Is China the Solution to the NBA’s Television Sports Rights Bubble?

Sticker Shock

On the morning of July 7, 2016, NBA fans woke up scratching their heads.  Lightly regarded players such as Timofey Mozgov, Bismack Biyombo, and Evan Turner suddenly became among the highest paid players in the entire league, with each one earning four year contracts paying them between $16 and $18 million annually.  However, the biggest case of sticker shock came a week later when the Memphis Grizzlies re-signed their point guard Mike Conley Jr. to a five-year, $153 million contract, which became the highest total value contract in NBA history.  Previously an unsung hero known for his quiet leadership and steadying presence on defense, Conley Jr. also became the second highest player in the NBA on an annual income basis, behind only LeBron James.  This was quite a feat for a player who had never even been named an All-Star.

The New NBA Deal

This was all made possible by the NBA’s new TV deal with its American broadcast partners, ABC, ESPN, and TNT, which kicked in for the 2016-17 season (although it was signed two years earlier).  In return for exclusive broadcast rights of the U.S. market, the networks are paying the NBA $24 billion over 9 years.  The $2.67 billion annual deal almost triples the previous agreement, which gave exclusive rights to the same networks for $930 million a year.  As a result of the collective bargaining agreement between NBA players and owners, players are entitled to half the income derived from television deals, as well as all other basketball-related income.

In this case, it means that over the course of the new TV deal, players will be making an average of an additional $870 million annually.  With fewer than 400 players on full-year contracts at any time, this means that players should expect to make about $2.2 million a year more than under the previous deal.  After factoring in lower cost rookie contracts, the number creeps closer to $3.5 million annually for experienced players.  Mozgov, Biyombo, Turner, and Conley Jr. were simply among the lucky few to become free agents in the first year of the new television contract.  This coming July, a new batch of players will be paid even larger contracts.

Cable Viewers are Declining

At the same time that Disney (ABC & ESPN) and TNT signed the NBA rights deal in 2014, a growing number of television viewers stopped paying for cable, especially when provided with alternatives for digital content such as Amazon Prime, Hulu, and Netflix.  In October 2016, market research firm Nielsen stated that ESPN had lost more than 600,000 subscribers in a month. In November, Nielsen showed ESPN losing another 540,000 subscribers.  While more than 98 million households still subscribe to cable in the U.S., the long-term outlook is not promising.

Due to the declining numbers of cable subscribers, ratings for NBA games are also down from previous years.  According to the Sports Business Journal, local broadcasters saw their ratings for 2016-17 drop 14 percent.  Additionally, the national broadcasters saw their ratings fall about six percent from last year according to Variety.  Therefore, the NBA’s broadcast partners face a two-pronged crisis.  Due to declining ratings and a smaller base of subscribers, the networks are likely to make less money than expected from their new NBA deal.  Some media analysts even believe that they may lose money on the deal.

As a result, it is possible that the NBA will never see a $20+ billion dollar windfall from American broadcasters again.  If player salaries are to rise without owners forking over more of their paychecks, then alternative revenue streams must be found.

Can the Chinese passion for basketball be the answer?

Basketball is one of the most popular pastimes in China, according to New York Times bureau chief Jim Yardley, who wrote a book on Chinese culture and basketball called Brave Dragons.  In fact, he writes that it was one of the few Western imports that was not repressed during Mao’s Cultural Revolution, largely due to its popularity with military leaders.

As a result, more than 300 million people in China play the sport and there is a considerable fanbase for both the domestic league, the Chinese Basketball Association (CBA), as well the NBA.  The popularity of the NBA grew significantly after Chinese star Yao Ming debuted in 2002.  Although Yao’s promising career was cut short due to injury, Chinese fans continued to watch the league after his retirement.

Due to China’s love of basketball and its population of 1.37 billion people, the NBA has found China to be the most promising market for selling coverage rights abroad.  For example, in 2015 the NBA sold exclusive digital streaming rights in China to Tencent, for five years for an estimated $700 million.  The $140 million annual stream is the largest outside the U.S. and Canada for the NBA.  Tencent, which owns WeChat, QQ instant messenger, and Tencent Weibo, is the world’s largest publicly traded company outside the United States as of December 2016 and can easily afford the deal.

For the sake of comparison, the NBA’s 2015 deal with Digiturk in Turkey, another country with a growing NBA fanbase, is worth only $12 million Euros per year.  The television deal in India, with 1.3 billion people but a much smaller number of NBA fans, is only estimated at $1 million a year through the 2015 season, although that was a 200 percent increase from the previous deal.

Perhaps the most intriguing aspect of Tencent’s NBA deal is that it covers exclusively digital broadcast rights.  State-run CCTV has traditional television rights, and unlike in the United States and other markets, there is no competitive bidding.  Therefore, the NBA’s deal with Tencent is an attempt to circumnavigate state-run media to create a bigger piece of the pie for both the NBA and private Chinese companies.

However, if the government reverses its policy and opens up bidding for NBA television rights, the contract with Tencent shows a glimpse into just how much the NBA can make in China.  Additionally, the NBA’s agreement with Tencent gives it freedom to explore how fans consume basketball beyond traditional television broadcasts and may allow it to sign lucrative extensions and streaming options with Twitter, Snapchat, or even Netflix or Amazon.

For a league that may be facing a dearth of traditional monetary sources in 2025, it may be just what is needed to keep growing.

Deniz Koray, M.B.A. Candidate, 2017