Alibaba co-founder Joseph Tsai | YouTube, Adam Najberg

The Facts —

  • Joseph Tsai, vice chairman and cofounder of the Chinese e-commerce company Alibaba Group, is purchasing a 49% stake in the NBA’s Brooklyn Nets at a valuation of $2.3 billion, the highest in NBA history, according to The Wall Street Journal.
    • The agreement does not give Tsai a role in the basketball or business side of the Nets, but it does give him the option to buy out Mikhail Prokhorov, the principle owner, in the future.
  • Russian mogul Mikhail Prokhorov, who owned 100% of the Brooklyn Nets and its home arena, the Barclays Center, approved the sale to Tsai.
    • The sale to Tsai does not include any rights to the Barclays Center, which Prokhorov will keep, according to The New York Times.

Chinese Investments in American Sports —

  • Tsai is the co-founder of the Chinese e-commerce group Alibaba.
    • Michael de la Merced and Joe Drape of The New York Times write that Tsai’s acquisition of a stake in the Nets “is the latest example of an executive from a Chinese conglomerate — or a Chinese company itself — spending heavily to acquire pieces of sports properties, including the Premier League team Manchester City and other top clubs on the European continent… With a population of 1.3 billion people and a rising middle class with an unquenchable thirst for sports, China is considered a lucrative and largely untapped market for both consuming and participating in sports.”
  • In August, Tsai purchased the rights to the National Lacrosse League’s new expansion team in San Diego.
  • CNBC reported in March that Zhou Xiaochuan, China’s top central banker, has not supported recent Chinese sports and entertainment acquisitions.

“Some are not in line with our requirements and policies for overseas investment, such as in sports, entertainment and clubs. This didn’t bring much benefit to China and caused some complaints overseas.”

  • The New York Times reported that Chinese multinational conglomerate the Wanda Group purchased the rights to the Ironman competition for $650 million in June.
  • In August, the Times of London reported that an unnamed Chinese billionaire was interested in purchasing a stake in the English soccer team Manchester United.

“Negotiators claiming to act for a billionaire Asian investor have contacted some of United’s independent shareholders in recent weeks over a possible deal to buy a holding in the football club.”

NBA Valuations and a Possible “Bubble” —

  • According to the NBA Collective Bargaining Agreement, between the owners and players, 49 to 51% of basketball related income (BRI) must go the players’ salaries, leaving about 50% of the income to the teams’ owners.
    • In October 2014, The New York Times reported that the NBA had reached a $24 billion media agreement with ESPN and TNT through the 2024-2025 season.
    • The agreement represents a near-tripling of annual fees that ESPN and TNT will pay per year, as the average yearly payment rises from around $930 million to $2.66 billion.
    • According to the NBA’s collective bargainning agreement, television rights count toward BRI, which will add about $12 billion to players’ salaries and $12 billion to the owners of the league’s 30 teams.
  • Forbes’ 2017 valuation of NBA teams revealed a 13% increase in league revenue and a 9% increase in average team valuations. The article attributes the primary reasons for these rises to the $24 billion media deal.

“The league’s 30 teams generated $5.9 billion in revenue last season, up 13% from the 2016 valuations and another record high for the league. The average NBA franchise value is $1.36 billion, up 9% over last year. NBA team values have shot up 3.5-fold over the past five years. Fueling the gains are; the NBA’s $24 billion media deal with ESPN and TNT that kicked off this season.”

  • In February, Forbes valued the Nets at $1.8 billion, making it the seventh most valuable franchise in the NBA.
  • The New York Knicks, owned by the Madison Square Garden Company, led the list at a valuation of $3.3 billion. Five years ago, the Knicks were the second most valuable team in the league at $780 million.
  • In 2014, former Microsoft CEO Steve Ballmer purchased the Los Angeles Clippers for $2 billion, an NBA record.
  • In September, Sports Illustrated reported that Houston billionaire Tilman Fertitta agreed to purchase the Houston Rockets for $2.2 billion, the highest sale price in NBA history.

Arguments That There is a “Bubble” —

  • In July 2016, Clay Travis, founder of the sports site Outkick the Coverage, wrote that the NBA’s revenue and team values are not sustainable because cable customers will have more freedom to pick the channels they receive in the future. Travis asserts that customers will opt out of purchasing “cable bundles,” where they have to buy a large collection of channels, and customers will opt to buy only the channels they want to watch.
    • Now, every cable and satellite subscriber pays $30 a year for the NBA’s games whether they watch or not. As users become able not to pay for NBA games, the subscriber base will shrink and decrease revenue.

“Right now ESPN and TNT are making back their investment in the NBA because they are able to charge over 90 million people for the content they’re buying. That’s even though the vast majority of the people they’re charging won’t watch their games… ESPN has lost 10 million subscribers in the past three years, that’s hundreds of millions in lost revenue. More ominously, only 6% of cable subscribers say they would pay for ESPN if it were offered direct to consumers. (Where those subscribers are going is a good question, are they old and dying off or are they young and making the conscious decision not to subscribe? We don’t know, but it honestly doesn’t matter because the key thing is they’re leaving.)”

So how would the NBA replicate its $2.7 billion a year without the cable bundle? Remember, right now every single cable and satellite subscriber, whether they watch the NBA or not, is paying $30 a year for the NBA’s games.

  • According to Travis, if people could opt out of purchasing TNT and ESPN, then it would cost NBA fans $270 per year to have access to games. He asserts that the market will not be willing to pay that much, which will leave a deficit of over $2 billion dollars.

“In order to replicate this $2.7 billion a year in national TV money, the NBA would have to get those ten million people to each pay $270 a year for their games, or roughly what the NFL Sunday Ticket costs every year…

Did you know that only two million people are willing to pay for the NFL Sunday Ticket, which gives you every NFL game airing outside of your market? Given that the NFL’s ratings destroy the NBA’s ratings, don’t you think it’s significant that the NFL can only get one fifth of the subscribers the NBA would need to replicate its existing TV revenue?

So how many of those ten million NBA fans would pay for the NBA if it wasn’t already a part of their cable bills? Let’s be generous and say it’s two million diehard fans, the same number paying for the NFL Sunday Ticket.

That would mean that the NBA’s television package on the open market offered direct to fans would garner $540 million a year.

That’s a deficit of over $2 billion dollars.

So if the market would only support a payment of $540 million and the market is actually paying nearly $2.7 billion, that’s the very definition of a bubble. (The reason ESPN and TNT are paying this much of a premium is two fold: 1. their market is artificially propped up by subscribers who never watch their network and 2. the bubble only stays afloat if you can justify your monthly subscriber fees. Which means, you guessed it, you have to overspend.)”

  • In response to Forbes’ most recent valuations of NBA teams back in February, Yahoo Sports columnist Kelly Dwyer wrote that we could be seeing “the edge” of the bubble.

“This could be the edge of the bubble. We could look back on this batch of valuations and agree that the league was only getting started when it came to looking at fawning estimates of club value and expected growth, which we do when looking upon past Forbes valuations, or we could one day look at the 2017 (with live television rights still king) release as the highest-charted ebb.”

William Spruance contributed to this report. 

The Whim News Team

The Whim News Desk

We'd rather be second and accurate than be first and wrong. The Whim News Desk is a dedicated team of researchers and investigators committed to presenting the news without bias. Follow us @TheWhimOnline for daily news coverage without the spin!

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