The Growth and Sustainability of NBA Contracts
A brief look at the business of the NBA
Let me take you back to the year 1946. Life in America was entering a period of economic prosperity, but the aftermath of World War II still lingered. Veterans were returning home and integrating back into civilian life. The cost of living was drastically different from today. A house cost $5.5k, a new car was just over $1k, and a gallon of gas cost around 21¢.
Factories that once produced military equipment began making cars, appliances, and household goods. If you were one of the lucky ones, you may have even been a proud owner of a TV, washing machine, or refrigerator. Inventions, such as frozen foods and canned goods were becoming popular and making the meal prep process easier across America.
The Origins of the NBA
With the economy booming, entertainment became a key component of daily life. If you weren’t going out to a movie or dancing with friends, you were enthralled by sports legends such as Joe DiMaggio and Ted Williams.
In a small corner of the United States, a new sports league was just getting started—The Basketball Association of America (BAA), which eventually became the NBA. Consisting of 11 teams, the first-ever BAA game tipped off on November 1st between the Toronto Huskies and New York Knickerbockers with tickets going for as low as 75¢. To separate itself from the two other basketball leagues in America and attract larger crowds, the BAA played in larger venues, mainly hockey arenas, instead of small high school gyms.
During that first year of the BAA, the salary cap was $55k. The average player earned between $4-5k per season, which in today’s money, is equivalent to about $64-80k. This is far from what players make today, but considering the average non-farming family in America at the time made around $2.5-3k, it wasn’t anything to scoff at.
While basketball as a sport was becoming popular in the 1940s, the BAA and other professional basketball leagues were far less popular than college basketball. For the most part, BAA and early NBA players lived like the average American with very little fanfare. Players washed their own uniforms and local medical people, sometimes even veterinarians, were hired to tape the players before games.
Team owners largely made money from ticket sales and a few game concessions. To make extra cash, owners would schedule upwards of 20 preseason games throughout towns across America. Teams traveled to games by bus and train and endured travel pains like the average citizen.
Philadelphia owner, Eddie Gottlieb, would rent a bus to travel to games and would rent out unused seats to fans. Since many of the players were reimbursed for their expenses, they were literally nickel-and-dimed. Tommy Heinsohn, who played for the legendary Red Auerbach, recalled asking for $3.50 in reimbursement, but because it only cost Auerbach $3.25 for the same item, he withheld the extra 25¢.
In the early years of the BAA and NBA, teams came and went as they got into financial trouble. Today’s NBA is a completely different story. Team valuations are the highest they’ve ever been and player salaries are booming. The game continues to gain popularity globally and there is no slowdown in sight.
NBA Broadcasting Rights
During the first few years of the BAA and NBA, no games were televised. It wasn’t until the 1953 season that the NBA signed a deal with DuMont Television Network. However, due to financial troubles, DuMont sold its broadcasting rights to NBC the following year, which continued to broadcast games until 1962. It is reported that the DuMont deal was worth $39k.
The NBA cashed out in 1964 when ABC acquired the rights to air NBA games for around $650k per year until 1973. Though the deal with ABC was quite a jump from the DuMont deal, television rights contracts were still fairly small.
Throughout the 1980s, NBA basketball was scattered around many different TV stations, especially as cable was still up and coming and the big broadcasters were still being established. However, during the 1990s, two broadcasting companies, Turner (who owns TBS and TNT) and NBC, established themselves as the home of the NBA. Both were the only companies that owned the rights to televise NBA games up until 2002.
Fast forward to today and we are seeing the largest TV rights deal to date for the NBA. The NBA has signed a $76 billion media rights deal over 11 years with Disney, NBC, and Amazon, which pays 159% more than the current deal. The price increase exceeds the growth of any TV market, which begs the question of how the NBA commanded so much money. A few key factors include:
Live sports are one of the most valuable digital assets for broadcasters in an era of declining TV viewership. In other words, sports get people to stick around and subscribe. Plus, the season is long, so subscription-based viewership is locked in for most of the year.
The NBA has a young audience, which makes it particularly attractive to advertisers.
Supply and demand. What used to be competition among just the traditional broadcasting networks, streaming surfaces have now entered the chat, helping to drive up prices.
NBA Salary Growth
As TV right deal dollar figures continue to skyrocket, so do NBA player salaries. However, it wasn’t always that way. In 1954, Bob Cousy began organizing the National Basketball Players Association (NBPA) with a focus on improving working conditions. It took three years, but in 1957, the NBA finally agreed to the players union’s terms, which included among other things:
A $7 per diem and other traveling expenses
Removal of the requirement to report to training camp earlier than four weeks before the season
A limit on the number of exhibition games to be played during the season
Reasonable moving expenses for players traded during the season
Though the wins were small at the time, the formation of the NBPA made it possible for players to earn a cut of NBA earnings years later. Fast forward to 1967 and the NBPA then negotiated with the NBA for improved pay, including a pension for seasoned players and an increase to the minimum salary. It was also at this time that the American Basketball Association (ABA) started to drive up wages due to increased demand for players.
As the players gained more power over the NBA, they demanded more. By 1983, the players were able to negotiate a deal that changed the league and the earning potential of its players forever—a salary cap that guaranteed the players between 53-57% of the NBA’s gross revenue, which included ticket sales, TV deals, and radio deals. Finally, everything was in place to make NBA players flat-out rich.
As you can see from the graph below, the new TV deal in 2016 set off explosive growth in salaries. With a new TV rights deal in place now, the NBA salary cap and max contracts will continue to grow exponentially in the coming years. Assuming consistent salary cap growth, a max salary could be worth up to $460 million and even up to $100 million per year by the mid-2030s. This is a far cry from BAA and NBA salaries during the first few decades of the league, where it took 33 years before a player broke the $1 million barrier.
The Sustainability of the NBA’s Financial Growth
With the salary increasing at an unimaginable rate, one has to ask the question, is it sustainable?
For one, I believe live sports (namely the NBA) will continue to be one of the most valuable digital assets for broadcasters and streaming services.
The NBA continues to grow in popularity, especially in international markets. With the game's growth worldwide, demand to own its TV rights will only continue to grow. I have written about the game’s popularity a bit in the past:
“Out of the U.S. sport leagues, the NBA is the one with the highest earnings from international broadcasting rights. International viewership continues to rise, and approximately 45% of the NBA’s merchandise revenue is generated outside the U.S. and Canada. With the growth of the NBA and basketball in general, it makes for an attractive sport to buy into now as international popularity will continue to skyrocket.”
The NBA obviously has a very lucrative audience that advertisers want to get in front of, but my biggest question is if the prices they pay to advertise on, say NBC, give a big enough return to justify the higher price. If advertisers aren’t willing to spend, broadcasters and streaming services won’t be as willing to pay top dollars.
Clearly, advertisers are willing to spend as of now. I assume that a lot of the final $76 billion figure in the most recent TV rights deal bakes in inflation and demand growth over the 11-year duration of the contract. Still, as media consumption becomes more fragmented, some advertisers will struggle to justify the high cost of traditional TV advertising and rely on alternatives to reach similar audiences. In the end, it’s all about business returns.
There isn’t great public data on the return on investment (ROI) for advertising during a televised NBA game, but the average viewership per Finals game has been in the 10-12 million range over the last few years. As long as there is a large viewership, there will always be some sort of demand.
The price to advertise during the NBA Finals has increased dramatically over the last few years, at a rate far higher than viewership. In fact, a small sample of data from the 2014-2018 Finals shows that advertising prices increase even when viewership is stagnant or decreases.
There is more data available on Super Bowl advertising returns that may be comparable to NBA Finals advertising returns. According to Kantar, Super Bowl ads in 2022 delivered an average ROI of $4.60 per dollar spent. However, other reports suggest Super Bowl ads only deliver short-term ROI, which is 20-50% lower than alternative advertising options.
Of course, like any investment, determining whether a 30-second Super Bowl commercial is worth it depends on who the brand is and what it wants to get out of the purchase. Buying commercial spots is all about increasing brand awareness, but on top of that, it’s also about having a cultural impact and the perceived prestige of saying, “My brand is successful enough to advertise for X sporting event.”
The real value of purchasing expensive advertising during sporting events is how the brand capitalizes on all the eyeballs after the commercial airs. Jed Meyer, a Senior Vice President at Kantar said:
“While having a spot in the Super Bowl now costs about $7 million per 30 seconds, the real media value in big game advertising comes from how the spot is amplified across a variety of channels. While having that hero anchor and TV spot still is incredibly valuable and effective, the real impact lies in how those hero campaigns utilize more experiential and creative social media tactics to resonate with what’s happening socially and culturally. Those tactics get consumers to continue engaging with that campaign for days and weeks following the Super Bowl and drive additional ROI for the campaign.”
The Impact of Flowing Dollars
So what does this mean for the NBA, its players, and its fans? It may mean that prices of TV rights in the U.S. eventually start to plateau at some point. As the NBA continues to drive prices up, the broadcasters and streaming services will only be able to bid as long as it makes sense for advertisers. With the growing game, there may be greater opportunities to secure more broadcasting rights for bigger dollars in international markets.
Players’ salaries will continue to increase. It will be difficult to get players to accept a reduced salary cap now that the dollars are flowing. In today's NBA, where the athletes on the court carry much of the power, I don’t expect many poor outcomes for the players.
The fans may see the most immediate impact of the new TV rights deal. For one, the beloved Inside the NBA show on TNT will no longer be a thing unless TNT or another broadcast can revitalize it somehow.
Local TV rights will likely suffer. There will most likely be fewer games to air, which means games could be less accessible for the fans. And talking about accessibility, the knockout phase of the In-Season Tournament (every year) and one Conference Finals series (every other year) will be on Amazon Prime, which means shelling out more money to watch exciting and important games if fans don’t already pay for Prime.
Change is coming. The NBA, its owners, and its players are being flooded with cash. One thing is for certain, this isn’t 1946 anymore.
This is very good Austin!
The one thing I wonder is if sports are beginning to cannibalise their own cultural relevance with all the imposed expense on the people who are supposed to be key supporters of the product. Baseball did this. One third of Americans used to love baseball. Now it's less than one tenth, which means the overall number of baseball fans in America has stayed about the same (30M or so), and the NFL also hasn't gained any relative popularity since the 1970s. Anecdotally, it also feels like sports are less culturally relevant than they've ever been in my life right now. Even ten years ago, it was much easier to walk up to a human on the street and have a conversation about sports than it is now.
Sports are evidently going with the notion that a small audience with tons of money per head is the right way to go. The only American sport gaining in relative popularity right now is the NBA, and even its viewership is looking fairly stagnant. The argument I often get in return is that you don't (directly) make money from cultural relevance, and I get that, but if baseball had somehow maintained its loyal viewing audience of one third of the entire country imagine how much money they'd be making right now.
I also don't expect any negative monetary outcomes for the players involved in any sports league, but if we allow these processes to continue to completion I think you were on the right track with analysing advertiser suitability. If something is truly not culturally relevant, how much money will there be in the industry?
Good read Austin!
Really I mean really great research!! Thanks for the knowledge and insights!