By Naman Patel
The ongoing NBA offseason has proven basketball to be one of the most well-paid sports. Former Cleveland center Timofey Mozgov, who averaged 17.4 minutes and 6.3 points per game in the 2015-2016 season, signed a four year, $64 million contract with the Los Angeles Lakers this July. Memphis point guard Mike Conley, who averaged 6.1 assists and 15.3 points per game in the same season, signed a five year, $153 million contract in what became the largest player deal in league history.
However, the NBA is a bankable assurance not just for its players, but its team owners and investors as well. In fact, the NBA has presented and will continue to present one of the most profitable ventures investors can make. The NBA’s competitive advantages, favorable secular trends, and strong growth potential make an investment in one of its teams a lucrative proposition.
The NBA’s business model is the envy of many companies: it holds a monopoly over its industry, operates in a market with large barriers to entry, and derives its revenue from predictable streams. Prior to 1976, the U.S. was home to two nationally watched basketball leagues: the National Basketball Association and the American Basketball Association (ABA). However in that year, the ABA entered into bankruptcy which allowed for the NBA to acquire the league. The bankruptcy enabled the NBA to legally gain full control of the country’s professional basketball market. Prospective leagues were unable to materialize due to the professional basketball market’s sizable barriers to entry: talented players, multimillion dollar arenas, loyal fan bases, and media contracts. Today, basketball fans eager to watch a game of professional basketball have little choice but to tune into the NBA.
Moreover, NBA teams have stable sources of income: ticket sales and concessions, broadcasting deals, and licensing agreements and sponsorships. While a poorly performing team may see less in the way of ticket sales, concessions, and TV viewership than a championship contender, just about all teams are able to maintain positive EBITDA. Case in point, the New York Knicks, who have for years maintained their position as one of the worst performing teams in the league, recorded the second highest EBITDA in the league in 2016. The only team to perform better (in monetary terms) than the Knicks were the Lakers who finished last in their conference. Income through ticket sales, concessions, and TV broadcasting deals have less to do with team performance and much more to do with local market size and fan loyalty, both of which are much more stable factors. Licensing agreements and sponsorships as forms of revenue are also favorable because they are often signed for long-term contracts, providing teams with consistent income for years to come. For example, in 2015, Nike agreed to an eight year contract with the NBA for the privilege of making the league’s uniforms.
The league also has strong growth potential. While the MLB and NFL have continued to focus on a saturated domestic market, the NBA has for years been making inroads into emerging markets, particularly Brazil, India, and China and affluent European bases. The league routinely has its teams play games overseas, programs its Sunday games such that European viewers can watch them live, and cultivates an international social media reach. In China, for example, the league’s teams and players have an avid fan base contributing to merchandise and broadcasting sales. While competition for professional basketball viewers does exist abroad (many countries have their own professional leagues), the NBA holds a large advantage the most dominant basketball talent in the world. Basketball’s global popularity has been growing rapidly and is second only to soccer.
Of course, there are business risks to the NBA’s teams. Demand for attending a sports game is certainly elastic and spending on tickets and merchandise is discretionary spending. For example, in the midst of the recent recession–during the 2008-2009 season–nine teams saw a decrease in gate revenue year-over-year. Responding to the difficult economic conditions, owners attempted to lower the players’ share of basketball related income, leading to the 2011 NBA lockout. In addition, the NBA is susceptible to scandals and public relations slipups that could reduce its popularity. For example, the Pacers’ brawl with fans at a 2007 game certainly damaged the league’s reputation.
Nonetheless, the league and its teams have shown great resiliency and even greater growth. The reigning champions, the Cleveland Cavaliers, were bought in 2005 for a price of $375 million. Today, the team is worth $1.1 billion. The Golden State Warriors, which were bought in 2010 for a price tag of $450 million are today valued at $1.9 billion. Indeed, increases in team value have been seen around the league. From 2012 to 2015, the average franchise value of an NBA team more than doubled from $450 million to $1,100 million–and its team owners continue to see their capital appreciate. Combined, the NBA’s 30 teams generated a league record $900 million of EBITDA in 2016.
Uncertainty is inherent in any investment–and an investment in an NBA team is no different. However, strong industry dynamics, coming tailwinds, and a track record of growth bring considerable value to an investment in an NBA team. Such an investment offers relative security and strong long-term growth potential for able investors.
The Economics Review 