NBA’s $1 Billion Licensing Deal Really About Building the Next Generation of Fans

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Take-Two Interactive (TTWO) will pay the NBA (and the NBAPA) up to $1.1 billion – more than 2x the value of the expiring deal – over the next 7 years, for the rights to use team logos and player likeness’ (must-haves for gamers) in its popular 2K game; as of November, NBA 2K19 was the best-selling sports game of 2018 and 3rd best-selling overall. The global licensing rights extension includes NBA2K Mobile and the free-to-play games (in China only) NBA2K Online and NBA2K Online2, games with a combined 40 million users.

Howie Long-Short: Video game licensing rights are calculated based on a percentage of product sales (typically 10%-15%) and NBA2K posted a franchise sales record in ‘18 (10 million), so TTWO’s rising costs are a product of the title’s success more than anything else. Competitor Electronic Arts Inc. (publishes NBA Live) – which sells a fraction of the units – will be stretched to move forward with a rights fees increase on their next deal, but the company won’t pay anywhere close to the same amount as TTWO because they’re not generating equal revenue.

NBA2K was first released in 1999. Few gaming titles remain relevant within pop-culture beyond their initial release, so it’s worth wondering why the 2K franchise has been able to thrive for 20 years? Tony Ponturo, EVP at Turnkey Intelligence (strategic consulting for leagues/teams/facilities), told me “there are several reasons why NBA2K has had staying power. One is the game itself. The content is so good that there’s been repeat and growth business for the NBA2K brand. The second has been the increase in young fans watching the game – the growth of the young male demographic has given a boost to the game; and the NBA’s also experienced tremendous international growth that’s helped to increase the potential audience.”

While 2K has certainly benefited from the NBA’s youth movement, it has been a 2-way street. In fact, one could argue that despite the $1.1 billion figure receiving all the headlines, the NBA’s deal with TTWO is truly about building the next generation of fans. Tony explained, “NBA2K has helped to grow awareness of the sport on a global basis and it’s resulted in more fans, more knowledgeable fans and more passionate fans of the league. Fans of NBA2K – particularly those abroad – may not be going to the games and millennials might not spend 2.5 hours watching a traditional television broadcast, but the video game helps to begin shaping their passion for the league; they can become fans through the video game.”

The NBA has invested in esports with the introduction of the NBA2K League, so it would seem as if TTWO would have had some leverage in negotiations (it’s been said they paid on the high-side of the 10%-15% range referenced), but Tony explained that it was really the NBA with all the leverage. “TTWO understands that without NBA trademarks and an association with the league’s players, that they don’t have a basketball gaming business; they had no leverage. You also can’t deny that the NBA gained leverage during this round of negotiations as there’s no longer a collegiate game for TTWO to compete against (EA’s popular NCAA Basketball game existed back in ’11); the rights are that much more valuable with the pro game now capturing all basketball gaming business.”

It should be noted that while NBA2K Online and NBA2K Online 2 are free to play, the games do offer micro transactions. That’s important as the small digital in-game purchases accounted for +/- 50% of the TTWO’s total net revenue in fiscal Q2 ’19.

Fan Marino: The NBA2K League – a JV between the NBA and TTWO – has announced intentions (no time-frame) of going global because simply put, that’s where the fans are; 53% of the 380 million esports fans around the world reside in Asia or the Pacific and another 18% live in Europe. No timeframe has been established for international expansion, but with the ability for the teams to compete without traveling – few hurdles stand in the way. 21 NBA teams will field clubs that will compete in the NBA2K League’s sophomore season. Brendan Donahue, managing director of the 2K League, has said that the league could ultimately include teams in 45+ cities.

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Author: John Wall Street

At the intersection of sports & finance.

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