_{And How Do Teams Remain Profitable?}

NBA teams generate revenue from a few primary sources, which collectively contribute to their overall profitability. There are 2 categories of revenue:

1. Basketball Related Income - Revenue that’s generated directly from Basket Ball related activities. For eg, Ticket Sales, Broadcasting rights, Television Contracts, Arena Revenue, Licensing, Merchandise, Playoff Revenue, NBA Events, Local Event Revenue etc

2. Non Basketball Related Income - Revenue generated from outside the core operations. For example: Concerts and Events, Arena Naming Rights, Real Estate Dev, some Broadcasting, Community Programs etc.

Let’s take a look at some of the major revenue generators in a bit more detail:

1. Ticket Sales🎫: NBA teams sell tickets for their home games. The revenue from ticket sales is influenced by factors such as team performance, opponent, and overall demand for the game. For example, The tickets to the Golden State Warriors home game at the Chase Center during the regular-season games ranged from around $130 to about $11,011 per seat & the average price per game this season(2022-’23) was around $538.50. (It has 18,064 seats)

2. Broadcast Rights 📺: Television and radio networks pay significant amounts for the rights to broadcast NBA games for the season. Here the National Basketball Association (NBA) makes money & then the money is divided amongst the teams. Broadcasting rights deals can range from tens of millions to hundreds of millions of dollars per season for successful teams.
   
   The league sells TV rights at different levels. For high-profile regular season and playoff games, they have a massive nine-year, $24 billion contract with Disney's internal broadcasting, bringing in around $2.7 billion each year. Additionally, they sell local TV rights for individual teams, generating approximately $1.5 billion for the 2019-2020 season. Foreign TV rights, particularly to China, are also a significant source of income, amounting to $300 million annually. In total, TV rights make up around 56% of the NBA's revenue.

3. Sponsorships and Advertising🤝: NBA teams sign sponsorship deals with various companies, including apparel brands, technology companies, and beverage companies. These sponsorships often involve placing the sponsor's logo on team jerseys, in arenas, and during broadcasts.
   
   The NBA secures various sponsorship deals, with notable ones including the eight-year, $1 billion contract with Nike for apparel, which generates $125 million annually. Teams also receive an average of $10 million per year for jersey logo sponsors, totaling around $300 million for the 2019–2020 season. Other sponsorships on the court and in different areas bring in an additional $525 million, contributing 13% to the overall revenue.
   

4. Merchandise Sales 🎽: NBA teams sell a wide range of merchandise, including jerseys, hats, t-shirts, and other team-branded items. This is a significant revenue stream, especially for popular teams and star players.
   

5. Concessions 📈: NBA teams make money from selling food, beverages, and merchandise at their home arenas during games.
   

6. International Opportunities 🌍: The NBA has a global fan base, and international partnerships, exhibition games, and other global events contribute to the league & team's revenue.
   

7. NBA’s Digital Properties 🌐: The NBA owns and operates various digital platforms, including NBA League Pass (a subscription-based service that allows fans to stream games), NBA.com, and the NBA app, which generate revenue through subscriptions, ads, and merchandise sales.

8. Playoffs and Championships 💰💫: Success in the playoffs and championships can lead to increased revenue through higher ticket sales, merchandise sales, sponsorship opportunities along with additional prize money for making the playoffs.

9. Video Game Sales 🎮: The NBA makes substantial profits from selling video games like NBA 2K. A seven-year, $1.1 billion contract with Take-Two Interactive for NBA 2K adds to their earnings. Merchandise and other sales sum up to $1 billion, constituting approximately 13% of total revenue.

Of course, each NBA team’s revenue significantly varies based on factors such as market size, team performance, popularity, ownership, and management efficiency. Some teams, especially those in larger markets or with a successful history, tend to generate higher revenue compared to smaller-market or less successful teams.

Now that we’ve had a quick overview of revenue, let’s take a look at the most common expenses for teams:

Main Expense Buckets for NBA teams

The biggest expense bucket for NBA teams is player salaries, and this is where it gets interesting: NBA has salary limits in place for each team, and the team that exceeds the salary cap has to pay a luxury tax. This tax is then divided equally amongst the teams that haven’t exceeded the salary cap. This luxury tax is calculated using a complex formula that you can read more about here. But for instance the Golden State Warriors paid $164.9 million & the LA Clippers paid $144.7 million as luxury tax in the just 2022-23 season.

Here’s a Breakdown of the Revenue for Each Team

If you take a look at the revenue breakdown for NBA teams below, you’ll notice something interesting: almost all teams, except the Brooklyn Nets, have seen an increase in their valuations, and most seem to be profitable!

(Source: Forbes)

How the League Makes Sure All NBA Teams Remain Profitable:

There is a Revenue Sharing model that is set in place, which makes it easier for almost all teams to stay profitable if the league is growing. Let’s dig right into it:

There are 2 types of teams in NBA:

• Large Market Teams: Metropolitan cities, bigger market size and fan base, larger valuations & hence ability to generate larger revenue & attract free agents. For eg, New York Nicks, Boston Celtics, LA Lakers, etc.

• Small Market Teams: Smaller cities, smaller market size, smaller fan base, modest valuations, hence lesser ability to generate large revenue and attract free agents. For eg, Memphis Grizzlies, Milwaukee Bucks, Oklahoma City Thunder etc

The obvious guess is that large market teams will do better, but the fact is, today the small market teams are giving the bang for the buck invested! If you look at the top small market teams like Milwaukee Bucks, OKC, Cleveland, etc, their revenue is phenomenally high. There are 2 reasons for this

a) Great ownership and Management

b) Financial Stability due to the Revenue Sharing Model in place.

Here's how the NBA's revenue sharing model works:

1. National Revenue: Think of the entire NBA as a big company with different branches (the teams). When they make a big deal with TV networks or other major sponsors, that money gets split equally among all the branches.

2. Revenue Sharing: Now, if some teams are making a lot more money on their own, the NBA has a system to help balance things out. The richer teams share a part of their earnings with the ones that aren't making as much. This is like a tax on the more profitable teams that goes to help the less profitable ones.

   Each team contributes about 50% of basketball-related income along with a certain amount from non-basketball-related income to a revenue pool that’s re-distributed among all teams every season.

3. Luxury Tax: If a team spends too much on player salaries (going over a pre-decided salary limit), they have to pay extra money as a penalty. This penalty money gets shared with the other teams that aren't overspending. It's a bit like a speeding ticket – if you go over the limit, you have to pay, and that money is used for the good of everyone else.

4. Incentives and Compliance: Teams can't just rely on the shared money and need to make efforts to earn it on their own. If a team doesn't try hard enough to make money, they might get less from the shared pool. It's like a scholarship that requires you to maintain a certain grade point average; if you don't meet the standard, you might lose some or all of the scholarship. All teams are required to generate at least 70% of the average league revenue to stay in the league & get the re-distributed revenue.

5. Collective Bargaining Agreement: The rules of how all this money is shared are written down in an agreement that the players and the teams/league agree on. This can be likened to a contract or a set of rules that everyone has to follow, like a student council constitution in a school.

In simple terms, the NBA's revenue sharing model is all about making sure that all the teams have a fair chance to compete, regardless of how big or small their market is. It's like a combination of revenue sharing and rules to ensure that the league remains exciting and competitive for everyone involved.

This Revenue Sharing Model is one of the biggest reasons NBA teams remain profitable regardless of their performance. This keeps the NBA extremely popular and thriving as an organization, and it’s only growing.

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