League revenue sharing [Archive] - BillsZone.com

imbondz

06-16-2003, 08:08 PM

Doc.

this article NFL: Model of Consistency (http://cbs.sportsline.com/b/page/pressbox/0,1328,5675892,00.html) explains some where the $$$ is going.

The NFL is a $4 billion annual industry. Its $1.14 billion of profit is more than three times that of the National Hockey League, five times that of the National Basketball Association, and obviously ahead of Major League Baseball (who reported losses on a yearly basis before its recent labor agreement). While the National Football League is the clear preference for sports investors and corporate partners who can afford to pay the substantial entry fee, the league nevertheless faces three ongoing challenges in key areas: (a) labor relations; (b) facility development; and (c) television/corporate advertising.

Major business challenge one: continue to stabilize the ongoing economic labor/management partnership

The National Football League pioneered the concept of revenue sharing in the 1960s with its visionary television sharing partnership, effectively allowing markets like Green Bay and New York to share television revenue equally, regardless of size. This has expanded into the sharing of tickets, television, and other major revenues approximating 82 percent of the overall total -- a system light years ahead of every other sport. The Collective Bargaining Agreement structured the sharing of 64 to 68 percent of “designated gross revenues” with players, coupled with a “hard” salary cap that is standing the test of time.

Not surprisingly, commissioner Tagliabue and NFLPA head Upshaw continue to speak as partners, with ongoing discussions geared toward refining the system. This offseason, the NFL and NFLPA agreed on a process that distributes money for the amount of action each player gets. Though the pool starts at a modest $500,000 per team this year, lower salary players will receive a majority of the dollars, measured by the number of downs in which a player participates vs. the number of downs he is eligible to play.

Another major modification is in the area of pension payments. Beginning last April, the pensions for more than 2,000 retired pro football players were raised as much as 100 percent, a deal described as “without precedent in American industry.” About 625 retirees who played before 1959 will see their pension checks rise from $100 a month for each season they played to $200 a month, with benefits staggered accordingly.

This “tinkering” with the system is coupled with positive predictions of future labor peace, as the average salary per player has increased to $1.1 million for last season. Though NFL teams combined to pay $2.14 billion in salaries last year, the average salary represents a 1.4 percent reduction from the previous year. Overall, however, average salaries have basically stabilized over the last four-year period, with variations of no more than three to four percent.

On the other hand, NFLPA documents showed that the disparity in payroll spending between the top and bottom NFL teams since the salary cap was implemented in 1993 had continued to increase -- an issue that will receive considerable focus in years ahead.

Major business challenge two: continue the momentum and finish the trend toward completing NFL public/private stadium partnerships

The National Football League has successfully completed 22 stadium processes since 1993 (at a cost of over $5 billion), clearly the most of any major league. The new $325 million Gillette Field opens in New England on Sept. 9; Reliant Stadium in Houston, Seahawk Stadium in Seattle, and Ford Field in Detroit open their regular seasons in September as well. A $295 million renovation of Green Bay's Lambeau Field has been 60-70 percent completed. The Chicago Bears will open their new Soldier Field renovation in the near future, and the Philadelphia Eagles recently completed a 20-year, $139.6 million naming rights deal for their new stadium scheduled to open next year -- Lincoln Financial Field.

These new facilities are critical to long-term NFL growth. While ticket and television revenue sharing promotes stability described earlier, stadium-related revenue (parking, skyboxes, naming rights, concessions, and the like) are not shared, leaving teams without new stadium deals at a decided competitive disadvantage. For example, numbers made available at the (community-owned) Green Bay Packers annual shareholders meeting revealed that the Packers reported operating income of $132 million last fiscal year, with net income of $3.75 million. When the Lambeau Field renovation project is fully operational next year (including the new Titletown Atrium -- a themed retail area featuring the new Packer pro shop), the team expects to move into the top half in league revenue.

The National Football League has helped facilitate stadium construction by adopting the “G-3 Resolution” in March 1999. It authorizes the league to advance up to 50 percent of the total private contribution to a stadium construction (up to a maximum of $150 million for each facility) based on the philosophy that league-wide stadium development increases the value of each franchise. The NFL sold about $350 million in bonds for its G-3 stadium financing, increasing the size of its offering by 75 percent in the last two years.

Communities seem to understand the benefits of these public/private partnerships as well. The Houston Chamber of Commerce predicted that the Texans will pump $200 million-$280 million into the local economy each year. Additionally, a consultant recently reported that the Titans generate over $109 million of direct spending into the Central Tennessee economy, and the team generates $85 million worth of personal earnings and 2,100 jobs generated by direct and indirect spending surrounding the Titans. Not surprisingly, the Jacksonville City Council approved $40 million in improvements to Alltel Stadium as part of a deal that will allow the 2005 Super Bowl to be played in the region.

Significant challenges remain, however. The New York Jets, Minnesota Vikings, San Diego Chargers, and Indianapolis Colts are publicly reviewing their stadium options and respective new revenue sources. The New Orleans Saints worked out a $186.5 million, ten-year renovation deal as part of a plan to keep the team in the Crescent City.

Another stadium challenge involves insurance payments. NFL executives suggest that insurance costs have risen as much as five times since the Sept. 11 attacks. Texas Stadium insurance increased to $2.4 million from about $500,000 last year, and Philadelphia Veterans Stadium insurance rose to $1.8 million from about $750,000 annually. Stadium designers and security executives are working together to hold these premiums to a reasonable level in the future.

Major business challenge three: sustain and increase television ratings in order to preserve corporate advertising and rights fees agreements in the longterm

The National Football League business took a giant leap in 1998 with the eight-year, $18.3 billion national media package. The average of $73 million received per club on an annual basis is an approximate 89 percent increase over previous agreements. Obviously, such economics place substantial pressure on the league and television executives to continue the advertising momentum and fan support.

This year’s Al Michaels-John Madden Monday Night Football package should reverse the yearly MNF ratings decline. The first two preseason games showed a 10 percent viewership increase, while the prized 18-49 demographic group ratings increased by eight percent. Even the NFL Draft on ESPN was viewed by a seven percent larger television audience.

Overall, ad spending also continues to increase. Executives report that there is over $200 million more in the “ad marketplace” this year, and average price increases for ad packages exceed 10 percent. ABC has sold over 80 percent of its available Super Bowl ads at an average price of $2.2 million per 30-second spot, a new high and 15 percent more than the $1.95 million Fox received last year. Ford, Microsoft, Gateway, and others have become sponsor/partners for the Sunday regular-season packages, and more support seems likely from corporate America over time.

On the other hand, a report from Morgan Stanley Dean Witter predicted that ABC, CBS, and Fox would lose a total of $2.9 billion on their combined NFL contracts over this existing term, and Fox publicly admitted to writing down $387 million of NFL losses as part of their $909 million sports reconciliation.

Another challenge seems to be the uncertainty regarding the long-term role of pay-per-view television. DirecTV’s deal to carry all regular-season Sunday NFL games in all cities via satellite is nearing an end, though iN Demand is pushing to land the cable rights to “NFL Sunday Ticket” beginning next year. DirecTV has about 10.7 million subscribers, and digital cable systems have passed 17 million subscribers on the way to 40 million over the next five years. The alignment of cable and pay-per-view over time may have a profound effect on future television rights fees.

Overall, the business of the NFL remains uniquely healthy. This spring, the league increased its loan program by $210 million to $1.1 billion, a 24 percent increase over previous years -- their investment bonds are rated higher than any other major league sport. Expansion fees have grown over 20 percent per year since 1960, far outpacing the S&P 500, which has returned only eight percent per year over the same period.

As far as franchise values are concerned, the Atlanta Falcons recently sold for $545 million, and the New York Jets sold a year before at $635 million, meaning that NFL franchises have changed hands at an average of well over five to six times revenue. Forbes recently published its annual NFL valuation study, placing the Redskins at $845 million, Cowboys at $784 million, Cleveland Browns at $618 million, Carolina Panthers at $609 million, Baltimore Ravens at $607 million, Tampa Bay Buccaneers at $606 million, and Denver Broncos at $604 million.

While most NFL executives distance themselves from these “magazine valuations”, Minnesota Vikings owner Red McCombs said in May that “I don’t think there’s any franchise in the league that anyone would consider to be worth less than $600 million.”

Obviously, the National Football League is entrenched as the premier sports business. Next week, we will focus on major marketing challenges as the NFL kicks off its 2002 season.