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Sports Economics For Dummies: How To Split $9 Billion Dollars

Posted on February 18, 2011 by Dean Hybl

The announcement Thursday that the NFL and its Players Association have agreed to mediation is a sign of hope, but unless there is a major breakthrough in the next two weeks, it still looks like the NFL is headed for its first major labor disruption in 24 years. Given that residents across the United States are still feeling the pinch from the most pronounced economic recession since the Great Depression, don’t expect either group to receive much sympathy as they struggle to split more than $9 billion in annual revenue.

With the revenue and popularity of the NFL at an all-time high, it seems like a strange time for a labor dispute, but both sides seem more interested in annihilating the other side than reaching a compromise that would benefit all parties.

The owners, who opted out of the previous collective bargaining agreement two years early, are focused on receiving additional money off the top to cover expenses that they say are critical to growing the league and generating new revenue. Currently, the first billion dollars of revenue goes directly to the owners with the players then receiving roughly 60 percent of all remaining revenue.

In 2010 the result of this split was that the owners received $4.75 billion with the players earning $4.65 billion. All in all seems like a pretty good return for both sides. However, since the owners have never been forthcoming about their total expenses, it is difficult to tell if the owners are making a great profit or barely breaking even.

The owners have proposed taking an additional billion dollars off the top before any revenue splitting occurs. Conversely, the players are proposing that all revenue be split 50-50.

There is no question that escalating costs for stadiums, promotions and other elements of operating the business have increased over the last decade. Though revenues have continued to increase during the economic recession, the cost to generate these revenues has also increased.

In most businesses, he who takes the greatest risk typically receives the greatest rewards. However, professional football is somewhat different than the norm because while the owners are the ones taking the financial risks, it is the players who are taking the physical risks every Sunday.

With an average career length of barely four years and the very real risk of suffering injuries that will have an impact for years to follow, NFL players are very much focused on keeping as much revenue as possible.

Unlike the players in baseball, basketball and hockey, NFL players do not have guaranteed contracts, so their contracts often include large up-front signing bonuses. The owners would like to make it easier to recoup this bonus money when players break the law or violate the personal conduct policy, but the players are hesitant because up-front dollars are the only guaranteed money a player receives.

If There Is an NFL Lockout, Which Side Will You Give More Blame?

  • Both Equally (44%, 25 Votes)
  • Owners (35%, 20 Votes)
  • Players (21%, 12 Votes)

Total Voters: 57

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The issue of long-term physical health, which has never really come into play in the past, has also suddenly become an important component of these negotiations. The primary reason is that the owners are proposing an 18-game schedule because it will give them an avenue for more television and ticket revenue.

While this idea has been popular with some season ticket holders who are tired of paying regular season ticket prices for exhibition games, it has not been popular among players. Primarily because they see it as an increased injury risk with no guaranteed reward on their behalf.

If a player signs for a $2 million contract, his salary is currently spread over the 17 weeks of the season (16 games plus a bye week). If the number of games increases, unless a provision is added to increase his salary accordingly for the two games, his salary would simply be divided among the new number of weeks for the season.

Unless changes are made, increasing the number of games in a season would mean players would have more games to risk their health before becoming eligible for the NFL pension program. Currently, players must complete three seasons in the league before being eligible for the pension plan.

Much has also been written in recent years about the physical and mental health of former NFL greats whose bodies eventually broke down from the physical rigors. Even with a pension, most former players receive less than $50,000 a year from the NFL program and no assistance on medical bills.

The players might be best served in the long-run with focusing on increasing post career care, rather than focusing just on receiving more money in current player salaries.

So far the players union and owners have spent many contentious hours negotiating to no avail on how to split their $9 billion dollars and the other issues related to the agreement. For the benefit of time and because I, like every other American football fan, don’t want to endure a fall without professional football, I have outlined below what I believe to be a fair compromise on the primary issues. I am calling it “Sports Economics for Dummies” because the title seems to fit the situation.

Splitting the Revenue: Many Americans are struggling to pay a mortgage, car payment, grocery bills, health insurance and maybe even a college education or two on far less than $9 billion dollars per year, so it would seem that amount of money would be more than enough to please both the 32 NFL owners and roughly 1,700 active players.

I propose that the owners receive the first $1.5 billion in revenue with the remaining revenue be split in the following manner: 52% for current player salaries, 45% for the owners and 3% put into a pool to pay for long-term health insurance (I will discuss this a little later).

Based on the 2010 revenue of $9.3 billion, this would mean that the owners would receive $ 5.01 billion, with the players receiving $4.06 billion for current salaries and $234 million for long-term health care.

This split would result in a slight reduction in salary pool for the players, but still a large amount that would increase as revenues increase. The owners would receive more money for operations that hopefully would also help spur continued investment in stadiums and other revenue producing projects that would continue to grow the revenue sources. The players would also receive money for a long-term health care fund that will benefit players long after their playing days are over.

Because both sides often are looking to create revenue that isn’t part of the CBA and thus not split amongst the two sides, an action that creates distrust, I propose that the revenue split include everything licensed through the NFL or the NFLPA, even potential future revenue streams (like ads on uniforms) that have not yet been tapped.

At the end of the day, the two sides must understand that they are truly partners and act that way. Currently, they are acting much more like adversaries than partners and that must change.

18-Game Schedule: Because it is difficult to understand how much new revenue would be created by an 18-game schedule until you actually have an 18-game season, I think the money generated from the extra games needs to be treated separately to ensure that players receive fair compensation for these extra performances.

I propose that for the first year of an 18-game season the revenue split outlined above would account for the same amount of revenue as in the last season of the 16-game schedule.

Then, all new revenue would be categorized separately with the owners continuing to receive their 45% and 3% being deferred for long-term care. The remaining 52% would be split by the players based on a formula that takes into account their current salaries. This ensures that players would receive new money for playing additional games, instead of simply having their contracts spread over more games.

I have no idea what the two additional games would generate in television and ticket revenues, but say the addition is judged to be $1 billion. Then the players would receive an additional $520 million, the owners would receive an extra $450 million and the health fund would receive $30 million.

Since most of the risk of an 18-game season would fall on the players, this seems like a fair compromise.

Rookie Salary Cap: One issue where both sides agree in principal is on the need for a rookie pay system that keeps unproven rookies from making more money than proven veterans.

The next labor agreement must address contracts like the $50 million dollar one Sam Bradford received before throwing an NFL pass.

However, the stumbling block on this issue is related to trust, or lack thereof.

The players want to ensure that the extra money available because rookies would be receiving less money is spent on veteran players who have proven their value. The owners have proposed a system that the union is concerned would amount to a veteran wage scale that would make it harder for players to become free agents during their peak earning years.

I propose that a rookie wage scale be developed that would make all contracts of draft picks automatically four years in length with the dollar amounts dependent on draft position. The contracts would include some signing bonuses for high round picks, but most of the money would be part of the base salary. However, for every year a player drafted into this system is on the opening day roster (regular or practice squad), the next year of the contract becomes guaranteed.

Any undrafted free agents would also be subject to the same program where their next season would become guaranteed when they appear on the roster for a regular season game.

Thus, any rookie who is still with the team on opening day would be guaranteed not only their contract for that season, but also for the following season.

This would give young players some guaranteed money and stretch it over a longer amount of time.

All players would become free agents following their fourth NFL season, thus potentially throwing players into the free agent pool at a time when they should be at the peak of their earning potential.

Current mechanisms for teams to keep players like the franchise tag would still be in place to help secure the most valuable players.

It would also be very important that measurements are in place to ensure that teams spend as close to the salary cap numbers as possible. Any money a team does not spend from their salary cap could be put into a fund to give bonuses to players who earn All-Pro or Pro Bowl recognition.

Player Health and Retirement:
Under the new system with an 18-game schedule, players would become eligible for the NFL Pension Plan after two seasons, rather than the current three years.

Injuries and long-term player health must be part of any new labor agreement.

With the money set aside from the revenue sharing, the league would develop an insurance program where all players who meet the two year requirement would then receive health insurance from the league for five years following retirement.

Any player who plays a minimum of 5 years would receive health insurance from the league without cost for 10 years following retirement and players who spend 10 or more seasons in the league would become part of the free health insurance program for life.

The new health insurance program would also include a provision that allows players whose time of benefits is ending to purchase the insurance at the same rate that the league negotiates with the insurance company.

Long-term player health is a crucial issue and one where I hope both sides will see the humanity and importance of taking care of the players that have put their health on the line to make the game great.

Based on current revenue, my proposal would provide more than $230 million per year to fund this system. I believe that would be enough to ensure the long-term stability of the program, but if it is deemed that more money is necessary, then each side could reduce their split by a half or whole percentage to provide more revenue for this important program.

Bonus Forfeiture Language: One of the values of the Rookie Salary Cap proposed above is that it reduces the amount of signing bonus money given to young players and instead guarantees contracts for the following season. One provision that would be in all contracts is that the contract could be voided if the player violates the NFL’s personal conduct policy or is convicted of a felony.

For veterans, if a team gives a veteran a substantial signing bonus when signing them to a new contract it may still be difficult to recoup bonus money if the player violates the conduct policy or is convicted of a crime. However, it could be written into contracts that players would have to return 50% of any bonus money if the player is unable to perform on the field due to violation of the conduct policy or a criminal violation.

Summary: The question still remains as to whether the owners and players can come to some agreement or if they will ultimately kill the golden goose as a result of their greed and short-sighted views.

While my proposals certainly aren’t perfect and provide some space for debate and negotiation, they seem logical and fair to both sides.

There is little debate that the real loser in any prolonged labor dispute will be the fans, so I hope both sides eventually come to their senses and realize that some of $9 billion is a lot more than a bunch of nothing.

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