While the NFL lockout does have an element of greed, it’s the owners’ fear of stagnated growth that’s really keeping the two sides apart.
While negotiations might be “at the five-yard line,” the NFL lockout continued on into July, a mile marker many analysts thought it would never reach. Why are the owners seemingly willing to sacrifice actual revenue—by cancelling preseason games—instead of reaching a lesser settlement?
Many have said the NFL lockout is about greed. While this is undeniably true, it doesn’t provide any insight into why the owners are locking out the players. To understand this, all you need to know is one phrase: low-hanging fruit.
In economic or business terms, low-hanging fruit is profit or productivity that can be easily realized with little risk or effort. The NFL has been feeding off low-hanging fruit for about two decades now, which has fueled their exponential growth in value.
Stadium subsidies
The NFL has used untapped markets (mostly Los Angeles) as leverage to get cities to build new, state-of-the-art stadiums largely on the taxpayer’s dollar. Since 1995, 26 of the 32 NFL teams either got brand new stadiums or major renovations to their existing ones. In fact, the public paid for a little more than half of the bill for stadium improvements to the tune of $5.5 billion, or $345 million a year.
As a result, franchise values have increased exponentially. For reference, in 1989 Jerry Jones purchased the Dallas Cowboys and the Texas Stadium lease for a then-NFL-record $150 million—$260 million in 2010 dollars, adjusted for inflation—but in 2010, the Cowboys were valued at a league-high $1.81 billion, largely with the help of the value of Cowboys Stadium. The lowest-valued team was the Jacksonville Jaguars at $725 million.
As outlined by John Vrooman of Vanderbilt University, there were two distinct periods of NFL stadium construction: the expansion-relocation period from 1995-1999, and the G-3 Loan Program after 1999. During the expansion-relocation period, the NFL defrayed most of the stadium costs to the public, paying for only 26.6 percent of stadium costs, and 60 percent of that came from Personal Seat Licenses.
When the NFL feared the public was tightening their budgets—after the infamous Patriots-to-Hartford scare of the late 90’s—the league formed the G-3 Loan program, which offered league money to pay some of the private costs of the stadiums: 50 percent for large market teams, 34 percent for small market teams. G-3 loans were funded by diverting visiting team shares of luxury seating.
Essentially, the G-3 Loan Program incentivized owners in large markets to stay there (because a larger percentage of the stadium costs would be paid for by the league) at the expense of the smaller market teams (because the larger market teams were building stadiums with lots of luxury suites, and the funds previously shared from luxury suites were now literally paying off their construction).
As if this wasn’t devious enough, the players ended up sacrificing income as well. The G-3 Loan revenue was excludable from the salary cap base—meaning 34 percent of luxury suite revenue didn’t count toward league revenue, and therefore wasn’t factored into calculating the salary cap—so the salary cap was lower than it otherwise would have been.
The moral of story is that owners have gotten virtually everyone else to pay for large market stadium improvements: the public, the players, and even other small market owners. This has led to most large market football teams being valued in the billions—a valuation usually reserved for European soccer clubs—without much investment from the owners themselves. However, we can already see the stadium fruit being picked. There simply aren’t many teams left that need new stadiums, and the ones that do have to finance an ever-increasing portion of it themselves. Jerry Jones paid for 70 percent of Cowboys Stadium, and the New Meadowlands—where the Giants and Jets now play—was 100 percent privately funded.
Owners now have to enter into debt to pay for new stadiums with hundreds of luxury boxes, and debt lowers franchise valuations.
TV contracts
TV contracts ballooned as a result of the increased popularity of the game. The NFL gets over $4 billion annually from their TV contracts. Again, no real risk was assumed by the owners here. Rule changes off the field improved competitive balance, and therefore kept more markets interested in games deeper into the season than ever before.
But, the owners are worried the league can’t get any more popular, and they’re probably not far off. It’s hard for a league to be more popular than the NFL, which means the growth of the last two decades might slow. Also, the NFL already tapped the exclusive content market with DirecTV Sunday Ticket. That increased their revenue by about $1 billion per year. By definition, exclusive rights content can only be sold once.
The owners are used to total rights contracts increasing by double-digit percentages every contract period—in 1993, they received $900 million in TV rights, compared to the $4 billion today—and they are afraid rates will stagnate, if not decline in the future.
International Markets
Even though the NBA is also in a lockout, they would be in even worse trouble if it wasn’t for the international market. The NFL saw this, and launched the International Series to try and reap some benefits from the rest of the world. Remember the “Drive to China?”
I have not heard one pundit or sports writer mention the relative failure of the International Series as a contributor to the lockout, which astounds me. Financially, it was a drop in the pond to the owners, but it was a resounding signal about prospective growth. The International Series actually required a fair amount of investment (relative to the other low hanging fruits) from the owners, and it hasn’t worked. The game has not caught on like they hoped in Europe—particularly England—which has the owners even more worried potential investment opportunities for future growth won’t pay off.
Merchandising
In 2000, the NFL sold exclusive rights merchandising to Reebok—who just got outbid by Nike for the next five years—which led to a monstrous increase in merchandise sales. Reebok sells about $350 million in NFL apparel every year, and their contract with the league was estimated at roughly $500 million annually (although terms of the Reebok or Nike deal were never officially disclosed). Like the DirecTV Sunday Ticket deal, exclusive rights can only be sold once. Increased league revenues in licensing will be at the margin, not revolutionary.
I have heard people comment, “Owners are profit-driven.” That is true, but it misses the point. Owners are investment-driven. They are billionaires; they aren’t thinking in terms of profits on the margin. They want high rates of returns on large investments. A few million dollars every year is meaningless in the scheme of their capitalist empires. Their teams were investments for most of them. They purchased their teams when the stadiums were old, the TV-rights contracts were archaic, and merchandising was a complete free-for-all.
You can probably think of other areas where the NFL spent very little money, but increased profits tremendously, simply because they’re the NFL—a league we are all addicted to. Now, the owners look around and see all the low-hanging fruit has been eaten.
What do you do after you eat the low-hanging fruit? You either increase the size of the tree—remember the talk of 18 games?—or get a larger share of the tree—and reduce player salaries. That’s why we have a lockout.
––Photo wjklos/Flickr