Sports Leagues' Record-Breaking Media Contracts Make Huge Impact on Revenue
Despite being billion-dollar industries, the manner in which the four major professional sports leagues handle revenues is distinctly different.
The NBA, NFL, NHL and MLB each generate huge revenues from TV rights, as well as sponsorships, ticket sales and officially licensed products. However, each league faces challenges in slicing up the pie, and the resulting labor difficulties reflect structural differences.
The NFL recently agreed to a nine-year broadcast rights extension with CBS, FOX and NBC that will generate over $3 billion in revenue for the league each year. That's in addition to the $4 billion in annual revenues from its contract with ESPN and DirecTV.
The league splits the pot among the teams and imposes a hard salary cap, which prohibits clubs from exceeding the limit set by the league. The stated goal is to preserve parity and allow small-market teams to remain competitive. The underlying motivation of the cap is to control costs and prevent owners from signing too many players to bloated contracts.
In what some termed "a battle of the billionaires vs. the millionaires," the NFL lockout last summer could have resulted in the loss of the entire 2011 season. In the aftermath, the league designed a system limiting rookie contract values, ultimately enabling teams to pay proven veterans more money without increasing the salary cap limit.
For instance, Cam Newton, last year's No. 1 pick overall, signed a four-year guaranteed contract with the Carolina Panthers worth $22 million. Meanwhile Sam Bradford, the top pick in 2010, inked a six-year, $78 million deal (with $40 million guaranteed) with the St. Louis Rams. Future rookies of similar caliber are expected to sign agreements identical to Newton's. Teams are trending away from offering long-term, high-valued contracts for first-year players.
Although Major League Baseball has agreements with FOX, ESPN and MLB Network to air games nationally, baseball teams make huge deals by individually negotiating multimillion dollar local broadcasting rights.
The New York Yankees, traditionally the team with the deepest pockets, generate $85-90 million annually from the YES Network. With their ability to charge premium prices for tickets and merchandise, the Yankees have long had the highest payroll in the Major Leagues.
Likewise, the Yankees' chief rivals, the Boston Red Sox, reap substantial dollars from their broadcast rights deal with NESN and frequently have been active in the free-agent market.
In 2010, the Texas Rangers inked a 20-year deal with Fox Sports worth over $3 billion dollars, while the Angels agreed to a similar deal with Fox Sports this year. Flush with an infusion of cash, the Angels and Rangers became aggressive with free-agent spending in the offseason.
Meanwhile the Yankees and Red Sox have looked for ways to cut payroll and avoid baseball's luxury tax, the surcharge on organizations that exceed MLB's spending parameters.
Smaller-market teams respond to revenue inequities by signing younger players to long-term contracts, wrapping them up before the market rate goes up even higher. For instance, the Cincinnati Reds gave Joey Votto a big payday, agreeing to a $251.5 million, 12-year deal that locked up a popular player through his prime (rather than risk overpaying for a free agent who may be on the downside trajectory).
The Tampa Bay Rays have somehow figured out a way to be competitive, despite frequently losing talent to free agency. Others, such as the San Diego Padres and Pittsburgh Pirates, have not been as successful in putting a quality product on the field. It will be intriguing to watch the bidding on the services of talented but troubled Josh Hamilton, who leads the league in home runs, but has been injury prone in recent years.
The NBA lockout this season, the fourth in league history, shortened the season from 82 to 66 games. The primary disputes between owners and players included the division of revenue, the salary-cap structure and the configuration of luxury taxes.
A major hurdle was increasing the basketball related income (BRI) for NBA players. The collective bargaining agreement permitted NBA players to receive 51.2 percent of the BRI in comparison to the traditional 49-51 ratio.
In addition to its luxury tax, the NBA also administers a "soft cap" prohibiting teams from exceeding cap space to an extent; teams cannot continue to sign free agents but can re-sign current players while exceeding the cap.
With teams in Canadian cities and small U.S. markets, such as Columbus, the NHL salary cap was implemented to preserve parity in the league, allowing small-market teams to remain competitive.
Hockey, with the smallest fanbase and revenue stream among the four major team sports, can ill-afford to overpay its players.
The good news for the NHL is that this year's Stanley Cup playoffs have provided their highest ratings in years. It has taken a while for the league to truly overcome the effects of the cancelled 2004-05 season, but the NHL did well in signing a 10-year deal with NBC worth over $2 billion last year.
However, the conclusion of this year's NHL season brings the expiration of the league's seven-year collective bargaining agreement. Negotiations are expected to start directly following the season.
With Donald Fehr, the longtime head of the baseball players union, now serving as the executive director of the NHL Players Association, commissioner Gary Bettman will have his hands full with an experienced and quite skilled negotiator. The salary cap and overall compensation in light of the NHL's recent financial successes will draw a hard line from the players.
Jed Hughes is Vice Chair of Korn/Ferry and the leader of the executive search firm's Global Sports Practice. Among his high-profile placements are Mark Murphy, CEO of the Green Bay Packers; Larry Scott, Commissioner of the Pac-12 Conference; and Brady Hoke, head coach of the Michigan Wolverines. Earlier in his career, Mr. Hughes coached for two decades in professional and intercollegiate football where he served under five Hall of Fame coaches: Bo Schembechler (Michigan), Chuck Noll (Pittsburgh Steelers), Bud Grant (Minnesota Vikings), John Ralston (Stanford) and Terry Donahue (UCLA). Follow him on Facebook, Twitter @jedhughesKF.
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