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May 12, 2023

Editor Note: Adam Grossman takes the controls on Friday mornings. You will find his latest Revenue Above Replacement column is below. I'll be back on Monday. Have a great weekend.

Long-Term Value Creation is the Key To NBA Media Rights Fees, Not Short-Term Ratings

Conventional wisdom would suggest the ongoing, star-studded, NBA postseason would propel the league to be able to command record revenues in its upcoming media rights negotiations.

However, there is an argument to be made that it could have the opposite effect. The league's 'best-case scenario' is now a 'known' value, and knowing the potential upside typically limits an asset's option value.

Industry insiders also say tier-one media rights deals should be based on long-term value creation opportunities rather than short-term viewership trends.

Options are contracts that enable the buyer to pay a price now for the right to take a future action on a specific quantity of the underlying asset. Option pricing theory can be applied to NBA media rights given that rightsholders are wagering on their ability to derive future revenues from the league's content.

The most well known option pricing model is the

Black-Scholes-Merton (BSM) model

.

The main takeaway from BSM is that a systemic way to price options is to determine the probabilities of the option falling in (being exercised) or out (not being exercised) of the money.

A secondary learning was that options with more variability are worth more to a buyer. Essentially, buyers do not need to purchase an option if they already have a good idea for how much the underlying asset is worth.

This year’s NBA playoff games have potentially eroded one of the key elements that drives option value for the league.

The first and second rounds both delivered strong matchups with compelling storylines creating a likely 'best-case scenario' for driving eyeballs. 

And while the first round did draw its highest ratings since 2015, viewership only rose 15% year-over-year. Similarly, the conference semifinal round has its largest number of viewers since 2011, but the games are 'only' averaging 5.3 million viewers a piece through the first four of each series.

That is underwhelming for a league that has publicly stated its intent to achieve a 2-3x rights fee increase in its next deal–at least in a best case scenario.

“I do not think these playoffs will have an impact on future media rights,” David Levy (co-CEO, Horizon Sports & Experiences) said. “The ratings for the NBA are going to be solid every year because of the built-in fanbase.”

The former Turner Sports president led the network's negotiations with the league the last time around.

The NBA would be better served selling the long-term benefits it can offer a potential rights holder, rather than any short-term variance in this season’s playoff ratings that would be difficult to support with an option pricing model.

For pay-tv and over-the-air distributors, the NBA can consistently deliver audiences advertisers deem valuable (see: younger, diverse, and affluent). And as sports betting matures, some industry insiders believe those viewers will be increasingly engaged.

“If you bet on a sport then you are 95% more likely to watch,” Levy said. “That means more people are watching for longer, which means higher ratings and [an] increase in advertising dollars.”

Cable and streaming operators also use live sports content as a primary driver of subscribers. ESPN, in particular, relies on

live rights

to power its linear and OTT platforms.

And "direct-to-consumer operators, like Amazon and Apple, are using sports as a tool to sell their products,” Chris Bevilacqua (co-founder and CEO, Simplebet) said. 

While a lot has changed since the last time the league went to market with its rights, some things remain the same. 

“The NBA rights enable a company to manage one of the most dominant global sports,” Levy said.

Bevilacqua agreed that the NBA should be in a strong, long-term position, regardless of how their postseason ratings finish.

“Media rights are long-term investments that companies are making with the NBA. Looking at the situation right now as a static shot is more for atmospherics," he said.

About the Author: Adam Grossman is the Vice President of Business Insights & Analytics at Excel Sports Management. He works with companies, sports properties, media rights holders, athletes, agencies, and events to determine the value of their most important assets. Grossman is also a professor at Northwestern University Master’s In Sports Administration program and the co-author of The Sports Strategist: Developing Leaders for a High-Performance Industry. You can find him at [email protected].