The National Bubble Association
I think the NBA just put itself in a dangerous place…
I know, I know. A guy in Silicon Valley is calling a bubble in another industry. The jokes write themselves. But after watching the free agent signings the past few weeks in the NBA, its hard to think of anything else. Though maybe not for the exact reasons you may be thinking.
Look, I’m not going to talk trash about any individual deal that was signed. I could, but I won’t. First and foremost, these people are all decidedly larger than me and infinitely better at basketball. The NBA is a relatively small league when it comes to team size, so while we may not believe that some players are particularly good, they’re better than 99.9999% of all basketball players on the planet. Those skills are worth a lot of money.
More importantly, at the end of the day, these players are worth what the teams are willing to spend on them. It’s a market — not exactly an entirely free one — but every team has to follow the same rules. And collectively, those teams have decided that a lot of players are suddenly worth a lot more money. Good for the players.
Well, good for the players in the short term.
Here’s the thing: while it may appear there are no “losers” in these deals — rest-assured that the teams make far more money than they’re paying the players — they all may end up as losers in the long run. Because the scary thing isn’t really these deals, it’s what’s behind them.
In 2014, the NBA signed a new television deal with ESPN and Turner Sports. That deal was worth $24 billion over 9 years. And it starts this coming season. As a result, the salary cap has jumped from $70 million last year to roughly $94 million next year. This kind of jump is unprecedented. It’s so big that the league (wisely) tried to propose smoothing the increases out over multiple seasons, but the players union rejected that. Hence, the current contract gold rush.
And I believe it really is a gold rush because I think there’s a pretty good chance that it’s a one-time thing as we reach peak television — or really peak, live sports on traditional television. And, again, it could lead to a bad situation down the road.
As we all know, the current state of television is undergoing massive changes as we speak. Everything is moving online in one form or another, and new models are emerging as a result. Meanwhile, cable, while not yet dying, is starting to dwindle. The last remaining stronghold of the old system is live sports. And because of that, there’s an even higher premium on them than ever before.
Simply put: live sports are the only form of “traditional” television that can reliably still put butts in seats at a set time around the world so they can be advertised to all at once. This is very, very, very valuable to advertisers. More so now than ever before because of the aforementioned changes occurring across the rest of the television landscape.
Unfortunately (for multiple parties), this change will happen to sports as well. We’ll always want to watch it live, but the way we do that will shift away from the traditional cable means. This is inevitable.
And when that happens, it will lead to a rapid change in the economics of everything we’re talking about. There will be fewer people paying for cable which means cable will pay less money to ESPN and Turner Sports, which means those channels will have less money to pay to the leagues. That, in turn, will lead the leagues to look elsewhere to make up for this lost money, and that probably means going direct to fans or some other new system we haven’t thought of yet. This, in turn, will only hasten the decline of ESPN and Turner Sports.¹ And round and round we go.
The only unknown is when this will start to happen. As noted above, this latest NBA TV deal is a nine year one. So it may take a decade. But it just feels inevitable.
And while I think you could argue that eventually, the NBA going direct-to-fans may end up being more profitable — especially if basketball keeps growing in stature as I believe it will versus the other sports — there will be a gap where the money coming in from these new streams doesn’t match the money that came in from these insanely lucrative TV deals signed recently. And when that happens, I suspect there will be a bit of a “holy shit” moment, where the leagues — and the NBA in particular for this thought exercise — realize they’ve been paying far too much for certain contracts. And the new world order won’t support it — at least not yet.
To be clear, the players contracts being done right now may never run into these issues because of the length of the TV deal that was just signed. But the new player contracts signed over the next few years that run longer than this TV deal may be an issue. And now that the floor for these deals have been set so high, it will be hard to talk players into taking less money. But I think they may have to, at least for a bit.
None of this speaks to some of the other issues at play here: namely, that the very best players in the NBA should be worth far more than the guys on the bench. And yet, because of the current cap rules, their salaries aren’t that far apart — and some of these newer contracts, of course, have bench players making more than superstars right now. That’s insane and will eventually need to be addressed.
Probably easier to do that before this television sports money bubble pops.²
¹ ESPN, of course, will eventually wise-up and go direct-to-consumers as well. But because their economics are so good with their cable payouts, it seems unlikely they can make as much money going direct. But who knows in the long run.
² And what about those owners who paid, say, $2 billion for teams?…
