SBJ/February 28 - March 6, 2011/Labor and Agents

This labor showdown isn't playing out before a backdrop of red ink

Labor disturbances are no stranger to sports, but if the NFL locks players out after the collective-bargaining agreement expires Thursday night, it would stand as one of the few times team owners shut down their business not because of red ink, but rather for insufficient profit.

When players and owners began battling in boardrooms decades ago, the prime fights initially concerned free agency. More recently in the NBA, NHL and MLB, the issues have related largely to teams losing money.
Now comes the NFL and NFL Players Association fight, where the terrain is not what’s a tolerable loss, but instead what’s an acceptable rate of return.

“We have never claimed we are losing money,” NFL Commissioner Roger Goodell has insisted many times over the last year.

While a multitude of critics blast the NFL and the players for not figuring out how to divide a $9 billion-and-growing annual revenue pie, it’s precisely because of the scale of the business that the travails have developed. To generate so much revenue, and over a sliver of games compared with other sports, expensive capital investments are required, whether it’s a new stadium or a TV channel. Bulging revenue also triggers soaring franchise values, which affect player perceptions of owner demands.

“The revenue split is not as simple as it sounds,” said Andrew Brandt, a former Green Bay Packers executive. “There are factors of team debt [and] team operations. It’s not just how much, but breaking up chunks of revenues and seeing what the value is there.”
That is a paradigm different from the more traditional and easier-to-grasp sports labor confrontations of the past, when teams bled money and demanded player concessions.

“The lockouts that the NHL players were in were about survivability,” said Ian Pulver, an NHL agent who was associate counsel for the NHL Players’ Association when its players were locked out during the 2004-05 season. “It was about NHL franchise survival and losing, apparently, hundreds of millions of dollars.”

More recently, NBA Commissioner David Stern said his league loses $400 million a year, though the National Basketball Players Association disputes that figure. The NBA labor pact expires June 30, and the league is asking for salary cuts ranging between 30 percent and 40 percent.

For the NFL, the questions instead include how much should NFL players pay for new stadiums that ultimately generate substantial new revenue for them, or how much should they pay for new TV endeavors and concession companies? And, what is an appropriate rate of return for the owners to justify investing in these businesses?

The NFL demands additional financial credits for those investments. The NFLPA is not deaf to the pleas but requests proof that the profit margins are in the low single digits. The owners to date have rebuffed the union’s open-books proposal.

Although the NFL maintains its economic system needs an overhaul, the league has not, as the NHL and MLB did, hired an outsider to publicly document the need for change.

In 2000, MLB tapped former U.S. Sen. George Mitchell and other luminaries to author the Blue Ribbon Panel on Baseball Economics, which concluded that baseball suffered from a major disparity between high- and low-revenue clubs. The report’s findings formed the foundation of the MLB owners’ collective-bargaining position.

In 2004, the NHL picked former Securities and Exchange Commission Chairman Arthur Levitt to write a report on NHL losses. That report fueled the NHL’s demands and the subsequent 2004-05 lockout. The season-killing lockout resulted in a new system for the NHL that featured a first hard salary cap.

The NFL argument is even more forward-looking. The league warns that revenue growth will shrink without a restructured CBA, rather than arguing that the past is littered with eye-popping losses, the kind that expert reports trumpet.

“They are arguing the system will work better if it is changed,” said Gabe Feldman, director of Tulane University’s sports law program. “But they are not claiming the system is broken.”

Similarly, Gene Orza, retiring COO of the MLB Players Association, noted that MLB was not pleading poverty in that sport’s 1990 lockout. “The NFL is within its rights to call a lockout to exert pressure on the players, and, in doing so when it is not pleading poverty, [it] is not unique in labor relations,” Orza said.

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