NBA: A profitable business model

Publicado: octubre 4, 2013 en Economia, Empresa, Gestión, Marketing
Etiquetas:, , , , , , , ,

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As you all know, the National Basketball Association or NBA is the top competition in basketball and also one of the most followed sports competitions worldwide. This success also translates to the economics having in mind that the 30 teams that make up the organization are valued in 11,800 million (Forbes).

According to the same source, the NBA generates 3,900 million a year in revenue, of which 1,154 (almost 30%) come from the sale of tickets. This shows how attractive the competition is for the audience, especially if we consider that in addition to the attendance to the games, the NBA had a television audience of 391,000 viewers a day last year only in the U.S..

The above data demonstrates the success that the NBA has as a sport competition and as business model. But how can it be so successful? How can it work so well and instead the profitability of other sports competitions such as the ACB or LFP (basketball and football leagues in Spain) are constantly being challenged? Well, there are a number of factors that explain it and are the keys for success of the NBA business model:

Franchise model

The NBA was created as a limited partnership in which the partners are the teams that operate as franchises. If a team wants to get into the league it must be accepted first by the management organization and afterwards pay a fee of $300 million. This does not guarantee the final entry into the competition as the team has to wait an average of five years until it’s finally admitted, a period during which it is subjected to audits and reviews of the business model to validate its feasibility.

Market players and draft

This is one of the points that differentiate NBA most from other sports competitions, especially European ones. The NBA itself has an own market of players. Each player has a value priced at his annual salary. To be able to change to another team, the receiving team must give the issuer one or more players valued at the same amount. When a player finishes contract becomes a free agent and can automatically sign with any other team without any cost.

In other competitions, if a team wants to sign a player first has to negotiate with the theam where he is playing and agree on a value for the transfer.

Regarding the draft, is the standard procedure with which the NBA incorporates players to the league. Each team chooses from a number of pre-registered players (local players over 18 who have gone through at least a year of college or foreign players declared eligible). The most important is the order in which the teams opt to choose the players. The options to have the first choices are inversely proportional to the classification in the league the previous year. When a team gets the rights of a player it can decide whether to release his contract, to transfer him to another team or finally hire him.

Wage limit

The wage limit is the spending cap that has every team in the league to pay their players during a year. It helps to maintain equality in the competition because regardless of the economic power of a team everyone can invest up to the same amount. The ceiling for last season was $58 million per team.

I must say that there is also a minimum, which the last season was 49.3 million (85% of the maximum), it helps maintaining competitiveness and quality on the league but is a handicap for teams that struggle obtaining income.

Additionally there are some exceptions with which teams can exceed the salary cap (we won´t write about them in this post), and fulfilling these exceptions there is a second cap located in 70.3 million, from which teams have to pay a luxury tax (one dollar for every dollar that exceeds the maximum amount).

Finally, income and expenses

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Income sources can be grouped into four main groups: television broadcasting rights shares (higher revenue per team, all teams receive the same amount per year), market revenues for each team (depends on the home city of the team and fans globally), revenues from stadium management (ticket sales, advertising, etc..) and brand management.

An example of the management differences with the European leagues are television rights. In the NBA every team receives the same amount for this item while in La LIga both Barcelona and Madrid will receive 150 million next year and the next teams listed are Valencia and Atletico Madrid with 40.

In conclusion

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This huge difference makes almost impossible to maintain the quality of the competitions and in many cases leads to the disappearance of teams that are having great results in sporting but fail to be profitable.

I´m not tryint to say that the model adopted by the NBA is best nor I think is the sports competitions model to follow. In the U.S., the NBA is the fifth sport on popularity, behind pro football, college football, baseball and college basketball (yes, though it’s hard to believe college basketball is more popular than the NBA in the U.S.). One explanation for this is that the sports model adopted makes it less exciting, having long playoffs, than other sports that winners are decided by one way matches. Therefore, it´s not my intention to show as an example the model established by the NBA, but to show that there are ways to make a sport competition a profitable business while keeping it exciting and competitive

To end the post, I do not think that the NBA model is replicable in most European competitions (especially in Spanish ones) given the enormous differences on how they are structured. Anyhow, what I do think is necessary is to trend towards a greater equality, since actual differences make matches increasingly less attractive for the viewer and the competition less profitable to remain viable.

Nuts

comentarios
  1. knowthing dice:

    Do you think the NBA business model is replicable in Europe? What measures would you adopt to make more profitable Spanish competitions? Do you think that there are measures to enhance competitiveness can be implemented?

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