7/21/2015

TheNBAsBusinessModel(BUD,PEP,KO,NKE)
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The NBAs Business Model

By Trevir Nath

AAA |

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Not only a popular pastime, basketball is a multi-billion dollar operation, and it's
growing. With popularity waning in the MLB due to slow paced games and
safety issues plaguing the NFL, the National Basketball Association (NBA)
continues to shine. Contributing to its growth, the NBA has focused on
expanding basketball viewership overseas to Europe and China.
On the world stage, basketball is one of the most popular sports, trailing only
soccer. With expanding viewership, revenue in the NBA has significantly
grown. In fact, in the 2013-14 season all basketball related income generated by
the NBA amounted to $4.8 billion. Basketball related income includes broadcast
rights, advertising, merchandising, and concessions, among other things. A
recent TV deal worth $24 billion is expected to significantly increase basketball
related income, affecting team operations like player salary caps. Consequently,
the average NBA team is now valued north of $1.1 billion, representing a 74%
increase from the year prior.

BASKETBALL RELATED INCOME

A majority of revenue generated by the NBA and its subsidiaries is classified as
Basketball Related Income (BRI). This includes ticket purchases and
concessions, TV deals, which deliver the game to viewers' homes, and
merchandising rights from jersey and apparel sales. Not included in BRI are
proceeds towards expansion teams, fines levied throughout the season, and
revenue sharing.
Because BRI contributes to calculating the salary cap, revenue sharing must be
excluded from BRI because it would present an economic advantage to big
market teams. Hypothetically, a high revenue generating team such as the Los
Angeles Lakers or New York Knicks would drive the salary cap up, forcing small
market teams to spend exorbitant amounts to retain players. This leads to an
unsustainable system and economic disparity among franchises
franchises.. As a result,
revenue sharing is not designated as basketball related income. (For more, see:
How The NFL Makes Money.)

TELEVISION DEAL
Over the past 10 years, TV viewership has declined due to various technological
advancements, including steaming services and DVRs. However, live sports

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COMPANIES IN THIS ARTICLE

Symbol

Last

Change

(%)

BUD

128.51

+0.01 (+0.01%)

PEP

97.31

+0.53 (+0.55%)

KO

41.38

+0.13 (+0.32%)

113.13

+0.33 (+0.29%)

NKE

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TheNBAsBusinessModel(BUD,PEP,KO,NKE)

have remained largely immune to this trend. As a result, networks are paying
exorbitant amounts to televise these games. Recently, the NBA agreed on a nine
year, $24 billion media rights deal with ESPN and Turner Sports.
Sports. When the deal
takes effect for the 2016-17 season, ESPN and Turner Sports will combine to pay
the NBA $2.6 billion annually. Putting this in perspective, the current deal
signed in 2007 costs both networks $930 million annually. The new media rights
deal represents a 180% increase from the previous deal.
Coincidentally, when this deal
comes into effect, the current
collective bargaining agreement
(CBA) is set to expire. While this
new deal will certainly increase the
wealth of owners, player contracts
will also increase. Since TV and
media rights are a large portion of
basketball related income, the salary
cap is expected to increase from its
current $63 million to $108 million

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Due to the increasing popularity of basketball, attendance for the 30 NBA teams
has grown. The Chicago Bulls,
Bulls, who continually have the highest attendance in
the league, saw cumulative attendance rise from 850,000 in 2010 to 875,000 in
2015. With rising attendance, average ticket prices have also increased by 3.4%
to $53.98. According to a Team Marketing Report,
Report, the New York Knicks, who
operate in a large market, have the highest ticket prices at $129.38. Conversely,
the cheapest tickets are sold by the Charlotte Hornets at $30.60. This
represented a 4.5% increase from the year prior.
The report also defines a Fan Cost Index (FCI), which is the cost of taking a
family of four to an NBA game. This metric includes the cost of tickets,
concessions and parking. On average, the cost of bringing your family to an NBA
game is $333.58, but can be as expensive as $676.42.

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LICENSING AGREEMENTS AND SPONSORSHIPS

Among the four major sports in the United States, royalty revenue grew to $698
million on $12.8 billion in merchandise sales. Recently, the NBA decided to end
its partnership with Adidas and signed an eight year, $1 billion contract with
Nike ((NKE
NKE).
). This represents a 245% annual increase from its previous deal.
Nike, which had previously produced replica jerseys, will carry official uniforms
at the start of the 2017-18 season. Prior to this deal, Nike had played a large role
in basketball shoes and apparel. It is estimated that Nike brands control 90% of
U.S. basketball shoe sales. Likewise, many of the NBAs biggest stars have
lucrative endorsement deals with the worlds largest shoe and apparel company.
When you attend an NBA game, you will notice a number of sponsors and
brands located around the arena. In 2013, the NBA generated approximately
$679 million in revenue from corporate sponsors.
sponsors. These sponsors include
recognizable brands like Anheuser-Busch ((BUD
BUD),
), State Farm and Gatorade.
Recently, Pepsi ((PEP
PEP)) replaced Coca-Cola ((KO
KO)) as the official food and
beverage brand of the NBA. Included in sponsorships, are naming rights for
NBA arenas. For example, the home of the Golden State Warriors, Oracle Arena,
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TheNBAsBusinessModel(BUD,PEP,KO,NKE)

is named after the computer technology company. (For more, see: Advertising
From TV To Internet: An Industry History.)

REVENUE SHARING
Like the MLB and NFL, the NBA operates with a revenue sharing system. As
stated above, revenue from this system is not a part of the basketball related
income. Revenue sharing in the NBA addresses the inequitable circumstances
between small and big markets. As a result, all teams pool their annual revenue
together and redistribute it from high grossing teams to low grossing ones. By
these means, each team will receive revenue equal to the salary cap that year. In
order to receive the full revenue sharing benefits, the revenue structure requires
small market teams to generate revenue equal to at least 70% of the league
average.

INTERNATIONAL GROWTH
With a growing number of international players and countries represented on
NBA rosters, worldwide growth has shined. On the opening night of the 201415 season, the NBA recorded 101 international players from 37 different
countries. As this number continues to grow, the NBA will look to international
markets to promote media broadcasts and merchandise sales. In the near future,
we may also see a number of European-based NBA teams. Currently, the NBA
generates $350 million from overseas operations, an 18% increase from the
previous year.

THE BOTTOM LINE

Drawing interest domestically and abroad, the NBA has seen its popularity and
revenue streams rapidly increase over the past few years. With a new TV deal
valued at $24 billion, a $1 billion Nike deal, increasing number of corporate
sponsors and rapid international growth, the average NBA team is now valued at
over $1 billion. This also comes at a cost to the fans as average ticket prices and
concessions have also increased.
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