SBJ/August 1-7, 2011/NFL Special Report

Done deal: What's next for NFL

League aims for investment with revenue-sharing shifts

Before NFL owners reached a new labor agreement with the players last week, they made a key change in their system to aid teams in need that will result in wealthier clubs paying less to low-revenue ones, an important element of the new collective-bargaining agreement that is expected to be ratified this week.

The significant shift underscores how the deal that brought an end to the league’s first work stoppage in more than two decades fixes some of the core concerns the NFL had with the old labor pact, although not as quickly as the owners might have liked.

The league expects subsidies to lower-revenue clubs to nearly disappear by the end of the 10-year contract, but not right away, as the new deal is structured so that teams enjoy the main benefits toward the back end of the agreement. This is the primary reason why the NFL successfully fought a last-minute effort by the players to insert an opt-out at seven years into the deal.

Over the course of the new deal, the owners could draw around $3.6 billion to $4.8 billion more in revenue. That is based on the extra three to four percentage points of revenue that will swing their way, spread over the roughly $120 billion the league is expected to generate over the next decade. The league further expects a majority of that intake to flow from national revenue streams, like media, which gets divided evenly among the 32 teams, as opposed to the growth coming from locally derived club revenue, which is what has fueled revenue disparity between the franchises.

For the start of the new deal, however, the 3 percent to 4 percent gain by owners is spread over slightly more than $9.5 billion in league revenue, which results in an extra $285 million to $380 million. That is not enough to fully fix the league’s main issue that too much had been paid to the players, resulting in slowing investment in the future of the game and financial disparity among the clubs.

“You are talking about low single-digit percentage gains. I would say that was a little bit more marginal that I would have expected,” said Neil Begley, an analyst with Moody’s Investor Service who tracks debt tied to the NFL.

What the league is banking on is an explosion in revenue to at least $120 billion, and as much as $140 billion, to come in over the contract’s 10 years. By the last years of the deal, annual revenue could more than double the current amount.

“Three to 4 percent of $9 billion is a lot less than 3 to 4 percent of $20 billion,” said Marc Ganis, a sports consultant with close ties to the NFL.

A league source said the deal motivates the NFL even more to generate national revenue, which should help ease the strains between low-revenue and high-revenue clubs.

The league is moving right away to ease tensions over the subsidy system, which is the league’s supplemental revenue sharing, that previously had transferred about $100 million annually to low-revenue teams.

Beginning this year, the league is capping at $3.5 million the amount that any single club must pay into the system, whereas under the old formula, top teams could pay millions more than that. In addition, in that old system, the top 15 teams in revenue paid out to the lower-revenue teams. It’s unknown how many teams will give and receive because of different formulas now.

Top teams will now be assessed not on their overall revenue, but on their amount of locally derived revenue. Teams’ eligibility also will be loosened a bit, with those clubs for whom player compensation consumes 63 percent of their revenue now being eligible. Previously, that requirement was 65 percent.

It’s possible then the amount paid out to needy clubs could rise, but high-revenue clubs won’t have to fund it all themselves because new revenue now will come from greater access to club-seat fees. In the coming years, waivers that have allowed many teams to keep the visitors’ share of club-seat revenue will expire. That money now will be banked in a revenue-sharing pool.

The NFL anticipates, though, that as national revenue rises, fewer clubs will need extra help.

The fact that supplemental revenue sharing is even necessary underscores that the owners did not get everything they wanted in the new labor agreement. Players won significant victories in the negotiation, like a higher salary floor and more cash spending, as well as health and safety measures. The NFL Players Association also had been deeply concerned about capturing its share of the explosion of media dollars expected in coming years. One reason it walked away from the table on March 11 was because the league’s proposal that day could have cut off their chance to enjoy that growth.

Now, the players will get 55 percent of media revenue, which is treated as a unique stream of revenue.

“National revenues have the least costs associated with the them,” said Mark Murphy, Green Bay Packers president, explaining why the league would share this money more generously.

Players will get less of high-cost revenue, such as local, club-raised revenue and NFL Ventures revenue, which comes from areas like NFL Network and licensing and merchandise. Players take 40 percent of club revenue and 45 percent of NFL Ventures revenue in the new deal, which mandates that players must average at least 47 percent of all revenue during the decade.

In the last year of the old contract, the figure was less than 51 percent.

The league had originally wanted a large cost credit to deflect investments, but the players rejected that approach, at least without access to the league’s financials.

“We didn’t directly get cost recognition, but through the sharing of different percentages, we were able to take into account what we incurred,” Murphy said.

There is one credit remaining, however, with the league able to lop off up to 1.5 percent of gross revenue for stadium investment. Private contribution to stadiums would be eligible as credits, Murphy said.

The league got some other significant concessions, as well. The players agreed to end federal judicial oversight of the labor relationships, a key demand of the owners. That means the owners have seen the last of their nemesis U.S. District Judge David Doty, who so frequently ruled for the players. Disputes now are to be heard by arbitrators agreed to by the two sides. The players also agreed to drop the antitrust lawsuit against the league (Brady v. NFL), as well as its lawsuit seeking billions of dollars in damages from the NFL for requiring broadcasters to pay fees even in a lockout.

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