Between the NBA’s new collective bargaining agreement and the potential revenue from jersey sponsorships, the day when all NBA teams are profitable might not be that far away.
Last season, 18 teams were profitable, up from just eight in 2010-11 and despite the lockout, according to SportsBusiness Journal. This season, 22 teams are projected to make a profit, thanks in no small part to the NBA’s expanded revenue-sharing program.
Although the NBA’s Board of Governors sent the issue of jersey sponsorships back to the planning committee this month, experts still expect patches will be in place for the 2013-14 season. One of the biggest remaining questions is whether the revenue received by teams from the sponsorships would be shared among all teams formally or whether it’ll be shared informally as part of the revenue-sharing plan.
Sponsorship consulting group IEG and Kantar Media recently studied the advertising value of the proposed 2.5-inch square patches. Teams could be looking at substantial income from the patches, the study found.
The ad equivalent -- the amount of money a sponsor would spend on advertising that received the same exposure on television -- would range from about $5 million to $34 million, according to the research. SportsBusiness Journal recently reported that the patches likely would bring in anywhere from $800,000 a year for smaller-market teams to $15 million a year for big-market teams.
The lower end of the scale would be for a team that did not reach the playoffs, while the higher end would be attributable to a finalist.
So how would a sponsor determine how much a patch was worth before the season was played?
"One way would be to just be conservative and only look at the regular season and calculate it that way," said Jim Andrews, IEG senior vice president of content strategy. "We’ve also seen clauses in contracts where there’s a bonus if the team makes it to the playoffs or advances further in the playoffs."
Of course, market size matters, too.
"It’s a huge factor," Andrews said. "Certainly from a media perspective you’ve got larger markets where the cost of advertising is more, and more media is covering the team. Some teams have a bigger following, so that’s another factor. Then there are other factors in terms of amount of engagement, how the team is performing, and the athletes on the team."
Andrews said the value also could increase if the patch is present on jerseys sold at retail.
How the new ad revenue would be shared among teams would be an important factor in whether the teams not projected to be profitable this season could be profitable in the future.
If the patches brought in $100 million league-wide, as the NBA previously projected, and that money were split evenly, each team would see $3.3 million in revenue per year. Sponsorship-evaluation company Joyce Julius & Associates pegged it higher at $157.5 million annually, which would mean $5.25 million per team.
A Forbes study on NBA team profits that used average operating income during a five-year period from the 2006-07 season through the 2010-11 season found 15 teams lost money at an average of $11.6 million per team. Of course, that was before the new CBA introduced expanded revenue sharing. In 2010-11, just $54.5 million was shared among 12 teams. Last season, 15 teams were projected to share $119 million.
Although the actual calculations don’t have those teams sharing equally, the average would have been $7.9 million per team. Add in the potential income if sponsorship patch revenue was shared equally, and the fact that players are receiving a smaller share of revenue under the new CBA, and it’s easy to see a day when every NBA team is profitable.
"Jersey sponsorships would certainly increase the odds that every team is more likely to be profitable," said Patrick Rishe, an economics professor at Webster University and director of Sportsimpacts.
But teams shouldn’t spend the new money wildly, Rishe warns: "Jersey sponsorships may not be enough to help those teams that spend lavishly above the luxury tax when the higher tax rates kick in next season."