The Lockout - A Solution

In my first posting  "WHY DECERTIFY - All You Wanted To Know About The Lockout And CBA, But Were Afraid To Ask", I presented the background and explanation as to what is going on. I will assume you have read that posting, but this posting can stand on its own. Having described the background to the problem, in that posting, I would now like to offer a possible solution.

So why are the owners claiming they are suffering from financial distress, and demanding the players provide relief?  As I stated in my previous posting the TV industry analysts expect the "NFL will add $46 billion in additional revenue over the next ten years from the TV industry", more then an additional 4.5 Billion per year. The TV money is a given – and the NFL has other revenue streams. Fans filled stadiums to 95% capacity last season and  according to "Forbes", the widely respected business magazine, "sponsors are banging down the NFL’s door to do business. Anheuser-Busch inked a six-year, $1.2 billion deal with the NFL last year to make Bud Light the league’s official beer replacing Coors Light." How many items do you see that are "official NFL" products? Each of them adds to the NFL's revenue. Again "Forbes" estimates "if the owners are successful in getting players to lop $1 billion from the shared pool with players, team values will rise a cumulative $15 billion." 


At the current time approximately 4.6 of the 9 Billion of "Total Revenues" used to calculate the salary cap is revenue from television, this means that starting in 2014 the "Total Revenue" will increase by 50% based on TV revenues alone. The salary cap for each team at that time would be a minimum of $233,750,000 to $250,750,000, per team per year; depending on whether the players percentage was 55% or 59%. Any increases in other national NFL revenues, as I explained in my previous posting, would be in addition to this. No wonder the two sides are in a conflict now, the salaries of players along with the revenues of owners could escalade dramatically. Each 1% differential of the players share, based on TV revenue alone, would mean at least $4,250,000 yearly to each team. It would be nice if the owners would reduce ticket prices, but because the teams split revenue from ticket sales, that is unlikely to happen.


The problem the NFL is trying to address has nothing to do with the players salaries. The Green Bay Packers are the example the NFL uses as to why the current CBA formula is no longer sustainable. (The Packers are atypical, in that, they are a non-profit community owned corporation that releases financial statements.) Although its fans are fanatical, Green Bay is a small market team. Indeed the Packers' player costs rose from $139 million in 2008 to $161 million last season, and operating profits declined from $20 million to $10 million during the same time. However on a percentage basis the Packers had  one of the largest increases in Player costs in the NFL. Total player costs for the NFL increased only 4% last year to $4.5 billion, including benefits. Of this amount 245 million dollars was for benefits, which is over and above the salary cap, this amounts to $7.7 million per team last year. The Green Bay experience is not indicative of the large market teams. (The numbers I used for Green Bay's payroll were from "Forbes" magazine,  and are on a pay as you go basis, which does not include the tricks used by teams to keep their numbers under the Cap.)


The real problem is that the National Football League is evolving into a tiered league, with the upper tier being those teams that play in big markets, and stadiums that feature many luxury boxes and suites which are not subject to revenue sharing. This is a part of their "Local" revenue. These teams also have entrepreneurial owners who take advantage of the opportunities a large market presents. A great deal of the revenue of these teams are not shared with the other owners. The lowest tier are those teams that are run by conservative owners who play in small markets with low-revenue stadiums. Almost all of their income is based on the shared revenue. 


The shared revenue upon which the salary Cap is based, is divided equally among the teams. Each team receives the same revenue from the shared pool. Each team also has the same salary cap. Therefore, the revenue dedicated to the salary Cap represents a proportionally larger share of the small market team's revenue, and a smaller share for the large market teams. The revenue pool was expanded in 2006 by the owners in order to address the discrepancy in the actual revenues of each team. The actual dollars  received from the shared pool by each team was increased. However, the salary cap was also increased in actual dollars, since it is averaged out for all teams. 


When the revenue pool that is shared among the teams was expanded in the 2006 agreement between the owners, the revenues each team received from the shared pool increased, but their "Local" revenue decreased to the same extent, since it became a part of the pool. However, even though the NFLPA agreed to decrease the percentage of the revenue pool that represents the Cap, the actual dollars in the Cap increased, because the pool was larger. The salary Cap still represents a proportionally larger share of the small market team's revenue, and is now a slightly larger share for the large market teams also, since the shared pool, upon which the Cap was based, has grown due to the loss of the "Local" revenue assigned to it. This is why the owners say the 2006 CBA is not working for them. The large market teams, Jets, Giants, Dallas, New England, Washington, etc,  feel the local revenue they gave up to address the complaints of the small market teams, has accrued mostly to the players; even though the players reduced the percentage of the common pool dedicate to the salary cap.


According to "Forbes" magazine the most valuable NFL team is the Dallas Cowboys valued at $1.8 billion. The team, moved into its new $1.25 billion stadium last season, and sold out every regular season game with the league's highest average ticket price, $160. The team's overall operating income (earnings before interest and taxes) hit $143 million, a record for a U.S. sports franchise. The Washington Redskins are worth $1.55 billion, second only to the Cowboys, with operating income of $104 million last season. On the other hand,  the NFL's 10 least valuable teams all declined in value over the past year, led by the Jacksonville Jaguars, which fell 16% to $725 million. They are in one of the league's smallest markets. The Jaguars lost 17,000 season ticket holders following a disappointing 5-win, 11-loss season in 2008. In addition, the recession hit Florida particularly hard. The Detroit Lions loss  money ($2.9 million) last season (2009) on an operating basis. The Lions have struggled to sell tickets since becoming the first NFL team to ever finish winless in a 16-game season in 2008. Once again the local market was effected by the recession, and their record did not help either. Please note the financial figures are based on the 2009 season, the last normal season with a cap and floor.  


 The greatest problem to any solution is how do you rectify this discrepancy so that small market teams are satisfied, other then reducing the Cap that represents the players share of the revenue to a major, unacceptable degree. The NFLPA is afraid that the ultimate goal of the NFL owners is to make the Cap a fixed dollar amount, not based on a percentage of the shared revenues. This fear was reflected when they replied to the owners last proposal, when they said "Your proposal also would have given the owners 100% of all revenues above the low projections, including the first year of new TV contracts in 2014.  Your offer did NOT meet the players halfway when it would have given 100% of the additional revenues to the owners." The players feel they are the product the NFL is selling and they deserve to share in the NFL's success.


I would like to propose a possible solution since it appears that the NFL real revenue (shared plus local) and the pooled shared revenue represented by the cap will soar in the future. This proposal is based on that assumption.


1) One of the players main complains is that their salaries are not guaranteed. If an NFL team cuts a player part way through his contract, he's done, no more money is paid to him. The players therefore bear all the risk of injury, or deteriorating performance. The only implications for the team are if a signing bonus was paid, that money is lost, it is not refunded by the player. There is also a cap-hit to the team as the money which was prorated over the life of the players contract is immediately counted against the team's salary cap. Only about 40% of the players have received any kind of signing bonus and therefore only these players have any type of guarantee of the money in their contract. 


It must be understood because there is some kind of modified guarantee does not mean that the star players would no longer seek a signing bonus. As I said in my original posting, the players have two type of relationships to the owners, that of average player whose salary is basically determined by the CBA and receives no signing bonus. This represents 60% of the players. The other 40% are the stars and above average players who can act as independent contractors and get pay and benefits above those established by the CBA. They command the large signing bonus, and would still get them, for them nothing would change. But for the 60% of players who can not command the signing bonus, this will benefit them greatly. Think of it as equal to the minimum salary, you have to have at least that much protection, but you can try to get more. The rookie player would be in a probationary period and this guarantee for injury would not kick in until they played in four games. Nor would the rookie have any guarantee for deteriorating performance since his performance and signing was speculative.


Since guaranteed contracts would be welcomed and have a real value for the players, they may be willing to reduce their cap percentage in exchange. The owners might be willing to do something they have dismissed as too expensive in the past because now each 1% differential of the players share mean at least $4,250,000 yearly to each team. To make it more tenable to the owners, the individual maximum could be 5 to 7 million dollars based on the players contracted salary, minus any signing bonus the player received. This would protect those average players who need the protection most.  A reduction of 5% would be worth at least $21 million per team per year ($672 million total for the NFL per year), and the players salary Cap for each team would still be in excess of 200 million dollars. The actual details of the implementation would be worked out by both parties to this agreement. This should zero out or accrue slightly to the benefit of the owners.


2) It may be in the NFLPA interest to maintain the membership of retired players, and set up a jointly administered employer/employee welfare (health-disability) and pension plan, as exists with most unions. Since the benefits retired players now receive are relatively small, and based on projections that Cap revenue should explode upward starting with the 2014 TV contract, these benefits could be included in the gross cap (the number of retired players would not effect individual teams). The players then would have a greater voice in how these benefits were handled, at the current time they have none. This would reduce the immediate financial obligations of the owners (245 million dollars this past year) and shift  it to the players, thereby increasing the justification for maintaining a close to current percentage of revenue the players receive. In addition, the retired players will have an more effective voice in looking out for their interests, and every player will retire at some point.


3) The percentage of total revenue that makes up the cap would now be lessened, as the owners have been demanding, however the players received something they wanted in exchange. This is what real negotiations are all about. Yet, this in itself would not take care of the owners problem. Therefore, instead of evenly dividing the pool of shared money amongst the owners, the owners could divide a portion of it proportionally. In a hypothetical example dealing only with the relationship between owners, the first 2 billion dollars of the pool of shared money among the owners is cut out, and shared equally among the owners as it is now done. However any revenues in the pool above this amount would be divided in an inverse proportion to the real revenue of each team, as compared to the NFL average. This would adjust for the differences in "Local" revenue, yet not wipe it out completely. The divergence in the total real revenue of each team would be lessened. The details and formula would be worked out by the owners amongst themselves, and the only one who would need to see their books would be the NFL office itself. The owners problem would be solved by the owners, and their sacrifice. This is an ownership problem which really has nothing to do with the players. Yet the owners are asking the players to fix it, in a way that will benefit wealthy owners, as well as the teams that really need help. Using a proportional sharing of part of the owners shared revenue would mean the owners would not have to be demanding the players to make a major sacrifice, which the players fear may well be the precedent for sacrifices asked of them in the future.


As for the other issues that face the NFL and the NFLPA, there has already been some indication that a mutually satisfactory agreement can be reached on them. They are secondary issues, and none of them are non-negotiable.


Under this proposal the owners will have made 917 million dollars in future savings by reducing the salary Cap by five percent (5%) and shifting the expense of "benefits" to the Cap and the players, as represented by the NFLPA. The Players will have gained some type of salary guarantee for the 60% of players who at the present time have none (the union officers will not lose the next election), and a greater voice in their benefit structure. The owners will have made the change to the way they share revenue, so that it is dynamic, and a way that will assure that we not go thru this drama again. The negotiation will have ended the way negotiations are suppose to end, with each side feeling they gave a little, and got a little, in other words a compromise.


The rich and successful owners would not be happy with this solution, but given the projected increase in NFL revenues there will be plenty of money to go around.  And whatever sacrifice these owners make will be nothing compared to the revenue lost and uncertainty generated by the Lockout and a possible lost season. And the irony is, the Lockout really has very little to do with problems between the players and owners, and unless the owners fix the way they divide the pie of shared revenue they will be back in a few years asking the players to address the salary Cap. And this merry-go-round will start once again.


As with my first posting, if you found this worthwhile, please recommend it. That will increase awareness of it, by increasing its life on the front page. You have my permission to eMail or copy this to wherever you like.

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