NFL Team Parity and Revenue Sharing

Most of the focus on the lockout, except for wondering when it will end, has been on potential deal terms between the players and the owners.  But as NFL Commissioner Roger Goodell has reminded us many times, there are 32 different teams and he needs at least 24 of them to vote in favor to approve any new deal.

With that in mind, a hotbed of contention among the owners is team revenue sharing, and it could impact where your favorite team will be playing years from now.

Dallas Cowboys Stadium

Since the early 1960s, when the NFL signed its first television contract, the league has had some form of revenue sharing.  Revenue sharing was established to help create parity through the league, and is one reason that the NFL has been so wildly successful.

Any team can win on any given Sunday – it’s one of the guiding maxims of the NFL. Parity has led to more competitive games, and is a big contributor to the success of the league, the high television ratings, and the growth of the television contracts.  Without revenue sharing there might not have been a Packers-versus-Steelers Super Bowl last year, and fans are less willing to spend their hard-earned money for less exciting games.

The formula for revenue sharing is a complex myriad of definitions, not unlike our federal tax code, and was set out in the expired CBA.  Yes, that’s right; the formula for sharing revenue among the owners was part of the expired CBA.  And like the tax code, it has a series of loopholes that lead to unintended consequences.

Retained Revenue is the income that a team generates which it doesn’t have to share with the rest of the league – they retain 100 percent.  It includes things like luxury box sales, stadium pro shop sales, concession sales, and local media contracts.

On the other hand, Shared Revenue goes into the total pot that is split among all of the NFL teams.  It includes things like the multi-billion dollar television contracts, 60 percent of stadium ticket sales (excluding luxury boxes) and NFL Properties income from licensing.

This structure provides an incentive for teams to maximize Retained Revenue, since it contributes more directly to their bottom line.  If a team is going to have a new stadium built, it might reduce the allocation for regular seating in favor of luxury boxes as the team will retain all of the luxury box income.  Newer stadiums around the league are heavy on luxury box seating, concessions, shopping areas and bars.

A problem has developed within the league as some clubs succeeded in growing their Retained Revenue, which they keep but which then increases the salary cap for everyone.  The salary cap for the teams under the previous agreement was calculated as a percentage of total revenue, which is equal to Shared Revenue plus Retained Revenue.   Other clubs, for a variety of reasons, were unable to grow their own Retained Revenue by the same amounts.  Teams with newer stadiums and larger media markets do very well under this system, whereas teams with older facilities and less successful local media sales suffer.

While there was a cap, there was also a floor.  The floor represents the minimum that teams were required to spend on salaries, while the cap represented the maximum.

While the formula was complicated, under the old CBA the salary cap was generally around 50 percent of Total Revenue, and the salary floor was 87.6 percent of the cap in 2009, scheduled to grow to a maximum of 90 percent by 2011.

Here’s an example under the existing system that highlights the problem:

Let’s assume the Salary Floor is $120 million.  Team A has $400 million in total revenue, while Team B has $200 million in total revenue.

To reach the Salary Floor, Team A would only spend 30 percent of its total revenue while Team B would be required to spend 60 percent of its total revenue to reach the same dollar amount.

To attempt to alleviate this problem, in the 2006 deal the owners instituted a supplemental revenue sharing system that provided for transfer of $100 to $200 million per year from the higher revenue teams to the lower revenue teams, to help the lower revenue teams in meeting their obligations, including the salary floor.

Reports about the labor negotiations suggest that any new agreement will have a cap of 47 to 48 percent of Total Revenue, and a floor of 95 percent of the cap or higher.   The proposal for 2011 is that there will be a per-team minimum of 89 percent of the cap, but across the league, the 32 teams must average 99 percent of the cap.

Without addressing the revenue sharing among teams, the economic structure will remain a difficult pill for the lower revenue teams to swallow.

As an interesting side note, the owners attempted to remove this structure for the 2010 season using the argument that it was an uncapped year, which would have removed the salary floor for the teams that were receiving the subsidy.  The NFL players successfully sued to keep the supplemental revenue sharing system in place.

At the vote for the last CBA, Buffalo Bills owner Ralph Wilson warned the league about the dangers inherent in the 2006 deal, “The non-shared revenue is growing and it’s got to be addressed, otherwise markets like Buffalo won’t be able to compete.”

Revenue sharing is certain to be a topic this week but it’s not looking like any proposed system is something that smaller market teams are going to be able to live with, or more accurately survive with, at least for very long.

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