The National Basketball Association has a reputation for being the most innovative of the major professional North American sports leagues, earning money from a combination of television rights, merchandising, ticket sales and more. That’s mostly out of necessity: the NBA was founded long after the others (in 1946), and had to spend decades catching up to its entrenched counterparts in baseball and football. It was the first league to turn its all-star game into a 3-day weekend loaded with events, the first to draw a significant portion of its revenues through merchandising, and the first to consciously develop its most marketable players into global media superstars. The international approach is working, too. The league broadcasts to every populated continent, everywhere from Poland to Mongolia. In the 1970s, rosters were almost uniformly American. Today a quarter of active players are from outside the United States, hailing from 37 countries.
Because it is not a public company, the NBA does not release detailed financial reports to the public. However, according to Forbes, which regularly compiles valuations of the 30 teams of the NBA, total revenue across the organization reached $8 billion last season. Each one of the teams is worth at least $1 billion, and a team is worth on average $1.9 billion for last year, about 3 times the valuation from just 5 years ago.
The NBA's Business Model
In North America, the NBA flourishes but does not dominate. Revenues are about half those of the highest-grossing sports league in the world, the National Football League, not that the two leagues are necessarily in competition. Still, one of the largest differences between the leagues is the origin of their disparate revenue. Alongside other major sports leagues, the NBA generates revenue from multiple streams, the most significant of which are television, merchandising, sponsorships and tickets.
- The NBA makes money primarily through television, merchandising, sponsorships and tickets.
- The 30 teams making up the NBA have an average valuation of $1.9 billion each.
- Across last year's season, the NBA generated about $8 billion in revenue.
The NBA's Television Business
Like other major sports leagues, television comprises a key part of the NBA’s business strategy. When television first made the transition from luxury item to ubiquitous staple of everyday life, some professional sports team owners balked at broadcasting their games. After all, why on Earth would you give the product away to people sitting at home instead of charging them to attend the game? Eventually, team owners figured out that a) they could reach scores of TV viewers for every ticket-buying fan, and b) that makes it more than worth it to sell to the middlemen (i.e., advertisers) instead of to the fans directly. Add the hassles of going to a game– the price of tickets, the time spent getting there and back, finding an expensive offsite place to park, possibly encountering an aggressive drunk or two at the stadium or arena—and within a few years it had become clear that watching games on TV would be the primary way that most fans would consume what sports leagues were selling.
While the NFL’s television contracts are famously lucrative, and are signed exclusively with national networks, the NBA broadcasts 277 regular-season games nationally per year, plus 90 or so playoff games. In the 2017-2018 season, NBA TV aired the most regular-season games with 106 followed by Disney's (DIS) ESPN (87), Warner Media's (TWX) TNT (67), and ABC (17).
TV accounts for most of the NBA’s revenue. For the 2016-2017 season, TNT and ESPN re-upped their contracts to an estimated $24 billion in total. Even with a total of 400-odd active players making an average of close to $5 million annually, national TV contracts generate enough revenue to cover salaries and then some. However, those national contracts still leave 1078 regular-season games unaccounted for. Filling in that gap, local TV contracts can gross between $120 million and $150 million annually.
The NBA's Merchandise Business
There’s another major contributor to NBA revenue, and unlike the others, this one corresponds to something tangible. Merchandise accounts for well over a billion dollars annually, and for the first time in the NBA's history, in the 2017-2018 season, teams wore advertisements on their jersey. On average, jersey patches net teams $9.3 million annually. There is also a serendipitous function of the sport itself: colorful tank tops can double as casual or workout wear, whereas football jerseys are impractical on the street. (The same goes for baseball button-ups, and hockey jerseys for that matter.)
A related component of the NBA's merchandising business has to do with sponsorships. As an example, the Milwaukee Bucks recently opened a $524 million arena, Fiserv Forum, which has generated ample opportunity for sponsorships, premium seating and more. In June 2015, the NBA ended its longstanding partnership with Adidas and signed an eight-year, $1 billion contract with Nike (NKE). In all, this constituted a 245% increase per year over the previous deal.
The NBA's Ticketing Business
You may be surprised that ticketing is actually not one of the primary sources of revenue for the NBA. It tends to lag behind some of the other revenue streams mentioned above. However, that's not to say that ticketing doesn't contribute at all. According to ESPN, for the 2018-2019 season, teams saw an average of anywhere from just under 15,000 to just over 20,000 fans attend per home game. With tickets costing close to $100 on average, the money earned from ticket sales adds up quickly. Along with tickets, other so-called Basketball Related Income (BRI) includes concessions and other sales.
As the NBA’s popularity increases, team values grow far out of proportion. NBA teams are not sold that frequently, but when they are, records break every time. Over the last decade, the average sale price of a team has tripled. Granted, that’s largely due to a single outlier: the 2014 sale of the Los Angeles Clippers, who went for an unprecedented $2 billion. Even discounting that sale, the remaining prices show that NBA owners and prospective owners clearly expect revenues to augment even further in the next few years.
The NBA has moved past Major League Baseball as the second-most popular sport in the United States. That will happen when World Series games take 4 hours to play and feature interminable breaks in what’s generously referred to as “the action”. But with average TV ratings under 4.0, pro basketball still has plenty of room to grow domestically. That’s to say nothing of the growth potential overseas. The NBA doesn’t disclose all its revenue by country, but the league did take in $150 million in China in 2012, and Forbes indicates that annual revenue outside the U.S. is growing at rates in the high teens. With greater international appeal also comes international investors as well. For instance, Alibaba (BABA) Joe Tsai purchased a 49% stake in the Brooklyn Nets last year for a rumored $1.15 billion.
There are a number of key challenges facing the NBA, even as professional basketball continues to grow in popularity in the U.S. and elsewhere around the world and as individual teams balloon in value. For one thing, not every team is valuable all the time. Last year, the Cleveland Cavaliers lost money on an operating basis and declined by about 4% in value to $1.28 billion, per Forbes.
Another important component of the NBA's finances are its revenue sharing system. Like some other major sports leagues, the NBA shares non-basketball related revenue between teams in order to address inequalities across different markets around the country. All teams pool their eligible revenue together to redistribute it from teams with higher revenues to those with lower. Each team then receives revenue equal to the salary cap for that year.
Other challenges to the NBA's revenue may include the continuing trend away from television viewing as other technologies have grown increasingly popular in recent years. So far, live sports have tended to remain safe from these changes, but that may not continue forever.