NBA Announces Digital Partnership With Chinese Internet Giant Tencent

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The NBA has formed its largest international digital partnership through an expansion of its arrangement with Chinese Internet giant Tencent Holdings Limited, the league announced in a joint press release issued late Thursday night.

Tencent – a publicly-traded company with a current market capitalization of $163 billion, whose shares trade on the Hong Kong Stock Exchange (HKSE: 0700) and whose American Depository Receipts trade over-the-counter in the U.S. (OTC: TCEHY) – will become the league’s exclusive official digital partner in China.

The new five-year pact will provide Tencent the exclusive right to stream live games, original programming and highlights to hundreds of millions of active users across its online and mobile platforms, including Tencent QQ, Tencent Video, Tencent News and Weixin, the popular messaging app also known as WeChat.

The deal will provide Tencent the right to offer for the first time in China the NBA’s League Pass package, which will allow subscribers to watch a full season’s worth of games live and on-demand on their computers and mobile phones. The deal also provides for interactive gaming and the sale of merchandise.

According to The New York Times, the agreement calls for the NBA to receive a guaranteed payout of $500 million over the life of the deal, with an additional $200 million more expected through a revenue-sharing arrangement. It will start on July 1, 2015, the first day of the 2015-16 NBA season.

It remains unclear as to how much of the revenues in this new deal would be incremental to those provided in its existing arrangement, but the increment figures to be substantial. And it will have a material impact on the salary cap.

By the league’s math, an estimated annual payout of between $100 million and $140 million increases the salary cap by $1.5 million to $2.1 million, respectively, and the luxury tax by $1.8 million to $2.5 million. 

The NBA provided initial projections for the 2015-16 salary cap and tax threshold in a memo distributed to all member teams on July 9, 2014. Initial projections called for a salary cap of $66.3 million and a tax level of $80.7 million.

While no updated figures have been formally released, the league has informally increased the starting salary projection in the maximum contract that kicks in next season for Cleveland Cavaliers point guard Kyrie Irving to $15.9 million, from which updated cap and tax figures can be extrapolated.

Based upon my own personal calculations, Irving’s updated maximum salary figure implies a 2015-16 salary cap of $67.8 million and luxury tax threshold of $82.5 million, increases of $1.5 million and $1.8 million, respectively, equal to the low end of the impact of the Tencent deal. Whether that is a coincidence is unclear.

The updated cap and tax figures would result in year-over-year growth for each of approximately 7.5 percent, from the current $63.065 million and $76.829 million, respectively. If the figures hold true when they are finalized next July, it would represent the highest annual growth for the cap and tax since the 2005-06 season(1), the first year of the previous collective bargaining agreement, which was aided by more favorable calculation methodologies(2).

League revenues are now projected to cross $5 billion in 2015-16 for the first time ever(3).

The new deal is expected to give Tencent a unique offering at a time when China’s major Internet companies are vying intensely for media content. Tencent rivals such as Alibaba, Baidu and Sina have all invested heavily in producing new content as young Chinese spend increasing time consuming online media.

The deal represents the latest in the league’s decades-long charge into China, where basketball is the No. 1 team sport, played by an estimated 300 million people. The NBA has an estimated 70 million followers on China’s microblogging platforms.

China will continue to grow increasingly important to the NBA as it seeks out new sources of revenue growth. The league’s China revenues have soared past $100 million annually in recent years with sales of merchandise and licensing agreements.

NBA games are televised in China through a partnership with national broadcaster CCTV.

Notes:
(1) The salary cap grew by a nearly identical 7.5 percent for this season, as compared to the 2013-14 season. However, part of that growth was something of an illusion. Some of it is driven by the reversal of artificially depressed figures for the 2013-14 season. The league imposed a $1 million one-time downward adjustment to the cap and tax for 2013-14 because league-wide salaries were too high in 2012-13 – a relic of the transition to the new CBA and the amnesty waivers it forced – which, in turn, caused the cap and tax growth we experienced this season to be artificially high. Without the salary-related adjustment, the cap and tax for this season would have grown by 5.7 percent and 5.6 percent, respectively, relative to 2013-14.

(2) The salary cap in 2004-05 was calculated based on 48.04 percent of league-wide revenues, producing a $48.37 million figure, in accordance with the terms of the 1999 CBA. The salary cap in 2005-06 was set at a flat $49.5 million, which works out to roughly 49.5 percent of league-wide revenues, in accordance with the terms of the 2005 CBA. The year-over-year growth in the salary cap was therefore 12.8 percent.If the formulas were identical, the year-over-year growth would have been approximately 9 percent. 

(3) Bhe growth will certainly not stop there. The league’s massive new media rights deals with Disney (ESPN/ABC) and Turner (TNT), which will provide a whopping $24 billion to the NBA over nine seasons, kick in the following year. They alone will increase league revenues by an immediate $1.1 billion. When factoring in growth in other areas, the league could cross $6.5 billion in revenues by the 2016-17 season, with a salary cap approaching $90 million (excluding the effects of any potential smoothing techniques that may be implemented).

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