Despite Troubles in China, In-Season Tournament, Short Video Clips Could Keep NBA Revenues Climbing

JohnWallStreet

Late last month, Adrian Wojnarowksi reported that the NBA has informed teams the 2020-2021 league salary cap ($115 million) is expected to be lower than initially projected ($116 million). A decline in revenues (estimated to be between $150 million and $200 million) is responsible for the adjusted figure. It should be noted that despite the estimated luxury tax threshold coming in lower than anticipated, $115 million would still be an increase on the 2019-2020 ceiling ($109.1 million). The final cap number will be set in July following an audit of the league’s financials.

Howie Long-Short: It’s atypical for the NBA to provide cap predictions this far in advance of the following season, but the league wanted to be sure teams had a grasp of what the financial landscape would look like next year before the Feb. 6th trade deadline (so that they could make “informed financial and roster decisions”). While the revised luxury tax threshold seemingly didn’t spark any deadline trades, with teams having $32 million less to spend on players next summer - and most treating the threshold as a hard cap - it will impact free agency. The lower figure will also hurt any player with an existing contract tied to a percentage of the cap.

NBA television ratings are down, but cord-cutting and tepid fan interest aren’t to blame for the anticipated revenue decline; the league has long-term broadcast pacts in place that guarantee those revenues regardless of audience size. Instead, it was Daryl Morey’s comments in support of Hong Kong protestors that has since led to depressed merchandise and sponsorship sales in China (the NBA’s deal with Tencent and the corresponding revenues remain safe). As a result, Marc Ganis (founder of the sports consultancy, Sportscorp.) doesn’t believe the NBA has a “structural or endemic problem on its hands.” He said that a “confluence of events created what should be a one-time situation" (i.e. an unexpected nine-figure revenue decline).

The NBA cap won’t see a YoY decline, but the structure of the league’s TV deals (with ESPN, ABC and TNT) is among the reasons next year’s ceiling will be only modestly higher than it is now (at least relative to $24 million bump the teams received in 2016). The league’s desire to cash in early on $24 billion in rights deals (from a percentage standpoint) means the NBA doesn’t benefit from the “significant gradual year over year increases” that the NFL and MLB enjoy. 

With the NBA’s current TV contract running through the 2024-2025 season, it’s fair to wonder where the league will grow revenues to ensure the salary cap continues to climb over the next half decade (especially if China doesn't bounce back). Ganis said the creation of an in-season tournament (as Commissioner Silver has discussed) - which would give the league “more valuable broadcast inventory [to sell]” - is part of the solution (as is making individual regular season games more meaningful). While it's unlikely the changes will be implemented in time for next season, it’s feasible the inaugural tournament could occur in 2022-2023.

The NBA would also seemingly have another lucrative revenue stream on its hands if it could just figure out how to properly monetize short video content. Ganis said the NBA has “far more fans and far wider consumption [than those watching on television], but not the corresponding revenue growth. There are tens of billions of short-clip highlights being consumed. The league should be monetizing some of those viewings.” The International Cricket Council has begun to do just that. Facebook will pay the ICC $100 million over the next four years for the rights to broadcast match highlights.

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