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SBJ/October 24 - 30, 2005/Opinion
Its owners divided, the NFL reaches a revenue-sharing crossroads
Published October 24, 2005
When it comes to collective bargaining and revenue sharing, the standard mantra in the NBA, NHL and MLB is that they should take a page from the “socialism” and labor-management cooperation of the NFL.
Now, it seems, for the first time since 1993, the NFL is taking a page from the other team sports. NFL owners can’t agree with one another about extending their revenue-sharing system, and they can’t agree with Gene Upshaw and the players association over the terms for a new labor deal.
NFL socialism goes back to the league’s inception in 1920, when sharing of gate revenue was introduced. Forty years later, Pete Rozelle persuaded the owners to extend this to include national television money and then persuaded Congress to allow this “collusion” in the Sports Broadcasting Act of 1961.
As a result, the NFL has largely avoided the paralyzing wars among groups of owners that have plagued baseball and other sports.
The NFL’s labor-management peace dates to the 1993 collective-bargaining agreement, under which (with a few modifications) the league still operates. The agreement, however, expires after the 2007 season; if it is not extended before that year, there will be no salary cap in 2007. Further, Upshaw threatens that if the cap is lifted one year, it will not come back.
It is also true that without an extension, the players having between four and six years of NFL service would lose unrestricted free agency rights. But the players association correctly believes the benefits of salary growth from lifting the cap would outweigh the diminishing effect of taking away unrestricted free agency for a group of players.
Thus, the players are willing to let the current agreement lapse if their two basic demands are not met.
First, they want the salary cap (now 65.5 percent of “defined gross revenues,” which itself is about 90 percent of total revenue) to be based on all NFL revenue.
Second, they want their percentage to stay roughly the same on the larger base. Put differently, they now get about 59 percent of total NFL revenue and they want to get 64 percent.
Their position is premised on the perception that NFL teams have become enormously profitable. National revenue, which is shared equally, is approaching $140 million a team annually, and some teams are earning more than that sum from local sources.
Revenue-sharing and CBA challenges are the biggest the NFL has faced since the ‘87 strike.
As team revenue rises rapidly and the players’ share remains steady, the absolute amount of revenue after player payroll grows handsomely.
In 1996, average team revenue was about $75 million. If the players received 60 percent of this, they would have gotten $45 million a team and the $30 million balance would have gone to the owner to meet his expenses and perhaps yield a small profit.
Today, average team revenue is about $190 million, producing an average payroll around $114 million and an average balance of $76 million to the owner to meet non-payroll expenses and yield profits.
If, in 1996, the average team had $24 million in non-payroll expenses and $6 million in operating profits, and non-player expenses grew at triple the rate of inflation or 6.6 percent a year between 1996 and 2005, then average team expenses after payroll in 2005 would have been $42.7 million and average team operating profits would have been $33.3 million.
Hence, under these not-unreasonable assumptions, profits have grown almost sixfold over the last nine years. Understandably, the players, who produce the product and put their bodies and health on the line, want to participate more in the bonanza. (A major focus of the union from any gains will be to bolster post-retirement health benefits.)
If the players received the desired 64 percent of total revenue this year, the salary cap would have been $121.6 million and the average owners’ operating profits would have been $25.7 million — representing a more than fourfold growth relative to 1996.
But the above estimates are all averages. What about the teams without new stadiums, with less advantageous leases, in smaller markets, or less effective management?
The NFL brand of socialism has led owners to expect automatic profits. Under the existing labor agreement, this guarantee is pretty much assured for each of the 32 owners. Under the players’ proposal, the bottom lines of some owners may turn red.
Many NFL owners are not used to the rigors of the marketplace. In the name of competitive balance, they say that they need more revenue sharing before they can discuss meeting the players’ demands.
But competitive balance in the NFL would not suffer under the union’s proposal. Any new financial imbalances could be rectified with modest leaguewide measures and more efficient, aggressive team management.
Whatever leaguewide initiatives are implemented, there must be care taken not to further undermine the incentives for entrepreneurial behavior. The league’s future growth depends on encouraging such instincts, not blunting them.
Meanwhile, Paul Tagliabue now knows what Bud Selig must have felt like in the early 1990s. Running a league is never easy; it is next to impossible with a group of divided and acrimonious owners.
The owners need to find common ground, first among themselves and then with Upshaw and the union. It is the biggest challenge the NFL has faced since the 1987 strike and the ensuing antitrust suit.
There are more than sufficient resources to construct a fair and rational system. The only question is whether there is sufficient good will, intelligence and common sense.
Andrew Zimbalist is the Robert Woods Professor of Economics at Smith College.