With 2011 Lockout Looming, the NFLPA Tour Stops in Pittsburgh: Part III

I'm sorry that it is taking me so long to get this information out there, but the problem is that the issues involved are all things that I know little or nothing about, and so to write about them in a meaningful way, I have to do a lot of basic research.  If only one of the issues was whether it is okay to add extra ornamentation to the music of François Couperin, or whether one would generally use inegal in an allemande. I could do that in my sleep - and the rest of you would be asleep, too...

So today's area of ignorance is finance.  I'm going to focus on the issue of revenue sharing.  This issue is perhaps the most important issue we will face, because it will more profoundly affect the game than almost anything else I can imagine.  You may feel that my statement is ridiculous, because issues like the new emphasis on rule enforcement are going to change the way the game is played.  But honestly, in the historical sense, those issues are peripheral.  As I've discussed in some depth before, the game is continually changing in that regard. But if you want to continue to see 32 football teams who at least theoretically have the opportunity to be competitive each season, revenue sharing (and the related issue of a salary cap/floor) is almost the only issue.

I first heard about revenue sharing when my then-14-year-old son patiently explained why football was so different from baseball. It seemed like a good idea to me then, and it seems like an even better idea now.  Although I suspect that most of you have a reasonable understanding of what that is and what the implications are for football, I'll start off with the history, after the jump:

Pete Rozelle is the man who generally gets the praise (or blame, according to taste) for the idea of revenue sharing.  Prior to the 1960s football revenue in the NFL was generated individually by each team as they could manage it, including the few teams who had negotiated a local television deal.  The upstart AFL, which formed in 1959, began operations with a structure that negotiated television deals as a whole and shared gate receipts.  Rozelle knew a good thing when he saw it, and persuaded NFL owners who had TV contracts to give them up in favor of negotiating a package deal.  The initial deal, between the NFL and CBS, came under scrutiny and was voided in court under the antitrust laws.  Rozelle quickly pushed for an exemption, and in 1961 Congress passed the Sports Broadcasting Act, which gave professional sports leagues an antitrust exemption so that they could negotiate television deals as a national package.  This shared revenue is still the largest single item in the League books.

By the mid-60s there was a bidding war for players between the NFL and AFL teams, leading to "crazy" contracts like the 4-year, $427,000 total contract that Joe Namath received from the Jets. But there had been sort of a gentleman's agreement that they would not poach from each other once a player had signed in either league.  This blew wide open in early 1966 when the NY Giants (NFL) signed the first soccer-style kicker, who already had a contract and was playing with the Buffalo Bills (AFL.)  Al Davis retaliated, signing a number of starting NFL quarterbacks to AFL teams.  The owners in both leagues decided that at least some of them were going to go bankrupt, and quietly began negotiations behind their commissioners' backs.  (The commissioners in question were Pete Rozelle and Al Davis, commissioner of the AFL) 

In 1966 they drafted the agreement that created a partial merger, leading to a full merger with two conferences in 1970.  The Super Bowl was also created, with Super Bowl I being played between the Packers and the Chiefs in January of 1967. The merged league continued the idea of sharing both television and gate revenue, as well as instituting a combined draft.  The newly certified players' union (the NFLPA) was not at all thrilled with the league merger and attempted to block it, fearing that it would lead to less competition for players.

During the 70s and particularly during the 80s there was labor unrest.  In 1982 there was a player strike for 8 weeks, with the NFLPA declaring a goal of obtaining 55% of revenue for player compensation. Player-organized "All-Star Games" were not a success, and the players returned to work in November of 1982.  In 1987 they tried again, but this time there was only one week without a game, as the owners quickly assembled teams with players from Arena  and other semi-pro teams and players cut after training camp.  (One of those players, hired to quarterback for the Bears, was Sean Payton, now the coach of the New Orleans Saints.)  The other category of player, and the one that probably killed the strike in the end, was 'scabs' - players who crossed the picket lines to play for their team. The union had not collected a strike fund, and a number of players couldn't afford to hold out.

The antitrust suit filed by the union failed in court, and it was at this time that the players took the route of decertifying the NFLPA.  A new antitrust suit, filed in 1989, successfully challenged the league's free agency rules as an unlawful restraint of trade, and this as well as other suits that were pending brought all parties to the table. An agreement was crafted that allowed for true free agency.  It was tied to a salary cap and a salary floor - the former for the owners, the latter for the players. This CBA, agreed to in 1993, has been extended a number of times, with the latest extension approved in 2006.

Revenue sharing can be viewed as one of the most successful experiments in socialism ever to happen in this country.  In combination with the salary cap/floor for player compensation, it has been possibly the major factor that has made the NFL the most successful brand in the world.  The idea that any team, no matter how long they have been uncompetitive, can rise from the ashes and win the Super Bowl has kept public interest in the game high even in markets with less successful teams.  The Saints last season and probably the Browns this season can be viewed as poster children for the concept.  So why on earth would anyone want to mess with it?

Well, as they say, follow the money.  Mewelde Moore told me last Tuesday that this was all about greed.  This is probably at least partially true, although I'm not sure that the charge can only be applied to one side of the table.  After all, even the rookie minimum of $325,000 sounds like a lot of money to fans who may be earning 1/10th of that.  (How much of that $325,000 actually goes into the player's pocket is another question, and one that I will address in a later post.)  However, the players' salaries are matters of public record, unlike the financial information for the teams, other than the publicly-owned Packers. But leaving that aside, one of the bigger problems in the league has been the ever-increasing gap between the richest and poorest teams.  How can this be?  There's revenue sharing, right?

Well, that depends on which revenue you are talking about.  There are two categories of income in the NFL, and these are treated somewhat differently.  The first category is Licensing and Sponsorship Revenue, the second Game Revenue.  Included in the second category are the television revenues, which are nearly half of all income.  But within both categories there are some sources of so-called local revenue that aren't shared, and that didn't really exist, or at least weren't actively pursued, until the 1990s.  As Ravens President Dick Cass said in 2004:

'There were not as many revenue opportunities . . . .’ Most owners ‘didn’t control the stadiums, they didn’t control concessions, they didn’t control parking. Sports sponsorships weren’t a big deal.’  (quoted by Stefan Fatsis in Can Socialism Survive? The All-For-One, One-For-All Ethos of Pro Football Has Made It the Envy of Other Sports; The NFL Is Fighting To Make Sure It Stays That Way, published September 2004 in the Wall Street Journal.  You can read the article here.)

Jerry Jones bought the Dallas Cowboys in 1989 for $150 million, and quickly began looking for ways to leverage his investment.  He first cast his eye on the sponsorship and marketing deals.  He felt that the equal portion of national revenues that went to the Cowboys didn't adequately compensate the team for their superior marketability.  He decided to directly negotiate some local deals, and in 1995 cut deals with Nike and Pepsi, in contravention to the exclusive deals that Coke and Players, Inc. had with the NFL.  The NFL filed suit against Jones for $300 million, and he immediately counterfiled a $700 million suit, stating that the NFL prevented teams from marketing themselves.  These suits were settled out of court in late 1996, and part of the settlement was that the Cowboys could keep their deals.  This opened the floodgates for other, mainly large-market teams, to negotiate their own deals, and this income is naturally exempt from the league-wide revenue sharing. 

The other thing that has allowed teams that are well-positioned to do so to generate substantial "local revenue" (revenue not shared with the league) are stadiums.  Cass' quote above states the situation - that most teams didn't have deals that allowed them to control the revenues other than ticket sales.  As new stadiums have been built with much more favorable deals, the following revenue streams have become available: parking fees, concessions, naming rights, stadium clubs, signage, fees for other events, and so forth.  A huge growth area in unshared income has been in luxury boxes.  The team that controls their stadium revenue is in much better shape, even with increased debt, than the team without this control.  This was leading to an ever-widening gap between the richest and poorest teams, with little chance for amelioration.  After all, if your team is located in a large metropolitan area, you are going to have more sources of income available to you. 

But, you may say, the salary cap/floor still means that teams stay competitive, even if their net worth is not as large.  Well, maybe and maybe not. An influx of what you might call discretionary income (in other words, unshared revenue) allows a team to pay larger bonuses. Because these signing bonuses can be amortized over the life of the contract, teams with more disposable income were able to spend an additional $2 billion over the salary cap between 1994 and 2004.  A billion here, a billion there, and pretty soon you're talking about real money. In 2003 the Colts spent almost 70% of their income on player salaries, as compared to about 38% of the income of richer teams.  (At that time the Colts were one of the lowest-income teams - they were 29th out of 32 on the Forbes Team Value assessment for that year.  Now, with a new stadium, they have moved up to 11th place for 2009.)  Between 2003 and 2004 the Redskins paid $77 million in signing bonuses, compared to the Cardinals, who paid $22 million.  The Cards were 6-10 in 2004, and ironically so were the Redskins.  Which just goes to show that money is only part of the equation.  But, all other factors being equal, a team with more to spend is likely to do better than one with less to spend, and more to the point, the lower spending is likely to catch up with them sooner or later.

When the owners agreed to an extension of the CBA in 2006, they also agreed to a revenue pool that would be funded on a sliding scale by the 15 teams that earn the most non-shared revenue, to be dispersed to the lowest-earning teams.  The purpose was to make sure that all teams were actually able to comply with the salary floor, if not spend up to the cap. Even with this pool of funds, the 'revenue gap' was close to $80 million, and has continued to widen.  And on December 6th of 2009 the owners decided to do away with the so-called supplemental revenue sharing, because with no salary cap or floor anticipated for the 2010 season it was unnecessary.  In September of 2009 at a pre-season game in Minneapolis Jerry Jones told a reporter that he was finished writing checks to a program that benefits one of his chief NFC rivals, the perennially low-revenue Vikings. Although an arbiter sided with the union in stating that the owners didn't have the right to do this, the owners appealed, and this is presumably still in litigation, as I couldn't find out that anything further has been decided.

Here's a comparison of three teams, from the Forbes Team Valuation for 2009.

Team             Rank     Value    Debt/value      Revenue    Gate        Player Expenses    Change in value since 08

Cowboys         1        $1.8 B        11%             $420 M    $112 M        $143 M                    +9%

Steelers          17       $997 M      25%             $243 M    $50 M         $146 M                     -2%

Jaguars          32       $725 M      17%             $220 M    $38 M         $133 M                     -16%

Full figures for all the teams can be found here.

There is so much more that could be addressed. One of those things might be the growth of the dollar value of NFL teams, and for that matter salaries in comparison to inflation. I have what seems like a half a legal pad filled with scrawled notes of things to check out.  But what I've already written is probably as much as all of us can stand for the moment.  So I'll just finish by noting that I asked Nolan Harrison, the Senior Director of Former Player Services, what he thought would happen to the league if the new agreement eliminated revenue sharing.  Although he declined to speculate, he said that this raised a good point, which is that the owners have to 'get their own houses in order.'  He also said that there are successful non-sharing models for professional sports.  This is of course true.  But as a fan, I would really hate to see the NFL go the way of Major League Baseball.  And in the process, the NFL might find that while they may not have killed the goose, they may end up with a rather smaller egg.

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