CSS Button No Image Css3Menu.com

Baseball Prospectus home
  
  
Click here to log in Click here for forgotten password Click here to subscribe

<< Previous Article
Wait 'Til Next Year: H... (05/21)
<< Previous Column
Premium Article The Biz Beat: Affiliat... (05/07)
Next Column >>
Premium Article The Biz Beat: 21st Cen... (06/04)
Next Article >>
Game Story (05/21)

May 21, 2009

The Biz Beat

Conceiving a New Contract

by Shawn Hoffman

the archives are now free.

All Baseball Prospectus Premium and Fantasy articles more than a year old are now free as a thank you to the entire Internet for making our work possible.

Not a subscriber? Get exclusive content like this delivered hot to your inbox every weekday. Click here for more information on Baseball Prospectus subscriptions or use the buttons to the right to subscribe and get instant access to the best baseball content on the web.

Subscribe for $4.95 per month
Recurring subscription - cancel anytime.


a 33% savings over the monthly price!

Purchase a $39.95 gift subscription
a 33% savings over the monthly price!

Already a subscriber? Click here and use the blue login bar to log in.

For decades, the NFL has been considered the model pro sports league, thanks to a system that promotes fiscal parity and, as a result, strong competitive balance between small- and large-market teams. The league has consistently won enormous national media contracts, which have allowed all 32 teams to be profitable, almost regardless of how many tickets or sponsorships they sell. Add in some local revenue sharing and a narrow payroll cap/floor system, and the result is a socialistic system that has kept everyone happy, at least on the surface.

In many ways, the NFL was considered the anti-MLB in the late '90s and early '00s, when baseball struggled with labor problems and competitive balance, but while baseball is now in its golden age of business and labor relations (it will be seventeen years without a work stoppage when the sport's current CBA expires in 2011), the NFL's system is slowly starting to bend. Those with money on the line-the players and the owners-all want major changes, and the league could be headed for a lockout following the 2010 season. The players have felt shortchanged for years, as the NFL is the only major sports league without guaranteed contracts (aside from signing bonuses). The owners, meanwhile, have their own set of complaints. Last year, they voted unanimously to opt out of the existing CBA, citing "high labor costs, problems with the rookie pool, and the league's inability, through the interpretation of the courts, to recoup bonuses of players who subsequently breach their contract or refuse to perform." The move will probably result in a cap-less season in 2010, which, according to the mainstream press, will likely cause the earth to implode.

So where has the NFL gone wrong? (As much as a company earning about $800 million a year can go wrong.) And for baseball's sake, what can MLB's owners learn from the NFL's current situation?

Once a Best Practice, Now a Pumpkin

To some extent, the NFL's owners have been victims of their own success. For decades, they've dominated the NFLPA in labor negotiations, getting everything they've wanted and then some. They've latched on to certain policies that may have been right ten years ago, but have since become outdated.

The most obvious is the salary cap, which we've discussed before. If the owners' latter two complaints above (the rookie pool and bonus clawbacks) seem like minor issues, it's because they are. The real problem is player costs, which are fixed at about 60 percent of revenues. That number isn't nearly high enough to cause the league to become unprofitable; Forbes estimated that the average NFL team made a $25 million profit in 2007, compared to $16 million for the average MLB team that year. But whereas baseball teams set their own budgets and pay out whatever number they think is appropriate based on their expected revenue intake, NFL teams are locked into a set range-this year's cap will be $128 million, with a $108 million floor.

(Note: the listed payroll numbers are somewhat more divergent because they include players' full signing bonuses. Under cap rules, bonuses are accounted for over the course of the players' contracts. Accounting for the bonuses all at once makes for some interesting payroll numbers-small-market teams like the Vikings, Browns, and Saints are in the top five, while the Patriots are thirtieth. This method is a good way to measure that specific year's cash flow, but it's not as good of a representative of the team's ongoing costs. Ben Roethlisberger's $25 million bonus will have a big financial impact on the Steelers for many years, not just in 2008.)

The cap has worked reasonably well in the past, thanks to the league's revenue-sharing system; because NFL teams have relied so much on their national television contracts, even a small amount of local revenue sharing used to ensure that every team would be more than capable of doling out the minimum payroll. But with local revenue in some large markets skyrocketing, including unshared sources such as advertising and local broadcast rights, the system is quickly becoming obsolete. The payroll floor is now growing faster than many teams' revenues, rising 44 percent since 2005, from $75 million to $108 million. This is putting pressure on most teams' profit margins, since it's the teams at the very top (the Cowboys, Redskins, Giants, etc.) that are creating most of the new revenue.

Throwing Out the Baby With the Bathwater

The thing is, while MLB has long been criticized for its financial system and labor relations, it's the NFL that's been fighting the wrong battle. The owners have been so fixated on the cap/revenue-sharing system that they have been willing to guarantee a very high percentage of their revenues to the players in return. MLB, which doesn't have a cap/floor, usually pays out about half of its revenues to its players; the NFL pays out around 60 percent, a figure which could actually go higher in the next CBA if the league still insists on keeping the cap.

Dig a little deeper and you'll see just how ridiculous this is. In a true free market, a team only pays its players based on the revenue that they can produce for that specific team. Randy Moss might help the Patriots raise ticket prices or sell more sponsorships, but he has no effect on the team's cut from national media contracts. Therefore, the more a league relies on pooled revenue, the lower the percentage the players should end up with.

Because of the NFL's current system, however, that's not what we're seeing. Baseball's pooled revenue (its national television and licensing contracts) accounts for well under half of the sport's intake, while the NFL's is well over half. And yet MLB teams continue to spend far less on players than their NFL counterparts.

Looking Forward

Taking a step back, the NFL is still in a very good position. It has huge national TV contracts and a much lighter cost structure than Major League Baseball-aside from its players, at least. This should keep most teams profitable for the time being, and it's certainly a great starting point for any sports league.

The NFL needs to refocus, though, since its socialistic payroll policies only work when teams are bringing in an equal amount of revenue. If the league wants to go that route, it will need to convince the highest-earning teams to share a much greater percentage of its local revenue. Otherwise, it would be better off ditching the cap entirely, and using that as a bargaining chip to win smaller battles (such as the rookie pool and bonus clawbacks). Eventually, this would also take some air out of player salaries, as teams begin to determine their own means.

What MLB Can Learn From This

Major League Baseball's teams should take these lessons to heart when it's time to negotiate a new CBA. There are battles to be won in collective bargaining, and fighting for the wrong issues can lead to more problems later on. A number of owners have been pushing for a more NFL-like system, which would actually be a major step backward. Using a cap as a bargaining chip isn't a bad idea-the owners pulled contraction out of thin air in 2001, and successfully used it to win a luxury tax (with no reverse-tax on the bottom payrolls). But it will be important for them to keep their eyes on the ball, and not fall into the same traps that the NFL has.

Shawn Hoffman is an author of Baseball Prospectus. 
Click here to see Shawn's other articles. You can contact Shawn by clicking here

Related Content:  Revenue,  NFL

11 comments have been left for this article. (Click to hide comments)

BP Comment Quick Links

Mike Juntunen

This is a pretty interesting aricle, Shawn. Couldn't you argue, though, that the NFL owner's 'dominating' the player's union is sort of a mirage? After all, while individual contracts are not that guaranteed in the NFL, there's a fairly sizable chunk of guaranteed money for larger contracts, and more importantly, the union has succeeded significantly in garnering a massive proportion of overall revenue for its members. While individual union members are not as secure as individual MLBPA members, as a whole, the NFLPA's members are doing better. The NFLPA's major failings come in the pension/health areas, as I think you could argue that they actually do an excellent job for -current nfl players- as a general concept. They do not, however, do so well for individual nfl players in either providing for them the instant they cease to be a current player, or producing inertia/controls that help ensure that currejnt players remain so; they have created a highly fluid membership pool, whom they take very good care of at the expense of outgoing members.

May 21, 2009 09:12 AM
rating: 0
 
Richie

I don't see any evidence the players feel short-changed, any more so than you do or I do or anyone else does. They're getting their 60%, their bonuses are guaranteed. Of course they'd like a pay raise. Donald Trump would like a pay raise.

"So where has the NFL gone wrong?" Easy answer. Nowhere, yet. And with plenty of money to go around, my prediction is that will hold. Some sound out there, a touch of fake fury, which in the end will signal nothing.

May 21, 2009 10:06 AM
rating: 1
 
John from Bel Air

Does the NFL sharing so much of its revenue have any relation to franchise location? I just can't wrap my head around how the NFL has franchises in Jacksonville, Buffalo, New Orleans, and Tennessee yet none in Los Angeles.

May 21, 2009 11:42 AM
rating: 2
 
Richie

I believe Jacksonville and Tennessee each got their franchises via real sweetheart stadium deals.

I was in LA while both the Rams and Raiders were there. Both left for what they saw as greener pastures. It's really a pretty awful pro football town. And with TV revenue being split evenly, their media market size just isn't that big a deal.

May 21, 2009 12:28 PM
rating: 0
 
Saroff

Interested to hear what people think about the interview with new NFLPA head DeMaurice Smith on this week's REAL SPORTS. The guy is steeling for a fight and has appealed to players (his constituents) on those grounds. My own general rule is that when there is this much posturing, there is NEVER a peaceful settlement because the negotiators perceive that they have more to lose by coming to an amicable solution than they do by fighting it out. I think that the players are going to get hosed here - they will get locked out in 2011 by a deeper pocketed ownership group (the owners get paid by CBS/Fox for 2011 even if there are no games) and be unwilling to come to a quick settlement because their leadership has chosen a combative route. When the dust settles, they will end up with the same or worse deal that they have now and they will have missed a season of pay. In the midst of all this Smith will get fired and replaced by a former player who will preach peace, love and understanding.


May 22, 2009 05:42 AM
rating: 0
 
Mountainhawk

The NFL's cap is the best thing for fans in all of sports. It truly is the goose that lays the golden egg. Calling it 'socialism' just shows you don't fully grasp the marketplace.

The Eagles and Redskins are competitors on the football field, but they are not competiting with each other in the business world. There are very, very few "up for grab" fans, and loyalty to a brand is insanely high. The NFL recognizes that the teams are essentially 'branches' of the same company, one that is competing with MLB, the NBA, NHL, MLS, movies, concerts, etc for the consumer entertainment dollars.

The NFL might have an uncapped year in 2010, but the cap will be back in force in 2011 and for the foreseeable future.

Meanwhile, Baseball is in the midst of a 'golden era'? Exclude the 5 most valuable franchises (NYY, NYM, BOS, LAD, CHC) and the other 25 teams have seen a total drop in their franchise value from 2008 to 2009, according to the Forbes report.

Meanwhile, the NHL only had 1 team shrink in value last year (2009-2010 season data obviously not available yet). The NFL had NO team shrink in value last year. The NBA had a bunch, but their growth wasn't tied up in 2-3 top franchises either as POR and OKC both had double digit growth rates.

I think it's mypoic to think that baseball is in a golden era. Sure, if you live in the northeast, maybe it is. But it dying in cities like Kansas City, Pittsburgh, and Cincinnati. IF MLB wants to be more than a regional interest league, it will have to concede that the salary cap is the way to do it. It is the lone sport in North America to not do it at this point, and it'll either have to confirm, or continue to make itself irrelavent to fans in many, many cities.

May 22, 2009 08:18 AM
rating: 0
 
Drungo

Not sure why you think a salary cap would make MLB's small markets more competitive. It would simply shift where the large markets can spend their money. Instead of $200M payrolls in NY, the Yanks would have gold plated minor league facilities and international signing budgets larger than most teams' payrolls.

May 22, 2009 10:34 AM
rating: 0
 
Evan
(47)

That drop in franchinse value is due largely to the weakened US economy. Those will bounce back.

"The payroll floor is now growing faster than many teams' revenues"

This is the problem the NFL has created for themselves (and exactly the same mistake the NHL made with their salary cap). Caps and floors do not work unless you centralise ALL of the revenue.

As the article points out, baseball actually pays less in salaries relative to revenue than the NFL does. So the cap clearly isn't working as intended.

May 22, 2009 11:22 AM
rating: 0
 
Mountainhawk

The NHL has a revenue sharing scheme designed to make sure teams can afford to pay the floor, assuming they have 'reasonable' other expenses. A huge part of Phoenix's issue is they pay Gretzky $8M a year to coach, when most teams don't pay 20% of that.

I do think the floors are a little too close to the cap in both leagues, I think a ratio of .6 or so is about right.


A Cap and Share system is certainly not the ONLY way to get parity, but it is the general flow of American sports. MLS is a single entity, the NFL, NBA, and NHL all have cap and share, all the other sports minor leagues have caps as well.

MLB is the last league standing, so to speak, and I don't think they remain standing alone forever.

May 22, 2009 11:31 AM
rating: 0
 
IAPiratesFan

Interesting comments. I'm a big believer that the success of a franchise is determined a lot more by the intelligence of the front office people than the amount of money spent. Sure, money is great and it'll help a team that might have some holes to fill. But what good is the money gonna do if the team is run by a bunch of idiots?

If the NFL's system is so great, ask the fans in Oakland, Detroit, Cleveland and Houston if it's helping their teams any. Likewise, if MLB's system is so great ask fans in Pittsburgh, Kansas City, Baltimore and Washington if it's helping their teams any. If there's more "parity" in the NFL, why have two teams won 5 Super Bowls this decade? If there's less of it in baseball, why has only one team since 2000 won more than one World Series?

I guess what I'm saying is that neither system perfect nor is either system wrong.

May 22, 2009 11:00 AM
rating: 0
 
Jeff Evans

You're right on both counts. I grew up with the Twins , who had a good player development system to replenish the roster somewhat. Then when a star player became eligible to earn a significant increase, he was gone, usually for more prospects. Hit or miss, every time. I couldn't possibly be a season ticket holder in this never-ending scenario. My rants would be heard in that case, most certainly.
But maybe I've had it good compared to you, Mr. Pirates fan. So far,anyway. There's been a lot of teams that have opened new stadiums over the last decade that haven't spent the money needed to upgrade their talent, whether it be through free agency, the draft, or more dollars for signing and development purposes. Considering the fact that nearly all of these new play palaces have been paid for primarily with taxpayer dollars and ticket prices are at least doubled in most or many cases, it's a travesty to just keep the status quo in terms of the near totally inept management decisions that are made within the so-called higher-ups of these teams. They promise the fans that all they need is the new ballpark and they'll be able to afford to keep their stars and build a winning team around them. Sound familiar?
The perfect owner from a fan's perspective is one that needs a big, bad ego-boost from some championship trophies on his mantle and enough brains to have the guys running the operation that have the same mindset and know how to get it done. If all they want is a profit, well, they're probably pretty sharp businessmen, but not the guys you want to keep you being brainwashed into unquestioningly forking out that ever-increasing season ticket payment to.
Your team might be making headway now. My team might be on the road to the same. Hell, the Reds, the Brewers, the Rangers, on and on, might be on the right track. But year after year striving to the fullest to be in contention as hard as possible? It's up to the agenda of the ownership in the end. That's my nickel's worth anyway.

May 22, 2009 18:13 PM
rating: 0
 
You must be a Premium subscriber to post a comment.
Not a subscriber? Sign up today!
<< Previous Article
Wait 'Til Next Year: H... (05/21)
<< Previous Column
Premium Article The Biz Beat: Affiliat... (05/07)
Next Column >>
Premium Article The Biz Beat: 21st Cen... (06/04)
Next Article >>
Game Story (05/21)

RECENTLY AT BASEBALL PROSPECTUS
Fantasy Article Fantasy Players to Avoid: Starting Pitchers
Fantasy Infographic: Starting Pitchers
Fantasy Article Dynasty League Positional Rankings: Top 175 ...
Premium Article Rumor Roundup: Diamondbacks Third Baseman is...
Premium Article Transaction Analysis: The Bad Bullpen Teams ...
Prospectus Feature: A.J. Preller's Offseason...
Premium Article Raising Aces: The Eyes of March

MORE FROM MAY 21, 2009
Premium Article Future Shock: Way Too Early Mock Draft
Premium Article Prospectus Today: AL All-Stars
Premium Article You Could Look It Up: The Relaunched
Premium Article Under The Knife: Read and React
Game Story
Wait 'Til Next Year: Handicapping the Field

MORE BY SHAWN HOFFMAN
2009-06-18 - Premium Article The Biz Beat: Social Networks
2009-06-11 - The Biz Beat: Probing the Yankees' Local Str...
2009-06-04 - Premium Article The Biz Beat: 21st Century Labor Issues
2009-05-21 - Premium Article The Biz Beat: Conceiving a New Contract
2009-05-07 - Premium Article The Biz Beat: Affiliate Programs
2009-04-30 - Premium Article The Biz Beat: Yankee Ticket Pricing
2009-04-24 - Premium Article The Biz Beat: Forbes on Baseball
More...

MORE THE BIZ BEAT
2009-06-18 - Premium Article The Biz Beat: Social Networks
2009-06-11 - The Biz Beat: Probing the Yankees' Local Str...
2009-06-04 - Premium Article The Biz Beat: 21st Century Labor Issues
2009-05-21 - Premium Article The Biz Beat: Conceiving a New Contract
2009-05-07 - Premium Article The Biz Beat: Affiliate Programs
2009-04-30 - Premium Article The Biz Beat: Yankee Ticket Pricing
2009-04-24 - Premium Article The Biz Beat: Forbes on Baseball
More...