by Jim Yardley
Li had already decided the CBA needed major structural change. He commissioned a firm in Shanghai, Zou Marketing, to examine successful basketball leagues and draft a plan to improve the Chinese league. Zou was a small outfit run by three men, Frank Sha, Tor Peterson, and Terry Rhoads, the former Nike employee. Their proposal, completed in 2004, was called the North Star Plan. By Chinese standards, it called for a revolution. “The big issue in our minds,” recalled Peterson, “was that government interests and private interests were colliding in the league.”
The North Star Plan examined the full breadth of Chinese basketball, from how players were developed to the ownership structure of teams to the conflicts sowing dysfunction in the league, none more disruptive than the political mission of the league to produce a national team that would bring glory to China. League officials were expected to act as government bureaucrats and businessmen, an inevitable conflict. Officials make policy. Businessmen try to make money. The North Star Plan eliminated the conflict by creating an independent, commercial league in which the Chinese Basketball Association would oversee the league from a distance, with a status akin to a board of directors. The league would be incorporated as a holding company, with every team required to meet certain standards. Teams would buy shares in the league and revenues would be equally distributed. Teams would also submit to audits from the league office, while the league office would be independently audited, too.
The idea was to create checks and balances of the kind that didn’t yet exist in the relationship between the Chinese government and the Chinese people. Official corruption was endemic in China, a trend magnified in sports, especially soccer. Match fixing was such a stain on soccer that Chinese fans became disgusted and lost faith in the league. Without transparency, Zou argued, basketball could be ruined, too. “One reason for these rules is showing the fans that this is serious,” Peterson said. “You are saying, ‘We take this very seriously and we will not allow coaches and players to disrespect the game.’ ”
In drafting the plan, Peterson and Sha met regularly with a special CBA panel to review the proposed business model or discuss suggestions for how the league could better develop talent. Again and again, Peterson was confronted by cultural assumptions about the physical inferiority of Chinese athletes. “We just told them that there actually is no physical barrier to creating a top basketball team with Asian blood,” he said. “There was no reason that a group of Chinese players could not beat the United States national team one day. The Spanish beat them. Argentina’s national team beat them.” China simply had to find a style of basketball of its own. It needed its own basketball identity. It also needed to find a better way to develop talent. By using medical tests to identify teenagers mostly likely to grow tall, the system shuttled prospects like Pan Jiang and Big Sun into sports schools. From there, the best players were recruited for the junior teams of the professional clubs, which produced the raw material supplying the national team. This meant the talent pool was actually tiny. Maybe thirty professional teams across the country kept junior teams. If each team kept thirty players, then fewer than 1,000 players were being trained.
“That’s just not a lot in a country of 1.3 billion people,” Peterson said. “We tried to create a plan to solve player development issues and systemic issues.”
Li Yuanwei was impressed. But when the sports bureaucracy considered the plan, the answer was no. Zou Marketing was told that China wasn’t ready. No one mentioned that the North Star Plan would have pushed many basketball bureaucrats out of power. “You can’t understand something if your job depends on you not understanding it,” Peterson said. “At the end of the day, I think they had a really difficult time. Lots of things would have been restructured and privatized.”
Publicly, Li Yuanwei praised the North Star Plan as a blueprint for the future, without discussing the radical parts of the blueprint that would be ignored. Privately, Li was deeply disappointed. When I met him at a Beijing hotel in 2009, he continued to hope the league would someday reflect the North Star blueprint. “That’s our final goal,” Li said. “Otherwise, we face a deadlock. But in reality, the current system doesn’t allow us to do that. Nor does it encourage us to.” He added, “We are in a special transitional time. If we are determined to have a market-oriented league, we’ve got to solve this gradually.”
By 2006, Li Yuanwei was doing the easy pieces of the North Star Plan, such as adding cheerleaders and dividing the league into northern and southern divisions, but little more. Li knew the system needed change, yet he also knew trying to force change was a pointless exercise. He concentrated on shoring up the league’s finances and signing a marketing agreement with a Swiss conglomerate, Infront, which was expected to attract new sponsors for the league.
The NBA now had an office in Beijing, and was expanding rapidly, signing new television contracts with stations across the country, pursuing branding partnerships and selling NBA merchandise. In the late summer of 2006, Stern visited Guangzhou to watch the American team play exhibition games as part of a warm‑up for the World Championships. Meeting with reporters, Stern boasted that NBA revenues in China were growing by 30 percent and described China as “our most important and largest market outside the United States.” Business was so good that NBA executives in New York had been quietly discussing the possibility of a China league. It made perfect sense, yet no one had dared say it out loud.
Among the many talents attributed to Stern by his admirers is the star player’s gift for making the right decision at the right time. Mark Fischer regarded Stern as a visionary strategist and masterful negotiator. “He can negotiate and present with anybody,” Fischer said. “He could sell ice to Eskimos. He’s amazing at saying the exact right thing for every situation, for every audience. In many ways, David Stern is the smartest person I’ve ever known.”
Yet at the Reuters Media Summit in November 2006, Stern unwittingly said the wrong thing at the wrong time. In two interviews, as Stern discussed his desire for a bigger NBA footprint in China, he floated the possibility, almost as an aside, of a league. “The model that we’re working on now is the placement of all our assets in China in an enterprise with all NBA rights,” he said. Reuters quoted Stern as saying this new Chinese entity would oversee the NBA’s business in China and have the ability to operate a league “such as NBA of China.”
In another situation, another country, Stern’s comment might have been received as inconsequential, or even as a tactical mistake by tipping his hand, yet in China the consequences were immediate. China Daily, the country’s official English-language newspaper, quickly reprinted one of the Reuters articles. Stern’s staff at the NBA office in Beijing was startled. Chinese basketball officials were blindsided and alarmed. Several Chinese team owners held an emergency strategy session and wondered if Stern knew something they did not. Had he somehow gone around the CBA and gotten permission for a league? No one knew. Only as days and weeks passed would it become clear that the NBA didn’t have permission at all.
Li Yuanwei was furious. In China, personal relationships mattered deeply in business, and while he admired Stern’s league, Li had remained wary of Stern and distrustful of his promises of cooperation. During Stern’s visit to Guangzhou, Li later recalled that Stern had needled him about the Chinese team’s performance during a recent trip to Europe. The Chinese had played poorly and lost to Spain by 47 points. A year earlier, the CBA had signed the marketing contract with Infront, even though the NBA had also bid for the contract. “You see,” Stern said, as Li later recalled the meeting in his memoir, “you work with the Swiss, and you lost by 47 points. That’s just very shocking!” When the translator relayed Stern’s joke, Li said, he had almost stormed out of the meeting.
As he digested Stern’s unexpected comments about a league, Li realized the NBA commissioner had miscalculated. “I was astonished,” Li told me. “He had never said this before to us. If he had said he wanted to cooperate with the CBA, then that would have
been understandable. But he didn’t say a word, which meant he knew nothing about China.”
Several months later, in early 2007, David Stern and Li Yuanwei appeared together at a news conference in Shanghai. It was tempting to think of them as a couple that had averted a bad breakup though, publicly, there had never been a spat. Yet a new tone was obvious. No longer did Stern speak of the NBA’s desire for its own China league. Now the theme was partnership and cooperation and how both leagues could benefit from collaboration. Maybe they could share a league. Li Yuanwei seemed pleased. He later joked to me that Stern was “now my best friend.”
With reason. The NBA’s ambitions in China had grown. By early 2007, NBA lawyers were conferring with Goldman Sachs over a proposal to form a subsidiary, NBA China. No longer would the NBA be an outsider, a foreign multinational; if it created a Chinese subsidiary, the NBA would be proving its commitment to China, and also creating the business infrastructure that could lead to potentially far greater riches. The Olympics were less than two years away and a giddy optimism had infected the sports marketing world. The commercial potential of Chinese sports was now nakedly obvious, and expectations were rising that finally China was going to open the door to real commercialization. No one expected major changes so close to the Olympics; the optimism was about what might happen after the Games. Many people thought the Olympics could have a catalyzing impact on reform and that the government would finally begin decoupling sports from politics.
The NBA certainly did. Months earlier, an opportunity had unexpectedly landed in the NBA’s lap. Across Beijing, stadiums were rising through clouds of construction dust as a new Olympic Green was being carved out of the northern tier of the city. Beijing’s Olympic organizers were not simply building stadiums. They wanted to make statements. Rising side by side, the National Stadium, known as the Bird’s Nest, and the National Aquatics Center, known as the Water Cube, were so daring and original that visiting architecture critics breathlessly described them as portents of a new Chinese age. No one offered such praise for the basketball arena. Located on the west side of the city, the original design envisioned a building masquerading as a television set; the exterior facade would be covered with digital screens televising round-the-clock game coverage and commercials during the Games. Inside would be a six-story mall with shopping, restaurants, and nightclubs. The International Olympic Committee was alarmed enough that the project kept getting scaled back. But the more important problem involved the builder, a Beijing firm, Cencons, which had suffered losses in another venture. Faced with a cash flow shortage, Cencons sold the property to a Chinese land development company, later named Air China Real Estate, or ACRE. The company owned an adjacent property and saw the potential to build a shopping mall on the extra land around the arena. The only problem was that ACRE knew nothing about basketball.
But the NBA did. One September morning in 2006, a former Boston bakery chain owner named Matthew Carberry left his suburban home in Beijing for nine holes of golf. Carberry had arrived in China three years earlier and reinvented himself. He had followed his wife after IBM relocated her to Beijing and had quickly built a network of friends and contacts around the city. He was a natural entrepreneur and salesman who tried different things before he landed in real estate as a foreign face inside ACRE. Carberry’s morning golf partner was Mark Fischer, who was now living in Beijing and overseeing the NBA’s operations in China. Fischer and Carberry had never met, though they lived in the same housing compound and their children attended the same international school. Carberry arrived with a pitcher of homemade fruit shakes and a proposal: The NBA should partner with ACRE on the Olympic arena.
From that morning round of golf would begin five months of discussions and meetings that culminated in a deal in February 2007. Joined by Carberry, Cai Tong, head of ACRE, flew to New York and signed an agreement with David Stern that granted management rights over the Olympic arena to the NBA. The old designs were jettisoned. Architects hired by the NBA would redesign the arena to meet the league’s specifications. The Beijing Olympic Committee would still manage the arena during the fortnight of the Games, but the NBA offered consulting advice on in-game entertainment and helped import cheerleaders, music soundtracks, and tumbling teams for the halftime show. For the NBA, the deal seemed like a marketing coup; the Olympics had always been considered the best stage to showcase the league to Chinese fans, and now the NBA would control the stage for years to come. The arena, known as Wukesong, would eventually be called “the Home of the NBA in China.”
In the NBA, arenas were not merely basketball courts; they were carefully designed cash machines, especially the newest ones, like the Staples Center in Los Angeles. Wukesong offered the NBA a chance to transplant its economic formula onto Chinese soil. The game was the spectacle, the draw to lure patrons (and to be converted into content for television). Once spectators entered the arena, they entered a piece of real estate painstakingly designed to separate them from their money. To do this, arenas were subjected to an encyclopedic list of specifications dictated by a doorstop-thick NBA manual. The manual was the NBA’s guardian of quality, protecting what league officials called “the integrity of the game,” but it was also a blueprint for profit.
Nothing demonstrated this more than concessions. The failure of many CBA arenas to sell concessions would have been unthinkable in the NBA. Concessions were profit centers granted inalienable rights in the NBA manual. There must be at least one “point of sale,” or cash register, for every 150 patrons, and each point of sale must be granted at least four linear feet of counter space. To supply concessions, an arena also must reserve space for kitchens, beer storage, and refrigeration. An NBA franchise in the United States might earn one third of its revenues from tickets and concessions. Most CBA teams charged less than a dollar for a ticket and sold nothing.
But what also excited the NBA about the Olympic arena was the potential for naming rights once the Olympics were over and, presumably, a NBA China league was up and running. Naming rights were the richer cousins of the marketing partnerships signed by the NBA and corporations such as Tsingtao. Except the transaction was reversed; if a marketing partnership meant Tsingtao paid to place the NBA logo on Tsingtao beer cans, naming rights meant a corporation would pay to place its logo on an NBA arena. When stadiums began selling naming rights in America, the backlash was predictable and futile. Purists were horrified at the crassness. Commercialism seemed to have run amok. Football teams were playing in stadiums named after potato chips and oil-change chains. But naming rights, if anything, were the brutally logical extension of what sports stadiums had become: boxes designed to advertise and sell products. They were television sets where people actually entered the box. In China, the NBA viewed the Olympic arena the same way a butcher viewed a cow, as something to be maximized and carved into different cuts, so that each slice could be assigned a different value. If naming rights to the whole arena could be auctioned, other parts of the building could be auctioned, too. Maybe a Tsingtao Lower Concourse could be created, which would have concession stands selling cups of Tsingtao beer over four linear feet of counter space.
The Wukesong arena was bricks-and-mortar proof that the NBA had something besides air to sell in China. By October 2007, a small group of NBA executives and investment bankers from Goldman Sachs had toured Hong Kong and mainland China. They called it the Road Show. In New York, Goldman bankers and NBA executives had decided to structure the Chinese subsidiary as a private offering in which selected corporate investors would receive preferred equity, a guaranteed return, dividends, and an out clause. ESPN invested from New York, but otherwise the NBA wanted Chinese partners as “strategic investors” whose advice and connections would be as valuable as their money. At the same time, a subsidiary represented a potential payout for NBA executives. In the United States, the league was privately held, and although executives were well compensated, their income was limited to salaries and bonuses. NBA employees would be granted
shares of the new Chinese subsidiary, and if the subsidiary went public one day, those shares could reap millions of dollars.
“This was an opportunity, potentially, to reward some people,” said someone close to the process.
Yet a problem had to be addressed: How much was a Chinese subsidiary worth? More than anything, the NBA existed as a brand in China. It sold content (games) to television stations, operated an NBA.com website, sold jerseys and other merchandise, and pursued corporate marketing partnerships. In the United States, the NBA was a sports league and a marketing business. In China, marketing was almost the entire operation—and certainly a profitable one. In an investment overview provided by Goldman to one prospective Road Show investor, a graphic showed that NBA revenues in China had shot upward from $9.5 million in 2004 to $53.2 million in 2007, with projections for $78.3 million in 2008 and $149.3 million by 2010.
But the ability to project perpetually bigger revenues depended on determining how the basketball business would grow in China. Partly that value came from gazing into the future and seeing the same demographic trends that made everything seem valuable in China; the annual economic growth of at least 8 percent, a steadily enlarging middle class, the expansion of Internet and television media, and, most of all, the birth of a consumer society assumed to have tastes similar to those of consumers in the United States. The problem wasn’t any lack of appetite for NBA basketball; it was overcoming the systemic obstacles to satiating that hunger. Basketball games might seem to be apolitical, innocuous events, but they contained worrisome ingredients to a Communist Party that placed tight restrictions on freedom of assembly. Yet it seemed safe to assume that change was happening every day in China, and investing in basketball was betting that China inevitably was being reshaped by the wider world.
