NFL Labor Dispute: A Look at the Issues, and Is the NFL in Financial Jeopardy?

Paul RosikContributor IIIMay 16, 2011

NFL Labor Dispute: A Look at the Issues, and Is the NFL in Financial Jeopardy?

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    MINNEAPOLIS, MN - MAY 17: NFL lawyer Jeff Pash (L), NFL Commissioner Roger Goodell and Art Rooney II (R), president of the Pittsburgh Steelers arrive for court ordered mediation at the U.S. Courthouse on May 17, 2011 in Minneapolis, Minnesota. As the NFL
    Hannah Foslien/Getty Images

    The on again off again NFL lockout has many fans wondering just what the deal is between the owners and players.

    At first glance it appears to simply be an argument between billionaires and millionaires over who gets to be even richer. But there must be more to the disagreement for both sides to risk such high potential damage.

    Make no mistake, a missed season, or even part of a season, will have huge economic and public relation ramifications for both sides. So what’s at stake for both sides to take such dug in stances?

    Let’s look at some of the issues on both sides of the ball—or dollar in this case.

    I do not intend to look at the legal wrangling of the lawsuit but at the core issues between the owners and players.

1) NFL Football Is in Financial Jeopardy

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    The owners maintain that the current economic setup of the NFL is not sustainable. That is, they claim that some franchises will go bankrupt and fail in the foreseeable future if the current system is not adjusted.

    In their own vernacular the owners plan is to take a larger credit from the revenue pool. The owners have always taken “up front” money out of the revenue stream for their ability to run the team.

    But they propose to take an additional $1.4 billion out of the stream (increasing from $1 billion to $2.4 billion) reducing the amount available to the players as salary. They owners say this additional $43 million per team is necessary and a sign of the current economic times.

    Currently the players receive a near 50/50 split of the revenue generated by the league (after the current $1 billion dollar “credit” is taken by the owners). If this proposal goes through, adding the new amount taken out of the revenue stream prior to any salaries being paid, the players will effectively reduce their total pay by 18 percent.

    The owners' position is that they are still willing to split the revenues with the players on a near 50/50 basis, they just want that revenue to be calculated after the “credit” is taken for the cost of doing business for the team.

    [Right now the players receive approximately $3.9 billion in total salaries league wide. That is 50 percent of the $8.8 billion total revenue minus the $1 billion credit. The owners' new proposal would result in a total of approximately $3.2 billion for the players, which is 50 percent of the total revenue after a $2.4 billion dollar credit is taken.]

    A company in trouble will often reduce costs and even salaries. In the case of the NL the largest portion of their money by far goes to the players. A reduction in this amount is what they say is required to save the lower end franchises of the league from failing. The question is whether this financial jeopardy is real or overstated.

    So how much money does it take to run an NFL team and if they revenue share so much of it how can some teams still be in trouble?

2) All Franchises are Not Created Equally

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    In the NFL some franchises have advantages over the others. Fan base loyalty and sweet stadium deals for some franchises have created a hierarchy of team revenues with a wide disparity between them.

    The NFL is quickly becoming a tiered league consisting of an upper third of teams owned by entrepreneurial owners with huge, modern stadiums and large markets to draw from and a lower third with more cautious owners that play in smaller markets and with low revenue stadiums.

    According to Forbes magazine the Dallas Cowboys are valued at $1.8 billion while the Jacksonville Jaguars are valued at $800 million. This is a difference of 125 percent. So what makes the Cowboys over twice as valuable as the Jaguars?

    NFL teams share revenue deriving from television contracts and any league wide sponsorships. With the disagreements between the NFL and the cable companies finally resolved, the 2010 television rights amounted to an astounding $141.6 million per team (an increase of $10.6 million per team from 2009).

    Any other league-wide revenues are also split equally among all franchises as part of the “credit” taken before division with the players.

    After that each team is on its own. According to data collected on the Internet, revenues reported in August of 2010 showed that the Detroit Lions were the league-low with reported revenues of $210 million and the Dallas Cowboys were the league leaders with reported revenues of $420 million.

    This led to the Cowboys having an operating income listed at over $140 million while the Lions and Dolphins both reported losses, negative operating incomes for the past year.

    After these shared revenues, each NFL team makes revenue based on its ticket sales, concessions, and merchandise sales. It is no wonder that the Cowboys and Patriots report higher revenues than the Lions and Bills.

    Gate receipts alone show the Cowboys reporting $112 million collected while the Lions showed a mere $37 million. Dan Snyder may have his detractors as a football man, but his ownership has certainly led to the economic stability of the Redskins who currently are listed as the No. 2 team in terms of revenue—only behind the Cowboys.

    Overall the teams with good attendance and a modern stadium are showing healthy profits while the ones with lower fan turnout and older, outdated stadiums are reporting near zero or even negative operating incomes.

    This is expected to get even worse according to the owners and is the reason the extra $43 million per team is required for the economic stability of the league.

3) Are NFL Teams Losing Money?

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    The general consensus of fans and the players is that the NFL is experiencing higher popularity than ever before with unprecedented attendance and fan interest.

    Fantasy leagues, betting, and general fan interest have led to a high demand for the NFL’s product to such a degree that even something as silly as the Red Zone Channel is showing high popularity.

    It is hard to believe that under these conditions, with the amazing amounts of money given to the league through the television contracts, that any team would have trouble making a profit. The players have consistently asked to see a more complete reckoning of the owners financial statements as they are not fully convinced that the situation is as dire as the owners contend.

    In addition it seems impossible that there are not additional revenue streams that the team could tap to raise their overall profit levels.

    Yet the league maintains that this lowering of profits is reality. The facts they point to include:

    The Super Bowl Champion Green Bay Packers (Go Pack Go) are the only team that releases financial statements, since it is a public owned team. Their player costs rose over $22 million from 2008 to 2009 while their operating profits dropped $10 million over the same time.

    The Packers have raised ticket prices an average of $9 per ticket to help cover increasing player costs according to the team.

    As shown in the previous information, the NFL reported operating losses for both the Detroit Lions (-$2.9 million) and the Dolphins (-$7.7 million) in 2009.

    There is no hysteria on the part of the owners and saying that a team is imminently going to fail or anything like what is currently going on in baseball where one team is possibly unable to make roster payments this month.

    But they are saying that there is a negative trend and that costs are increasing faster than revenue is rising. They are also acknowledging the growing disparity between the haves and the have-nots in the league. In their minds a change is required to avoid having team failures become a possibility.

    Or even worse, having the NFL devolve into a league like the MLB. In Major League baseball the disparity is so great between franchises that some teams have so large an economic hurdle to climb that making the playoffs is almost an impossibility.

    An owner does not buy an NFL team to make money. The owner buys an NFL team because of their desire and passion to run a team and for the prestige it represents to them. But at the same time, the team should not lose money either. And the parity we have seen in the NFL should not be ruined by the economics involved.

    As already stated, a company in trouble will often reduce salaries and/or benefits to reduce costs. The question that is not yet clear is how deep the economic woes of the NFL are and to what degree is player cost tied to these woes.

4) What Does The NFL Union Do?

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    Since every player in the NFL negotiates his own contract it is often asked why do they have a union. Tom Brady and Aaron Rodgers do not need the NFL Players Association as their multimillion dollar contracts and high powered agents have them well taken care of in most cases.

    We have all heard of players who were well compensated in their playing days but are now poor and have to sell their Super Bowl rings for cash to pay their medical bills. It is a sad story but is no different than the lottery winners who are poor again three years later. Further, the lottery winner does not have an agent who was supposed to be looking out for them and setting up their retirement income and health insurance.

    Ostensibly the NFLPA is designed to protect the “little guy” in football, the practice squad player or career special teams player making the league minimum. These players often play only a year or two and are treated as replaceable commodities by the team.

    Even “training camp fodder” added just to make the squad larger during camp but who have no real chance to make the team are covered by the Union and have some rights and minimum standards that have to be adhered to by the team.

    The NFL League Minimum salary is nothing to be sneezed at $310,000, but it is certainly true that the player making the league minimum salary does not have nearly the leverage in his contract negotiations as the star player.

    It is an inescapable fact that playing in the NFL is not meant to be a lifetime career. But playing it can lead to lifetime health impacts. Long term health impacts such as knee injuries, back injuries, and post concussion syndrome are just several examples of the long term damage that can be seen as a result of playing a game as tough and violent as football.

    Many players are now coming forward showing the impacts of those thousands of high speed collisions they encountered and what it has done to their mental faculties in their later years.

    One possible solution is the existence of long term insurance and health benefits for players. But where would this benefit come from? The existence of the salary cap, as flawed as it is, prohibits players from making long term “personal service” contracts.

    In a personal service contract a player may be able to defer money now in exchange for a smaller amount of money spread out over a large number of years. Almost an annuity to make sure there is some income received even many years later; or perhaps this remuneration could take the form of benefits and insurances that could cover the player for years after his playing days are done.

    But the whole issue of how does this count against the NFL’s salary cap makes these nearly impossible to set up.

    Thus the Union is designed to look out for players who can not contract themselves for life. The Union has created insurance and health benefits based on length of service. It is not sufficient to cover the damage seen in some cases but it is the best that can be created thus far.

    The Union also has negotiated the contracts with the NFL that has set the total amount of compensation available for players. This has resulted in higher player salaries and higher minimum salaries as NFL revenues have increased over the years.

    Overall, it is still a bit difficult to see where the player’s agent leaves off and where the player’s Union takes over. This has led to a fan perception that the Union is superfluous and not really needed in this case of high powered, millionaire players.

5) Player Salaries Are Out Of Control

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    Almost anyone watching football over a long period of time will conclude that this is true. The average player now makes way more than the biggest stars of several decades before. In 2010 the average salary for a Pro Bowl player was a touch over $4 million per year.

    The average salary for an NFL player is $1.9 million per year. [The median salary is only $750,000 which shows how much the super high salaries of the league stars throw off this average.] It is hard to see how a person making over a million dollars per year needs any sort of protection or assistance in the form of a Union.

    If you make $1.9 million for even just one year you should have yourself set up for life. Unfortunately many athletes treat their high salaries like they will never end and find themselves out of money until the next check arrives.

    Every year we hear of the bidding wars for this years crop of free agents. Teams pay outrageous salaries for borderline players to lure them away from other teams. The average fan is left to think they just paid $5 million for some guy I have never heard of before.

    To forestall this the teams then pay their star players even larger sums to keep them from entering free agency in the first place. There are 22 millionaires on even a lower end NFL team like the Detroit Lions.

    At the same time I am not saying the players should make less either. NFL players create the excitement and play that interests the fans to make the league so popular and fuels the owners revenues. Without the high level of play and competition the owners would not make the money that allows them to pay these salaries in the first place.

    The owners have created the pay scale by bidding so wildly for free agents. The owners could reduce the pay scale for players by just agreeing among themselves on limits available for players. But the moment a big free agent becomes available the teams all jump over each other to bid away a star player to come and play for their team.

    The result is a continually escalating scale where each new star contract eclipses the previous high salary. The salary cap is little constraint upon this escalating race. The owners have let themselves have outs where up front money and “bonuses” count differently and allow them to pay players huge one-time amounts that inflate their overall contract values without impacting the salary cap as heavily.

    In addition, the fact that player contracts are non-binding and that a player can be cut any time his production falls off and this money no longer impacts the team leads to a lot of cap games as well.

6) Should NFL Players Make Less?

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    An NFL player's career is notoriously short, so you cannot blame them for negotiating whatever they can get in their contracts. In addition, much of their contracts is not guaranteed.

    We often hear about some NFL star signing a new long term contract for $50 million over eight years. But unless he remains a star for all those eight years the player is unlikely to see that entire amount. His contract will be restructured or he will be cut for salary cap reasons and his net will be far less than the huge contract originally reported. But overall, NFL players remain very highly compensated professionals.

    The owners have let the genie out of the bottle so to speak and are now seeing how difficult it is to put the stopper back in. They have created a system where salaries have only gone up and up. Originally it was thought that revenues would similarly go up and up to cover this escalating cost. But the new reality is that player cost is now rising faster than revenue according to the owners.

    The amount of total compensation paid to players (as a percentage of total revenue) has not changed in the last 10 years. So the players argue that they are taking no more money from the system than they did in the past. And they are correct.

    The owners are unable to help themselves when it comes to bidding for star players. Players are the owner’s drug of choice and the can not resist paying more and more to go for a winning team.

    Thus they are trying to legislate their addiction away by reducing the amount of money available for players in the first place. This way they can say their hands are tied and that is the highest amount they can pay because that is all the money that is available.

    Even if the owner proposed system was in place players would still be wealthy. But is it reasonable for the players to have their pay reduced by a total of 18 percent?

7) The Bottom Line

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    Both sides have their points. The owners claim that the NFL is in financial difficulties and the low end teams will be lost or put into ruin if changes are not made. And the only area they feel they can make substantial changes to their costs is in the salaries paid to players.

    The players have been taking the same percentage of the revenues for many years and the NFL is experiencing wild popularity and growth on television. Can there truly be financial troubles in this climate?

    The owners have been preparing for a lockout for some time. They have arranged their television contract money in such a way that they will receive a huge amount of money this year even if there are no games.

    It is scary to think that for some teams not playing would be a financial boon to them and help them become more solvent. This is the basis of the players legal arguments. That the owners have planned this lockout in an effort to destroy the union and its ability to collectively bargain. The owners have covered themselves so they will not take a large hit.

    But once the players miss a few game checks the pinch may be felt for some and they may become much more agreeable to what the owners put forward. Their argument that the owners have conspired to destroy the union appears to have some merit. 

    Ultimately, like so many things in this world, it is about the money. The owners maintain that the current economic setup of the NFL is not sustainable and that lower end franchises will be lost unless changes are made. The problem is that they have never presented a really compelling case to show this financial jeopardy that they claim is on the way.

    Thus the majority of fans and the players do not believe this is true. They believe the owners just want more of the pie for themselves. And they are going to take this pie from the largest slice they dish out—the salaries paid to the players. The players maintain that there is no NFL without their efforts. The players have a short and uncertain career span that entitles them to go for all they can in terms of salary.

    If the players truly believed that the NFL was in trouble, I feel they would be willing to give up a portion of their contracts to ensure the stability of the league. But they don’t believe there is any financial trouble. And when one side does not believe the other in a labor disagreement it can set up to be a long and bitter fight. Let’s just hope that both sides are too smart to let this linger for too long.