Abstract
Sports leagues are unique in that individual clubs are mutually interdependent in their cooperative production of competitive games. As joint members of natural cartels each sports team is only as strong as its weakest opponent. Over the last half-century the National Football League (NFL) has become the most economically powerful sports league in the world largely because it has also been the most egalitarian. In 2010 NFL clubs pooled and shared two-thirds of over $8 billion in revenues among 32 franchises. The underlying source of NFL economic strength has been a survivalist “league-think” mentality that developed from the outset of the NFL-AFL war 1960–1966. Evenly shared national media money has grown at a compound rate of 12% from $47 million annually at the time of the actual NFL merger in 1970 to $4 billion under 2012–2013 TV contract extensions. Over the last 2 decades, however, a major threat to league-thinking solidarity has emerged from an individualist counterrevolution in unshared venue revenue. During the luxury-seat stadium building frenzy that followed the watershed 1993 Collective Bargaining Agreement (CBA), the proportion of team-specific venue revenue has doubled from 10 to 20% of total revenue. This once-tight syndicate now finds itself split into those teams with new venues and those without.
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- 1.
This tactic was obviously designed to enhance TV rights package because NFL season-ticket prices already included two preseason games and the marginal cost of annual player contracts is zero. Players countered that they should be paid proportionally more.
- 2.
Three preset safeguards prevented payroll explosion during the uncapped 2010 season. First, free-agent eligibility was increased from 4 to 6 years. This adversely affected 293 players or 21.6% of NFL players with 4–5 years experience in 2010. Second, according to a Final Eight Plan, the eight divisional playoffs clubs in the previous season were limited in the unrestricted free-agents they could sign. The four clubs playing in league championship games could only sign UFAs unless to replace those lost. The four clubs that lost in the divisional Playoffs could only sign one additional UFA after replacing UFAs lost. The first year salary of UFAs signed could not exceed the first year salary of the player lost. Third, the uncapped 2010 season would also be played without a team payroll minimum.
- 3.
A schizophrenic history of antitrust law has protected the NFL as a natural cartel in the negotiation of TV rights in the Sports Broadcasting Act of 1961 and as a nonprofit trade association in the Internal Revenue Code 501(c)(6). US Courts have consistently treated the League as several and separate firms. In American Needle, Inc. v. NFL, et al., 560_U.S. (2010)(08–661) the Supreme Court reversed the 7th Circuit’s ruling 538 F.3d 736 (7th Cir. 2009) that the NFL was a single entity. The 7th Circuit was the first US Court of Appeals to consider a professional sports league as a single entity.
- 4.
“League-think” was the business model of former Commissioner Pete Rozelle, “Revenue sharing is the single most effective means of balanced competition in a sports league” The AFL sued the NFL for Sherman Act Section 2 antitrust violation. In American Football League v. National Football League, 323 f. 2d 124 (4th Cir. 1963) the Court found that the “fact that the American League was successfully launched, could stage a full schedule of games in 1960, has competed very successfully for outstanding players, and has obtained advantageous contracts for national television coverage strongly supports the District courts finding that the National did not have the power to prevent or impede the formation of the new league” Vrooman (1997).
- 5.
The AFL-NFL “Merger Act” was an amendment to the Sports Broadcasting Act of 1961, which previously exempted all four major sports leagues from antitrust liability under Sherman Act, Section 1 with respect to the collective negotiation of TV rights. In Congressional merger hearings then NFL Commissioner Pete Rozelle testified, “Professional football operations will be preserved in the 23 cities and 25 stadiums where such operations are presently being conducted,” Following the actual 26 team merger 1970 (16 NFL clubs and 10 AFL clubs) the NFL added 2 clubs in 1976, 2 more in 1995 and 1 team each in 1999 and 2002.
- 6.
Compare other 2009 revenues: MLB $5.9 billion; NBA $3.8 billion; NHL $2.9 billion; and EPL $2.75 billion.
- 7.
National Revenues include common revenues from National TV and radio, International TV, NFL properties, enterprises and films, and the 34% Visiting Team Share (VTS) of ticket revenues.
- 8.
NFL’s “Plan B” free agency system where a team could protect 37 of 47 roster players was rendered illegal in McNeil, et al. v NFL, 790 F. Supp. 871(8th Cir. 1992). After McNeil NFLMC and NFLPA reached an accord in 1993 CBA that granted unrestricted free agency after 4 years and restricted free agency after 3 years.
- 9.
The hard NFL cap can be temporarily avoided by paying players signing bonuses which are prorated over the length of the contract for cap purposes. The prorated bonus carries forward and creates an equivalent amount of “dead cap space” which limits future payroll.
- 10.
The cap in 2006 CBA was set at $102 million (2006), $109 million (2007), 57.5% of total revenues in 2008–2009, and 58% 2010–2011. The fail-safe trigger adjustment rate is set at 2 percentage points higher: 59% (2006–2007), 59.5% (2008–2009), and 60% (2010–2011). Minimum payroll ratio increases by 1.2% points each year from 84% of the cap in 2006 to 90% of the cap in 2011 The top 15 revenue clubs agreed to share $430 million 2006–2009 with clubs in older venues whose payroll exceeds 65% their revenue and their gate revenue is at least 90% of the league average.
- 11.
Eleven teams had contracts with CBS, two with NBC and the Cleveland Browns had its own network. After pooled national TV contract between AFL and ABC in 1960 the court ruled against pooled rights selling by the NFL in United States v. National Football League, 196 F. Supp.445, 446 (E.D. Penn.1961). The Sports Broadcasting Act reversed the decision to remedy an “apparent inequity” between NFL and AFL. The first provision of the SBA enacted in 1961 exempts agreement among professional football, baseball, basketball, and hockey teams to pool their sponsored television rights for sale as a package. A second provision of the SBA was passed in1966 to allow the NFL and AFL to merge without antitrust challenge. The antitrust exemption applies to agreements by “member clubs of two or more professional leagues to combine their operations in an expanded single league…if such an agreement increases rather than decreases the number of professional football clubs.” The same 1966 act also amended the tax laws so that “professional football leagues are exempt from federal income tax if they are not organized for profit and no part of the earnings inures to the benefit of any individual.” In Shaw v. Dallas Cowboys Football Club, 171 F.3rd 299 (3rd Cir. 1999) the Court held that the exemption applies only to broadcasts provided free to air and not to satellite broadcasts. The second merger provision of the SBA applies only to professional football leagues.
- 12.
National rights fees for the NFL since the AFL-NFL merger dwarf MLB and NBA revenues four-to-one. Comparison annual TV rights fees: MLB, $803 million; NBA, $930 million; NASCAR, $560 million; NCAA Basketball Tournament, $565 million; and NHL, $148 million.
- 13.
The AFL originally signed a 5-year pooled agreement 1960–1964 with ABC for $2.125 million per season. Immediately following the specific SBA exemption in 1961 the NFL struck an annual deals with CBS for $4.65 million (1962–1963) followed by $14.1 million (1964–1965). In 1964 ABC had bid $13 million and NBC $10 million per year. After losing the 1964 NFL bid, NBC solidified the AFL with a 5-year deal for $36 million plus $6.7 million for postseason. The NBC-AFL deal for $8.54 million per season (1965–1969) was tripled a year later by the NFL-CBS deal for $25 million per season (1966–1969). ABC then found a broadcasting relationship with NCAA college football before acquiring the MNF rights in 1970.
- 14.
By their own admission NBC and CBS overbid 1982–1986 contracts, when annual fees doubled from to $420 million and lost over $300 million on 1990–1993 contracts which doubled fees again to $900 million.
- 15.
The FOX strategy was to run financial losses and use sports broadcasting to gain legitimacy as a fourth major network rising from its 1986 start-up with a handful of UHF stations. In its first year, FOX outbid ABC for the MNF package in the 1987 rights auction price of $125 million. The NFL chose the incumbent ABC and offered FOX eight Sunday night games that ultimately landed with ESPN for the NFL’s first cable contract 1987–1989.
- 16.
ABC acquired ESPN in 1984 and Disney acquired ABC/ESPN in 1995. FOX Network launched in 1986 and is owned by Rupert Murdoch’s News Corporation, which gained control of satellite platform DirecTV in 2003.
- 17.
San Francisco 49ers $937 million stadium was approved by Santa Clara voters in 2010. Five clubs playing older venues: Miami Dolphins Sun Life Stadium 1987; Minnesota Vikings Hubert H. Humphrey Metrodome 1982; New Orleans Saints Louisiana Superdome 1975; Buffalo Bills Ralph Wilson Stadium 1973; and Atlanta Falcons Georgia Dome 1992. Two clubs paying in older partially renovated Stadiums: Oakland Raiders Oakland Alameda County Coliseum 1995R and San Diego Chargers Qualcomm Stadium 1997R.
- 18.
Purchase price included $65 million for 56% of the NFL Club, $75 million for all of Texas Stadium and $20 million for Valley Ranch and deferred salaries. After going 1–15 in 1989, the Cowboys became the NFL’s most successful team in the 1990s. Dallas qualified for the playoffs eight times, won six division titles, and won three Super Bowls in 1993, 1994 and 1996.
- 19.
Jones entered into licensing agreements with direct competitors of NFLP: Nike v. Reebok, Pepsi v. Coke, and American Express v. MasterCard. The NFLP argued misappropriation of NFL property (Cowboy brand) in NFL Properties v. Dallas Cowboys, Texas Stadium, and Jerry Jones, S.D.N.Y., 1995, 95 Civ 7951. In Dallas Cowboys Football Club, Ltd. v. NFL Trust, No. 95-civ-9426 (S.D.N.Y. Oct. 18, 1996) the Dallas Cowboys challenged the teams’ agreement allowing NFLP control over their marks. The Cowboys alleged that “[t]he marks of the member clubs are not of equal, or even comparable, value,” At the time the Cowboys accounted for one-third of NFL merchandise and twice as much as the second highest team. Jones argued that NFLP exclusive licensing constituted collusion in violation of Sherman Section 1.
- 20.
Club-seat money is split into club fees and reserve-seat tickets. The ticket portion of the club seat is shared with the league (66/34) as gate revenue while the club fee premium is treated as unshared venue revenue.
- 21.
A PSL is the present value of a season-ticket discount over the life of the season-ticket option. For example, if the true value of the season ticket is $1000 per season ($100 per game), a $5000 PSL would be paid up front for the season ticket priced at $500. PSLs usually work for a relocation or expansion teams and first time season-ticket holders. PSLs do not work if there is no discount or there is a limit to the life of the PSL option. The Oakland Raiders bungled PSL offering in 1995 relocation violated both of these basic principles.
- 22.
This is because the top half of the League occupies the 16 largest TV markets (1.5 million and higher), while the bottom half is auctioned to the highest public funding bid by the 30 or so mid-markets eager to land a club.
- 23.
Because the $158 million PSLs were sold by the Carolina Panthers about $60 million was paid in Federal income taxes. Later $80 million in PSLs were sold by the St. Louis Convention & Visitors Commission (CVC) for the Rams. The Rams’ PSL funds were not taxable, because the CVC is a public authority. All subsequent PSL financing schemes shielded PSL revenue from Federal income tax liability by using the public authority loophole. So about one-third of PSL subsidies were shifted to general taxpayers.
- 24.
St. Louis sold $80 million PSLs: $20 million for $29 million Rams relocation fee, $17 million for PSL sharing with League, $28 million for Rams lease in Anaheim, and $15 million for practice facility. Oakland sold $68 million in PSLs: $53.9 million for Raiders non recourse loan, plus $10 million practice facility. Raiders forewent $46.3 million in court 1987 settlement and paid no relocation fee. Maryland Stadium Authority sold $67 million PSLs: $22 million for Ravens lease in Cleveland, $16 million lost Browns expansion fee, and $29 million relocation fee. Nashville sold $71 million PSLs, for $29 million relocation fee and stadium costs.
- 25.
Cleveland received a replacement franchise as settlement of a law suit against the NFL over the relocation of the Browns to Baltimore in 1996. The League delayed the decision on whether the Cleveland franchise would be an expansion or relocation club until after 90% public funding was approved in both Tampa and Cincinnati.
- 26.
Al Lerner paid $530 million for the Browns but $54 million was used to repay the League for stadium loan.
- 27.
In lieu of a stadium the Saints get $186.5 million subsidy 2001–2010. Cardinals took a two-thirds public subsidy for new stadium in 2006. Colts received $575 million subsidy for $675 million Lucas Oil Stadium in 2008.
- 28.
One of the most valuable aspects of NFL venue revenue over gate revenue is its contractually obligated certainty. V/R multiples also reflect league-specific risk on revenue and player costs. Compare the NFL league multiple of 4.0 to MLB 2.5, NBA 2.91, and NHL 2.34 (Forbes). NFL ticket demand is relatively price and win inelastic compared to the other leagues because of its 16-game regular season compared to 162 games in MLB; and 82 games in NBA and NHL. NFL demand could become more elastic with a proposed 18-game season.
- 29.
The NY Jets and NY Giants each borrowed $650 million in addition to G-3 loans of $150 million each to finance the $1.6 billion New Meadowlands Stadium that opened in 2010. The Detroit Lions privately financed 75% (including $100 million G-3 loan) of $500 million Ford Field in 2002. Steve Bisciotti paid $275 in 1999 for 49% and $325 million in 2004 for the remaining 51% of the Ravens, Stephen Ross paid $1.1 billion for the Dolphins in 2008–2009; Arthur Blank paid $545 million for the Falcons in 2002; Zygi Wylf paid $600 million for the Vikings in 2005; Dan and Art Rooney II borrowed $250 million to buyout other Rooney brothers in 2009.
- 30.
According to the plan $100 million to be distributed for 2006; $110 million to be distributed each year 2007–2009. SRS replaced a pool that previously distributed about $30–$40 million annually. SRS was funded by the league’s top 15 revenue teams. SRS was discontinued in the 2010 uncapped season when the owners opted out of the final year of the CBA. Owners in new stadiums were not eligible for 5 years and new owners during term of the 2006 CBA were not eligible. Player costs include benefits of about $23 million per club in 2009.
- 31.
After 1987 bargaining impasse over unrestricted free agency, the NFLPA decertified in 1989 to remove the NFL owners’ labor-law antitrust exemption. NFL’s Plan B restricted free agency system where a team could protect 37 of 47 roster players was rendered illegal in McNeil, et al. v. NFL. 790 F.Supp.871 (8th Cir. 1992).
- 32.
NFL average player salary doubled during USFL competition from $120,000 in 1982 to $245,000 in 1985. In United States Football league v. National Football League, 644 F. Supp. 1040 (S.D.N.Y., 1986) a jury found that the NFL had violated Section 2 of the Sherman Act, but that the USFL had damaged itself and was entitled to damages of only $1. The NFL successfully argued that the strategy of the USFL was to force an NFL merger. The NFL-USFL war ended with the financial collapse of the USFL, followed by two seasons of frozen salaries for NFL players, a failed NFLPA strike in 1987 and a 5-year collective bargaining impasse through 1992.
- 33.
The 1993 season was uncapped but the salary cap and payroll minimum would become effective if player costs exceeded 67% of defined gross revenues (DGR). Guaranteed league-wide salary was set at 58% of DGR and the 1994 cap was set at 64% of DGR less league-wide benefits. The cap was set at 63% in 1995–1996; 62% in 1997; 63% in 1998–2001, and 63.5% of DGR in 2002. The minimum team payroll was set at 54% of DGR.
- 34.
Accounting rules for DGR before 2006 and TR thereafter allow expense deductions for cost of goods sold, luxury-box and club-seat depreciation, and reasonable advertising expenses for internet and satellite TV.
- 35.
The cost-credit proposal is similar to that of the 2005 NHL CBA where all existing player contracts were rolled back by 24% to lower the player share from 75% before the 2004–2005 lockout to 57% of Hockey Related Revenues (HRR) by 2005.The 6-year NHL deal that runs through 2011 specified a hard salary cap that limits the players’ share to 57% of HRR. The difference is that NFL player costs are already at 57% of TR not 75%.
- 36.
Player cost shares of revenues are similar in all four major sports leagues. Vrooman (2009) argues that, “As the result of internal competition among sportsman owners, monopsonistic exploitation has virtually vanished over the last decade in all leagues. All leagues have similar carrying capacities for player costs at two-thirds of revenues and current payroll cap percentages are almost identical at about 60%.” Zimbalist (2010, 25) concludes, “The tensions experienced in the NFL since the 2006 move to using TR as the cap base suggest a possible disadvantage to the cap system, namely unequal club revenues. If all teams are compelled to have payrolls with a certain narrow range, and such range is determined based on league-wide revenues, then markedly unequal rates of profit across clubs may be the result.”
- 37.
“Under our (NFLMC) proposal mandatory contract lengths would be 5 years for first round players (6 years for quarterbacks), 4 years for 2nd –7th round picks and 3 years for undrafted rookies. First round contracts could be renegotiated after 3 years and after year two for all other rookies. Under the proposal the first pick would sign a 5-year contract for $5.34 million bonus and $1.5 million salary his rookie year. In years 2 and 3 his salary would be $1.7 million and $1.9 million. His fourth and fifth year would rise to $2.3 million and $2.9 million for a package of $15.6 million. If he was quarterback he would be paid $4.3 million in year six.” Mark Murphy (2010), president of the Green Bay Packers and member of the NFL owners’ bargaining committee.
- 38.
Former NFLPA executive director Gene Upshaw argued that any salaries gained by the rookies ultimately trickle up to the veterans who renegotiated their contracts, and that nonmarket controls on rookie salaries would allow the League to keep four or five rookies because it’s cheaper than keeping one or two veterans.
- 39.
In the last uncapped season 2009, the performance-based pool made up $109.5 million of about $736 million in total player benefits. The fund began at just over $15 million in 2002 and was reset at $96 million ($3 million per club) in 2006, when the fund’s growth was also capped at 5%. A player’s PBP Index is the ratio of his playing time percentage to his PBP compensation (his salary plus prorated bonuses). Each player would receive an allocation determined by dividing his PBP Index by the sum of his team’s PBP Indexes and multiplying that by his clubs total PBP allocation. The top 25 payouts in 2009 ranged from $250,000 to $400,000.
- 40.
Entry pool allocations are different for each team based on number and position of draft picks.
- 41.
Experience distribution in 2009: 0 years 16.4%; 1 year 14.6%; 2 years 12.8%; 3 years 12%; 0–3 years 55.8%.
- 42.
In 2009 first round players received 36.2% and second round picks took 14.5%. In 2009 the Detroit Lions paid cap salaries for 3 of the first 33 draft picks (1, 20, and 33) equal to 65.6% of their $8.074 million rookie pool allocation, including 38% on first overall pick Matthew Stafford.
- 43.
Under the most recent 2006 CBA a rookie’s first contract could not exceed 4 years unless he was drafted in the first round. The first 16 picks were limited to 6 years and picks 17–32 were had a max of 5 years. First year salaries (calculated like Article XXIV salary cap using base salary and prorated signing bonus) for all players must fit within a team’s rookie pool allocation. The maximum raise for any season is 25% of the first year’s salary and rookie contracts cannot be renegotiated until after the second season.
- 44.
The first pick in the 2008 draft quarterback Matt Ryan signed a 6-year contract with the Atlanta Falcons for $72 million, $34.75 million guaranteed, and the first pick in the 2010 draft, quarterback Sam Bradford signed a 6-year deal with the St. Louis Rams for $76 million with $50 million guaranteed.
- 45.
Stafford’s minimum salary cap numbers equal his expected base salary plus prorated option bonus of $3.48 million 2010–2014. Minimum cap hits 2009 $3.1 million, 2010 $3.875 million, 2011 $4.65 million, 2012 $5.425 million, 2013 $6.2 million, and 2014 $6.975 million; total $30.225 million.
- 46.
Brady had $6.5 million left on previous contract for 2010 which brought 5-year total to $78.5 million. Only $28.3 million is “fully guaranteed” against being cut for “skill, injury, and salary cap” reasons.
- 47.
NBA rookie contracts are usually signed for the maximum 120% of the scale that is specified in the CBA since 1995. Each NBA rookie scale contract for a first round pick covers two seasons with a club option for the third and fourth seasons. A team may sign a player between 80 and 120% of the scale salary figure. Teams can provide this amount using the Rookie exception, even if they are over the salary cap. Annual raises are limited to 8%, and can’t exceed 120% of the scale amount for that season. The percentage increase for the third and fourth option years varies by the player’s draft position. Teams have until the player’s second season to use their option for the third season and until the third season to use their option for the fourth season. If the team uses both options and keeps the player for four seasons, then the player is a restricted free-agent after his fourth season. If the team declines either option, then the player is an unrestricted free-agent.
- 48.
The Dallas Cowboys draft-day trade value chart first used in the 1990s follows a similar power rule.
- 49.
In results not shown here the inverse power rule also holds for the NHL’s entry level system after performance bonuses are paid. In the NHL Entry Level System: All group 1 players (rookies) face the same maximum annual compensation depending on year drafted ($925,000 in 2011). Players 18–21 years old are covered by the Entry Level rules for 3 years, players 22–23 are covered for 2 years, players 24 are covered for one and players who are 25 years and older are not subject to limits. A signing bonus cannot exceed 10% of annual compensation. Players can receive Individual “A” performance bonus up to a maximum of $212,500 each $850,000 total; Individual “B” League-wide performance bonuses payable by the League and/or club up to a max of $2 million per season. As the first overall pick for the 2005–2006 season Sidney Crosby earned a $765,00 salary and $85,000 bonus (10%) for the maximum compensation of $850,000 stated in the 2005 CBA plus: the maximum $850,000 in Individual “A” bonuses, the maximum of $2 million in Individual “B” bonuses from the Pittsburgh Penguins and $400,000 bonuses from the League for total compensation of $4.1 million in his first season. After three seasons in the entry level system, Crosby received $9 million in 2009–2010.
- 50.
If NFL owners are concerned about efficiency then it makes more sense to reduce max contract lengths from 6 years for the top of round one (picks 1–16), 5 years for the bottom of round one (picks 7–32) and 4 years for players taken after round one (rounds 2–7) to 5, 4, and 3 years, respectively. In the NBA rookie scale system all 1st round contracts are for 2 years with team options for the third and fourth years. It is questionable whether NFL teams are entitled to recover player development expenses that have been shifted to the NCAA.
- 51.
Former player Gene Upshaw was the executive director of the NFLPA for 25 years until his death in 2008. Upshaw was succeeded by outsider and Washington lawyer and lobbyist Demaurice Smith in 2009.
- 52.
In American Needle, Inc. v. NFL, et al., 560_U.S. (2010)(08–661) the Supreme Court reversed a lower court finding that the NFL was a single entity: 538 F.3d 736 (7th Cir. 2009). The 7th Circuit was the only US Court of Appeals to consider a professional sports league as a single entity. The case concerned the exclusive contract in 2000 between Reebok and NFL Properties. NFLP was created in 1963 as the marketing arm of the NFL. Between 1963 and 2000 NFLP granted nonexclusive licenses to vendors, including American Needle, Inc.
References
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Vrooman J (2009) Theory of the perfect game: competitive balance in monopoly sports leagues. Rev Ind Organ 34(1):5–44
Zimbalist A (2010) Reflections on salary shares and salary caps. J Sports Econ 11(1):17–28
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Vrooman, J. (2012). The Economic Structure of the NFL. In: Quinn, K. (eds) The Economics of the National Football League. Sports Economics, Management and Policy, vol 2. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-6290-4_2
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