The NFL Gravy Train: Too popular to derail? The Rewards and Risks of Power Centralization

For the majority of its existence, the National Football League (NFL) served as a “tax exempt, not-for-profit trade association promoting the interests of its members.” Even after shedding a tax status deemed as a “distraction” (and target of congressional inquiry) in April of this year, the NFL “trade association” has continued to “promote the interests” of each of its members… to the tune of over $12 billion in total revenue in 2014, including $7.2 billion consolidated at the league level that was distributed evenly to all 32 franchises.

Unlike other professional sports league models that primarily defer power and revenue generation to the individual franchises, the NFL has leveraged a model that ensures roughly 60% of all team revenues come from the shared, national NFL pool. The NFL negotiates TV contracts and associated sponsorships (which account for over 60% of the shared revenues) as a single entity and games are broadcast nationally. The NFL also controls the merchandising and licensing of all NFL and associated team products. The proceeds of these revenues are also evenly distributed among all organizations (and account for roughly 33% of shared revenues). The last piece in revenue sharing is through ticket sales, whereas the NFL mandates that home teams keep 60% of ticket sales, while the remaining 40% are placed in a pool to be distributed to other franchises. Proceeds from this pool account for roughly 10% of the shared revenue each team receives annually.

Using data from the league’s only publicly-owned franchise, the Green Bay Packers, the financial breakdown for one individual league “member” in 2014 is roughly:

• $225M in revenue evenly distributed to each team from the NFL (~$150M from pooled broadcast/sponsorship revenues; ~$50M from pooled merchandise and licensing revenues, ~$25M from shared ticket sales)
• $149M in “team-generated” income stemming from home ticket receipts, concessions, team events, parking, private boxes and local media/sponsorship deals
• Overall Revenue of $374M, with profits of $39.4M (with largest expense (~45%) stemming from player salaries)
• Overall Team Valuation of $1.95B (Forbes)

At its most basic level, the NFL model described above is socialism. Despite the blasphemous connotation, especially when used to describe what has truly become “America’s Game”, the NFL’s centralized approach is a leading contributor to the NFL’s ability to deliver on its business model of value creation for all 32 teams and cements its standing as the most profitable professional sports league in the US. By negotiating TV rights and merchandizing deals as a single unit, the NFL is able to leverage the collective power of the NFL franchises – a strategy which ensures the NFL is consistently a “national” brand and not a regional one built loosely upon the successes of a few “major market” teams. The NFL also has a strict salary cap that restricts a team’s 53 player contracts to a set limit adhered to by all franchises. Accordingly, the NFL firmly believes its “socialist” strategy ensures there is economic AND performance parity among all 32 teams – a parity that leads viewers to believe that every time they tune in to watch a game on TV or show up to a stadium on Sunday, that every team truly has a chance to win every game.

Major League Baseball, on the other hand, has no salary cap and individual teams generate the majority of revenues independently (with the exception of a small, rich-to-poor revenue redistribution program targeting the elite that keeps a large portion of weaker members afloat) – leaving the sport vulnerable to becoming only regionally relevant and highly dependent upon the success of its large-market teams. The NFL has also held a very strategic ace-up-its-sleeve to incentivize its lowest-performing members “do their part” beyond collecting the annual 60% check from the NFL and to ensure that their corresponding communities support fancy, new stadiums that elicit maximum in-game revenues. This asset is the NFL’s constant relocation threat – the perpetual “opening” for a struggling NFL franchise to call Los Angeles “home” instead.

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While it is my belief that an airtight alignment between business and operating models has led the NFL to immense prosperity; the same power centralization that reaps mountains of cash has its risks and the NFL has certainly lived out these risks within the public spotlight over the past few years. Atop the NFL’s centralized operating model sits its commissioner, Roger Goodell, whose individual salary of  over $35M is a testament to both the financial success of the league and his status as the league’s pivotal figure. Central to the NFL’s structure is a belief that the league’s public image needs to be carefully curated and its narrative tightly controlled– and that this is best achieved through a single voice. Through a collectively bargained agreement (CBA) with the NFL Player’s Association, Roger Goodell has been given immense power to act on behalf of the 32 owners on matters such as player safety management, pension plans, league officiating standards and player discipline, among other issues. This consolidation of authority and influence is the source of great consternation among the players, who fundamentally believe they should be receiving a greater portion of the growing NFL pie, that their contracts should be “guaranteed” (as is the case in MLB) and who do not want to fall under the jurisdiction of a leader anointed in the minds of many as “judge, jury and executioner.”

The aforementioned risk exists, of course, because the NFL is first and foremost an entertainment business that depends on a steady influx of talented players to deliver a quality product and the positive perceptions of its vast and growing network of consumers to maintain interest and viewership. NFL television deals are massive because the audiences are unprecedented in size and the subsequent advertising opportunities immense. NFL merchandise sales are through-the-roof because fans can’t get enough of their favorite teams’ and players’ gear. However, given the growing concerns over player safety (perception that NFL hid knowledge about dangers of concussions from players for years and that it still doesn’t fully understand/mitigate the risks of head trauma); player conduct and associated discipline (Ray Rice incident becoming the catalyst for national domestic violence tolerance discussions), the role of gambling and daily fantasy contests as league “sponsored” ventures/vices and the quality of officiating and of the league’s “integrity of the game” investigations (Deflategate) – the NFL is not immune to both losing the pool of talented players willing to play football and a large number of its paying customers.  Many critics bearish about the NFL’s ability to sustain unprecedented revenues and staggering growth feel that the NFL’s centralized structure and lack of appropriate checks and balances (that could exist within a more well-rounded and comprehensive governing structure), have left the league vulnerable for continued employee lawsuits, declining long-term football participation, loss of sponsorships and a shrinking network of loyal fans.

Of course, despite all of the aforementioned concerns, the NFL is as popular as ever and even amidst some widespread “outrage” over recent controversies, ratings have not declined and the cash is still flowing. In 2010, Roger Goodell set a revenue target of $25 Billion for 2025, which meant, at the time, tripling revenue over a 15 year period. Already eclipsing that pace by a significant margin, $25 Billion could end up a mere fraction of the league’s top line in ten years…assuming, of course, the NFL is responsive enough to these challenges to ensure that this gravy train doesn’t derail before it even makes it to 2025.

Sources:

http://www.guidestar.org/organizations/13-1922622/national-football-league.aspx

http://money.cnn.com/2015/07/20/news/green-bay-packers-revenue/index.html

http://www.sportingnews.com/nfl-news/4607230-nfl-revenue-sharing-television-contracts-2014-season-business-model-nba-nhl-mlb-comparison-salary-cap

http://www.forbes.com/teams/green-bay-packers/

http://www.bloomberg.com/bw/articles/2014-09-04/nfls-secretive-finances-a-nearly-10-billion-mystery

http://www.packers.com/news-and-events/article-1/Packers-financial-picture-remains-strong/5b23fe6d-0df4-4440-9c94-cbc4f9119146

http://operations.nfl.com/