The NBA's TV-Rights Bluff
Part 1 of 3
16 May 2021

CNBC reporter, Jabari Young, recently published an article announcing that the NBA is eyeing a hefty $75B haul from the next broadcast rights deal. This article seemed more like an NBA authored release than the work of independent journalism. No shots at Young, but the anonymous quotes, the startling figures, and its dubious timing all reeked of graft. It gives me the suspicion that the NBA floated this aggreation thirsty story in an attempt to apply some pressure on ESPN and TNT who are balking to their demands. If this is the case, I wouldn’t blame the networks for behaving cautiously given the changes and uncertainly in entertainment. The once-dominant pay-TV business model has been declining for years, but 2020 may have been the tipping point for when streaming services became the foremost in-home entertainment product.

The cable business was gifted with a year of COVID-related restrictions which confined people’s entertainment options to their living rooms. Certainly, there was optimism that captive audiences would translate to improved TV-ratings (like Mark Cuban touted). However, more people grabbed the remote to their AppleTV/FireStick devices which accelerated cord-cutting. The non-intuitive results made the threat posed by these cheaper on-demand services seem existential to the cable business. The impact of 2020 should have made shareholders and executives extremely worried about entering an ~$8B billion a year deal through 2034.

The Decline of Cable

I like to view the troubled outlook for the NBA’s next TV deal through the rapid decline of young people watching TV. Pew Research tracked that in 2021 only 34% 18-29-year-olds have pay-TV at home – a 52% drop from just 2015. A perhaps more cogent image is how quickly MTV became culturally irrelevant. From its inception in 1981, MTV had long been an influential pillar of teen popular culture. Now MTV’s once must-see event programming has faded into a wasteland of gimmicky reality TV shows targeted to the last (and ageing) generation of kids who had watched earnestly (here comes JerseyBama Shore vacation reunion part 12). I suspect if we indexed the year when MTV stopped being fashionable for teens, we would notice an accelerated decline in pay-TV subs happening in the 5 to 8-year mark (2014-17?). It must be terrifying for TV network executives is to mentally forecast out the demographics and sub counts 25-years from that point – which incredibly, is a year when the next supposed NBA broadcast deal would be ripe.

The compounding effects from not adding young subscribers should give anxiety to any network executive considering long-term deals. Then factor in the expected leakage from older cord-cutters and things get really ugly. Statista tracked and forecasted US pay-TV subscribers that estimated the number of subs to fall to 60 million by 2025. That would be a 40% drop from its peak subscriber rate, a time period that cover the length of the current NBA deal. Calculating and applying a CAGR to reach the 2030, the deals midpoint, would yield 48 million subs. Applying it to end of the contract returns fewer than 40 million subscribers. Given further unknown changes in tech and the entertainment industry (the known unknowns 😅) I wouldn’t be surprised if ~40 million pay-TV subs significantly exceeds the actual value in 2034.

So, just from performing back-of-the-envelope math, the NBA is seeking 3X the money when its partners are expected to generate half the adjusted-revenue. These companies are no longer cash cows with a natural monopoly on in-home entertainment, so it’s difficult to imagine how they could suddenly afford to pay the dizzying asking price. ESPN and Turner have already begun making operating cuts that laid off hundreds and cancelled programs. These actions should mark their new economic realities, and if anything, apply downward pressure on the price of its current long-term deals. Jacking rates on consumers won’t be a viable option. Networks used to bully carriers with network fee increases 3.5X the rate of inflation, but they won’t bear it in a robust competitive environment where cable companies have to push back. Their competition is cheaper and better. The resulting higher consumer price sensitivity would turn increased network fees into even faster cord-cuting.

Now, Young’s article might just be the league posturing to combat the negative news surrounding their lacklustre ratings. However, if they are sincere, Adam Silver is badly overplaying his hand which may come back to hurt him. In my next blog, I’ll share my reasoning why Big Tech and streaming services shouldn’t provide the with any leverage in these contract negotiations. Until then..