Wharton's Mori Taheripour and Ohio University's Bob Boland discuss sponsorship of NBA jerseys.

The National Basketball Association has announced it will allow teams to add a sponsorship patch from a company on a team jersey in the 2017-18 season. Half of this additional advertising revenue will go to the team and the rest will go into the league’s revenue-sharing pool. With this decision, the NBA becomes the first of the big four North American sports leagues to add a sponsor logo to its game jersey. Could the other leagues follow suit? Mori Taheripour, co-founder of the Wharton Sports Business Initiative and a lecturer in the legal studies and business ethics department, is joined by Bob Boland, a sports law professor from Ohio University and principal of Boland Sports Practice Group, to discuss the complexities of the issue.

The two discussed their views in a recent segment on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM. An edited transcript of the conversation appears below.

Knowledge at Wharton: Is it surprising that it took this long for one of major sports here in the United States to decide to do this?

Mori Taheripour: Yes, especially at the NBA. The conversations have been going on since 2009 around this issue. Major League Baseball tried this out some years back with the New York Mets and naming rights on stadiums and they were looking at patches on jerseys. That did not go all that well. Not just the fact that the fans didn’t love it, the patches were terrible looking, as I remember. The NFL (National Football League) and the NBA have been doing this with practice jerseys for some time now, and we’ve seen it with MLS (Major League Soccer), WNBA (Women’s National Basketball Association) and the D-League (NBA Development League).

It’s not unfamiliar to the sports league, but for the major sports leagues, this was a big move finally for the NBA. I think it came at a right time. The NBA is sitting on a really, really important and exciting moment in time, especially when the announcement was made with (Los Angeles Lakers player) Kobe Bryant’s retirement and the Golden State Warriors breaking a record. There’s so much going on with fan engagement and excitement, so I think this was a really great time to do this.

Bob Boland: I think the history of it is interesting, and the reason why the inertia has lasted so long is it’s not as good a business issue as it looks from the surface. We look at it usually in a binary sense. European soccer teams, European basketball teams, even European hockey teams have had sponsor logos for years. But if you think about the history of it, European soccer clubs, in particular, don’t have the same high-value intellectual property attached to their team name, logo and trademarks that North American clubs do. I think that’s been one of the primary reasons why the North American teams have resisted thus far. The NBA has been always the most interested because they have probably the least amount of intellectual property or branding on their uniform of any of the leagues. There’s always been the question of, “Do we diminish our value by adding a logo?” That was never an issue in Europe. If you look back at pictures of George Best playing for Manchester United in the 1970s, he was wearing a simple red jersey.

The next, more practical issue is now because of revenue sharing. This would be shared money. It would be shared with the players. It would drive the cap up, and the teams that would generate the most money — the Knicks, the Lakers, the Celtics, the Bulls — probably have the most established intellectual property. They’d be the ones least likely to want to do this. At least one way the NBA gets around it is not to share that revenue in the short run. That would be team-based revenue, but it would be subject to the cap and the tax. So, this may prove to be a much thornier business issue, and I think the inertia in North America was for good reason. It isn’t the thought that North American sports marketers have failed. We’ve sold pretty much every square centimeter or inch of any stadium from South Florida to Vancouver and back again. The last part is, “Does this interfere with other sponsorship rights that are already existing for clubs?” And that may be a place where this pilot program may prove a little thornier than we think.

“We’ve sold pretty much every square centimeter or inch of any stadium from South Florida to Vancouver and back again.” –Bob Boland

Knowledge at Wharton: Is there a feeling that the other three major sports leagues won’t jump onboard immediately just to wait and see how this all works out?

Boland: I think that’s exactly going to be the case. You could probably make a different business case for each of the leagues. Hockey is probably the one sport where just the baseline revenue of $100 million extra would be very significant. … The ability to share that money would be an issue. The second piece will be, “Will the other leagues want to watch it and do it? And will it interfere with their own intellectual properties?” The Dallas Cowboys are a lot more valuable than a motor oil patch on a jersey. Those are really interesting questions.

Taheripour: The issues are pretty complicated, as Bob just talked about, especially going into the collective bargaining agreements. If they opt out for 2016-2017, then this whole revenue sharing model with the players in the league gets reviewed again. As it stands right now, the players would get 1% of the revenue earned, but all that could change during that time as well. I think they were smart to call it a pilot project. If it doesn’t work for three years, they can pull this and re-evaluate it and allow the other leagues to look and learn and see how well this goes with the NBA at this time.

Knowledge at Wharton: The NBA has been doing this already the last few years with the WNBA. All of the teams in that league have a main sponsor corporate logo that, in some cases, replaces the team name.

Taheripour: I think they can do that with the WNBA, particularly as the revenue model and the need to grow fan engagement and connection to the community are of utmost importance. The D-League is very much the same thing. But it’s a different story for the NBA. The cost of running a sports team and owning a franchise is incredibly high these days. We may see ticket revenue sliding over the next few years, as you can look at any of these games now on your computer and you don’t necessarily have to show up. The entertainment value of being there has to be really strong for the fans. As we see that becoming a challenge for the teams, I think they have to look for new revenue. It is a business, after all. Some of the fans may not love the aesthetic value of this; most tend to be really traditionalists. But it is a business. And I think it’s something that they have to look at, not just the NBA but all the leagues.

Knowledge at Wharton: The NFL is by far the biggest sport in the United States. But globally, the NBA has probably a far greater value than the NFL at this point.

Boland: Certainly in intrinsic value, in the opportunities to develop in China, in the opportunity to market around the world, and that may be one of the biggest factors of why the NBA so wanted to do this. The pictures and image of its players have a global reach for potential sponsors. The other factor is that they have the lowest diminution in existing trademark or in existing intellectual property by doing this. I think the third part is as you’re moving on a global platform for the NBA, you actually are more in line philosophically with what the rest of the world looks like as opposed to the North American model. So, there was probably a lot less downside to the NBA to make that move. On the other hand, the NBA does have a very uneven earning kind of model. It’s really the 80/20 rule, that 80% of the income is earned by 20% of the teams. This revenue would be significant to the bottom-dwelling teams.

“If this were an easy one to sort out, they would have sorted it out before now.” –Bob Boland

Knowledge at Wharton: What happens when a player advertises for Coke? Does Pepsi go in there and jump on that jersey? And what happens when consumers go to the store to buy a jersey? Does that jersey have a Coke or Pepsi logo as well?

Boland: That’s a terrific point, and that is one of the problems. How does this compete with or conflict with existing player sponsorship or endorsements? How does this potentially conflict with existing league endorsements? I would assume because Nike is the official apparel manufacturer and their logo is going on the other side of the jersey, contractually, Under Armour and other main apparel manufacturers are probably out. But you’re right, the Coke/Pepsi ambush marketing campaign could certainly be an interesting one, and I think that’s one of the things we’ve overlooked. If I were a high-level sponsor, if I had the naming rights to the building, if I had a sponsorship for the team that was significant, I would be very concerned right now.

Taheripour: Bob is absolutely right. During this pilot project, the NBA has established some protections for their national partners to deal with that very issue. The Coke/Pepsi duel should not appear on a jersey. That would be highly confusing and the sponsors would never go for that. There are so many of these challenges. Going back to this being a pilot project is really interesting. This is going to make for a terrific business school case in a few years because they do have to look at all these issues, from revenue-sharing to large markets versus the small markets.

Knowledge at Wharton: During the NBA All-Star game earlier this year, there was no uproar about the fact that Kia had a logo on there.

Boland: I don’t think there was probably much discussion. They were a league-wide partner, this was a special uniform and it didn’t interfere with any other existing relationships. There is a difference now that teams are going to be selling these for themselves.

“The cost of running a sports team and owning a franchise is incredibly high these days.” –Mori Taheripour

Theoretically, they’re not going to interfere with their own sponsors. But if I were a $35 million sponsor of Madison Square Garden, which Chase is, I might be very upset that somebody grabbed this piece of very valuable front-end property that diminished the value of my overall sponsorship or dealt it in the same way.

On the other hand, I could also see Madison Square Garden Corp. looking at this and going, “I’m a publicly traded stock, why don’t I advertise my own stock ticker code here?” And not pay for it, but just use it as an in-kind and pay whatever the lowest value is, which would earn the end of the smaller market teams. Here, the New York Knicks and the Lakers aren’t maximizing their value. It’s not a complex circumstance, it’s just a very new one. I think that if history is any lesson, and I always believe that it is, that over the last 30 years, North American sports marketers have been the most aggressive they possibly can be in seeking corporate partnerships. If this were an easy one to sort out, they would have sorted it out before now.

“Some of the fans may not love the aesthetic value of this; most tend to be really traditionalists. But it is a business.” –Mori Taheripour

Knowledge at Wharton: How does NASCAR (National Association for Stock Car Auto Racing) do it? NASCAR has a lot of competing sponsors, and each team has a big main sponsor. Is that relevant to this conversation?

Taheripour: It’s interesting because NASCAR is one giant walking billboard. I think what NASCAR has done is very different than what the four major sports leagues can do and want to do. Bob was on the money with that in terms of the intellectual property rights and the international appeal of these leagues. Interestingly, when the commissioner sort of announced this, he talked about some very international corporate sponsors and the appeal for them because of the need and desire of our leagues looking for sort of global expansion. That’s a consideration that’s really big for the NBA, not so much maybe for NASCAR. It’s very much community-based, as well.

We see the appeal of NASCAR really deep into some of our communities around the country, so it’s a different culture. We see the branding, for example, in NASCAR on these cars. I mean, they literally are one big brand or two big brands driving around a track. So visually, we’ve gotten used to seeing this. And the appeal of each of individual players in each of these leagues, particularly in the NBA is very different. Each one of these players has really sort of branded himself and aligned with a certain corporate sponsor or two or three. The way we’ve seen sports marketing come along in these different leagues is very different and hard to compare at that level.

Knowledge at Wharton: Major league sports has taken a cue from minor league sports and NASCAR that anything can be sponsored. Is that part of the business that we work in these days?

“This is going to make for a terrific business school case in a few years because they do have to look at all these issues, from revenue-sharing to large markets versus the small markets.” –Mori Taheripour

Boland: It absolutely is. But NASCAR and minor league sports actually bring up a little different twist on this. In the big four professional leagues, the league signs broad deals, it signs big broadcast deals and then teams sign what I would describe as local deals. If you’re thinking about it, even the naming rights deal is a significant one. It gets a national reach. It’s still a physical, local deal. To some degree, it was NFL Commissioner Roger Goodell’s great compromise that got him the commissionership by dealing with Jerry Jones when Jones sort of went off the reservation of the NFL trust in the early days of his ownership and doing stadium-based deals for Texas Stadium, to allow the local team to have local stadium sponsorships that competed with league-wide sponsorships. Originally, it was league first, team second. And if you’re looking at it from the minor league or NASCAR perspective, it’s all team, very little overarching structure.

Knowledge at Wharton: Do you see this developing to the other leagues in the next decade?

Taheripour: A decade is a very long time.

Boland: I think it’s going to take a significant amount of time for the other leagues to jump in. I think revenue-wise, it may make more sense for the NHL. The NFL will probably be the last to jump into something like this and leave Major League Baseball somewhere in the middle. But as we see money sort of pouring into professional sports here, it’s going to take a while before they really need to jump in or want to jump in, particularly given some of the complications.