Interesting piece. NFL will certainly be hard-pressed to increase the size of the TV contract. And even with a salary cap, it looks like teams will be pressed to produce more local revenues or risk being unable to afford the salary cap, as it steadily climbs. If the players get their way and get local revenues included in the calculation of the gap, all teams will be pressed to build more luxury boxes, raise ticket prices, etc.
Entrepreneurship is fine but what if people like Jones and Snyder turn the NFL more like the MLB? Some fans are sick of parity but most NFL fans probably would not want competitive imbalances like MLB.
As of Monday, September 20, 2004
Can Socialism Survive?
The "all for one, one for all" ethos of pro football has made it the envy of other sports. The NFL is fighting to make sure it stays that way.
By STEFAN FATSIS
Staff Reporter of THE WALL STREET JOURNAL
September 20, 2004; Page R1
Socialism has been very, very good to the National Football League.
This season, the NFL's 32 franchises will share equally more than 80% of about $5.5 billion in total revenue -- the most income, and the largest measure of financial cooperation, in the four major U.S. professional sports. Every franchise made money last season, league executives say, and almost every one should do so again. And thanks to rules designed to engender on-field parity, reaching the playoffs is a not unrealistic hope for fans of all of the league's Lions and Jaguars and Bears. Oh my.
But while the NFL has never been financially stronger, the all-for-one, one-for-all philosophy that transformed the league from a collection of family-run enterprises to a multinational sports giant is weaker than at any time in the past 40 years. Socialism isn't dead in the NFL -- but it's beginning to smell funny.
What happened? A new generation of owners entered the league and challenged its longstanding arrangements, in part because buying franchises and building stadiums has left them with debt bills fatter than an offensive lineman. The result: an every-team-for-itself race to generate more "unshared local revenue" -- money that's out of the reach of the league's collective diktats.
Now revenue-rich teams, which count on this cash not only to service their debt but to fund lavish player salaries and bonuses, are fighting to keep as much of it for themselves as they can. Revenue-challenged franchises, meanwhile, want them to share even more. And players -- who have begun negotiating a new labor contract with the league -- think they are entitled to a bigger piece of the pie.
The competitive disharmony contrasts sharply with the principle cultivated by the NFL during its rise: that the league is only as strong as its weakest member. "The values have changed," says Art Modell, who joined the NFL in 1961 as majority owner of the Cleveland Browns and left in April after selling his majority stake in the Baltimore Ravens. "We were comrades in arms. We were partners. That doesn't happen now. Everything is revenues and profits."
Covering the Field
As in other leagues, NFL franchises divvy up evenly national income from sources such as TV rights, league-wide sponsorships and licensing. Television brings in the biggest chunk of income: This year, each team will get more than $85 million from TV contracts that are worth more for this one season than Major League Baseball's deals are for six. NFL teams also share 34% of their individual gate receipts, the most generous sum in sports, as well as a portion of revenue from luxury suites and club seats.
The NFL for decades kept tight control on clubs' ability to strike out on their own to generate revenue. But as the sports business has matured, and the cost of playing ball has risen -- the price of an NFL expansion franchise rose from $195 million in 1993 to $700 million in 1999 and could crack $1 billion the next time around -- that control has loosened under pressure from business-driven owners.
The most glaring consequence has been a widening gap between the league's moneyed elite and its less-prosperous brethren. While the Washington Redskins and last season's Super Bowl-champion New England Patriots rake in $250 million or more a year in revenue, NFL executives say, teams like the Arizona Cardinals generate just over half that. The gap is about 12 times as great as in 1990.
Even with payroll limits, the differential gives wealthier teams a cleat up. Lower-revenue teams spend as much as 70% of their income on players -- about twice the share of teams at the top, executives say. That means the NFL's downtrodden have less to spend on everything else, from front-office staff to stadium infrastructure to fan amenities.
"There are many teams that realize they cannot go forward like this," Indianapolis Colts owner Jim Irsay says. "It's become that big of an issue."
Still, even as individual teams endure tougher times, the game itself is flourishing. The NFL's revenue has increased more than fivefold in the past 15 years. Traffic on the NFL's Internet site surpasses that of other leagues. Its broadcasts outpace prime-time averages. And its exceptionally devoted fans buy more than 90% of available tickets. It doesn't hurt that NFL teams play just 16 regular-season games a year, and only eight at home, making each one seem like a big event.
NFL Commissioner Paul Tagliabue says the league's cooperative structure has a lot to do with that popularity. "Clearly, the attractiveness of the league is not dependent on any one team or small group of teams," he says. "It's a total league. That was the philosophy from the early '60s onward, and it's continued."
Mr. Tagliabue recalls that when he took over the NFL in 1989, after two decades as an outside lawyer for the league, his predecessor, Pete Rozelle, told him his job was to maintain a system in which the Green Bay Packers could win. He points out that, despite playing in the smallest market in major pro sports, the Packers have not only survived but thrived, compiling the NFL's best record over the past 10 years and third-best over the past five. "The structure has been there to enable them to compete and enable them to flourish," Mr. Tagliabue says.
That structure emerged after the NFL, founded in 1920 as the American Professional Football Association, began capturing fan interest in the late 1950s. Mr. Rozelle persuaded old-school owners like George Halas of the Chicago Bears and Wellington Mara of the New York Giants to relinquish their local TV rights and sell them as a national package, to be divided equally among the league's then-14 teams.
A federal judge in 1961 disallowed a contract with CBS on antitrust grounds. But later that year Congress passed the Sports Broadcasting Act, which let leagues negotiate TV deals as single units -- and revolutionized sports. CBS in 1962 agreed to pay the NFL $4.7 million a year for two years. Ratings soared 50% in the second year, and the next contract was triple the size of the original.
The Old Playbook
But while the business of football grew -- particularly with the 1970 merger of the NFL and rival American Football League -- it didn't change much. Through the 1980s, NFL owners cashed national-television checks, counted turnstile clicks and tallied profits. "There were not as many revenue opportunities," Ravens President Dick Cass says. Most owners "didn't control the stadiums, they didn't control concessions, they didn't control parking. Sports sponsorships weren't a big deal."
...YET FEELING PRESSURED
Soaring prices for franchises have left new owners burdened with debt and scrambling to increase revenue further.
Reported price (in millions)
New England Patriots
Tampa Bay Buccaneers
New York Jets
That would change with the arrival of owners who didn't grow up in the NFL. The savviest was Jerry Jones, an oil and gas wildcatter who paid $140 million for the Dallas Cowboys in 1989. Mr. Jones challenged the league's groupthink ideology, criticizing the size of national sponsorships and striking local deals that ran afoul of league rules. After Mr. Jones signed up Nike Inc. in a deal that conflicted with the NFL's own apparel agreements, the league sued him, and he sued back.
The parties eventually settled, but the NFL was changed. No longer was the collective everything. Under pressure from owners, the league in recent years has turned over some sponsorship rights to teams. For instance, Pepsi and Coors are the "official" soft-drink and beer of the NFL, able to use the NFL logo in national advertising. But teams have gained the right to sell their own local deals to competitors, allowing Coke and Budweiser to be poured inside stadiums.
Teams also finally began exploiting the powerful NFL brand, cutting more deals in areas not exclusively controlled by the league and crafting leases granting them explicit control of stadium income like parking, concessions and signage.
"In some respects, the business model the league has adopted is the one Jerry was proposing," says Mr. Cass, at the time a Washington lawyer who represented Mr. Jones.
But the issue of local vs. national rights still percolates. This spring, club owners passed a new sponsorship and licensing agreement that maintains restrictions on what teams can and can't sell, such as on-field advertising, which remains the province of the league. Mr. Jones and five other owners didn't vote for it, a level of dissent that upset Mr. Tagliabue, people familiar with the vote say. "We believe strongly that each club can do a better job on a local level than the league can," Mr. Jones says. His worry: The NFL one day will decide that revenue disparities are too great and try to retake control of local sponsorships.
The contretemps reflects a very postmodern question for the NFL: Whose teams are they, anyway?
"There are elements within the league who believe that their brand is stronger than other people's brands and therefore they are entitled to benefit more out of that," says John Moag, a sports-franchise consultant who has worked with several NFL teams. He wonders whether it might get to the point where an owner says, "My games are watched more than anybody else's," and demands a proportionate slice of TV income.
A big part of the debate involves revenue-churning stadiums that have jacked up franchises' local income. Since 1995, 16 NFL teams have opened new stadiums; a 17th is set for 2006 in suburban Phoenix. Several others have undergone renovations. Under a program begun in 1999, the NFL has contributed $650 million to eight public-private stadium projects.
The Packers -- the commissioner's litmus test -- demonstrate how stadiums have helped level the financial playing field, but also how they might not be enough. Playing in beloved but outdated Lambeau Field in Green Bay, Wis., and relying on the old chestnuts of national TV and local sellouts, the Packers in 1997 ranked ninth in the NFL in total revenue. As new stadiums went up elsewhere, the team's ranking fell for four straight years, hitting 20th in 2001.
Paid for mostly with a local sales tax, the $295 million renovation of Lambeau -- named for team founder Earl "Curly" Lambeau -- boosted stadium capacity by 20%, adding 4,000 pricey club seats and spiffier luxury boxes. Also new: two full-service restaurants, a Packers Hall of Fame that has attracted more than 150,000 paying customers and a team-owned retail store with this sign: "Where Your Purchase Helps the Packers Win."
The new Lambeau has hosted more than 1,100 non-football events in the past year, including 56 weddings and receptions and a junior prom. "We're lucky and atypical because we have the hallowed ground of football," says John Jones, the Packers' chief operating officer. "We can make it a tourist destination."
With the refurbished seats and suites in place, the Packers climbed to 10th in league-wide revenue after the 2002 season. The restaurants, Hall of Fame and other fan amenities opened before the 2003 season, boosting local revenue a further 31%, to $79 million, out of a total of $179 million. Despite that extra growth, the Packers didn't budge from the No. 10 spot last season. (The community-owned Packers are the only NFL club to release financial results.)
In bigger-market Baltimore, the story is similar. Under new owner Steve Biscotti, the Ravens are selling hard. During a recent tour of the six-year-old, state-funded stadium, Mr. Cass points out where five new luxury suites will go, where more scoreboard ads are planned, where new seats are contemplated.
Mr. Cass steps into the capacious press box situated at midfield a third of the way up the stadium. "These are the best seats in the house. Should the media be here?" he says. "To keep up with everyone, you just have to think about these things." Teams in larger markets than Baltimore generate less revenue, Mr. Cass says. "We could be a doormat if we're not careful" about pulling in as much revenue as possible.
The NFL's elaborate financial system is partly to blame. The more revenue the league generates, the more money is set aside for players, and the higher the per-team salary cap climbs. (It's $80.6 million this season, up from $34.6 million in 1994.) Smaller-market teams with static stadium situations bear the brunt of such growth, because their revenue can't keep pace with the salary-cap increases.
Further, loopholes allow teams to spend well above the cap. Teams can amortize for accounting purposes the cost of signing bonuses -- that is, spread out how much of the bonus counts against the cap. So clubs with more local revenue -- think of it as disposable income -- have been able to lavish even bigger bonuses on free agents.
The spending differences are stark. According to union data, the Redskins agreed to shell out more than $77 million in signing bonuses during this offseason, compared with $22 million for the Cardinals. Michael Duberstein, research director at the players union, says teams have spent $2 billion above the cap in the past decade by amortizing costs.
Calling an Audible
Inside the NFL, the debate is how significant such numbers are, and what, if anything, to do about them.
The NFL redistributes about $40 million a year in local revenue to a handful of lower-revenue teams -- its only unequal revenue split. The recipients say the league's heavyweights should be forced to share more. Even when they do everything they can to market themselves, even in new stadiums, less-rich teams say it's not enough to keep up. "No one anticipated this level of growth" in unshared local revenue, the Colts' Mr. Irsay says.
The heavyweights say there's no evidence of a competitive advantage for big spenders like Dallas and Washington, and the commissioner agrees. "I haven't seen many playoff games there in recent years," Mr. Tagliabue says, "and I usually go to quite a few playoff games."
The high-revenue teams argue that splitting all revenue, national and local, 32 ways would eliminate incentives for teams to market themselves. "That would be socialism without competition," says Marc Ganis, a consultant to several NFL teams. "The NFL has been socialism with competition."
The big spenders' solution: Get low-revenue teams to work harder selling themselves. "The big concern I have is not how to equalize the disparity in revenue but how to get the clubs that are not generating the revenue to see the light," says Mr. Jones, the Cowboys' owner.
Joe Banner, president of the Philadelphia Eagles, asks, "If you're an NFL team and you're not even selling out your games, how do you think you start to [become] whole? You've got to do your best first."
Mr. Banner says annual debt service of more than $30 million negates some advantages the Eagles gained when they moved into a new, $512 million stadium last year. The team financed about two-thirds of the project. Similarly, Redskins owner Daniel Snyder has around $300 million in debt left of his $800 million purchase of the team and its stadium in 1999. Says a person close to Mr. Snyder: "As Dan has said, 'I'll share my revenue whenever they're ready to share my debt.' "
Mr. Tagliabue isn't moved by the big-market anti-revenue-sharing argument. The Redskins' complaints, he says, remind him of the old story of the boy who shot his parents and then pleaded for mercy on the grounds that he was an orphan. "I don't start my sympathy with teams in big markets playing in big stadiums," he says.
Mr. Tagliabue earlier this year appointed a 12-member committee of owners and league officials to study whether big-money teams should share more of their local haul. But he says the bigger concern for all teams -- and the underlying reasons for their gripes -- is the league's labor agreement. Talks began in April on extending the current contract beyond 2007.
Players and owners negotiated the deal in 1993, ending years of discord that included a strike and two lawsuits. The contract permitted the NFL's first true free agency, guaranteed players a percentage of league revenue and established the salary-cap system. Salaries have more than tripled, from a $484,000 average in 1992 to $1.3 million last season.
The owners and players have been satisfied enough to extend the deal twice, but now Mr. Tagliabue says the league faces "the toughest negotiation we've had since we did the deal in the first place." Both sides are frustrated with how the system has evolved. League executives cite the substantial spending above the cap; a growing pile of "dead money" paid to players no longer in the league; and the cap's fostering of upfront payments not tied to performance. "It's a very costly system for everybody in the league," Mr. Tagliabue says.
Union officials say that, if anything, the NFL isn't giving the players enough. Under the labor contract, players are guaranteed a percentage of the league's "defined gross revenue," which includes income from television, tickets, sponsorships and other sources. But DGR, as it is known, excludes certain revenue, including parking, concessions, local sponsorships and nonfootball income like, in the case of the Packers, proms.
As those income sources have soared, the players say, their take of total league revenue has declined, to about 55% now from 62% in 1993. "We've outgrown that model to a model that to us looks like it should [include] all revenue," says Gene Upshaw, the union's executive director.
Screening the Pass
Of course, the parties have plenty of reasons to get a deal done -- billions, actually. The NFL's current eight-year, $17.6 billion in contracts with News Corp.'s Fox, Viacom Inc.'s CBS, and Walt Disney Co.'s ABC and ESPN expire after the 2005 season. The league wants to be armed for TV negotiations with a collective-bargaining agreement that ensures the networks freedom from worry over business-damaging labor woes.
How much more can the NFL squeeze out of TV? Mr. Tagliabue says he doesn't have a target in mind, but notes the league more than doubled its television income last time. "If we could do that again, great," he says. "If we don't, we would not be in a situation where our expectations are dashed."
The networks are sure to complain about how much money they have lost on the current deal. Also, while the NFL continues to generate good ratings relative to other programming, it's not reaching as many total eyeballs as it once did. Tony Ponturo, Anheuser-Busch Cos.' top sports marketing executive, says he has told Mr. Tagliabue that too big an increase would scare away some advertisers, who no doubt would face much higher rates. "You can't have some erosion in ratings and keep paying higher prices," Mr. Ponturo says.
The NFL faces other challenges. The league has been frustrated in trying to return a franchise to Los Angeles, which hasn't had a team in a decade. Some owners warn of brewing storms over issues such as the cost of long-term ventures like the 10-month-old NFL Network on cable, into which the league has pumped more than $100 million; the viability of a money-losing European league; and complaints about league expenses such as legal fees.
Of course, the NFL's future is hardly in peril. An L.A. expansion team conceivably could fetch as much as $1 billion. The NFL Network, which shows football-related programming, could one day telecast live games or be spun off as a public company. Mr. Tagliabue, who NFL executives say will earn a salary of around $11 million under a new contract through 2007, sees the headaches as minor. He is proud of the NFL's dominance of the sports business and prominence in popular culture. And he has a message for fractious owners: Lighten up.
"If you preoccupy yourself with reorganizing the chairs on the Queen Mary, you won't enjoy the trip," Mr. Tagliabue says. "You should relish the fact that you are on the Queen Mary."
Mr. Fatsis is a staff reporter in The Wall Street Journal's Washington bureau.
Write to Stefan Fatsis at stefan.fatsi
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