The NBA, China, and Marketing to Regulators

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Edward Nevraumont

Marketing Decisions

Marketing BS is nearing its six-month anniversary. Over that time, I’ve tried to cover a wide range of topics. When it comes to understanding how marketing decisions are really made, I believe my two most important letters are “Marketing to Employees” and “Marketing to Investors.” Although these posts share similar names, they discuss two very different ideas. 

In “Marketing to Investors,” I argue that companies make decisions in the best interest of their shareholders, and then rationalize those decisions with PR spin. In the United States, Procter & Gamble regularly advocates for LGBTQ issues. To justify their presence in Russia — a decidedly non-LGBTQ-friendly country — Procter & Gamble claims “if we have a positive and active conversation within these markets, we have the opportunity to bring people with us and to drive things forward.” Look: we all know that P&G does not conduct business in Russia with the primary goal of advancing LGBTQ issues. P&G operates in Russia because there is (a lot of) money to be made in Russia; plus, they know that with a little bit of PR spin, no one will care about their hypocrisy. Marketing to Investors highlighted ways that companies evaluate the costs and benefits of decisions. After selecting the strategies where the benefits outweigh the costs, companies focus on “marketing” positive messages to rationalize their actions. Bottom line: companies (and company executives) are driven by incentives just like everyone else.

In “Marketing to Employees,” I argue that companies understand the importance of maintaining happiness among their workforce. To attract quality talent, companies need to pay competitive salaries. That said, if a company can align its values with those of their employees, then it can offer lower salaries without hurting their recruitment plans. This concept explains why Disney can pay less for a marketing manager than Procter & Gamble, and also why Philip Morris needs to pay more. Working at Disney provides many employees with non-monetary rewards (the joy of children’s entertainment), allowing the company to skimp on the monetary rewards. Conversely, most members of the professional workforce would not derive a “good feeling” from working for a tobacco company. As such, tobacco companies need to pay higher salaries to convince people to put aside their moral concerns and work there anyway.

The market incentivizes companies to “do good” — at least if “good” is defined as the moral beliefs of their potential talent pools.

Which brings us to government and regulation…


China and the NBA 

Here’s some quick context for today’s post. China provides many significant opportunities for the National Basketball Association: 

  • The five-year deal with Tencent to stream NBA games in China is worth ~$1.5 billion.

  • Chinese citizens are avid purchasers of NBA merchandise, especially jerseys and basketball shoes. 

  • Many American players follow their NBA career with a stint in the Chinese Basketball Association, allowing them to earn hefty endorsement deals. 

In total, Forbes estimated that the NBA’s China dealings were worth $4 billion in 2018.

None of the NBA’s 30 teams benefit more from their relationship with China than the Houston Rockets — where NBA all-star Yao Ming played from 2002–11.


Enter the Dragon

As part of the NBA’s (very successful) strategy to expand its global reach, teams regularly play preseason games in international locations. For this year, China was slated to host a pair of games between the star-studded Los Angeles Lakers and Brooklyn Nets

A few days before the teams departed for Shanghai, however, any chance for an NBA celebration of goodwill went up in smoke.  

On October 4, Daryl Morey — General Manager of the (beloved-in-China) Houston Rockets — tweeted his support for demonstrators in Hong Kong:

Two days later, Morey deleted the tweet and backtracked on his original statement.

For the Chinese government, Morey’s “clarification” proved far too little, and way too late. A mob of “Twitter trolls” — probably unleashed by state-organized channels — directed more than 16,000 negative messages at Morey. Rockets merchandise was pulled from shelves and all of their games were yanked from the broadcast schedule for the year. Questions lingered about the fate of the two Lakers-Nets games, especially as China removed all NBA-related advertisements from the arenas. 

The furor showed no signs of dying down. China demanded an apology from the NBA. Commissioner Adam Silver — known for his vocal advocacy of social issues — surprised many people by releasing a tepid statement that acknowledged (without directly apologizing for) the situation: “We recognize that the views expressed by Houston Rockets General Manager Daryl Morey have deeply offended many of our friends and fans in China, which is regrettable.”

Silver’s statement elicited a rare show of bipartisanship from American congressional figures as far left as Rep. Alexandria Ocasio-Cortez (D-N.Y.) and as far right as Sen. Ted Cruz (R-Texas) — both of whom signed their names to a letter condemning the NBA’s acquiescence to China’s demands:

It is outrageous that the NBA has caved to Chinese government demands for contrition. ... NBA players have a rich history of speaking out on sensitive topics of social justice and human rights inside the United States, and the NBA takes pride in defending their right to do so. Yet while is it easy to defend freedom of speech when it costs you nothing, equivocation when profits are at stake is a betrayal of fundamental American values.

What about the players? 

As Tyler Cowen asked on his blog, Marginal Revolution, “How many players tweeted their support of Hong Kong?”

As I am writing this post, zero. … 

Presumably the league has, either directly or indirectly, told them not to run off at the mouth on this topic.

Over the last decade, NBA players have increasingly used their high-status platform to take strong political stances on a range of “sensitive topics” — systemic racism, police brutality, child poverty, and Donald Trump. And yet, not one single player chose to stand up to China on the issue of Hong Kong protests and human rights violations. In the very rare instances that players said anything about the political tensions, they seemed to direct their criticisms at Morey, not China. On October 14, superstar LeBron James — after returning home from the China games — shared the following opinion:

I believe [Morey] wasn’t educated on the situation at hand, and he spoke. And so many people could have been harmed, not only financially but physically, emotionally, spiritually. So just be careful what we tweet, what we say, and what we do, even though, yes, we do have freedom of speech, but there can be a lot of negative that comes with that, too. [Emphasis mine]

LeBron James — a noted philanthropist and activist — was immediately chastised by American journalists and sports fans for his statement. A few hours later, he (partially) walked things back via a follow-up tweet:  

Why would any player voice support for Hong Kong’s protestors? Individuals often behave like companies — by responding to financial incentives. China offers not only a huge market for the NBA, but also a massive generator of wealth for individual players in the NBA. By avoiding any potential conflicts with the Chinese government, players are acting in their own best (financial) interests. Unlike some members of the media, Congress, and advocacy organizations, the average American sports fan doesn’t seem to care very much about the tensions in Hong Kong. 


Money versus Morality

If customers don’t care about an issue, and employees don’t care, either, then companies have an easier time making decisions that balance money versus morality. In many cases, companies follow the same process P&G used when deciding whether to operate in Russia (despite their terrible LGBTQ record): they look at the size of the market and then rationalize their decision.

Over the past year, Nike seemed to win every imaginable award for their “Believe in something, even if it means sacrificing everything” campaign. Nevertheless, Nike didn’t feel comfortable sacrificing much of anything in China, as they pulled NBA merchandise from stores in major Chinese cities. Plus, Nike has completely avoided commenting about the statements made by LeBron James, their most prominent athlete.

Consider another vivid example of corporate kowtowing to Chinese pressure. Earlier this month, Apple’s App Store offered HKmap.live — an app that used crowdsourced information to mark the locations of police and pro-democracy protests in Hong Kong. 

After complaints from Chinese authorities, Apple pulled HKmap.live from the App Store (they actually removed, reinstated, and then ultimately removed the app within the span of 10 days). When questioned about Apple’s justification for pulling HKmap.live, Tim Cook responded in an internal memo:

The app in question allowed for the crowdsourced reporting and mapping of police checkpoints, protest hotspots, and other information. On its own, this information is benign. However, over the past several days we received credible information, from the Hong Kong Cybersecurity and Technology Crime Bureau, as well as from users in Hong Kong, that the app was being used maliciously to target individual officers for violence and to victimize individuals and property where no police are present. This use put the app in violation of Hong Kong law. 

As John Gruber of Daring Fireball argues, Cook’s memo “doesn’t add up”:

Three questions, no answers:

1.    When was HKmap.live “used maliciously to target individual officers for violence”?

2.    When was it used to “victimize individuals and property where no police are present”?

3.    What local laws in Hong Kong does it violate?

I can’t recall an Apple memo or statement that crumbles so quickly under scrutiny.

Are you really surprised that Apple’s actions didn’t “add up”? The decision was made to remove the app because the Chinese market is extremely important for Apple (second only to the US). Tim Cook’s statement is not an explanation about the truth, but rather a rationalization for their decision — just like P&G does not really operate in Russia to further “a positive and active conversation” about LGBTQ rights. 

A few days after the app flap, Bloomberg reported that Apple — a company that proudly describes itself as “privacy obsessed” — passed along customer browsing data to Tencent, which was in turn handed over to the Chinese government. I believe that Apple does care about privacy, but only to the extent that it does not harm the relationship with their second-largest market (and most important manufacturing hub).

A recent article in The Federalist identified several dozen companies that have bent over backwards for China. The list includes many high-profile corporations — Gap, Mercedes-Benz, Marriott, etc. — as well as Blizzard, the video game giant that just banned one player and suspended a team (from a competitive video game league) for their support of Hong Kong protestors. In practice, just about every company with exposure to China is bending a knee

Google and Facebook are “standing strong” and resisting Chinese influence, but that is only because both companies have been locked out of the country. When Google had a shot at operating in China, they were happy to censor their search engine. Likewise, when Facebook thought they had an opening, Mark Zuckerberg spent a year learning to speak Mandarin.


Rules of Law

Criticizing companies for their relationship with authoritarian governments is a hobby for many American media outlets and analysts. But before judging foreign situations too harshly, let’s take a minute to consider what’s happening closer to home. 

As noted earlier, Congress comfortably exhorts American companies to stand up in the face of government regimes that do not respect the “rule of law.” And yet…these same American companies are expected to obey the whim of their own domestic government, even for issues far outside any “rule” or “law.”

On October 8, two US Senators sent letters to Paypal, Mastercard, Visa, and Stripe, “urging” the companies to reconsider their involvement with Facebook’s Libra project (which I covered in “Facebook’s Currency”). According to the Wall Street Journal, these letters were followed by the Treasury Department “leaning” on these companies and “asking for a complete overview of their money-laundering compliance programs and how Libra will fit into them.”

To be clear: these American companies are neither violating any rules nor even considering violating any rules. And they are definitely not being charged with committing a crime. Instead, these companies are being asked by politicians to change a course of action under (pretty clear) threat of having regulatory agencies investigate all of their business dealings. The Senators’ letter doesn’t beat around the bush: “If you take this on, you can expect a high level of scrutiny from regulators not only on Libra-related payment activities, but on all payment activities.”

As you might imagine, it only took a few days for all of these companies, along with eBay and Mercado Pago, to withdraw from Facebook’s Libra Association. As Matt Levine writes in his newsletter:

Visa Inc. and Mastercard Inc. and other financial partners put their name on a vague statement about how Libra might be a good thing, and then there was immediate and substantial public and regulatory backlash about the idea of a global currency run by Facebook, and now the financial partners might want to vaguely take their names off the vague thing.

Without question, the benefits of being part of a successful new global currency could be very high. But consider the bigger picture. If (1) the chances of the new currency succeeding are low, and (2) any connection with the currency would prompt regulatory scrutiny on the non-Libra parts of their business, then the decision to pull out of Libra participation is pretty straightforward. Companies evaluated the pros and cons, before determining that it would be far too dangerous to get categorized as one of the “bad companies.”

Companies make these types of cost-benefit analyses all the time. For Libra, the answer was obvious: withdraw. For China, at least in terms of the facts on the ground at this particular moment, the decisions seem to fall something like this:

  • China is a huge market and American consumers and employees don’t seem to care that much about the Hong Kong protests. So, bend to the wishes of their government...

  • ...unless the company is already locked out of the country, in which case you can take the high ground (Google, Facebook).

  • ...or unless it will mean too much governmental retaliation in the US (which is an even bigger market for many of these companies).


Final Thoughts

Note that corporate decisions may change as the facts shift, but the structural processes with which the choices are made usually remain the same. Companies continually reassess the costs and benefits of their operations, with a particular emphasis on the way the decisions might be viewed by existing and prospective employees. More and more, though, companies are considering the perspectives of governmental actors and regulators.

Keep it simple,

Edward

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Edward Nevraumont is a Senior Advisor with Warburg Pincus. The former CMO of General Assembly and A Place for Mom, Edward previously worked at Expedia and McKinsey & Company. For more information, including details about his latest book, check out Marketing BS.