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NBA Can't Let Lockout Get In Way Of Huge New TV Contract Five Years Away

The NBA is five years away from a new national TV contract that should provide a huge boost to annual revenues. Letting the lockout stem the league's growth puts that pot of gold in danger.

The debate about the actual extent of the NBA's operating losses and the viability of its financial model has been at the root of the lockout. But from the outside, getting a completely accurate reading on the books of 30 different NBA franchises is nearly impossible.

What we do know is this: the league's financial trajectory will look a lot different in 2016, the next time its TV contracts can be negotiated, than it does now. Even in the midst of a stagnating economy, sports TV rights have been skyrocketing since the NBA last signed deals with TNT and ABC/ESPN in 2007. TV networks value live programming now more than ever, and the NBA, with its ability to produce polarizing stars with broad cultural appeal, is in an excellent position to take advantage.

The TV habits of the average American have changed drastically in the last decade. With DVR technology increasingly popular, people can automatically record any TV show they want and watch it at their convenience. The traditional model of broadcast TV was delivering millions of people in captive audiences to advertisers; if people can fast-forward through your ads, they are by definition not "captive audiences".  

Sports, because they are mostly watched live, are immune to the DVR effect. They are one of the few places advertisers can be sure that people will be watching. This is even more pronounced among the younger tech-savvier crowd, whom advertisers covet: in 2010, 99 of the 100 highest rated TV-telecasts among the 18-49 year old demographic were broadcast live. (Sporting events and shows like American Idol fit that definition.)

Sports rights are even more important for cable channels. A good percentage of the money channels make come from charging "carriage fees" to providers for offering their channel. The more people value your channel, the more TimeWarner or DirecTV will pay you. ESPN charges $4.25 a subscriber, almost $3.25 more than their nearest competitor.

Carriage fees are one of the main reasons why Monday Night Football was moved to cable. ESPN can charge cable companies a lot more because they are offering a product that can't be found elsewhere. In the age of Netflix and other low-cost entertainment options available from your couch, showing re-runs of Law & Order isn't the draw it used to be.

These twin driving pressures have exploded the value of sports TV rights in the last few years, and the effect of this new pool of money can be most seen in college sports. Last year, the ACC signed a $155 million annual broadcast deal with ESPN, doubling its annual media revenue. A few months ago, the Pac-12 signed a $250 million deal with ESPN and Fox.

Colleges and conferences have been scrambling to maximize this windfall. The Pac-10 initially tried to lure the entire Big 12 South to form a super-conference called the Pac-16, in an effort to combine the TV markets of California and Texas. A year later, Texas A&M has scrambled the pot again, attempting to join the SEC, partly out of jealousy for the creation of "The Longhorn Network", an ESPN-run channel devoted exclusively to arch-rival UT's sports programming.

Having popular sports programming legitimizes a channel, and the appeal of UT football is what prompted ESPN to invest over $300 million in the network. In the huge TV markets of Dallas, Houston and San Antonio/Austin, ESPN is trying to make cable providers put the Longhorn Network on a basic tier of channels, forcing every cable subscriber, even the ones who don't like sports, to pay for it.

Similarly, the NBA's presence on TNT, including huge media events like the Eastern Conference Finals, gives the channel a lot of leverage in negotiations with carriers. Forbes magazine estimated that the NBA would earn at least $1.2 billion a year in a new TV deal, more than 30 percent higher than the current $900 million. If the NBA had signed a five-year deal in 2007, as was customary, rather than the current 9-year arrangement, they could have made up a huge portion of their operating losses in TV negotiations.

For all the talk of how big stars joining together to form super-teams would destroy the league's smaller markets, the presence of LeBron James and Dwyane Wade in Miami has driven TV ratings higher and made the league a much more attractive commodity. And if the owners were really serious about competitive balance concerns, they would make revenue sharing in TV deals a part of CBA negotiations, so that the interest LeBron drives to the sport benefits all 30 franchises more equally.

Because of the importance of championships in determining a player's legacy, the NBA has the benefit of story-lines that can stretch out for over a decade. Whenever a new star emerges, the question becomes: can they be as good as MJ? Does LeBron have the heart to win a championship? Will Kevin Durant take his place instead?

Kobe's won five championships, but because he's being measured against MJ, his quest for his sixth title is as compelling as his quest for his first. It's a natural made for TV storyline involving "villains" and "good guys" that the other sports, where there's less focus on the individual, lack.

The NBA has a bright economic future. The worst thing it could do is give itself a self-inflicting wound by poisoning its relationship with the players and damaging its popularity when there's a pot of gold right down the road.