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Why is the lockout so hard to settle?

 

The lockout is all about money but the root causes run much deeper.

There are legal issues with anti-trust exemptions and unions issues (there was a big union fight in WI recently). There are philosophical business principles between the “old school” owners like the Rooneys, Wilson, Mara and the newer owners who bought in often with borrowed money. And there is the problem with the disparities between certain smaller market teams struggling with bad stadium deals and/or little ability to increase their unshared "local' revenue.

There are only about 10 teams who have original ownership from the start of the league. There are certain owners who have dramatically changed the way the league conducts business and they are: Snyder, Kraft and Jones. For better or worse they have forced the league into change. In 1996, the NFL sued Jones (and he countersued of course) for not sharing his stadium sponsorships with the NFL but the lawsuit was dropped and this is possible the biggest contributing factor to the lockout today. In 1999, Dan Snyder bought the Redskins for $800mm using mostly debt and his annual debt service was about $50mm. To make enough money not to go broke he had to scramble to get local stadium sponsors and luxury box revenue ($ he didn’t have to split with the other NFL owners).  Kraft is a businessman and owned parking lots and his ownership of the parking license allowed him to buy the Patriots. He was able to finance Gillette Stadium by himself and in 2007 at the stadium he developed a  adjoining shopping mall and Patriot Place. Most of us will say who cares about these 3 owners, we especially hate Kraft & Jones. Well, I argue they are at the very center of this lockout.

Consider, for YE 2009 that of the $1.07 billion in total NFL team operating profits these 3 guys made $313.5mm or exactly 29.3% of the total. You say how is that possible, only one of the teams is any good? None of them are in the biggest markets like NY or LA. The answer is simple, they are the most aggressive businessmen and they have captured the most local revenue.

To owners, local revenue is really the only thing that affects them. Ticket sales are important but they have to share a large portion of it. TV revenue and licensed products are split equally 1/32 to each team so owners have no control or incentive to increase this type of revenue. Local revenue like luxury box fees (above ticket prices), naming rights, local sponsors and certain other revenue are not shared at all.

But what’s this got to do with the lockout?

OK, go back to 2003, the league had $5.33b total revenue and $850.3mm operating profit, this meant the average teams had $166mm in revenue and $26.6mm in operating profit. Redskins had the highest revenue at $245mm and AZ lowest at $131mm. Cowboys were 2nd highest with Texans at $205mm and $201mm, while the two 2nd lowest revenue teams were ATL and MN with $144mm. By this time, Snyder had already jumped his local revenue since he gought the team in 1999, he was the only owner not within $30mm of the average league revenue. Also, the league in total was much more profitable than it is today as it made 82% of 2009’s profit with much less revenue.

Now jump ahead to 2007, Skins $327mm REV / $58.1mm OP, Patriots $282 / $39.2 and Cowboys $269 / $30.6. MN had lowest revenue at $195mm and 49ers were 2nd lowest with $201mm. Average team revenue was $221mm.

So if we look at 2009 which is most recent available figures, we have the Cowboys with $420mm REV and $143.3mm OP, Skins $353 / $103.7 and Pats $318 / $66.5. Lions were lowest with $210/(2.9) and Raiders 2nd to bottom with $217/$2.2. Which makes you ask the question how and why does Al Davis keeps spending like crazy on players? But anyway the average team’s revenue was $250.5mm.

When I look at all this information, I can only conclude that the disparity is getting worse not better. Years ago, all the teams basically shared the money and it was a true partnership but those days are long gone. The only way to make money in the NFL is thru new stadium development and creating local revenue streams. In two years, Cowboys revenue jumped from $269mm to $420mm because of their new stadium and its increased luxury boxes and sponsors. NY Giants and Jets will also see this type of jump with their new $1.6b stadium, in 2009 their revenue was each about $240mm each but in their market they should see a huge rise. I would bet my last dollar that if you go back before 2003, revenue was much more evenly split than in 2003 and way more even than 2009. What used to be a co-operative or partnership has truly become a group of modern day corporations. Although it could be argued some are stuck in the past and are not managing their bottom lines.

While boring to read, these figures are at the heart of this lockout, the bottom 10 teams made a total operating profit (EBITDA) of only $82.9mm. Obviously this lockout is for these teams to stay financially competitive not for the Cowboys or Redskins who collectively made $247mm. This problem goes beyond the lockout unless these trailing teams can increase revenue and profits, at this pace the Cowboys will be at $500-600mm shortly with the NY teams close behind.

The simplest solution for the fans and players is increased revenue sharing as this would subsidize the underperformers and give them more $ for player salaries and increase their bottom lines. This will never happen without a huge fight and lawsuit from owners like Jones who have made massive investments and need the profits to pay back their banks and investors. And the league would probably lose in court because it would be a huge anti-trust no-no. But without big player salary cuts how are the least profitable owners going to make more $ without new stadiums or better markets? I am not sure that they can and hence this is going to be a problem for years to come. Players are the biggest expense NFL teams have so unless the teams at the bottom can find other ways to make $ they will eventually have to move. While it is not the most pressing concern, you cannot compete long-term if you have ½ the revenue of the top teams.

The NFL cannot say “we need this lockout to help the financially challenged teams” because the players are going to say “why is that our problem? And what’s the solution let the “poorer” teams pay less and the “richer” teams pay their players more?” Obviously, the teams with the most money would attract the talent if this were allowed to happen. And this is the real reason we have the lockout and it’s not an easy fix. Yes coming to a CBA is easy but addressing the long-term imbalances that are already forming is the bigger problem and labor costs are just a part of it.

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