing,compared to NFL’s 70-75%.

    Quite frankly,Yao is a huge cash cow for the Rockets.
    Then there’s the little item that Les is a close Stern ally.(Note how fast Rockets were given the injury exception for Yao last yr,when other teams have had to wait months to get one.)
    I think it very reasonable that the Rockets have a good idea as to how the next CBA looks and are planning accordingly.(They certainly weren’t worried about taking on a long-term huge deal when pursuing Amare,Bosh or Carmelo.)
    My bet is Yao is resigned,but w/the max incentives allowed for games played and to a 3 yr deal.
    Brooks is gone,Felton and Conley have jacked up price too much for Aaron to be happy w/the deal the Rockets would likely offer.

  • Anonymous

    I was referring to games televised in China, which are not classified as local. However, I grant you that I may have misinterpreted Coon’s FAQ about arena signage.

  • NBA Law

    I think there is probably Chinese money for Les Alexander in the form of the relationships that he has the opportunity to forge with Chinese government officials and businesses. The value of this Chinese network is not easily quantifiable as it is income from private investments that Les makes and indirect business opportunity through the network.

  • pentajigga

    Still waiting for evidence that “chinese revenue” is a factor in why Yao hasn’t been traded, or why he’d be re-signed. I’m skeptical there is a connection b/w incremental Chinese revenue and shoe deals for secondary teammates, and basketball decisions that the front-office makes.

    Someone prove me wrong?

  • Patrick

    Great article Connor. Looking at old cap holds are pretty funny sometimes (…at least if you’re a giant nerd like me), and I’m pretty sure the Lakers have some pretty old cap holds since its been a good 100 years since they were under the cap. On Yao, the thing is you have to plan for him to be there because there’s no way you can get a solid replacement. The way the CBA is now constructed gives you an incentive to retain your players even if you have to overpay them (i.e. Joe Johnson) because it often gives you no recourse to get a suitable replacement.

  • Anonymous

    i wish there was a way to look into this somehow. the “yao revenue” is probably one of the most controversial issues surrounding the rockets where neither side really has any factual basis for its claims.

  • pentajigga

    I think to believe the Yao revenue theory, you must believe several things:

    1. That Yao generates significant revenue for the Rockets
    2. That ownership is willing to put a lesser team on the floor to get this revenue
    3. That ownership can get Morey and Adelman to go along with putting an inferior product on the floor, so ownership can make more money.

    Hard for me to believe any of these to be honest. And I can’t imagine the Yao revenue comes close to the rev a championship-caliber team could generate.

    Yao’s jersey hasn’t even been in the top sales in China in years. By that measure, you get Iverson for the Chinese revenue. Can’t see how this theory adds up.

  • Wayne

    Isn’t Brooks a restricted free agent?

    While it might be difficult to assess the total monetary factors revolving around Yao, I think it’s safe to say the Rockets come out ahead. Just by looking at other centers around the league who on average are arguably much less skilled, the Rockets aren’t overpaying that much on a relative basis. Yao makes a lot but it’s also not some 20m+ figure. I’m sure this difference is more than made up by China related deals, directly or indirectly.

  • Guest

    Yao’s jersey hasn’t been in the top sales in China because everyone’s already got one. 😛

  • Stephen

    Your belief #1 doesn’t lead to your 2 and 3s.
    To the contrary,we have seen ownership willing to spend for a better team. Buying the draft picks.
    Matching Lowry,paying Scola. Signing Miller and now Dampier. Agreeable to trading for Amare,Carmelo,signing Bosh. Not just letting McGrady’s contract expire,but using it to acquire Kevin Martin’s hefty deal.

    Yao when healthy is the best offensive C in the game and a significant presence on D. If he was a Hilton Armstrong type player,his ability to generate revenue would not prevent the Rockets from trading him away.

  • Easy

    #1: We don’t know.
    #2: If #1 is significant enough, the revenue generated may give the ownership incentive to spend money on other players who can improve the team. So keeping an overpaid Yao does not necessarily mean a lesser product.
    #3: Of course the owner can get them to go along if it is important enough for him, or else they will be fired. He’s the boss.

  • connorsmom

    Thank you for the notoriety, son. My friends will be impressed.

  • connorsmom

    Thank you for the notoriety, son. My friends will be impressed.

  • agreed. i like the term “yao revenue” and wish i had thought of it.

  • you just indirectly called me a “giant nerd” and not even as an insult. I guess I have to face the facts…

  • Its not not like I dragged your name through the mud (obviously because I did not use your name). I thought it would be more poignant to use you as a reference rather than “all of my family, friends, and extended family and friends.”

  • Patrick

    I guess it takes one to know one… I am not ashamed.

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