After a year of an uncertain TV deal, image problems and a perceived reduction of interest, the NBA has emerged from the 2002-03 season with a relatively clean bill of business health.
The league has finished the first year of its new six-year, $4.6 billion television deal with relatively strong cable ratings throughout the playoffs. As the NBA Finals tip off this week, executives are preparing to enter into an era of relatively stable league economics, positioning the NBA for long-term future growth and international development.
At the All-Star Game, the league focused on its three major business keys: (1) expanding all aspects of the television/corporate sponsorship model; (2) stabilizing all key markets and focusing on diverse fan demographics; and (3) intensifying international development and long-term expansion.
The issues are the same four months later. In the past three months, the NBA has established a $1 billion league-wide credit facility to allow more financial freedom for its owners -- the transaction done after recent sales of the Boston Celtics for $360 million and the Charlotte expansion franchise award to BET entrepreneur Robert Johnson for $300 million.
As the league continues its financial and business growth, it would be wise to monitor the progress of its three major business goals as the NBA Finals take center court.
Expanding TV/corporate sponsorship model
At the beginning of the season, skeptics were concerned that the deal that placed only 14 regular season games on network television would reduce the exposure and interest in the game.
From an economic perspective, TV revenue dropped this season to $675 million, compared to $810 million last year. The first NBA All-Star Game ever on cable earned a 9.8 Nielsen rating on TNT this February -- the highest cable rating ever for a pro or college basketball game, but a 20 percent reduction below the NBC rating for the 2002 game (and the second lowest rated All-Star Game in history).
The results from the regular season seem mixed as well. The ABC 2.6 season average was an all-time low for broadcast television, but ABC appears "pleased" with the ratings as the coveted 18-49 male demographic viewership was up 69 percent compared to comparable ABC programming last year.
Similarly, ESPN noted a 54 percent increase in regular season ratings, and even TNT was pleased with its 20 percent jump over its 2002 Thursday night games (where it had no exclusivity).
The NBA vowed to shake up this year's playoffs, expanding into a best-of-7 series in the first round (instead of the previous best-of-5). The playoff pool increased from $8 million to $8.75 million, and interest seemed to increase (depending on who you talk to).
Again, the aggregate ratings points for the first three weeks of the NBA playoffs were down 44 percent compared to the coverage on NBC and TNT last year.
On the other hand, ABC noted that its ratings were up substantially compared to last year's programming during that period, and ESPN's 20-game NBA playoff coverage averaged a 2.4 rating, a 300 percent increase over their comparable time period a year ago.
While the television ratings seem to tell two stories, Corporate America continues to support the NBA very well, believing that the sport "reaches a more diverse market than some of the other sports." The league added seven new blue chip sponsors to its stable, including Southwest Airlines, MBNA and Verizon -- bringing the total list of sponsor/partners to 20.
Some companies such as Gatorade, Coca-Cola, McDonald's, AT&T, and Nike have been with the league for over a decade. Also, the post-Sept. 11 recessionary advertising decline seems to be reversing itself -- as a record $9.3 billion was spent by the six major networks in advertising for next season, $1.2 billion more than last year. The NBA seems solid with Corporate America.
The NBA continues to work on other television projects as well. Spending merely $10 million to put the NBA TV channel on the air in 1999, industry analysts estimate that the property is worth over $400 million today. Also, their high definition game broadcasts cost 30 percent more to produce than a standard definition game, but the attention created by the new high def telecasts seems worth the price.
Stabilizing key markets; focusing on diverse demographics
When last we checked at the All-Star Game, the NBA was worried about regular season attendance, though the league was seemingly entering a relatively unprecedented era of market stability.
Overall, regular season attendance dropped slightly (0.5 percent), with 20 million fans attending NBA games (an average of 16,883). Big winners included the Golden State Warriors (up 7 percent), Detroit Pistons (up 10.3 percent), Boston Celtics (up 7.5 percent), New Jersey Nets (up 10.3 percent), Houston Rockets (up 17.4 percent), and the Charlotte Hornets (now in New Orleans, up 38.7 percent).
On the other hand, attendance for the Minnesota Timberwolves dropped 12 percent, the Milwaukee Bucks down 10.6 percent and the Miami Heat down 4.2 percent.
Marketing directors are scrambling to solve some of these problems. The Timberwolves announced a freeze on the five least expensive single game ticket price categories, and the Atlanta Hawks have announced a refund of about $500,000 to roughly 4,000 season ticket holders (as part of an ill-fated "playoff guarantee" promise).
The Miami Heat have reduced season ticket prices on 7,314 seats at American Airlines Arena, cutting some by more than 50 percent. The league continues to worry about overall season ticket renewals -- an 8 percent drop in league-wide season ticket sales, and a four percent decline in season ticket renewals is a major concern to marketing executives.
This year's Finals pits a San Antonio franchise that just moved in to its 18,766 capacity $190 million SBC Center, opposing a franchise that has struggled with developing a new arena in Newark for the past five years. Time will tell how that works out.
As expected, commissioner David Stern continues the focus on other important entertainment-oriented revenue sources. Sales of NBA-licensed merchandise rose more than $300 million to $2.1 billion.
Those sales figures are expected to be surpassed because of the new emphasis on retro jersey sales that have been embraced by most NBA teams. Not unexpectedly, the NBA continues to blur the distinction between sports and entertainment. The soundtrack for EA Sports "NBA Live 2003" became the first-ever video game soundtrack to be certified as a million-selling platinum album by the Recording Industry Association of America.
Intensifying international development, long-term expansion
Clearly, international outreach and expansion is good business for the NBA. About 20 percent of all NBA merchandise (about $430 million) is now sold internationally. Nearly 15 percent of the $900 million in annual television revenue (excluding local broadcasts) comes from 148 non-U.S. television partners in 212 countries. Some 40 percent of visitors to NBA.com log on from outside of the United States.
As the league remains focused on the global dimension of its game, fans seem to be following. A recent poll revealed that 49.8 percent of fans said that the "influx of international players has increased their interest."
The league has made substantial strides in the past three months -- Stern reversed himself and decided that the league would support the entry application of two 17-year-olds playing overseas -- Yugoslav Darko Milicic and Greek Sofoklis Schortsianitis.
The league had initially ruled that the Collective Bargaining Agreement required that foreign players be 18 on the day they declared for the draft. With some obvious lobbying from the National Basketball Players Association, the league subsequently decided that foreign players would now be eligible if they turned 18 at any time during the calendar year of the draft. Look for these two players to be key contributors to those teams that draft them early on June 22.
The league is also looking to its Oct. 30 and Nov. 1 season opening games between the Clippers and Sonics at Saitama Super Arena in Japan. On the other hand, the league office is wrestling with the commitment to play two exhibition games in Beijing and Shanghai on Oct. 17 and 19.
Though the three billion media impressions by Yao Ming this season will help the economics of that decision (especially as the Houston Rockets are scheduled to play), the SARS outbreak, international terrorism and other factors weigh heavily on this decision.
As for expansion itself, Stern notes that the league is "rather mature domestically", and that it might be appropriate to explore expansion opportunities in Europe and other locations. It seems clear that the league would place teams in Europe -- potentially in Italy, France, or Spain -- rather than co-branding a European league that already exists or starting another league in Europe.
According to Reuters, Stern has not laid out a timetable for European expansion, but says he is "unlikely to still be commissioner when it happens."
As the NBA Finals bring the 2003 season to a close, fan perception remains key. A Sports Illustrated survey done early this year reported that 40.1 percent of fans said they are "less interested in the NBA" than they were five seasons ago.
Though the poll was dismissed by Stern as "junk science", the league continues to worry about its image and fan perception. Look for the NBA Players Association to be actively involved in reacting to the "worldwide drug testing code" approved in March that requires all Olympic athletes to submit to random unannounced testing for substances banned by the IOC.
Though players cooperate with the notion of drug testing, the specific NBA policy was a result of very complicated collective bargaining, and the Olympic process may open a new Pandora's box on that score.
From another perspective, the NBA fan base may be increasing.
The National Sporting Goods Association noted that 28.9 million Americans play some type of basketball, a 3 percent increase over the year before. As always, competition for the entertainment dollar remains severe.
Total 2002 movie admissions were 1.64 billion last year, more than tickets sold for Major League Baseball, NFL, NBA, and NHL games combined -- and a 10.2 percent increase over the previous year. While the NBA continues to move forward, obviously more work needs to be done.
Thankfully, most owners seem to look at the long-term. Sacramento Kings co-owner Joe Maloof looks at his $5 million-$9 million fiscal year loss this way:
"When you're trying to build the asset value of your franchise, it is more important to look at a five- to 10-year plan, rather than their profit and loss every year."
As the NBA continues to stabilize and grow, more of its owners will look at the business from this perspective.