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NFL Lockout 2011: Revenue Sharing Is The Elephant In The Room Nobody Wants To Talk About by One.Cool.Customer on Feb 18, 2011 11:30 AM CST in Dallas Cowboys General If you think today's NFL players are making too much money, you may be right - or you may be wrong. That really depends on your own philosophical leanings, the frame of reference and how much you think is 'too much'. The NFL owners certainly think the players are making too much money. So let's look at some numbers. The table below shows the percentage of money that has gone into players' salaries over the last ten years, as reported by Forbes. 'All Revenues' is the total amount of money the league takes in, 'Total Revenue' is precisely defined in the CBA and is currently about $9 billion gross, minus a $1 billion credit in the owners’ favor. Both percentages have remained remarkably constant over the past ten years. So what is all the fuss about? Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Players’ Percentage 56.5 52.6 51.8 50.5 52.3 51.1 52.7 51.8 51.0 50.6 of All Revenues Players’ Percentage 61.7 57.1 56.1 54.3 57.0 55.1 58.4 58.0 57.7 57.1 of "Total Revenue" Commissioner Goodell recently said that "Staying with the status quo is not an option". Well, let me ask you this, Mr. Goodell: Why not? It's worked for the past ten years, why shouldn't it continue to work, and why are the players suddenly at fault? If you thought the labor dispute was about owners vs. players, you’ve been duped. The real issue at the core of this whole CBA mess is the NFL’s revenue sharing agreement or the growing lack thereof. It’s the elephant in the room that nobody wants to talk about. More specifically, it’s about small-market owners vs. big-market owners, with the players caught in the crossfire. You’ve heard all about the $9 billion that the league rakes in annually. Surely there must be a profit in there somewhere? Of course there is. Teams like the Cowboys, Redskins and Patriots are making so much money it’s not even funny anymore. But while high-revenue teams are raking in the cash by the truckload, low-revenue franchises make only a small profit - if they’re lucky - and are probably even losing money. And the situation can only get worse – by design. The way the current labor deal is structured, the following hypothetical example is happening in real life all the time. Say the Cowboys sell the naming rights to Cowboys Stadium for $32 million. Good news for the Cowboys, because they get to pocket all of that money. Bad news for the other teams, because those 32 million count towards the Total League Revenue as defined by the CBA, against which the salary cap is calculated. Effectively, this means that the salary floor for each team just went up by an additional $1 million, because the salary cap and salary floor is determined by the revenues generated by all teams, including the high-revenue teams. If you’re a low-revenue team like the Buffalo Bills or Jacksonville Jaguars, you don’t like that one little bit, because where the Cowboys just made money, you’re expenses just went up, and there’s nothing you can do about it. Think about that for a minute: every time Jerry Jones has a great idea and increases his revenues, the expenses for all other teams go up. How crazy is that? "Keeping up with the Joneses" just got a whole new meaning, and keeping up with the high-revenue teams in the NFL could become (and likely already is) a matter of life or death for a couple of franchises and markets in the coming years. At this point, we’ve all been inundated by what I like to think of as "flashbang" CBA topics (flashbang or stun grenades are used to temporarily neutralize the combat effectiveness of enemies by usually disorienting their senses): how to carve up the $9 billion pie; an 18-game schedule; a rookie salary cap. These topics have succeeded in creating a powerful diversion, with lots of fan emotion thrown in, to distract from what is really going on. Think about it, how many polls and articles have you seen about the 18 game schedule, how often have you argued the pros and cons of a rookie salary cap and how often have you heard the "billionaires vs. millionaires" argument? A lot. How often have you read about the revenue sharing process in NFL and its impact on the labor impasse? Riiiight. Well, you’ve been bamboozled. Rather than rehash those "flashbang" issues, over the next couple of posts we’ll take a long, hard look at how revenue sharing works in the NFL and how it drives almost every single aspect of the CBA negotiations. In a loose sequence of posts that is probably going to change as I start writing them, these are the topics I’d like to look at: * How teams make their money * Which teams are making how much * Why Jerry Jones doesn’t like revenue sharing * Why the have-nots of the league are struggling to survive In the meantime, ask yourself: why is the league so violently opposed to sharing the same percentage of revenue with the players that it has for the last ten years? I propose it's because the NFL revenue sharing system is broken, and instead of fixing it, the owners think it'll be easier to fix by getting more money out of the players than from each other. NFL Lockout 2011: The NFL's Revenue Gap Problem by One.Cool.Customer In the early 1960s, the NFL discovered socialism. Prior to 1961, NFL team's revenues consisted almost entirely of ticket sales, and each team looked after its own revenue. TV at the time was seen as more of a threat that would keep paying fans at home and out of the seats in football stadiums. In 1961, then-commissioner Pete Rozelle successfully persuaded congress and NFL owners to make two landmark decisions. Congress approved a special exemption to antitrust law that would allow NFL teams to market the broadcasting rights to their games as one national package. Owners gave up their local television broadcasting and agreed to redistribute the proceeds from a national deal evenly among all NFL teams. In 1962, each team started the season with $332,000 from that revenue sharing agreement - more than most teams' payrolls at the time - thereby in principle guaranteeing financially sound franchises for years to come and thus laying the cornerstone for what was to become arguably the most successful sports league in the world. Revenue Sharing NFL teams today have two principle revenue sources, shared revenues and retained revenues. Shared revenue is income shared more or less equally between the 32 NFL teams, with the bulk coming from national broadcast rights fees, augmented by a share of ticket sales, non-network media income and licensing. Retained revenue (or unshared revenue) is revenue generated and kept by individual teams. This includes about two thirds of the gate receipts, luxury suite revenues, stadium naming rights, sponsorships, concessions, parking fees and any local broadcast revenues. The Green Bay Packers are the only team that regularly publishes a statement of income, and we'll look at their numbers to better understand the individual revenue streams. The latest numbers available are for the 2009 season Green Bay Packers, Income Statement for league year ending March 31st, 2010 Revenue in $ Revenue Source Type million Shared Television and radio 95.8 Retained Ticket Revenue: Home games 31.1 Shared Ticket Revenue: Road games 16.0 Shared NFL Properties income 45.8 Retained Marketing\Pro Shop 43.0 Other - Local Media, Concessions Retained 13.3 and parking Retained Private box income 12.9 Total Income 258.0 I. Television and radio income (Shared revenues) What started out as a $322,000 check per team 1962 has grown into $95.8 million per team in 2009 in revenues from the league's contracts with CBS, NBC, ESPN and Fox. Non-network media contracts with providers like Comcast and DirecTV are not included in this number. Television and radio income from national broadcasting rights remain the single biggest source of income for most of the 32 NFL teams. II. Ticket Income (mix of shared and retained revenues) Ticket revenues have both a shared and a retained element. 60% of game ticket sales (but excluding luxury suite revenue) for home games are retained by the home team. Of the remaining 40% game ticket revenue, 34% is pooled and shared equally among the 32 teams (road game revenue), the remaining 6% stay with the home team to account for various deductibles. The Packers generated $47.1 million income from the sale of tickets, a little below the 2009 NFL average of $54.1 million. The Cowboys led the league in 2009 with an estimated $112 million ticket income, the Raiders rank last in the league with an estimated $34 million. III. NFL Properties income (Shared revenue) NFL Properties, Inc., manages all licensing for the 32 teams and shares its annual revenue equally with all 32 NFL teams. Traditionally, this revenue was generated largely from the sale of any of the countless items with an NFL logo on them (anything from lunch boxes and hats through jerseys, jackets and coffee mugs). But recently, this revenue stream has grown to include revenues from the NFL Network as well as revenue from non-network media contracts with providers like Comcast and DirecTV. This is by far the fastest growing source of income for NFL teams. The Packers' income statements show that while NFL Properties income in the 2002 season was a miserly $4.7 million, it has skyrocketed to $45.8 million in 2009. While the exact split of these incomes is unclear, it is probably safe to assume that most teams take home a similar figure. During the 1990's Cowboys heyday, Cowboys merchandise sales easily outpaced those of any other NFL team. By 1995 Jerry Jones had had enough of this aspect of revenue sharing, and, despite existing league deals with Coke and Players Inc., signed sponsorship deals with Pepsi and Nike. The league of course decried Jones' use of "ambush marketing deals" and, litigious bunch that they are, sued Jones. Jones, himself no stranger to litigation, of course immediately counter-sued. Long story short: by 1996 both sides reached a settlement that allowed the Cowboys to keep their new sponsorship deals. The deal also allowed other NFL teams to pursue local revenue streams, and retain the entire proceeds those opportunities generated. While it is unclear how much each NFL team makes from its local deals (see details below) it is safe to assume that the Cowboys and other big market are taking home a significantly bigger slice of the merchandising pie than envisioned under the original revenue sharing agreement. The disparity between the haves and have-nots has steadily increased. IV. Marketing/Pro Shop (Retained revenue) This income source summarizes basically all local revenue generated by the teams through advertising, sponsorships, and pro shop revenue to which Jerry Jones opened the door in 1995. The Packers generated $43 million in 2009 which they did not have to share with other teams. My guess is that this figure puts the Packers in the top half of the league, but nowhere close to the Cowboys, Redskins or Patriots. V. Other - Local Media, Concessions and Parking (Retained revenue) The Packers took in $13.3 million in this catch-all for local revenue. A critical driver for this revenue stream is the size of the local market and revenue potential of the stadium. VI. Private box income (Retained Revenue) Luxury suites and pricey club seating are the latest opportunity for owners to generate cash for their own pockets and are becoming a top source of revenue for NFL teams. Because teams get to keep all revenue from their suites, luxury boxes are a key consideration in the construction and renovation of NFL stadiums - even at the expense of total seating capacity. The Redskins for example generated more than $45 million in luxury suite revenue in 2008, the most in the NFL in 2008 according to Forbes.com. That's more than seven NFL teams generated in total gate receipts in 2009. With the opening of Cowboys Stadium in 2009, the Cowboys are likely to have easily eclipsed the Redskins figure, and the Giants and Jets will likely generate similar revenues in 2010 with their new digs in the swamps of New Jersey. The missing luxury suites and lack of the associated revenue stream is one of the key reasons why there is no NFL team in Los Angeles, which has not one but two stadiums (LA Coliseum & Rose Bowl) available with a total seating capacity of over 90,000 - but no luxury suites. Additional source of revenue for small market teams Part of the appeal of the NFL is the notion of parity, of small market teams like the Packers or Saints being able to win a Super Bowl. In this day and age, this is only possible because big market teams are subsidizing small market teams. Recognizing that the revenue sharing model was coming apart at the seams, the NFL and NFLPA agreed to implement a supplemental revenue sharing (SRS) pool in the 2006 CBA negotiations. The pool was valued at $210 million in 2009 and $220 million for 2010, and between eight and twelve of the league's bottom dwellers in terms of revenue received additional income from this pool. In 2010, the NFL tried to get rid of the of the SRS again but failed when the NFLPA won a decision against the NFL. Summary In the past, the NFL teams shared more than 80% of the total league revenue. More recently, there has been a dramatic increase in unshared or retained revenue. League rules have incentivized going after unshared revenue, which has resulted in the construction of new stadiums and the expansion of local revenue streams. In principle, this is a very good thing. Ironically, what is good for the league revenue overall can be bad for individual teams, as unlocking these revenue streams is easier for big market teams than for small market teams who are falling behind further and faster than ever before. The revenue gap between the league's haves and have-nots is widening almost hourly, and the imbalance this creates is threatening the future financial parity and competitiveness of the NFL. The Cowboys topped the league in 2009 with an estimated revenue of $420 million. The Lions were at the bottom of the league with a figure of $210 million, exactly half of what the Cowboys took in. This revenue gap will create a competitive imbalance that the league must address if it wants to avoid becoming the MLB. The NFL’s revenue sharing agreement is coming apart at the seams. Today, the owners do not appear to have a solution to this, and are looking to gain time by asking the players to finance part of the income disparity between the teams that the successful, financially potent teams have helped create, just as much as the bottom dwellers of the league helped create it by not being able or willing to keep up with the Joneses. NFL Lockout 2011: The Haves And Have- Nots Of The NFL by One.Cool.Customer on Feb 21, 2011 6:00 PM CST in Dallas Cowboys General In the previous post of this series in which we look at what's behind a potential lockout, we looked at how the growth of unshared revenue was threatening the NFL's revenue sharing system and with it the future financial parity and competitive balance of the league. Today we take a closer look at the size of the revenue gap between the teams and look at who the Haves and Have-Nots in the league are. Forbes magazine estimates that there is a revenue gap exceeding $200 million between the NFL's top and bottom earners (see graph on the right). Teams like the Cowboys ($420 million), Redskins ($353 million) and Patriots ($318 million) are no match for some of the league's low revenue teams like the Raiders ($217 million), Jaguars ($220 million) or Vikings ($221 million), despite the NFL’s revenue- sharing system. There is a growing disparity between the high-revenue teams and low-revenue teams, with a direct impact on the bottom line of the bottom dwellers, especially when you introduce the salary cap into the mix. The Salary Cap and Salary Floor The 2009 salary cap was set at $128 million, the salary floor was set at $108 million. Let's take a look at the teams with the highest and lowest revenues in 2009, the Cowboys and Lions who had revenues of $420 million and $210 million respectively. For the Cowboys, the player expenses would be a minimum of 26% of total revenues and a maximum of 30%. For the Lions, the percentages are twice as high, they would have to pay at least 52% of their revenues in salaries and could go as high as 60%. For the Cowboys, player salaries are really not that big a deal. Of course, every cent you save there increases your profits, but the Cowboys are certainly not hurting because of the player salaries. In fact, Forbes estimates that the Cowboys took in a cool $143.3 million operating income in 2009. In other words, the Cowboys made a bigger profit that the entire amount of money they spent on the salary cap- relevant player salaries in 2009. Unsurprisingly, the Lions appear to have incurred a loss in 2009. Here's how all the teams in the league fared: Key Financial Figures by NFL team, 2009 (click column header to sort) 2009 Total 2009 2010 Home 2009 Player 2009 TV Homes in Gate Team Revenue (in Game Expenses Operating Market (in Receipts $ millions)* Attendance** ($M)* Profit ($M)* millions)*** ($M)* DAL 420 696,377 112 143 143.3 2.59 WAS 353 665,380 85 126 103.7 2.39 NE 318 550,048 90 133 66.5 2.46 HOU 272 568,643 51 150 36.5 2.18 PHI 260 553,152 53 141 34.7 3.02 GB 257 566,362 47 147 9.8 0.45 BAL 255 569,817 61 138 44.9 1.11 CHI 254 497,561 57 144 37.3 3.50 DEN 250 599,264 60 142 22.0 1.57 IND 248 535,802 55 142 43.2 1.11 CAR 247 580,965 55 148 15.0 1.17 MIA 247 541,959 62 164 -7.7 1.58 TB 246 394,513 57 118 56.1 1.80 NO 245 560,304 48 150 36.7 0.64 PIT 243 504,669 50 146 17.9 1.16 TEN 242 553,144 47 142 23.3 1.04 CLE 242 528,933 47 125 36.1 1.53 NYG 241 632,156 58 166 2.1 7.52 SEA 241 535,942 47 125 21.0 1.87 NYJ 238 628,768 56 160 7.6 7.52 ARI 236 502,197 48 146 28.1 1.88 KC 235 541,380 53 111 47.8 0.98 SD 233 524,241 53 150 24.7 1.09 CIN 233 482,917 47 122 49.4 0.92 ATL 231 542,800 49 134 34.5 2.41 BUF 228 442,366 45 142 28.2 0.64 2009 Total 2009 2010 Home 2009 Player 2009 TV Homes in Gate Team Revenue (in Game Expenses Operating Market (in Receipts $ millions)* Attendance** ($M)* Profit ($M)* millions)*** ($M)* SF 226 488,124 44 136 34.0 2.52 STL 223 423,383 40 135 29.0 1.26 MIN 221 470,009 45 140 17.9 1.75 JAC 220 504,262 38 133 25.9 0.68 OAK 217 371,448 34 156 2.2 2.52 DET 210 450,286 37 139 -2.9 1.88 * 2009 estimates from Forbes.com, player expenses include benefits and bonuses; ** 2010 attendance figures from ESPN.com; 2010 TV Homes in Designated Market Area (DMA) from Nielsen; Packers data from Packers Income Statement where available. Small market crunch As we saw in the previous post, the current revenue sharing model puts the small-market teams at a systemic disadvantage because all the sponsor and luxury box money generated by the big-market teams isn't shared. But it still causes the salary cap, and more importantly, the salary floor, to increase. There is a very real danger that as a result, operating costs for low-revenue teams, like in the Lions example above, will eventually surpass their revenue streams. This is issue at the core of the current labor situation. In the last CBA, the owners agreed to a deal that didn't include enough revenue-sharing to make specifically the small market teams viable in the long run. At the time, Buffalo Bills owner Ralph Wilson warned the league about the dangers inherent in the 2006 deal: "The non-shared revenue is growing and it's got to be addressed, otherwise markets like Buffalo won't be able to compete." The league didn't listen. Wilson and the Bengals owner, Mike Brown, were the only two dissenting votes when the league ratified the new CBA in a 30-2 landslide. Today, ownership is pulling in two mutually exclusive directions at once. The Have-Nots want a revenue sharing agreement that guarantees financial viability and on-the-field competitiveness for small market teams while the Haves think the "Bottom-feeders", "pick-pockets", "freeloaders" and "commie bastards" should start carrying their own weight and find ways to increase their own revenue streams. You know, like, build a stadium or something. Or move to LA. Or something. This fundamental disagreement among the ownership is threatening the very foundations the league was built on. It is an open secret that small-market owners want a bigger piece of the NFL pie, while the large- market teams are tired of handing out what they consider welfare checks. The league has done a good job in keeping public scrutiny off of this substantial and growing rift between the high and low revenue teams. But the NFL will have to address this, and address it soon.
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