How the NBA can thrive in media disaggregation: the Product and the Market (1/2)
This article is part of a two-part series on the NBA:
- How the NBA can thrive in media disaggregation — 1/2: the Product and the Market
- How the NBA can thrive in media disaggregation — 2/2: the Product in the Market
It’s a fierce and relentless battle, as on the play-off courts. The sports industry, with its rich traditions dating back to the 20th century — if not the 19th — continues to strive ardently to keep the life cycle of its product on the verge of maturity, sometimes teetering on the edge of decline.
Where the NBA stands out from most is its propensity to not only manage the status quo, but to find and masterfully infiltrate pockets of growth.
In fact, the League has a unique legacy of creativity and innovation when it comes to embracing market transitions. It was, for example, the first sports rights owner to transfer a substantial portion of its games from free-to-air to pay television platforms in the late 1990s, setting a precedent for other sports leagues to follow.
But risk appetite and a pioneering spirit are just inputs; ‘strategy is numbers’, after all. Speaking of which, all performance indicators confirm the NBA’s status as a so-called ‘super competitor’.
Last season — the seventy-sixth — the League broke its revenue record by topping the USD 10 billion mark for the first time, and the clash between Warriors-Celtics recorded the highest finals TV ratings since 2017. This year’s play-offs featuring the Miami Heat’s crazy run recorded the highest audience for 5 years (5.47 million viewers on average). In fact, this 2022–23 season, 22 million fans attended games throughout the United States, reaching a fill rate of 97% — a record number as well.
Booming valuations
The outlook is even brighter when we look at the financial performance of franchises. The average value of these has grown by 110% from USD 1.36 to 2.86 billion in the last 5 years, despite the impact of the pandemic.
Revenue multiples have also risen by 95% from 4.4 to 8.6 (average), showing that franchise values are increasing exponentially due to a combination of financial (i.e. revenue growth, EBITDA improvements) and market factors. These include a period of low interest rates, which has accelerated the acquisition of assets with limited downside risks (as is the case with NBA teams, protected by the franchise system and the various structural mechanisms in place to maintain a competitive balance).
This of course continues to increase the interest of private investors. An interest that the League intends to capture by recently opening up access to private equity stakes to institutional investors — without increasing the level of third-party control (still limited to 30%). The roster of equity partners, which includes Arctos Sports Partners, Apollo Global Management, Bain Capital, Blackstone, and Guggenheim Partners among others, may have just witnessed its first major exits with Blue Owl’s Dyal HomeCourt reselling some of its equity stake in the Phoenix Suns (from USD 1.55 to 4 billion Enterprise Value over 2 years) and Michael Jordan in the Charlotte Hornets at a USD 3 billion valuation (vs. USD 275 million in 2010).
These upsides are backed by the gain in attractiveness to the fan. The NBA is the most followed sports league in the world on Instagram (81m — against 28m for the NFL), Twitter (43m), YouTube (21m), and TikTok (20m), cumulating a record 18 billion views across all social platforms for the 2022–23 regular season, the most of any sports leagues.
In the followership benchmarks for all non-athlete sports properties, it is only beaten by global football clubs Real Madrid and FC Barcelona.
In fact, its ‘crunch times’ and athlete-driven culture built around key stars allows the NBA to truly excel at digital storytelling and non-game programming. But fan reach and engagement form only one dimension of the NBA’s media performance. The other is defined by the licensing value of its media rights, especially the domestic ones — the ultimate benchmark of success for any ‘premium’ sports rights owners.
In this respect, the timing is critical: current contracts are about to expire at the end of the 2024/25 season. This article hinges precisely on this imminent milestone to analyze how the League strategizes rights distribution today, and how it might play out tomorrow.
But before delving into the specifics, it is only fair to reiterate that, probably more than any other sports entity on the planet, the NBA has developed an impressive ability to innovate and outperform benchmarks across the entire value chain. From core to adjacent. With (almost) no weak links.
Let’s unpack.
From IP to product, polishing every link in the value chain
Along with corporate strategy, the value chain of a sports rights owner can be vulgarized through the following key elements: IP, product, and distribution.
On the IP side, the rising valuations of NBA franchises reflect not only the opportunities for financial upsides, but above all the uniquely attractive positioning of the NBA’s modern brand identity. The NBA’s IPs are declined in an increasing number of ways, whether vertically (a system of mutually reinforcing league, team, and athlete brands that all have their stand-alone value), or horizontally, where it links with multiple endemic (e.g. Nike) or non-endemic (e.g. Louis Vuitton, Fortnite, Hugo Boss) third parties.
Each of these collaborations contributes to the development of the League’s audience and brand values, extending its cultural impact.
By travelling through time (e.g. the super modern editions of ‘Classic’ jerseys) and entering multiple spaces of expression (e.g. partnerships in fashion, music, art, entertainment), the NBA has truly succeeded in transforming itself from a sports organization into a lifestyle global cult icon.
The whole works powerfully to enable both traits of fandom: community belonging as well as self-identity.
As tailwind, it is key to note the accelerating trend of urban culture gradually rising to the top of popular culture. The NBA and its boiling North American metropolises on game nights, its super-stars’ highly mediated affinity for hip-hop beats and streetwear, as well as its frugal origins of the orange ball rubbing over and over again on the neighborhood tarmac, fit right into it.
A strong focus on partnership-enabled innovation
In terms of product, the NBA can rely on a massive game supply (82 matches per team i.e. a total of 1,230 in the regular season, ensuring an ‘always-on’ narrative), enhanced by best-of-breed broadcast production contributed by its own studio NBA Entertainment as well as multiple partnerships (e.g. player tracking technology platform “Dragon” with Genius Sports/ Second Spectrum).
Adjacent products include the Summer League, All-Star Games and international games, the NBA League Pass which has just been redesigned by Microsoft — now more of a one-stop shop mobile content hub — or emerging content experiences such as XTADIUM with Meta Quest, NBA Arena with Meta Horizon Worlds (52 games per season in live VR), as well as via new partnerships with Gym Class and COSM (i.e. 8K, immersive broadcasts in off-stadium venues).
The above examples do not mention the League’s pioneering experiments in Web3, including Top-Shot powered by DapperLabs (launched back in 2019), which marked a real turning point in the adoption of blockchain in sports and entertainment industries.
In support of these initiatives, the NBA is again standing out when it comes to partnership strategy.
Its deal with Microsoft, estimated at USD 70m per year, represents a key strategic enabler. It notably focuses on direct-to-consumer capabilities and services (e.g. fan data/ analytics with NBA ID, aimed at enhancing user experience and personalization).
Another strong symbol of this open-source mindset is the recent launch of a fund intended to invest in third-party businesses, mainly start-ups with promising use cases in sports, technology, or commercial innovation. With NBA Fund, the League is pushing even further than its Launchpad program to truly act as a strategic investor for its own development.
While this virtuous process of enriching NBA’s IPs and successfully exploiting them into products or rights — or both — seems well underway, what’s actually next? How to optimize media distribution and go-to-market in an increasingly complex and fragmented landscape, both at wholesale and retail levels?
This is perhaps the ultimate challenge facing any sports rights owner today. And the main focus of this article series.
Market commands disaggregation, while most sports rights owners still provide aggregation
It can be said that the media market has shifted from consolidated (same habits, same distribution systems) to fragmented (different media habits, similar distribution systems), then from fragmented to fractured (different habits, different distribution systems).
Media content distribution systems are now effectively fractured, in the sense that some audience segments may still overlap, although many no longer do. For instance, an NBA fan and media user can be news only, live on big screen only, highlights on small screen only, live on small screen only, documentaries on big screen only, or take on all of these personas. Even more importantly, for the same broadcast format (e.g. live on big screen), there may still be mutually exclusive audience segments consuming content in fully separate systems (e.g. traditional Pay-TV bundle vs. vMVPD).
The last edition of the All Star Games in Salt Lake City is a good illustration of this complex media mix, with national TV ratings down by 27% YoY (record low), but with record numbers for digital outlets (including live format on the NBA League Pass).
It can be suggested that the strong social media footprint of the NBA somehow compensates for the decline in linear audiences (i.e. migration rather than churn). But the situation raises at least two important strategic questions:
- How to compensate for the loss of value as social audiences are monetized via a fundamentally different, less lucrative model?
- How to compensate for the loss of volume considering the migration of certain audience segments to other linear TV outlets, where the NBA may not be present?
Anyhow, the key point here is the misalignment between supply and demand.
In other terms, the gap between the structure of the industry being disaggregated, and the structure of sports rights owners’ media distribution being mostly aggregated and financially valued in a single system: traditional, Pay-TV networks.
Money follows eyeballs, so what if eyeballs go down?
As explained in my previous article, cord-cutting has been accelerated by the rush of media companies transitioning to streaming — towards a Netflix-like model pointed to as the future of media — on the backdrop of shareholders considering the number of digital subscribers as the ultimate success metric.
In the US, broadcast networks (e.g. ESPN) then only accessible through Pay-TV bundles (e.g. cable, satellite, or telco bundles such as Comcast, DirecTV, or AT&T) have gone the DTC route, accelerating consumer flows to their streaming services with exclusive, premium titles (e.g. The Mandalorian only on Disney+).
The erosion of Pay-TV bundles has occurred at the same time as the SVOD subscription model has taken hold — cheaper, more granular, non-binding (I subscribe to what I consume only, and I can cancel anytime). An improvement in consumption efficiency for end users, but economically inefficient for the market as a whole: streaming has cannibalized the once very profitable unit economics of bundles.
In the US, the traditional Pay-TV model entails that users cannot choose services, but are forced to subscribe to the bundle and all of its channels. Channel operators that make up the bundle then receive an affiliate fee for each customer, the value of which is based on share of audience and relative impact on retention and acquisition.
The beauty of a bundle is that it maximizes the overlap between casual fans and minimizes it between super fans. In other words, each audience sub-segment in the bundle cross-subsidizes another. For the NBA, a bundled TV model has the merit of indirectly benefiting from the spend of super fans, casual fans, and even non-fans, all part of the same subscriber base.
But at user level, only super fans may have the activation energy and willingness to pay to subscribe directly to NBA content. Casual fans may watch a couple of big games, but with a lower direct willingness to pay — maybe no willingness to switch at all. And non-fans…
In short, streaming has revealed the true willingness of users to pay, with more granular consumer choices and packages (e.g. films only, documentaries only, TV shows only, sports only).
From the perspective of broadcasters, let’s explain the dynamics as follows:
Starting point (pre cord-cutting):
- High volume: high penetration of Pay-TV bundles in households (close to 100% in 2010); large addressable market for broadcasters
- High value; price cross-subsidized across different audience sub-segments — even those not interested in sport — resulting in high affiliate fees for broadcasters
Development:
- Volume leakage ➜ churn effect: loss of value caused by non-fans and majority of casual fans who leave the bundle and do not re-subscribe for broadcasters’ sports streaming packages, as no willingness to pay/ switch on a stand-alone basis
- Value leakage ➜ down-sell effect: resubscription of core fans and some casual fans to sports streaming packages, but at lower value (streaming ARPU < Pay-TV bundle ARPU) and profit (higher streaming churn means higher CAC)
In short, the erosion of Pay-TV bundles and their respective ability to cross-subsidize content has affected the platform and unit economics of broadcasters and, ultimately, their ability to refinance sports media rights on a standalone basis (i.e. increasing right costs per subscriber).
For sports rights sellers, this suggests a serious long-term risk.
Media rights valuations to rise before they fall?
While the value of sports rights has always been mainly determined by the refinancing capacity of rights buyers and the competition between them, the transformation of the media landscape has violently affected both.
Two relatively different patterns can be observed in the US and Europe.
In the US, as illustrated by the NFL super media rights deals of around USD 110 billion for 11 years, it seems that valuations are clearly on the rise. But this may be the tree that hides the forest.
As explained above, broadcast networks are moving to streaming and building their DTC offering. This has created a (temporary?) window of head-on competition between them, whereas this was previously mitigated by their co-existence within bundles, providing a fair share of value to each affiliated channel (including regional sports networks).
Today, a premium IP like the NBA — highly differentiating and guaranteeing subscription as well as advertising revenues via a large live inventory — is in high demand, as it can serve broadcasters both defensive and offensive strategies. The former is audience retention on traditional, linear channels providing higher ARPU. The latter is the migration of cord-cutters into new streaming offerings where sport plays a driving role in acquisition.
Nevertheless, inflated rights values due to heated competition on the wholesale side do not reflect the underlying economic challenges on the retail side. The effects of these root problems can already be seen in virtually all TV markets whose scale is below the US (national level), especially:
- In the US (regional level), via current economic challenges faced by regional sports networks given limited scale, i.e. audience of super fans
- In Europe, where the value of premium sports rights is plateauing due to the erosion of buyers’ margins, leading to consolidation in already oligopolistic media markets
This inevitably raises the question of whether current media distribution practices of sports rights owners still make strategic sense.
Exclusivity makes sense in a competitive market with an homogenous demand (only)
Let’s summarize.
On the demand side, broadcasters’ decreasing refinancing ability has led to consolidation in the market, materialized by organic (i.e. M&A) or inorganic (i.e. sub-licensing agreements — a pattern very present in Europe) initiatives, i.e. media companies sharing content and costs to combat sub-scale operations.
On the supply side, sports rights owners have been used to selling their media assets to relatively similar buyer profiles (e.g. Pay-TV broadcasters, telco companies), offering similar products to a similar audience, with a relatively similar direct and indirect refinancing system.
In this context, selling a rights package on an exclusive basis — segmented by territory, format (live rights vs. highlight rights), events (all Saturday matches vs. Sunday’s big game), or broadcasting technology — mattered.
The notion of exclusivity made a ton of commercial sense because it addressed media rights buyers’ head-to-head competition and winner takes it all challenge, including the willingness to pay and switch of the same universe of potential subscribers.
Audience follows the content, money follows the audience. Exclusivity was able to command consumer flows, so it was able to command rights buyers’ upward bidding.
But the underlying pattern has shifted. While exclusivity used to be a value driver, its mismatch with the current industry structure means that it may now cause value leakages.
First, exclusivity matters less if there is no competitive tension:
- In Europe, rights owners play on exclusivity in the first sale, but the effect is weak because there is little competition between buyers, who may share the content anyway
- In the above scenario, rights owners capture no value on secondary transactions, and have no control over risk or opportunity (e.g. upsell of adjacent, value-added services)
Second, exclusivity matters less if the buyer universe is heterogeneous:
- Nature of sports rights buyers has diversified drastically in recent years, notably with the entry of pure streamers (e.g. DAZN) and technology groups (e.g. Amazon, Apple, Google/ YouTube)
- It can be argued that audiences of the above buyers do not overlap much/ anymore; in this case, content exclusivity matters less
- As buyers’ needs and refinancing systems are fundamentally different, value drivers may be shifting from ‘which IP will I have access to vs. my competitors’ to ‘how will the IP enable me to reinforce my very own ecosystem’
All in all, value drivers for both rights sellers (i.e. how to set my auction model to capture maximum value from a given market structure) and rights buyers (i.e. what type of rights, value-added services, duration, and exclusivity terms allow me to maximize the refinancing of my investment) are set to change drastically, compounded by the market entry of new buyer profiles with different needs.
On this point, it is interesting to note that sports rights owners have, over the last 3–5 years, placed an increased — if not obsessive — emphasis on DTC relationships and monetization opportunities, including fan data and OTT. However, if we look at their revenue mix, they remain predominantly B2B companies, generating the bulk of their revenue through licensing agreements.
And while understanding and reaching fans as end users seems indeed essential, understanding (changing) direct clients may actually be of even greater importance.
This is well illustrated by the Harvard Business School’s case study on the NFL’s record-breaking media deals, which quotes Brian Rolapp on the importance of market listening and proactivity in order to address potential new market entrants:
We can’t expect these companies to one day wake up and say, ‘I am going to make a full commitment to live sports, to IP I don’t own’ when they have never done so before. With these technology firms, we have to create our own luck.
Embrace disaggregation and better match buyers’ needs
In summary, it can be argued that the underlying market conditions do not present a major risk to the NBA in the short term.
In the long term, however, the above considerations can be consolidated into two major challenges:
- Who; expand addressable market by packaging and allocating content in a way that appeals to a larger, relevant set of media rights buyers
Linearly slicing and dicing content with rigid exclusivity terms is no longer sufficient to maximize value capture as:
- Competitive intensity is set to decrease within incumbents (not yet the case in the US, but already strongly so in Europe)
- New players with different needs and audiences are entering the market, while certain incumbents are losing ground and showing a decreased refinancing ability
2) What; match licensed assets to buyer needs — which are increasingly heterogeneous — to optimize usability and, ultimately, rights value
Licensed portfolio of assets needs to evolve in line with changing buyer universe, e.g.
- For Pay-TV broadcasters, achieve retention/ slow down erosion
- For streamers, increase value/ user (i.e. upsell) as no longer able to address casual fans and cross-subsidize non-fans
- For technology groups, facilitate their ambitions for video aggregation and for using premium sports as a proof of concept for emerging use cases (e.g. VR)
All in all, there are several elements to imply that, unlike other sports rights owners, the NBA may be well positioned to tackle these challenges.
Read the rest of the NBA series: How the NBA can thrive in media disaggregation
- The Product and the Market
- The Product in the Market
