SBJ/Jan. 31-Feb. 6, 2011/Opinion

NFL too profitable to risk losing such success to lockout

If a new labor agreement is not reached between the NFL players and owners by March 4, there is widespread expectation that there will be a lockout.

Why has the country’s most popular sports league traveled to this perilous precipice?

Forbes estimates that all but two of the NFL’s franchises made money last year and that the average NFL team had a profit of $33 million (before debt service). ESPN reportedly has reached a new TV deal with the league that will pay an average $1.8 billion a year through 2022, 40 percent higher than the current fee, for a package that does not include the Super Bowl. Given this prosperity, new NFL Players Association Executive Director DeMaurice Smith understandably wants to know why the players are being asked to accept having 18 percent shaved off the revenue that’s used to calculate the salary cap.

Smith asked the owners to show the union their financial books. The owners weren’t interested. With the average NFL franchise worth roughly a billion dollars, the estimated $33 million profit represents only a 3.3 percent return on capital. If that were the full return to ownership, the owners indeed would have cause for concern.

It seems, however, that the owners might be driven by another force: their inability to see eye to eye with each other on the league’s revenue-sharing system. Approximately 70 percent of all NFL revenue is shared equally among its 32 teams. In contrast, MLB, the NBA and the NHL all share less than 30 percent. In addition to extensive revenue sharing, the NFL employs a hard salary cap, a reverse-order draft, a jiggered schedule and free agency signing rules, among other things, to promote parity across the teams.

The league’s parity policy works. Over the last 10 years, 10 different teams represented the NFC in the Super Bowl. No other professional sports league in the world comes close.

The question is whether the NFL’s “socialism” goes overboard in its parity promoting policies. Do these policies undermine individual team incentives to develop and promote its product?

The 2006 collective-bargaining agreement for the first time included all stadium revenue in the base that is used to compute the team payroll cap. Both a cap and a floor (approximately 87 percent of the cap) are set at the same level for all teams. Yet, since small city owners have fewer large corporations to buy sponsorships, signage and premium seating at their stadiums, they believe that the 2006 agreement works prejudicially against them. They insisted upon and got a major increase in the NFL’s supplementary revenue-sharing system that has increased transfers by an additional $200 million in recent years.

Big city owners believe the system has gone too far. The Cincinnati Bengals are Exhibit A. The Bengals play in Paul Brown Stadium, which was built in 2000 with $423 million of public money (and no money from the team.) The team pays no debt service, no rent, no property taxes, no maintenance or capital improvement expenditures and gets to keep all stadium-related revenue. The Bengals’ payroll has generally stayed close to the mandated floor. The result is that the Bengals have been one of the NFL’s most profitable teams, despite having an underperforming team on the field, yet the Bengals are one of the NFL’s largest recipients in its supplementary revenue-sharing system.

More ironic still, owner Mike Brown refuses to sell naming rights on the stadium that is named after his father. With several major corporations headquartered in Cincinnati (Procter & Gamble, Kroger, Macy’s, Fifth Third Bancorp, Ashland) Brown could probably garner between $5 million and $10 million annually from selling these rights. Needless to say, many teams that pay millions of dollars into the NFL supplementary revenue-sharing system — teams that have privately funded their new stadiums and experienced ballooning financing costs when the auction rate bond market collapsed — feel a bit cheated. Nonetheless, Brown and other smaller city owners want more transfers.

When sports team owners can’t agree on dealing with one another, it is not uncommon for them to seek concessions from the players. This is what the NFL owners have done in calling for an 18 percent reduction in the revenue base upon which the salary cap is calculated.

As proposed by the owners, the 18 percent salary shave is to come principally in the form of greater player contributions to the owners’ increasing stadium costs. In 1999, the NFL owners took the progressive step through their G-3 program of committing league funds to help finance new stadiums. The league, in essence, would grant up to $150 million a team to fund new construction. The union, in turn, agreed to accept a similar deduction in the league’s revenue base (amortized over 10 years), which would result in up a reduction of up to $8.9 million in the annual gross salary bill paid to all players.

The rationale for the union contribution is that players get 59.5 percent of all revenue, and new stadiums can boost team revenues tens of millions of dollars annually, lifting player salaries proportionately. Thus, the new Cowboys Stadium may increase the Dallas Cowboys’ revenue by $100 million and, therefore, player salaries by $59.5 million. If the players collectively contribute $8.9 million to the stadium, they are getting more than a sixfold
BUD FORCE

return.
MIKE STOBE / GETTY IMAGES
Cowboys Stadium (top), site of Super Bowl XLV, and the Giants and Jets' New Meadowlands Stadium are examples of how new stadiums can boost NFL revenue.

In 2011, stadiums no longer cost $400 million to build. The new Cowboys’ facility cost $1.2 billion, and the Giants and Jets’ new stadium even more still. The NFL believes that both the league and union contributions need to rise along with the sharply increased cost of stadium construction. The league also wants the union to kick in a bit more to help defray increased stadium operating costs, which can run up to $20 million a year.

Now, the fact that owners initially asked for an 18 percent reduction in the salary base does not mean that they expect 18 percent. And the fact that the union’s new leader has employed aggressive rhetoric to denounce the owners’ stance does not mean that the union won’t accept a smaller sum. In many ways, the verbal volleys are nothing more than a typical sports league collective-bargaining dance.

The good news is that there appears to be a clear path to compromise. In 2009, the owners contracted $1.2 billion to 256 drafted rookies with $585 million guaranteed to players who had not played a single game in the NFL. Although the 2006 labor agreement has a rookie salary cap, the system has gaping loopholes. The owners want to close those loopholes and lower the commitment to unproven college players.

If the union agrees to close some of these loopholes (and why wouldn’t it, since they affect non-union members?), it can probably avoid any cuts to the salary pool of current union members. Then, toss in an 18-game schedule and increased medical coverage for players, along with a few other touches, and there’s a deal waiting to be signed.
With $8 billion-plus in annual revenue, virtually all teams operating in the black, new revenue streams popping up with various new technology ventures, ongoing corporate enthrallment, and a massive, captive and growing fan base, the NFL is just too profitable and successful to risk shutting down operations. While the owners may whisper “lockout” to reporters and the union may prepare for decertification, smart money says there will be football next fall.

Andrew Zimbalist (azimbali@smith.edu) recently released his latest book, “Circling the Bases: Essays on the Challenges and Prospects of the Sports Industry.”

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