Coronavirus, The NBA, and The Houston Rockets: Assessing the Financial Impact (Part 1)

This time last week, it seemed nearly incomprehensible that the NBA season could be suspended. The coronavirus pandemic was less real here in the United States, with only mumblings that games could be played without fans in attendance. And yet the signs were all there. Japan’s professional baseball league, defined by an atmosphere more akin to an American college football game than an MLB game, was beginning to hold games in empty stadiums. Countries around the world had been limiting travel, with Italy closing its borders all together. In the United States, travel had been restricted to particular hotspots Italy and South Korea, and the signs of the first community spread of COVID-19 were found in California.

The league and its owners convened this past Wednesday afternoon to discuss options on how to approach the season in light of coronavirus. Some owners suggested playing games without fans in attendance, while others, including Houston Rockets owner Tilman Fertitta, preferred the league suspend the season for a few weeks. Then, on Wednesday night, moments before tipoff, a game between the Utah Jazz and Oklahoma City Thunder was abruptly cancelled, an unprecedented move made by the league. It would come immediately apparent that Rudy Gobert, the center for the Utah Jazz, was diagnosed with COVID-19.

While the spread of COVID-19 is becoming worse, its economic impact is as well, should not be taken lightly in any respect, and arguably will have much more lasting consequences.

The sequence of events set off a firestorm, which was particularly fueled by a video of Gobert being flippant about the virus two days prior. The league, now having its “Patient Zero”, had no choice but suspend the season. Players and media members at the game were held in quarantine throughout the night as testing was performed on each and every one to ensure no one else had the virus. The following day, it came apparent that Gobert’s teammate, Donovan Mitchell, was diagnosed with COVID-19, which undoubtedly created tension between the two players. With the NBA suspending its season, several other sports leagues followed suit, including the NHL and MLS, while one of the marque sporting events of March, NCAA’s March Madness, was cancelled outright.

While the spread of COVID-19 is becoming worse, its economic impact is as well, should not be taken lightly in any respect, and arguably will have much more lasting consequences. With sporting events being cancelled, the trickle down effect is and will continue to be startling. The NBA’s league revenues, already impacted by the fallout with the Chinese market at the start of the season, will be severely hampered, which will have dire consequences on salary cap for the 2020-2021 season. Media networks that air games and related content (ESPN, NBATV and TNT, in particular) have now lost live events they will never regain, vanquishing billions of advertising dollars in the process, while several sports bars across the country will be unable to survive.

Equally important is how dreadful the impact will be to employees of the 30 teams that make their living on the 82-game season and playoffs at the arenas, particularly concession stand servers, team shop managers and everyone else that makes the NBA live experience one of the best in sports. Around the league, players, owners and teams, including Fertitta and the Houston Rockets, are thankfully stepping up to support these employees, who will most likely be the hardest hit by the suspension.

For the players, the suspension will have an economic impact as well. The recent CBA states that the league can reduce every player’s salary by 1.08% for every canceled game. While NBA All-Stars like Lebron James, James Harden, Russell Westbrook and others can offset that loss with other sources of income such as shoe contracts, media deals and alternative investments, players playing at the minimum salary don’t have that luxury.

So where does this place Tilman Fertitta and the Houston Rockets? As I posited earlier this week on Twitter, Tilman is one of the NBA owners most at financial risk from the fallout from COVID-19, particularly given his primary source of wealth.

Fertitta is in the entertainment, hospitality and restaurant business, and the Landry’s casinos are all vacation destinations. With consumers on edge and most lacking the will to plan a trip to Las Vegas, Biloxi, Atlantic City, Laughlin or Lake Charles to visit one of Fertitta’s Golden Nugget locations, Landry’s casino segment is severely being impacted. Fertitta, among others in the hospitality and travel business, are doing everything they can to maintain some semblance of operation, with the Golden Nugget Las Vegas offering 30% off rooms currently, while airlines are providing fares at firesale prices. Landry’s restaurants are undoubtedly being hurt as well, as social distancing has forced patrons to give second thoughts on sitting down and having a steak at Salt Grass, a shrimp cocktail at Willie G’s or fajitas at Cadillac Bar. More difficult will be inoculating consumers to return to Landry’s restaurants once COVID-19 has been successfully managed, as Fertitta encapsulated in a sit-down with CNBC:

Fertitta was asked how his Chinese restaurant businesses were faring after a rapid spread that only hit Beijing less than two months ago. His answer is ominous for the NBA, which has only just begun this fight. “Let me use just one word: bad,” Fertitta said while chuckling. “You know, it’s so funny. I’m going to tell you something funny, is the fact that — and it’s not funny — but we were finally able to reopen a Morton’s in Beijing the other day and this has never happened in all my 30, 40 years with any of my restaurants, but we (re)opened the restaurant …”Fertitta continued. “And the sales for the day were zero.

Ramona Shelburne came out with a piece that essentially looked quite unfavorably at Fertitta for mitigating his losses, but, like everything in life, one must place the matter in some context. Fertitta, like any other major business owner, has employees, shareholders and bondholders to answer to, so it’s important that he does what he can to try to best manage any shock to his business. Not doing so will have a trickle down effect in his ability to retain servers at his restaurants, service debt and maintain the credit and solvency of Landry’s. Further, several owners in the NBA own a team not as an operating business but rather as an investment unrelated to their main source of wealth. Fertitta sees the Houston Rockets as synergistic to his casino, restaurant and hotel operations. Lastly, Fertitta’s other businesses have been particularly impacted greater by COVID-19 than other owners.

This doesn’t excuse Fertitta’s seemingly callous response to a pandemic gripping the world, which is bigger than sports and profits, but it does explain why Fertitta is doing what he can to mitigate Landry’s losses as best as possible.

I have to commend Adam Silver – I don’t believe any NBA Commissioner has faced such a tumultuous sequence of events unrelated to the playing of basketball that are so global in nature in the span of season. He’s done a truly impressive job.

Hopefully the NBA can resume its season, but, if cancelling it outright helps the nation and world control the spread of coronavirus, then so be it. Preservation of human life and preventing healthcare systems from being overtaxed is the most important immediate goal at this juncture. In the meantime, please wash your hands and practice good hygiene.