7/21/2015 TheNBAsBusinessModel(BUD,PEP,KO,NKE)

http://www.investopedia.com/articles/investing/070715/nbasbusinessmodel.asp?utm_source=newstouse&utm_medium=email&utm_campaign=NTU7/20/2015 1/5

Not only a popular pastime, basketball is a multi-billion dollar operation, and it'sNot only a popular pastime, basketball is a multi-billion dollar operation, and it'sgrowing. With popularity waning in the MLB due to slow paced games andgrowing. With popularity waning in the MLB due to slow paced games andsafety issues plaguing the NFL, the National Basketball Association (NBA)safety issues plaguing the NFL, the National Basketball Association (NBA)continues to shine. Contributing to its growth, the NBA has focused oncontinues to shine. Contributing to its growth, the NBA has focused onexpanding basketball viewership overseas to Europe and China.expanding basketball viewership overseas to Europe and China.

On the world stage, basketball is one of the most popular sports, trailing onlyOn the world stage, basketball is one of the most popular sports, trailing onlysoccer. With expanding viewership, soccer. With expanding viewership, revenuerevenue in the NBA has significantly in the NBA has significantlygrown. In fact, in the 2013-14 season all basketball related income generated bygrown. In fact, in the 2013-14 season all basketball related income generated bythe NBA the NBA amountedamounted to $4.8 billion. Basketball related income includes broadcast to $4.8 billion. Basketball related income includes broadcastrights, advertising, merchandising, and concessions, among other things. Arights, advertising, merchandising, and concessions, among other things. Arecent TV deal recent TV deal worthworth $24 billion is expected to significantly increase basketball $24 billion is expected to significantly increase basketballrelated income, affecting team operations like player salary caps. Consequently,related income, affecting team operations like player salary caps. Consequently,the average NBA team is now the average NBA team is now valuedvalued north of $1.1 billion, representing a 74% north of $1.1 billion, representing a 74%increase from the year prior.increase from the year prior.

BASKETBALL RELATED INCOMEBASKETBALL RELATED INCOMEA majority of revenue generated by the NBA and its A majority of revenue generated by the NBA and its subsidiariessubsidiaries is classified as is classified asBasketball Related Income (BRI). This includes ticket purchases andBasketball Related Income (BRI). This includes ticket purchases andconcessions, TV deals, which deliver the game to viewers' homes, andconcessions, TV deals, which deliver the game to viewers' homes, andmerchandisingmerchandising rights from jersey and apparel sales. Not included in BRI are rights from jersey and apparel sales. Not included in BRI areproceeds towards expansion teams, fines levied throughout the season, andproceeds towards expansion teams, fines levied throughout the season, andrevenue sharing.revenue sharing.

Because BRI contributes to calculating the salary cap, Because BRI contributes to calculating the salary cap, revenue sharingrevenue sharing must be must beexcluded from BRI because it would present an economic advantage to bigexcluded from BRI because it would present an economic advantage to bigmarket teams. Hypothetically, a high revenue generating team such as the market teams. Hypothetically, a high revenue generating team such as the LosLosAngeles LakersAngeles Lakers or or New York KnicksNew York Knicks would drive the salary cap up, forcing small would drive the salary cap up, forcing smallmarket teams to spend exorbitant amounts to retain players. This leads to anmarket teams to spend exorbitant amounts to retain players. This leads to anunsustainable system and economic disparity among unsustainable system and economic disparity among franchisesfranchises. As a result,. As a result,revenue sharing is not designated as basketball related income. (For more, see:revenue sharing is not designated as basketball related income. (For more, see:How The NFL Makes MoneyHow The NFL Makes Money.).)

TELEVISION DEALTELEVISION DEALOver the past 10 years, TV viewership has declined due to various technologicalOver the past 10 years, TV viewership has declined due to various technologicaladvancements, including steaming services and DVRs. However, live sportsadvancements, including steaming services and DVRs. However, live sports

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7/21/2015 TheNBAsBusinessModel(BUD,PEP,KO,NKE)

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have remained largely immune to this trend. As a result, networks are payinghave remained largely immune to this trend. As a result, networks are payingexorbitant amounts to televise these games. Recently, the NBA agreed on a nineexorbitant amounts to televise these games. Recently, the NBA agreed on a nineyear, $24 billion media rights deal with year, $24 billion media rights deal with ESPNESPN and and Turner SportsTurner Sports. When the deal. When the dealtakes effect for the 2016-17 season, ESPN and Turner Sports will combine to takes effect for the 2016-17 season, ESPN and Turner Sports will combine to paypaythe NBA $2.6 billion annually. Putting this in perspective, the current dealthe NBA $2.6 billion annually. Putting this in perspective, the current dealsigned in 2007 costs both networks $930 million annually. The new media rightssigned in 2007 costs both networks $930 million annually. The new media rightsdeal represents a 180% increase from the previous deal.deal represents a 180% increase from the previous deal.

Coincidentally, when this dealCoincidentally, when this dealcomes into effect, the currentcomes into effect, the currentcollective bargainingcollective bargaining agreement agreement(CBA) is set to expire. While this(CBA) is set to expire. While thisnew deal will certainly increase thenew deal will certainly increase thewealth of owners, player contractswealth of owners, player contractswill also increase. will also increase. Since TV andSince TV andmedia rights are a large portion ofmedia rights are a large portion ofbasketball related income, the salarybasketball related income, the salarycap is expected to increase from itscap is expected to increase from itscurrent $63 million to $108 millioncurrent $63 million to $108 million

for the 2016-17 season.for the 2016-17 season.

TICKET SALES AND CONCESSIONSTICKET SALES AND CONCESSIONSDue to the increasing popularity of basketball, attendance for the 30 NBA teamsDue to the increasing popularity of basketball, attendance for the 30 NBA teamshas grown. The has grown. The Chicago BullsChicago Bulls, who continually have the highest attendance in, who continually have the highest attendance inthe league, saw cumulative attendance the league, saw cumulative attendance riserise from 850,000 in 2010 to 875,000 in from 850,000 in 2010 to 875,000 in2015. With rising attendance, average ticket prices have also increased by 3.4%2015. With rising attendance, average ticket prices have also increased by 3.4%to $53.98. According to a to $53.98. According to a Team Marketing ReportTeam Marketing Report, the New York Knicks, who, the New York Knicks, whooperate in a large market, have the highest ticket prices at $129.38. Conversely,operate in a large market, have the highest ticket prices at $129.38. Conversely,the cheapest tickets are sold by the the cheapest tickets are sold by the Charlotte HornetsCharlotte Hornets at $30.60. This at $30.60. Thisrepresented a 4.5% increase from the year prior.represented a 4.5% increase from the year prior.

The report also defines a The report also defines a Fan Cost IndexFan Cost Index (FCI), which is the cost of taking a (FCI), which is the cost of taking afamily of four to an NBA game. This metric includes the cost of tickets,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 NBAconcessions and parking. On average, the cost of bringing your family to an NBAgame is $333.58, but can be as expensive as $676.42.game is $333.58, but can be as expensive as $676.42.

LICENSING AGREEMENTS AND SPONSORSHIPSLICENSING AGREEMENTS AND SPONSORSHIPSAmong the four major sports in the United States, royalty revenue Among the four major sports in the United States, royalty revenue grewgrew to $698 to $698million on $12.8 billion in merchandise sales. Recently, the NBA decided to endmillion on $12.8 billion in merchandise sales. Recently, the NBA decided to endits partnership with Adidas and its partnership with Adidas and signedsigned an eight year, $1 billion contract with an eight year, $1 billion contract withNikeNike ( (NKENKE). This represents a 245% annual increase from its previous deal.). This represents a 245% annual increase from its previous deal.Nike, which had previously produced replica jerseys, will carry official uniformsNike, which had previously produced replica jerseys, will carry official uniformsat the start of the 2017-18 season. Prior to this deal, Nike had played a large roleat the start of the 2017-18 season. Prior to this deal, Nike had played a large rolein basketball shoes and apparel. It is estimated that Nike brands control 90% ofin basketball shoes and apparel. It is estimated that Nike brands control 90% ofU.S. basketball shoe sales. Likewise, many of the NBAs biggest stars haveU.S. basketball shoe sales. Likewise, many of the NBAs biggest stars havelucrative endorsement deals with the worlds largest shoe and apparel company.lucrative endorsement deals with the worlds largest shoe and apparel company.

When you attend an NBA game, you will notice a number of sponsors andWhen you attend an NBA game, you will notice a number of sponsors andbrands located around the arena. In 2013, the NBA generated brands located around the arena. In 2013, the NBA generated approximatelyapproximately$679 million in revenue from $679 million in revenue from corporate sponsorscorporate sponsors. These sponsors include. These sponsors includerecognizable brands like recognizable brands like Anheuser-BuschAnheuser-Busch ( (BUDBUD), State Farm and Gatorade.), State Farm and Gatorade.Recently, Recently, PepsiPepsi ( (PEPPEP) replaced ) replaced Coca-ColaCoca-Cola ( (KOKO) as the official food and) as the official food andbeverage brand of the NBA. Included in sponsorships, are naming rights forbeverage brand of the NBA. Included in sponsorships, are naming rights forNBA arenas. For example, the home of the Golden State Warriors, Oracle Arena,NBA arenas. For example, the home of the Golden State Warriors, Oracle Arena,

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7/21/2015 TheNBAsBusinessModel(BUD,PEP,KO,NKE)

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

REVENUE SHARINGREVENUE SHARINGLike the MLB and NFL, the NBA operates with a revenue sharing system. AsLike the MLB and NFL, the NBA operates with a revenue sharing system. Asstated above, revenue from this system is not a part of the basketball relatedstated above, revenue from this system is not a part of the basketball relatedincome. Revenue sharing in the NBA addresses the inequitable circumstancesincome. Revenue sharing in the NBA addresses the inequitable circumstancesbetween small and big markets. As a result, all teams pool their annual revenuebetween small and big markets. As a result, all teams pool their annual revenuetogether and redistribute it from high grossing teams to low grossing ones. Bytogether and redistribute it from high grossing teams to low grossing ones. Bythese means, each team will receive revenue equal to the these means, each team will receive revenue equal to the salary capsalary cap that year. In that year. Inorder to receive the full revenue sharing benefits, the revenue structure requiresorder to receive the full revenue sharing benefits, the revenue structure requiressmall market teams to generate revenue small market teams to generate revenue equalequal to at least 70% of the league to at least 70% of the leagueaverage.average.

INTERNATIONAL GROWTHINTERNATIONAL GROWTHWith a growing number of international players and countries represented onWith a growing number of international players and countries represented onNBA rosters, worldwide growth has shined. On the opening night of the 2014-NBA rosters, worldwide growth has shined. On the opening night of the 2014-15 season, the NBA 15 season, the NBA recordedrecorded 101 international players from 37 different 101 international players from 37 differentcountries. As this number continues to grow, the NBA will look to internationalcountries. As this number continues to grow, the NBA will look to internationalmarkets to promote media broadcasts and merchandise sales. In the near future,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 NBAwe may also see a number of European-based NBA teams. Currently, the NBAgeneratesgenerates $350 million from overseas operations, an 18% increase from the $350 million from overseas operations, an 18% increase from theprevious year.previous year.

THE BOTTOM LINETHE BOTTOM LINEDrawing interest domestically and abroad, the NBA has seen its popularity andDrawing interest domestically and abroad, the NBA has seen its popularity andrevenue streams rapidly increase over the past few years. With a new TV dealrevenue streams rapidly increase over the past few years. With a new TV dealvalued at $24 billion, a $1 billion Nike deal, increasing number of corporatevalued at $24 billion, a $1 billion Nike deal, increasing number of corporatesponsors and rapid international growth, the average NBA team is now valued atsponsors and rapid international growth, the average NBA team is now valued atover $1 billion. This also comes at a cost to the fans as average ticket prices andover $1 billion. This also comes at a cost to the fans as average ticket prices andconcessions have also increased.concessions have also increased.

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