The Business of the NBA & Impact of COVID-19
by Jake Kemp
Sportcal takes a closer look at the business landscape of the biggest basketball league in the world, and explores the implications COVID-19 had had on its operations.
25th June 2020, 11:50

Executive Summary

1.Losses from COVID-19 expected to surpass $1 billion.

- The same period of the league, during the 2018-19 season generated $800 million for the league.
- Excluding the Playoffs, the collective losses from missing remaining 259 league games would cost the NBA an estimated $229 million.

- Using the 21.1 per cent as a base figure, the league could lose $548.6 million from media rights deals.

2. With its vast and diverse brand appeal, sponsorship adds huge value to the NBA

- The league is one of the most followed sports leagues around the world with a social media following in excess of 118 million 
- Its two most financially lucrative deals with 2K Sports and Nike generate $282.1 million alone.
- In only its second trial year, the patch sponsorships held by teams generates an estimated $190.17 million a year in revenue.

3. Finances have taken a big hit during the 2019-20 season even before COVID-19

- The league faced huge backlash in China after a tweet from Houston Rockets General Manager, Daryl Morey in October 2019.
- 11 Chinese local sponsors severed their ties with the league after the tweet.
- Lost new live streaming deal in China with Tencent, which had been valued at $1.5 billion over the next five years.

Key Stats

 

Teams

 

 

Media

The NBA has continued to follow a strategy of international expansion, looking to appeal to wider audiences outside of the US, similar to the other three big American sports leagues. Attempts at expansion has seen its pre-season tour of China become a regular annual event, with further steps taken for 2020 to also start a preseason tour of India before the upcoming 2019-20 season. The NBA has made serious inroads into the UK market with its annual London regular season game. However, in keeping with its expansion plans, the league has announced that these games will be moved to Paris from the 2019/20 season. For the league, the plans to grow the game can be achieved through its media avenues and as such has a number of broadcaster deals with nations outside of the United States. On top of traditional media outlets, the organisation also sells the NBA Pass, an OTT platform which allows fans to enjoy live and delayed games, and has been made available in over 200 nations worldwide. At the end of the 2018-19 season the five biggest markets for these passes were China, Australia, Brazil, Canada and the Philippines, whilst the UK was the most popular market in Europe, ahead of Germany and France.

For the NBA, media rights hold substantial value, accounting for a huge percentage of the organisation’s annual revenue each year, with current active contracts highlighting significance the league has in the US and growing influence abroad. A couple of examples from the American market sees TNT currently in partnership with the NBA, under a nine-year deal (2016-2025) for 64 games including exclusive coverage of Thursday night double headers at a cost of $1.25 billion a season, whilst ABC/Disney are reported to pay around $1.4 billion each year for similar rights. Growth of the games popularity in China has also seen media costs rise in Asia with Tencent’s current five-year deal sees them named as the exclusive partner in China for $700 million, of which $500 million is believed to derive from media rights.

In the last ten years the first three instalments of the Golden State Warriors/Cleveland Cavaliers dynasty have attracted the biggest audiences across the NBA’s showpiece event, with the 2017 victory for Lebron James and the Cavaliers the most watched final on ABC. Last season’s final between the Raptors and Warriors however saw a sharp drop in viewers, hitting an average of 15.13 million across the six games, to become ABC’s lowest watched Finals in the last decade; with the inclusion of a Canadian side perhaps offering some explanation. Unsurprisingly the series tends to grow in viewership as the series goes on, as the games become more meaningful. Over the past decade, the four championship series that have gone down to a seventh game have each drawn the four biggest audiences for the ABC network, averaging at 28.51 million views.

 

Sponsorship

At the end of the 2017-18 season, sponsorship spend in the NBA on the league and its 30 teams surpassed $1 billion for the first time in its history. Despite relatively limited visual branding opportunities on team shirts, sponsorship remains big business in North American basketball, with brands from nearly every sector keen to for affiliation with the league. Part of the increase in sponsorship revenue across the league by the end of the 2017-18 season was the league’s move to allow teams to have a sponsor small sponsor logo on their playing kits for the first time.

The league itself, according to the Sportcal database has 33 different brand partners for the current 2019-20 season, which collectively generate an estimate $602.15 million. The most financially valuable deal for the NBA is with 2K Video Gaming which signed a new seven-year contract with the NBA at the start of the current season which has been valued at $1.1 billion over its lifetime, a deal which reportedly doubles the value of the same deal signed in 2011. The deal is a licencing agreement with Take-Two Interactive Software to develop the popular NBA 2K video game franchise. Its NBA 2K19 edition of the game last year was named the best-selling sports video game in the USA and third bests-selling game of any variety.  The other eye-watering sponsorship deal the NBA currently holds is for its kit supplier rights with Nike which holds a reported worth of $125 million a season; a steep increase on its previous kit deal (at $36.4 million with adidas). The eight-year deal gives the brand shirt production rights until the end of the 2024-25 season, with the deal also extending to rights for the Women’s NBA competition. The centralisation of these deals allows for a more even distribution of income, with the fixed income from one sponsor perhaps reducing the potential income that bigger teams could achieve upon signing deals individually. The partnership has seen the two work on introducing the latest technology to the sport via the programme Nike Connect. The app allows fans to gain more from their shirt purchase, being able to unlock team and player content (including pre-game arrival and highlights footage) on their smartphone by scanning the NFC chip (under the NBA logo) on their shirt.

 

Shirt Sponsorship

The NBA introduced a three-year trial ahead of the 2017/18 season to allow teams to sell patch sponsorship spaces on its playing shirts, an initiative which now appears to set to stay across the league. Additionally, in 2019 the NBA announced new rules allowing teams to grant its partners additional promotional rights internationally. The NBA teams have bought in and as such the deals are estimated to have generated revenue of $182.67 million a year across the 29 franchises to have an active deal, averaging out at $6.3 million per franchise. The values of the different deals between teams remains fairly consistent, with increased value given to teams due to recent success, league history and geographical position in the States – major markets like Los Angeles, New York and Chicago are always likely to attract larger contracts than in smaller markets like Minnesota and Milwaukee. The trial has been seen as a success and as the league enters into its final year of the agreement, it should be expected that the NBA will continue discussions over the course of the season in efforts to extend the trial into a permanent option for the teams in the next collective bargaining agreement (CBA). This most recent agreement started with the 2017–18 season and runs through 2023–24, with a mutual opt-out after 2022–23.


Heading into the 2019/20 season, every franchise except the Dallas Mavericks holds an active jersey sponsorship deal. Last season the Mavericks were partnered with 5miles, a Dallas based ecommerce application which saw the team become the first NBA side to accept multiple forms of cryptocurrency. The deal was terminated with one season left on the contract by mutual consent, leaving the franchise on the search for a new sponsor ahead of the final season of the patch trial. Despite starting the season without a patch sponsor, the Mavericks did announce a deal with Chime Bank in January 2020. For the most part, teams have sold its jersey space to domestic brands, with 96.67% head-quartered in the States and Canada. Further to this, most franchises have opted to partner with even more localised brands, with 19 of the deals linked to brands predominantly based in their home state.
 
The stand out deal from this list is the most lucrative, with it reported that Rakuten’s brand logo placement on the Golden State Warriors shirt costing them $20 million a season. The deal itself also extends beyond just a logo on the teams shirt, with the Japanese brand also named the official e-commerce partner and sponsor of the clubs training facilities. The rest of the increased worth of this deal (compared to the rest of the league) stems from the recent on-court success of the Warriors and the location of the brand, with Rakuten the only non-North American sponsor and are thus having to pay a premium to establish its name in the American market.

In total there are thirteen different sectors involved in this type of sponsorship, with brands in the financial services market most active with seven deals. The list of sectors even extends to the charity sector, through Utah Jazz’s deal to promote the 5 for the Fight movement, in partnership with Qualtrics.

 

 

 

Player Wages

As is common practice in North American sports leagues, the NBA has a salary cap imposed on the league in which it sets a total amount of money teams are allowed to play their players is limited, as serves a means of controlling costs and generating relative parity across the teams. The terms of the salary cap are defined by the leagues collective bargaining agreement (CBA) which involves a complex number of rules and exceptions to player salaries and is generally set against a percentage of the leagues total revenue from the previous season.  Complex rule exceptions includes different salary caps based on league experience and unique contracts such as the Designated Veteran Player extensions (DVPE) or ‘Supermax’ contracts which start at 35 per cent of the salary cap (plus rising annual rates) when players re-sign for teams for up to five years. These rule exceptions are what make the NBA qualify as a ‘soft salary cap’, which is different to the ‘hard salary caps’ which are in play with the NFL, NHL and MLS.

For the 2019-20 season the league has the salary cap at $109.14 million. With only 15 players on a team roster, the NBA stands as one of the most financially lucrative leagues in global sport, with the average player annual salary this season coming in at $7.7 million.  At the highest level the highest earning player at each franchise currently earns between $40.2 million and $16.2 million, averaging out at $30,168,167. However, the impact on COVID-19 is likely to have a profound impact on the NBA salary cap, which is discussed in detail further in this report, which is based solely on league revenue. With revenue likely to decline in the short term due to lack of ticket sales primarily, the new reality for many NBA stars will likely involve a reduction in salary.

 

 

 

Home Venues for the 2019-20 season

 

Team Locations

 

Social Media

 

The average combined social media following of the NBA teams is 11,340,135. The most popular teams remain those that have the bigger history of success, such as the Lakers and Bulls, and those based in the largest markets, such as the  Houston and Boston.

The Impact of COVID-19

Even prior to the outbreak disruption, the 2019-20 NBA season had already experienced significant economic losses after the fall out in its relations with the country of China. On 4 October 2019, Daryl Morey, General Manager of the Houston Rockets made a tweet offering his support to Hong Kong protesters in relation to the ongoing protests against measures introduced by the Chinese government. Following Morey’s tweet and the subsequent backlash, a number of Chinese properties has suspended its ties with the league, including the Chinese Basketball Association (CBA), sponsors and broadcasters. Given the popularity of the league in China, the NBA has reportedly lost significant funds, which includes its agreement with streaming service Tencent, for which the current season was to be the first of its five-year $1.5 billion deal for broadcasting rights. Whilst total losses from the fallout have been reported to cost the league around $1 billion, NBA Commissioner Adam Silver played down these reports, providing estimates closer to the $400 million bracket.

On the 11 March 2020, the NBA announced that it had officially suspended all matches indefinitely for a minimum of 30 days. The announcement followed news that Utah Jazz player, Rudy Gobert had tested positive for the virus shortly before his teams game against Oklahoma City Thunder. The story was made even bigger by Gobert’s actions earlier that week, in which he had joked about COVID-19, intentionally touching all reporters microphones at the end of a press conference. The player has since publicly apologised and has since donated $1 million to various COVID-19 related causes. 

The most recent development from the NBA has been the easing of some its restrictions, allowing teams in regions where stay-at-home orders have been lifted to open their training facilities on 8 May. Despite this slight easing, only the Cleveland Cavaliers and Portland Trail Blazers opened up their facilities for players straight away. In May, the NBA announced plans to complete the current season at Disney World Florida. The revised format will see only 22 of the 30 teams attend, with those already out of playoff contention dropped. Each team is expected to play eight games to determine the final seedings, whilst a play-in tournament will be held to determine the final playoff places (for and between those not already assured of a playoff place). Once these games have been completed, the league will look to continue with its typical 16-team playoff system. The original slated date for the start of the NBA Finals had been 4 June, but this is now expected to re-start its season on 30 July. Disney World has been chosen to play host to the NBA because of its he land and wealth of facilities which can allow for containment as well quality facilities. Teams will be  split into different resorts around the park complex, with most of the resorts leisure activities to be made available to the players and officials during this period, whilst the league is planning to stage extra entertainment during down time, including movie screenings, DJ sets and live music. The NBA will also be joined by the MLS (Soccer) at Disney World, after they also announced a league based tournament to be held at the theme park.

Much like most sports operations worldwide, the NBA is expected to incur heavy losses as a result of COVID-19. Potential losses can be linked to areas which are usually their biggest source of income – in broadcasting and sponsorship, with no live content on offer meaning affiliated networks and brands are looking to cut its payments at this time. Whilst some form on return on investment could be saved if the season resumes, the total losses of the league are likely to be at its biggest in the event of all remaining games being scrapped. Whilst the potential losses from brands and networks could vary on an individual basis, these losses are expected to be hugely significant, with some 259 games of the regular season still to be played. Further to the end of the regular season, the most significant contributors to the league losses in this time could be the lack of Play-off action, which tends to be the most exciting and high profile period of the season, to which brands and networks attribute most of their budgets and marketing campaigns.

 

During the same period of the season (that is currently being missed) last year the NBA reportedly generated more than $800 million, with the period being the most financially lucrative, as teams push for the best possible regular season record, followed by the Playoffs. Given the usual period of high turnover in revenue at this stage in the season, it can be plausibly expected that losses will surpass $1 billion in the event of cancellation. The Washington Post reported that a high-ranking team executive had totalled the economic losses this year could reach $40 million per team, or more than $1.2 billion if the playoffs are lost. 

From a media rights perspective, the cancelation of the current season would have inevitably see its broadcasters seek compensation, putting a significant dent in its $2.6 billion yearly income. Even without reviewing the playoff’s, if the NBA lost the percentage equivalent of the cancelled fixtures (with 21.1 per cent of the season remaining) it would lose an estimated $548.6 million. Cancellation of the NBA Playoffs and Finals would be even more detrimental, with the Finals (six) games last year generating an reported $288 million alone in advertising revenue, whilst the playoffs itself is reported to be generate 62 per cent of the league advertising revenue across the whole season.

The result of the losses being faced across the league from COVID-19 will likely also impact the league in the years to come, with players and owners likely going to have to look at cost saving measures to recover its losses from this season. One direct hit from the losses experienced this season, will be the salary cap for the 2020-21 season, which being based on the previous season’s revenues is likely to drop in maximum value next season, despite initial projections that it would increase. Reports have suggested that the salary cap could fall by as much as $8 million, which in turn will affect current players contracts, particularly those players which have most recently signed max contract extensions last summer. 

Whilst player wage budgets look set to drop next season, the issue of wages has also been addressed by the league and its players during this period of inactivity. Initially the league had proposed a 50 per cent reduction to player wages, but following negotiations, has been pulled back to 25 per cent, with the cut expected to come into force from 15 May. These individual players losses could yet be go up in the event of the cancellation of the current season, as teams look to invoke force majeure contract clauses.  

In the same areas as the league, its teams are also likely to see substantial losses from this period of inactivity, with sponsors and local TV broadcasters looking to suspend payments during this time, with millions likely being lost by each of the thirty participating teams. Another area where the teams and the league are set to miss out on substantial revenue earnings is through game day ticket receipts. With 259 games remaining of the regular season, the league collectively stands to miss out on over $229 million from an estimated 4.6 million live fans, before even taking into account the Playoffs. 

Losses from Ticket Revenue

 

In the Western Conference, the fifteen teams, based on 2019-20 season averages, would  stand to attract 2,325,197 fans from its remaining games, at an average 155,013 per franchise.

In terms of revenue the San Antonio Spurs would stand to lose the most amount in ticket revenue, in excess of $10 million, whereas  the Phoenix Suns which would be the least affected at ticket revenues of over $4.8 million.

Total lost ticket revenue in the Western conference from unfinished games equals :

$118,585,047 (average $7,905,670 per franchise)

 

In the Eastern Conference, the fifteen teams, based on 2019-20 season averages, would  stand to attract 2,285,370 fans from its remaining games, at an average 152,013 per franchise.

In terms of revenue the Philadelphia 76ers would stand to lose the most amount in ticket revenue, in excess of $10.3 million, whereas  the Cleveland Cavaliers which would be the least affected at ticket revenues of over $4.5 million.

Total lost ticket revenue in the Eastern conference from unfinished games equals :
$110,532,383 (average $7,368,826 per franchise).


TOTAL LEAGUE FIGURES:
4,620,567 fans in attendance at remaining games 
$229,117,430 combined league losses from ticket revenue