In 2018-19 season, the National Basketball Association (NBA) generated an estimated revenue of $8.7 billion with an increase of $700 million on a year-to-year basis making it North America’s fastest growing sports league. It has propelled the sport of basketball and its players to be extremely popular around the globe and has also struck record breaking contracts in the past few years making teams and players wealthier than ever.
How did it get here:
The inception of NBA in 1946 was relatively late in comparison to other sports like National Football League (NFL) in 1920 and Major League Baseball (MLB) in 1903. Hence, it needed to market the sport intelligently and make it exciting for the audience to get their attention.
The league came up with a 3 day event of the All-star games in 1950-51 season where best players from all the teams come together and form 2 teams to play against each other. The current All-star weekend also includes celebrity games and contests. The marketing of the superstars of the league was appealing to the global market and accelerated the popularity of the league on an international scale.
Of course, no success is without drama. Another league called American Basketball Association (ABA) started competing with NBA in its locations. Finally after a long legal battle, they reached a merger in 1976 whereby 4 teams from ABA merged with NBA and each of those 4 teams had to pay $3.2 million as an entrance fee to the NBA.
Becoming a global sport:
While the league consisted predominantly American born players in 1970s and 80s, the international talent has risen to 108 out of 450 current players from 38 different countries making it a truly global sport.
The league has also expanded its international footprints by scheduling games to be played in different countries like Canada, China, and India. The 2019-20 season reaches 215 countries and territories in 47 different languages providing a more connected and immersive experience of the game through its broadcasting rights.
The international expansion of the sport and its digital presence has been widely credited to the late former NBA commissioner David Stern during his 30 year tenure from 1984 to 2014.
The Moneyball:
Basketball Related Income (BRI):
Just like any other sports league, NBA too gets majority of its income through distribution of streaming rights. In 2016, TNT and ESPN signed a 8 year deal for an estimated $24 billion which is responsible for a quarter of the revenue of the league each year which formed the catalyst for the tremendous growth in the subsequent years. The Chinese technology giant Tencent inked a $1.5 billion deal with NBA for providing exclusive rights to be a digital partner in the country.
In 2015, NBA ended their long time partnership with Adidas to sign a 8 year $1 billion deal with Nike which was 245% increase as compared to the previous deal amount.
In 2017, the league started a uniform patch programme where brands across the globe had the opportunity to display their logo on team’s jersey for an average price of $9.3 million for a season. In 2019 alone, this programme generated funds of over $150 million.
The NBA also generates revenue by signing corporate sponsors and brands for naming rights of the arenas (For example: Madison Square Garden, Chase Center, Staples Center, AT&T Center, Toyota Center, etc.) which generated $861 million in. 2016-17 season.
These revenue generated from broadcasting rights, merchandising, and licencing form part of BRI which constitutes to around 90% of the league’s revenue. Other income includes penalties, fines, and sale of assets, etc.
Re-distribution of BRI:
A small market team (A team situated in a location with relatively low income population and businesses) is at natural disadvantage to a big market team like Los Angeles Lakers, Golden State Warriors, or New York Knicks who generate 10 times the revenue of small market teams. To balance this and enable smaller teams to sign better players, NBA implemented redistribution of BRI.
The rules of NBA dictate that 50% of BRI is guaranteed to be distributed to 30 teams to go towards the player’s salaries and such amount received by the team will be the salary cap (maximum total salary that a team can pay to the players for that year). Hence, when revenues increase, salary caps rise too. For 2020-21 season, salary cap is $109.14 million per team.
Revenue of team:
Every team in the league is worth more than $1.3 billion and the top three are worth more than $4 billion each. The high valuation means they are able to generate high amount of revenues from their respective location.
Teams generate their revenues by selling tickets, selling merchandise, providing streaming rights to local radio stations. This may not seem like a lot but, in a typical season, each team plays 82 games and an arena can sit anywhere from 15,000 to 25,000 fans per game. Teams like Philadelphia 76ers reported average attendance of 20,628 in 2019-20 season and Golden State Warriors reported 200 consecutive sold-out arenas in 2016-17 season while having the most expensive average ticket price. This all adds up to hundreds of millions of dollars.
Teams can also earn additional revenue by placing advertisements around the arena.
The star players also make money off court. But, that is another discussion of billion dollars.
Redistribution of team revenue:
Just like redistribution of BRI, NBA also mandated that each team contributes a fixed percentage (equal for all teams) of their revenue to a pool which is then distributed equally among all 30 teams.
This distribution ensures that each small market team has enough resources at its disposal to ensure sustainable model to operate in the league and ensure that games remains exciting.
The effect of this distribution rule can be seen in the development of the small market teams. Half of the teams which could not cover their costs before 10 years are now making profits and are worth billions of dollars.
The bubble wrap:
The NBA abruptly suspended the 2019-20 season in March 2020 because of the global pandemic and only started it again in July with a plan to finish the season in a “bubble” at Disney World in Florida. The cost of creating the isolated micro-economy is estimated at $150 – $170 million including stay, food, and covid tests for every person in the bubble.
Getting into NFTs & Blockchain:
NBA along with Dapper labs created ‘NBA Top Shot’ which is a blockchain-based platform in 2019 that allows fans to buy, trade, and showcase limited versions of officially licensed video highlights on a virtual marketplace with some highlights currently selling for as much as $100,000.
Golden State Warriors have become first professional sports team to launch its own NFT collection consisting of championship rings and iconic games.
Ratings & drama:
The league’s revenue is rising year by year but the ratings and viewership has declined considerably in for the remainder of the season.
The factors responsible for such a decline are the shift of focus to the pandemic, election, injuries to star players, and the league’s selective involvement in politics. Polls show that 30% – 34% people watched less sports because of social justice campaigns. Almost every major distributor reported decline in the viewership and if the trend continues, it will mean less add revenues and less sponsors which may cost the league millions of dollars.
The league has the most youngest audience demographic of any sport who do not have Cable TV so it has to constantly look for new and better ways of and distributing content to make it more accessible and easy for young people to watch their favourite teams play and also make format of the game exciting like it did for 2020-21 season by introducing play-in tournament.
All said and done, the ratings put aside, NBA is more successful than ever and is not showing any chance of slowing down.
This post was written in collaboration with Asif Yahiya Sukri LLP. Asif Yahiya Sukri LLP provides unparalleled personalized financial services to a broad range of clients across different geographical locations. With a presence in the USA, India and the MENA region, they ensure that all of your financial decisions are made carefully and with your best interests in mind. They are innovators who understand what goes into building companies.
You can also reach out to them on info@aysasia.com
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