The NBA’s mammoth, $2.66 billion/year television deal has seen better days in the P.R. department. In the first regular season of the nine-year deal, viewership declined for all three major broadcast partners, with TNT and ABC posting their smallest audiences in nine years. ABC’s 19-game schedule was marked by all-time broadcast TV lows — the lowest rated game (Thunder-Rockets in March, a 0.9), the lowest rated primetime game (Cavaliers-Clippers in March, a 1.0) and the lowest rated season (a 1.9).
Beyond the ratings, the price tag has become increasingly glaring at a time when cable, ESPN in particular, is facing major challenges to its business model. Along with its $1.9 billion/year NFL contract, the $1.4 billion ESPN pays for NBA rights is an obvious target for those who believe the company has overspent its way into a crisis.
With cable networks shedding subscribers — and sports networks bearing the brunt of the damage — reductions in subscriber revenue and growth in rights fees have been a toxic mix for employees. Since the NBA deal was announced in 2014, ESPN and Turner have both experienced major layoffs, with the former set to begin a new round of cuts that will shear tens of millions in talent salary. Few would argue that the NBA is solely, or even principally responsible for those cuts, but the present climate is not conducive to starting a new deal that nearly triples the annual value of the old one.
There is little doubt that the NBA deal currently looks a lot better for the league and its players than for its TV partners. Player salaries exploded last offseason, and that is a drop in the bucket compared to the rise in average franchise values, which per Forbes have more-than-doubled over the three years since the deal was announced. If NBA ownership was not foolproof before, and one could argue that it always was, it certainly is now. Surely no owner who bought into the NBA before the new contract could exit selling at a loss.
Yet it is also the case that the deal is not as bad for ESPN and Turner as it may look. Neither network committed to $24 billion over nine years on the basis of a single regular season. It can hardly be argued that the networks overpaid. However it is not quite as outrageous as one might think.
Regular season games are important inventory for the networks, particularly cable networks, but they are far from the only consideration. There is increased flexibility for ESPN and Turner to deal with potential changes in the cable industry. ESPN acquired rights to create an over-the-top NBA package and, per a source with knowledge of the negotiations, neither ESPN nor Turner are locked into airing games on their cable outlets should the industry shift away from traditional television model. Less significantly, there are footage rights that allow ESPN and Turner great latitude in using game highlights on studio shows, documentaries and digital platforms, increased flexible scheduling rights and, of course, the playoffs and finals.
The deal also looks more reasonable considering what other leagues have brought in. The NBA’s closest equivalent, Major League Baseball, makes $1.6 billion/year under its contracts with Fox Sports, ESPN and Turner. MLB generally posts weaker national ratings in the regular season and playoffs than the NBA and is not as strong in the younger demos advertisers prize. Even last year’s World Series, the first to beat the NBA Finals in the same year since 2009, trailed the NBA in adults 18-34 (7.1 to 5.3) and adults 18-49 (7.5 to 6.7). Moreover, MLB offers its TV partners less exclusivity than the NBA, with many games outside of Sunday Night Baseball and Baseball Night in America subject to blackout. No NBA games on ESPN, TNT or ABC are subject to blackout. If a league with lower ratings and less exclusivity can get $1.6 billion a year, surely the NBA can justify upwards of $2.0 billion. (Standard disclaimer — for MLB, which is much stronger locally and in attendance than the NBA, national TV deals are a smaller portion of an overall larger revenue pie.)
More than anything, conditions were ripe for overpayment. By the time negotiations began, every other major league had already locked up TV rights through the end of the decade, leaving the NBA as by far the biggest free agent in sports TV. Meanwhile, ESPN and Turner both faced potential competition from Fox Sports 1, which was not shy about its interest in getting an NBA package and which, along with NBC, had engaged in informal talks with the league. As Sports Business Journal noted in 2014 post-mortem, league commissioner Adam Silver was keenly aware of the “white-hot TV rights market and the near desperation of the incumbent networks to keep the NBA in the face of increased competition from Fox and NBC” (SBJ 10.13.14). The threat of rights hitting the open market was enough to get ESPN and Turner to the table two years ahead of schedule, and enough to get them to pay as much as the league wanted. It was a long-awaited opportunity for the NBA to make up for having settled in previous negotiations. The league’s 2007 TV contract, signed in the wake of a prolonged post-Jordan decline, generated less than $1 billion per year from ESPN and Turner combined. Considering the NBA’s resurgence in viewership over the course of that deal, ESPN and Turner held rights on an absolute bargain for nearly a decade. It is no surprise that the league was aggressive in negotiations.
Whether any of that fully justifies nearly $2.7 billion per year is certainly questionable. If this were 2011, one could say with confidence that the networks would eventually come to afford it; ESPN and TNT were both in north of 100 million homes and there was no end in sight to the growth. As of last month, TNT was in 90.3 million and ESPN in 87.9 (Sports TV Ratings, 3.7), with the caveat that Nielsen estimates do not yet factor in streaming services such as Sling and Playstation Vue. Based on the historic trend of ever-rising rights fees, it may well have been wise to lock in NBA rights for less than $1.5 billion each for nine years back in 2014. With the cable industry entering uncharted waters, however, it may be the case that the deal looks even more exorbitant nine years from now.
ESPN and Turner made the right decision at the time in agreeing to the NBA’s price, and it was an easy decision to make. Why quibble over dollars for an ascendant league and risk opening the door to competitors, especially at a time when the industry — though weakening by 2014 — was still relatively strong? It was the NBA’s goal not to leave any money on the table, and ESPN and Turner’s goal to keep the NBA. Today, both outlets could probably use a few extra hundred million (particularly ESPN) and one imagines that the NBA would have been more-than-satisfied with, say, $2.2 billion per year. Considering the number of employees who have lost or will lose jobs in part because their network employers overpaid for sports rights (and were overconfident in their ability to make people who don’t watch sports continue paying subscriber fees in perpetuity), the hundreds of millions between an enormous TV deal ($2.0-$2.2B) and an even more enormous one ($2.7B) must be especially jarring. Even so, it is worth noting that one can be both overpaid and worth the money at the same time. If $2.7 billion seems grossly out of whack, well it is. Yet it is hard to question why ESPN and Turner ponied up the money.
To put it in basketball terms, the NBA’s TV deal is not on the level of the Lakers’ last contract with Kobe Bryant or the Bulls’ current deal with Dwyane Wade, hefty paydays for stars well past-their-prime. It is more like the Timberwolves’ record-setting 1997 contract with Kevin Garnett, a massive payday for a major star that had an ultimately mixed legacy. Garnett was worth a huge contract, but his deal made it difficult for the T’Wolves to operate successfully. Ultimately, it was one of the final straws in an increasingly frayed relationship between owners and players, which led to the 1998-99 lockout that canceled much of the season. The networks are hardly going to start conflict with the leagues, but one wonders if the NBA’s deal will be a final straw in the ballooning television rights game — especially with cable’s future so murky.
