TV ‘Sports Bubble’ Looms Over Future NBA Labor Negotiations

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By Hassan A. Kanu

The NBA seems to be flush with cash after its nine-year $24 billion television broadcasting deal with ESPN and Turner Sports kicked in this season. The extra cash may have helped smooth over what was expected to be a contentious labor dispute.

Representatives of both sides praised the National Basketball Association’s resulting collective bargaining agreement after a short and surprisingly agreeable process.

“There’s a connection between media revenue and what shows up at the bargaining table,” Michael LeRoy, a professor at the University of Illinois College of Law and School of Labor and Employment Relations, told Bloomberg BNA. LeRoy has published extensively on collective bargaining in sports.

The league salary cap jumped from about $70 million to $94 million per team in the 2016-2017 season, thanks to that television money. The cap limits how much players can be paid and is designed to even out competition between wealthy and less-wealthy team owners.

Many players, and not just the marquee names, recently renewed their contracts for eye-popping figures. Mike Conley, who is generally left out of debates about the top NBA players, signed the richest contract in league history—a five-year, $153 million deal with the Memphis Grizzlies. By contrast, the Golden State Warriors’ Stephen Curry, who has won the league’s Most Valuable Player award the past two seasons, signed a four-year, $44 million deal in 2012, under the old cap.

Cable Cord-Cutters Raise TV Viewership Questions

Although the league seems well-positioned financially, uncertainties about television viewership due to the trend of cord-cutting and “skinny” television bundles have created questions about the value of the NBA’s future television broadcasting deals.

Smaller broadcasting deals would mean less money overall for the league. That means future rounds of bargaining are likely to be much more contentious.

“When TV deals are lush, players don’t get nearly the same amount of it as the league, and when they’re poor players bear the brunt of that downside,” LeRoy said. “There’s sharing when times are good, but the sharing is not as significant when times are bad—and the league” would be “more than happy to share the pain with the players.”

In other words, if the slowdown in the television business continues, the huge upward movement in player salaries, and maybe even in franchise valuations, could swing in the opposite direction over the next several years.

“A 10-year-old ball player today—whether basketball or baseball, or even football—will never get a contract even close to what LeBron or A-Rod received because the current dynamic among teams, regional sports networks and sports networks is built on sand and will erode far quicker than even the realists are forecasting,” Leo Hindery Jr., managing partner of InterMedia Partners, told Bloomberg BNA Dec. 22. Hindery was referring to LeBron James, winner of three NBA championships and four-time league MVP, and Alex Rodriguez, a 14-time Major League Baseball all-star. James earned more than $30 million in 2016, while Rodriguez earned $20 million in his final season, also in 2016.

Hindery was the founding chairman and chief executive of the YES Network, which broadcasts the New York Yankees’ and Brooklyn Nets’ games, and is a former president of TCI and AT&T Broadband.

TV Deals Have Enriched League

The NBA derives much of its value from “basketball-related income,” which includes money from gate receipts, sponsorship deals with major corporations such as Nike and its highly lucrative television deals.

The NBA’s current $24 billion deal pays the league about three times more than its previous contract, and sports broadcasting deals have been getting much more expensive for some time. The league and its franchises also enter into multimillion-dollar deals with local stations that show home games.

Many NBA analysts speculate that former Microsoft CEO Steve Ballmer was willing to pay $2 billion to buy the Los Angeles Clippers—which sold for $12.5 million in 1981—because both the league’s and the team’s TV deals were expiring. The team now has a new deal with Fox Sports that pays it $50 million to $55 million a season, about double the previous deal.

The value appreciation for the Clippers was “close to stunning,” according to Paul Haagen, law professor and co-director of Duke University’s Center for Sports Law and Policy.

“That insane amount of money paid for the Clippers franchise looked like a totally bizarre outlier,” Haagen told Bloomberg BNA. “What’s remarkable, though, is all the transactions since then have reflected really dramatically increased franchise values.”

According to Forbes, the average NBA franchise is worth $1.25 billion, a 74 percent gain from the year before the latest television deals.

But media industry professionals and analysts interviewed by Bloomberg BNA pointed to research showing that television viewership is in an unprecedented decline, indicating that the influx of cash and amicable tone of labor negotiations may reverse once the current television deals expire.

In other words, owners, players and fans alike may be experiencing the best parts of a television “sports bubble” right now.

TV Industry in Decline

Media stocks took a big hit last year. ESPN reported a loss of 9 million subscribers over the previous three years and 3 million in 2016 alone.

Disney, CBS and Time Warner all saw their stocks dip at least 5 percent in one week in August. And investment analysts at Sanford Bernstein called American ad-supported television a “structurally impaired” asset.

Americans between the ages of 14 and 32 started watching more programming on mobile devices than on actual televisions for the first time in 2015, Kevin Westcott, head of Deloitte’s U.S. media and entertainment practice, told Bloomberg BNA.

“Year over year, that number’s been growing significantly,” Westcott said. Deloitte’s surveys showed that about 42 percent of the entire population watches sports. Among millennials, the number dips to about a third, “so they’re watching less sports and less live television” generally, Westcott said.

One factor contributing to the rise in cord-cutting is the cost of cable in comparison with over-the-top internet video providers such as Netflix and the many other options now available.

And, it turns out, sports are a major reason behind those high prices.

“Sports programming has become overpriced,” InterMedia Partners’ Hindery said. ESPN costs roughly $7.21 a month per subscriber. The second-highest fee is $1.82 for Time Warner’s TNT—which also shows NBA games.

These high costs are good for the NBA now, but they may expose the league to significant risk as the relatively high price of cable, and sports programming in particular, fuels consumers’ move away from live television.

Will the Bubble Burst?

The deals that networks, cable companies and sports leagues enter into essentially assume a fairly steady viewership.

“Sports programmers do not seem to be thoughtfully correlating rights fees with the trends underway in the distribution environment,” Hindery said.

Distributors may therefore be overpaying for the NBA’s and other league’s content based on their assumptions about how many subscribers they’ll have. If those companies aren’t able to recoup those costs, they’re likely to seek a renegotiation if the contract allows for it, or at least to make a lower offer next time.

The prices of those future deals will have a clear effect on many other numbers, including NBA team valuations and player salaries.

“We don’t have enough data points, but it certainly does look like a bubble is among the possibilities,” Duke University’s Haagen told Bloomberg BNA.

There are some signs of fundamental changes to the business already. Comcast dropped the Yankees’ YES Network in 2015, and Time Warner paid $8.3 billion to the Los Angeles Dodgers to run the channel that broadcasts their games after operators refused to carry the station because of high costs. In early January, the programmer that carries the Baltimore Orioles and Washington Nationals games lost a lawsuit against an auditing company it hired to see if its distributors had paid the appropriate monthly fees for each subscriber getting their channels.

“At this stage, it isn’t certain,” Haagen said. “But it’s possible that we’re riding a bubble after which there’ll be a significant recalibration and sports will be less important.”

“I do think there’s reason to believe that cable—without changes—is not going to be the future of content distribution,” the professor added.

Likely Issue at Next Bargaining Table

It’s likely that the trends underway in the TV industry will have a significant effect on the NBA player salaries and the next round of bargaining.

If past practices tell us anything, we should expect either a lockout or for the owners to take another look at the split of basketball-related income during the league’s next round of bargaining.

“The main ways” the league would address a large decline in television revenues “would be to redo the revenue split so players get a smaller cut of revenue sharing,” LeRoy said. “A related but different way is they could also lower the salary caps, those are the two levers—if they want to be straight up with no funny business, that’s what they would do.”

To contact the reporter on this story: Hassan A. Kanu in Washington at hkanu@bna.com

To contact the editors responsible for this story: Peggy Aulino at maulino@bna.com; Terence Hyland at thyland@bna.com; Christopher Opfer at copfer@bna.com

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