In the NBA's evolution, David Stern and Michael Jordan stand out as pivotal figures, driving the league's global influence and financial growth. Stern's tenure as commissioner saw the NBA embrace technology, international markets, and player empowerment, leading to a massive increase in revenue and fan engagement. Jordan, beyond his on-court dominance, secured a lucrative deal with Nike, resulting in the billion-dollar Jordan Brand. The NBA's strategy of highlighting player personalities, especially through social media, has positioned it as a forward-thinking league with a young, global audience. Despite challenges like the China-Hong Kong controversy, the league's focus on youth, international expansion, and leveraging technology suggests a promising future, though current valuations may already reflect this optimism.

Summary Notes

Introduction to Acquired Podcast Season 7 Episode 4

  • Ben Gilbert introduces himself and his background with Pioneer Square Labs.
  • David Rosenthal introduces himself as an independent angel investor and startup advisor.
  • The hosts discuss the focus of the episode on the National Basketball Association (NBA).

"Welcome to season seven, episode four of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I'm the co-founder of Pioneer Square Labs, a startup studio and venture firm in Seattle." "And I'm David Rosenthal, and I am an independent angel investor and startup advisor based in San Francisco."

The quote introduces the hosts and sets the stage for the episode's focus on the NBA, highlighting their respective backgrounds and the podcast's usual tech angle.

The NBA's Underdog Story

  • The NBA started 50 years later than other major American sports.
  • It's now the second most popular sport globally, after soccer.
  • The NBA's growth and popularity are examined through the "acquired lens."

"And it has done so using a playbook that is very much in the acquired wheelhouse."

The quote summarizes the NBA's impressive rise from an underdog to a global sports powerhouse, suggesting that its strategies align with the themes typically explored in the Acquired podcast.

NBA Team Valuation Growth

  • In the past decade, average team valuations have grown sixfold.
  • The growth was triggered by Steve Ballmer's $2 billion purchase of the Clippers approximately five years prior to the podcast recording.

"The average team valuation has grown a staggering six x in the last decade, which talk about an amazing investment return just on its own."

This quote emphasizes the significant financial growth of NBA teams, with the implication that such an increase represents an exceptional investment opportunity.

Early History of Basketball

  • James Naismith invented basketball in 1891 to keep his gym class active during winter.
  • The game quickly spread internationally through YMCA organizations.
  • The game's distribution was as crucial to its growth as the sport itself.

"During the long march, the Red Army's storied, yearlong retreat in the 1930s to evade the nationalist army, communist soldiers and officers played basketball to lift their spirits and solidarity."

The quote illustrates the widespread adoption and cultural significance of basketball, even during historical events like the Long March in China.

Formation of the Basketball Association of America (BAA)

  • BAA was founded in 1946 by ice hockey arena owners to monetize their venues on off-nights.
  • The BAA later merged with the National Basketball League (NBL) to become the NBA.
  • The league initially excluded black players, a decision that was both morally wrong and economically foolish considering the talent in all-black teams like the Globetrotters and the Rens.

"The owners of a bunch of ice hockey arenas in the northeastern and midwestern United States and Canada who wanted to make more money from their arenas on the nights when there weren't hockey games happening."

The quote explains the pragmatic and financially driven origins of the BAA, which would evolve into today's NBA.

Player Empowerment and Economic Shifts

  • The 1964 NBA All-Star game saw players, led by Chamberlain and Russell, demand a pension plan, setting the stage for the formation of the players' union.
  • Wilt Chamberlain's landmark salary deal with the Lakers in 1968 was twice that of the top major league baseball player, despite the NBA being much smaller than MLB.
  • The ABA formed as a rival league to the NBA, eventually leading to a merger that expanded the NBA's team roster and geographical reach.

"These players, kind of led by Chamberlain and Russell, they're not super happy with how they're being treated. They really want a pension plan from the league for the players after they retire."

The quote captures the early efforts of NBA players to secure their financial futures, highlighting a pivotal moment in the shift towards player empowerment and fair compensation.

NBA's Expansion and Growth

  • The NBA rapidly expanded in the late 1960s to compete with the ABA.
  • Landmark TV deals with ABC, spearheaded by producer Rune Arledge, helped popularize the league.
  • The introduction of the shot clock and the signing of black players like Bill Russell marked significant changes in the game and the league's culture.

"The athletes themselves were self-evidently proud and they liked nothing better than to beat their opponents, particularly on national television."

This quote reflects the growing prominence of NBA players and their impact on the league's popularity, as well as the role of television in showcasing their talents and competitiveness.

NBA vs. ABA Player Contracts and Innovations

  • Kareem Abdul-Jabbar's contract negotiation strategy involved taking one offer per year, which led to a significant increase from the Milwaukee Bucks' $1.4 million offer to the New York Nets' $3.6 million counter-offer.
  • The ABA's approach to counter-positioning involved signing college undergraduates and even high school players, which was not allowed by the NBA's rules at the time.
  • The ABA introduced several game innovations, including the three-point line, fast breaks, and a more finesse and skill-oriented game, as opposed to the NBA's big man, center-dominated style.
  • The ABA also invented what would become the NBA All-Star Weekend, starting with the slam dunk contest won by Dr. J (Julius Erving) from the foul line.

"Remember, it was just like that same year that Wilt got a $250,000 a year deal, which was crazy." "The ABA's rules let them sign college undergrads, which is actually how they get Dr. J or Julius Irving." "The ABA is actually the league that first invents and implements the three-point line and perimeter shooting and fast breaks."

These quotes highlight the competitive environment between the ABA and NBA, showcasing the ABA's willingness to innovate and challenge NBA's dominance by offering better contracts to players and introducing new game elements that would later become staples in professional basketball.

NBA and ABA Merger

  • The NBA and ABA were in a battle for the same cities, leading to a merger in the 1970s.
  • The NBA Players Association sued to block the merger on antitrust grounds, which took five years to settle.
  • The St. Louis ABA team owners negotiated an unprecedented deal to fold their franchise in exchange for a share of the TV money from the other ABA teams that joined the NBA, earning them over $150 million by 2009.
  • The merger imposed severe financial burdens on ABA teams joining the NBA, including indemnity payments and exclusion from television revenue for the first three seasons.
  • Four ABA teams were absorbed into the NBA, but the merger terms significantly disadvantaged them, leading to financial struggles and the sale of star players like Dr. J.

"After four years, they declare truce. They stopped the war. But remember the NBA Players association and the power of the players and the union and that they had gotten in a surprise move." "So St. Louis had a team in the ABA. The owners strike this deal where instead know, they were in dire financial straits like some of these other ABA teams. Instead of having to pony up more money to keep the team afloat and join the NBA, they fold the franchise in exchange for the draft." "The Nets have to pay the New York Knicks 4.8 million in indemnity as compensation for invading their territory."

These quotes describe the complex dynamics of the NBA and ABA merger, the legal challenges from the players' union, and the unique financial arrangements that some team owners made, which had long-lasting financial implications.

David Stern's Impact on the NBA

  • David Stern became the NBA commissioner in 1984 and served for 30 years, leading to significant growth and changes in the league.
  • Stern negotiated landmark TV deals, increasing the NBA's revenue tenfold in five years.
  • He implemented a strict drug policy to address the league's substance abuse issues, which helped clean up the NBA's image.
  • Stern pushed for the internationalization of the NBA, resulting in the 1992 Dream Team's participation in the Olympics and the opening of NBA offices worldwide.
  • He was instrumental in launching the WNBA in 1997, initially owned by the NBA or its NBA counterpart teams.

"In March of 83, by the way, this story so far, his background is identical to the Major League Baseball commissioner." "So Stern's in house, and then in March of 83, while he's general counsel, the league signs a new collective bargaining agreement with the players association." "Stern internationalizes not just basketball, but the NBA."

These quotes underscore David Stern's strategic moves as NBA commissioner, which included signing a new collective bargaining agreement, international expansion, and creating the WNBA, all contributing to the NBA's growth and global appeal.

Michael Jordan's Influence and the Jordan Brand

  • Michael Jordan was drafted third in the 1984 NBA draft and signed a deal with Nike, which has since generated over $3 billion in revenue for the Jordan brand.
  • Jordan's Nike deal is considered one of the best non-acquisition deals ever, earning him over $1.5 billion personally.
  • The Jordan brand holds a dominant market share in the basketball shoe market, and Jordan remains one of the highest-paid athletes due to endorsement deals, despite retiring over 16 years ago.

"It was 2.5 million upfront or something like that. And then a percentage of, I believe the profits from the Jordan brand over time." "Jordan as of today has made over one and a half billion dollars personally from the deal."

These quotes highlight Michael Jordan's significant financial success through his endorsement deal with Nike and the lasting impact of the Jordan brand on the sports shoe market, as well as his continued earnings from the deal long after his retirement from professional basketball.

Wealth and Entrepreneurship Among NBA Players and Alumni

  • NBA players and alumni are some of the highest-paid athletes and have become influential entrepreneurs and business owners.
  • Michael Jordan is the wealthiest former athlete in the world, with a net worth of $2.1 billion.
  • Other notable wealthy former NBA players include Kobe Bryant, Magic Johnson, junior Bridgman, LeBron James, Shaq, and Vinny Johnson, who have built successful businesses and amassed significant wealth post-NBA.
  • The NBA has produced a unique legacy of black entrepreneurs and business leaders, with players utilizing their influence and assets to create larger business empires.

"NBA players and alumni are one the highest paid athletes in the world as a group." "The current and former NBA athletes have wealth at a level and have become entrepreneurs and business people at a level that just is completely eclipsed any other sport period in the world."

These quotes emphasize the entrepreneurial success and wealth accumulation among NBA players and alumni, showcasing their ability to leverage their basketball careers into significant business ventures and influence.

Michael Jordan's Business Ventures

  • Michael Jordan owns approximately 80% of the Charlotte Hornets.
  • He is the first former player in any league to become a majority owner.
  • Recently became a NASCAR team owner, purchasing the team Bubble Wallace drives for.
  • In 2010, Jordan bought majority control of the Hornets for $175 million.
  • He sold 20% of it recently, valuing the company at $1.5 billion, showing significant appreciation over the decade.

"He bought the team that Bubble Wallace drives for." "Well, he had a nice little return here on buying the Hornets because in 2010, he bought majority control of the club, and I think it went for 175,000,000, and he just sold 20% of it. That valued the company at one and a half billion."

These quotes highlight Michael Jordan's successful investment in the Hornets and his expansion into NASCAR ownership.

NBA's Transition Post-Jordan Era

  • TV ratings and scoring dropped after Michael Jordan's final retirement in 2003.
  • A false narrative emerged suggesting the league was filled with "thugs," largely due to the style and persona of players like Allen Iverson.
  • The "Malice at the Palace" brawl, involving Ron Artest, reinforced negative stereotypes.
  • Stern introduced a dress code in 2005, which was criticized as veiled racism and out of touch with the players' culture.

"And there was this narrative, which a lot of people believed, but frankly, was really wrong and also crappy and kind of racist, that the league was just filled with thugs." "Stern institutes what he terms, these are his words, a liberal and easygoing dress code that mandates that players wear business casual attire when participating in team or league activities."

The quotes discuss the negative stereotypes that emerged post-Jordan era and Stern's controversial dress code, seen as a misguided attempt to address the league's image issues.

NBA's Recovery and Modernization

  • Players like Dwayne Wade and LeBron James embraced Stern's dress code by turning it into a fashion statement.
  • The NBA has become a leader in social justice among sports leagues.

"They embraced, and they're like, all right, great. You say we got to dress up. We're going to dress to the nines."

This quote illustrates how NBA players took the dress code and used it as an opportunity to express their fashion sense and individuality.

International Growth and Influence

  • International players and fans have significantly contributed to the NBA's global reach.
  • Yao Ming's draft by the Houston Rockets in 2002 had a massive impact on the NBA's popularity in China.
  • The NBA's global fan base has grown, with estimates of 300 million people in China alone playing basketball and 600 million watching it.
  • 25% of NBA players are international, with many emerging stars coming from outside the US.

"So he brought, of course, China to the NBA. But even more important, he brought the NBA to China."

This quote emphasizes Yao Ming's role in expanding the NBA's presence in China and its broader global impact.

NBA and Technology

  • The NBA partnered with Turner to offer League Pass, providing games and other content.
  • The NFL's streaming solution is limited compared to the NBA's offerings.
  • The NBA has a $1.5 billion streaming deal with Tencent in China.
  • NBA 2K is a highly popular sports video game and part of the NBA's brand.

"They have all sorts of other content too. So they're basically recreating everything ESPN does in terms of content, highlights, features, behind the know, NBA insider, all these things, plus games that you can stream on any device in any format in any country in the world with a direct to customer over the top relationship."

This quote highlights the NBA's comprehensive approach to providing content and games to its audience through various platforms and formats.

Player Empowerment and Social Media

  • The NBA has empowered players to build their brands and become influencers.
  • NBA players have significant social media followings, with LeBron James leading at over 119 million followers.
  • The league's support of player voices has extended to social justice issues, such as the Black Lives Matter movement.
  • The NBA allows teams to sell advertising slots on player jerseys, further leveraging player influence.

"LeBron is the NBA player with by far the most social media followers. He has 119,000,000 followers across Twitter and Instagram."

This quote highlights the massive social media influence of NBA players like LeBron James and the league's strategic use of this influence for marketing and social impact.

NBA's Business Model and Revenue Sharing

  • The NBA operates with a unique business model where owners are fierce capitalists with no ownership in other teams or the league.
  • Revenue sharing is a significant strategy, with half of all basketball-related income redistributed among teams.
  • This creates a highly competitive league and maximizes wealth for individual owners.

"So the situation is, well, how do I maximize my own personal wealth? And over the years, they've decided that the way to do that is by creating the most competitive situation possible across the whole league and by doing this really unbelievably large revenue share, like the fact that half of all of their basketball related income revenue goes to be re spread around to everyone else."

The quote highlights the rationale behind the revenue sharing strategy, which is to create a competitive balance and thereby increase the overall value of the league and individual teams.

National and Local TV Rights

  • The NBA generates significant income from TV contracts, with national TV rights bringing in about $2.6 billion a year from ESPN and TNT.
  • Local TV rights also contribute, with estimates of $1 to $200 million per team, depending on the market.
  • The total from TV contracts is roughly $5 billion of the NBA's $8.8 billion annual revenue.

"So that leaves the local tv rights for any given team, which I think there's about 1000 games across all the teams that are not sold as part of the national package. 82 games."

The quote explains the breakdown of TV rights and the significant revenue generated from both national and local TV contracts.

Licensing and Merchandising

  • The NBA earns over a billion dollars a year from licensing and merchandising.
  • A league-wide contract with Nike alone is worth $125 million a year.
  • The league enters into licensing agreements on behalf of all teams, distributing income equally.

"So another thing that we know for sure is that a little over a billion dollars a year is made from licensing and merchandising."

This quote emphasizes the substantial revenue the NBA makes from licensing and merchandising deals, which is shared among all teams.

Jersey Patch Program and Arena Naming Rights

  • The jersey patch program brings in $10 to $30 million per team per year.
  • Arena naming rights are sold by individual teams or the owners of the arenas.
  • The revenue from these sources is significant and adds to the overall profitability of the league.

"This jersey patch program brings in anywhere from ten to $30 million per team per year."

This quote highlights the financial impact of the jersey patch program, which provides additional revenue streams for NBA teams.

Ticket Sales and International Revenue

  • Ticket sales contribute an estimated $1 to $2 billion a year to NBA revenue.
  • Revenue from China, largely from streaming, adds another $500 million a year, with expectations of growth.
  • The NBA's reach is broad, but it is still behind in monetization compared to the NFL and MLB.

"That, of course, leaves one more huge pillar, which is tickets that our best estimates are one to $2 billion a year."

The quote outlines the importance of ticket sales in the NBA's revenue structure, which, despite challenges, remains a major source of income.

NBA's Power and Competitive Advantage

  • The NBA has cornered the market for professional basketball in America.
  • It competes with other sports leagues for attention and advertising dollars.
  • The league has scale economies, making it difficult for competitors to match its level of contracts and player attraction.

"There exists an asset called professional basketball, or called the game of basketball. Like, it's a product with product market fit with fans because it's a thing that's fun to watch and they seem to have a monopoly on it."

The quote explains the NBA's monopoly on professional basketball as a product with a strong market fit, giving the league a significant competitive advantage.

Future Prospects and Strategies

  • The NBA has focused on attracting young fans and tech-savvy owners.
  • It has executed strategies such as content creation, internationalization, and appealing to younger demographics.
  • The league's ownership group is more experimental and entrepreneurial compared to other sports leagues.

"The NBA franchises have managed to attract a younger and much more sort of tech and business savvy group of owners."

This quote reflects on the type of owners in the NBA and their willingness to be experimental, which has contributed to the league's growth and innovative strategies.

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