The Business Strategy of the NBA
By: Joshua Butler
Tags: Sports Business, NBA, Business Strategy, Utah Jazz, Mike Cannon Brookes

“Sports franchises are how we knight people in this country.” — The Oath, Billions

Today marks day one of the National Basketball Association’s 75th season. The offseason lasted barely six weeks. But in that time, the NBA has been front of mind for me. This was the year the NBA transcended the court. It set the benchmark for pandemic-management in pro sport. Successfully re-starting and finishing out the year — at Disneyland, no less… Along the way becoming a platform for social justice.

News broke on the weekend that Mike Cannon-Brookes will start the season as the first Australian co-owner of an NBA team in a deal that valued the Utah Jazz at over $1.5 billion. It was only six years ago that Steve Ballmer paid $2 billion for the LA Clippers franchise. A 15x revenue multiple at the time. This well exceeds the multiples paid for NFL teams, while the NFL grosses far more revenue than the NBA. So, what’s under the hood? Is the NBA’s value proposition so strong that it is deserving of valuations wild enough to make a SaaS company blush? One thing is clear. In a year of chaos and crises, the NBA shone through its peers. So as it kicks off its diamond jubilee, let’s take a look at the NBA’s business strategy. With any luck we will throw some light on why it’s commanding such frothy multiples.

Who owns it?

It’s helpful to first understand who’s who in the equity zoo. The NBA has 30 teams. The teams are privately owned. The “NBA” itself is really just a shared administration and marketing function paid for by the teams. So the equity owners of the NBA are the owners of the teams, and in a strange way, the players. What I mean here is that under their collective bargaining agreement, the players get just over 50% of all revenue earned by the NBA. Revenue, not profit. It gives the players an equal share in any upside the owners receive, before costs. In effect, you can think about it as the players are joint venture partners with the owners.

“Pay me in equity, and watch me reverse out of debt”

Early adoption

In 1946, owners of the major ice-hockey arenas in North America were scheming on how to make a few extra bucks renting out their arenas on off-nights. It was 55 years since Canadian physical education teacher Dr James Naismith pinned a peach basket to the gymnasium wall on a rainy afternoon. They cobbled together a league of semi-pro basketballers from the major cities, and on 1 November 1946, the Toronto Huskies hosted the New York Knickerbockers at Maple Leaf Gardens in Toronto, Ontario. The NBA was born.

By that time, basketball was well beyond product market fit. While the other major sports had a head start, the NBA would catch up quickly, counter-positioning itself against football, baseball and hockey as a primarily indoor sport. When snow hit the ground, athletes went indoors and picked up a ball.

The creator, Dr James Naismith

Distribution

Perhaps the most compelling pillar of the NBA’s business strategy is its distribution model, which can be summed up as: global-first. For investments in the billion+ range — like buying an NBA team — having a global growth strategy is usually table stakes. In American pro sports however, it has not been. The NBA has gone where no other big 4 US pro sport has: outside America.

It started in earnest when Commissioner David Stern encouraged the league’s stars to take part in the 1992 Olympics. One of the greatest rosters in basketball took the court that year as The Dream Team, capturing the gold medal and the world’s attention. Sparking the flame for a love of basketball in the hearts and dreams of many.

Larry Bird, Magic Johnson, Michael Jordan

Around that time, the NBA opened 14 international offices. Their mission was to market the product to a world audience and create a diverse talent pipeline. They succeeded in both. This all came to fruition in 2002, when the Houston Rockets selected with the number one draft pick a 7-foot-6 centre from Shanghai: Yao Ming. After Yao entered the league, the NBA onboarded more fans in China than there are people in the US. The Houston Rockets became the number one followed team in China. Today, the NBA has an audience of 600 million in China. Since Yao, the league has had 7 other number 1 draft picks from outside the US.

Digital marketing

One thing the NBA understood earlier than its competitors is the power of individual player brands. We live in the age of influencer marketing. Influencers command attention by putting out engaging and unique content. Players are influencers. Creating new, engaging content every time they step on the court. Through this lens, the NBA realised the powerful content marketing machine it was sitting on, and leveraged the hell out of it.

Content, content, content….Game 6

The proof is in the numbers. The NBA has 53 million followers on Instagram, its greatest asset Lebron James has 75 million. In comparison, the NFL has 19.4m while its social media heavyweight Odell Beckham Jr. has 14.3m. The MLB has less than 7 million followers. The NBA’s strategy on digital marketing has been simple and effective: give the players the platform and the tools, then get out of their way.

Values

The NBA’s support of its players goes beyond social media…to a more interesting arena. Social justice.

A material driver of restarting the season was the players’ intent to use their platform to advocate for Black Lives Matter. If you saw any content from the Disney Bubble you will remember. Where you would usually find names on jerseys and ads on the floor, we found statements of support for the BLM movement. I can’t breathe. Equality. Freedom. Say their names.

The Disney Bubble

The messaging was clear. What was also clear was the NBA putting their values into action. Standing behind their players and the cause.

I kept reminding myself of the bedrock principles underlying this league. Those values that have been in place long before me. And that is a support of racial equality and social justice. NBA Commissioner Adam Silver speaking on the Disney Bubble

User experience

The NBA introduced its flagship streaming product, League Pass, in 1995. This in an indicator of how early the league moved on digital — the NBA UX has been digitally native since the palaeolithic times of the web. The league has continued to be the tech-savvy kid on the block of pro sports ever since.

The NBA has put its eggs into the streaming basket, betting on younger generations wanting to consume content where they want, when they want. The trade-off in the short term is in the TV rights deals. The NBA’s streaming-first approach means it hasn’t struck the lucrative and exclusive TV deals the NFL has. This is a major reason why the NFL is making $13b yearly revenue, compared to the NBA’s $8.3b.

But again, we see the NBA playing the long game, optimising for high-quality content, live and on-demand, in the hands of its fans. And if it’s that vs. cable TV, I know which one I’m betting on.

To underscore the digital-native point, consider that the NBA’s video game, NBA2K, is actually one of the league’s four masthead brands. Alongside the NBA, the WNBA and the G League.

Young customer demographic

The last pillar of the NBA engine room is the demographic of its target customer. And I think this is the one that drives home the future growth story. The NBA has serious traction with a significantly younger demographic than other pro sports. The average NBA fan is 37 years old. This doesn’t sound particularly young until you compare it with MLB and NFL: 52 and 47 respectively. But here’s the real kicker: in the 13 to 17-year-old age bracket, 57% of the US population have basketball as their favourite sport. Compared with 13% for American football and 4% for baseball. Not a bad funnel.

What else we like

The list of competitive advantages the NBA holds goes on. If you consider the NBA’s market as “professional basketball”, it has a complete monopoly – no other league competes with it for top player talent. It’s also got incredible scarcity, with a fixed supply of 30 teams.

The NBA has spent many years laying the groundwork for the long-term. Through focusing on: (1) global distribution; (2) player-first marketing; (3) digitally native UX; and (4) the youth, it has sewn the infrastructure to drive healthy growth for the next few decades. It is clear to see why the tech, venture and private-equity elite are falling over themselves to get a taste.

Scott Farquhar with new Utah Jazz owners, Ryan Smith and Mike Cannon-Brookes

If you want to go deeper on the NBA’s business strategy, check out the podcast episode by The Acquired on the NBA.

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