Professor Blue: The CBA - The Primary Gripe (Owners' Perspective)

 

 

In this installation, I discuss the primary gripe of both owners and players, which everyone knows is MONEY!  First, recall that the owners opted out of the CBA in May 2008, and the reasons cited were high labor costs, rookie costs, and inability to recoup bonuses from non-performers.  Another important piece of information is that the CBA established that players would share approximately 60% of NFL total revenue (TR).

 

A note before you read further: I have not read the CBA in its entirety, nor am I intimately familiar with its details.  I have almost certainly painted a much more simplistic picture of the issue, but I also tried to avoid writing a thesis.  Finally, I do not "side" with either the owners or the players, though I am starting with the owner-oriented perspective… that's just the business degree in me.  Ok back to the post…

 

WARNING: MATH AHEAD

At first glance, it sounds like the owners are whining, that they are children throwing down their toys and walking away from the sandbox.  But something caught my eye - it was the use of the word "Revenue" in calculating how much the players would receive.

 

In most business arrangements where there is some sort of sharing, it is PROFIT sharing, not revenue sharing.  Profit sharing provides an incentive to everyone to maximize revenue and minimize costs.  By contrast, a revenue sharing agreement carries the risk that one party will have no incentive to minimize costs.  Here's a simple example, which at the moment ignores the details in the CBA.

 

Additionally - and this is very important - it ignores actual revenue and cost numbers of any franchise.  This is to illustrate the crux of the issue, not to reflect the ACTUAL numbers (which I will get to when I present the players' perspective):

 

Under a profit-sharing arrangement:

Revenue:  $100

Costs:  $60

Profit:  $40

Player share:  60% of $40 = $24

Owner share:  40% of $40 = $16

 

Under a revenue-sharing arrangement:

Revenue:  $100

Costs:  $60

Player share:  60% of $100 = $60

Profit:  $100 - $60 - $60 = ($20.00)   <<<---Anyone see the problem?

 

The truth is that some expenses ARE allowed to be included in TR.  However, after having reviewed Appendix H-3 Revenue Accounting Rules, it is a wonder to me that the owners ever signed this document.  Owners can deduct costs such as merchandise purchases (i.e., buying jerseys from manufacturers to resell to the fans) and some advertising expenses, but they are restricted from including depreciation. 

 

Depreciation is a fancy accounting word - let me explain.  When companies make big investments, like building a stadium, they don't want to take the cost hit all in one year because it makes it hard to compare results year-to-year (there are other philosophical reasons, but I'll save Accounting 201 for another post).  Anyway, depreciation allows a company to spread the costs from an investment over a number of years, and coincidentally also reduces its tax bill.  So not being able to offset revenue with depreciation results in a significant DISincentive for owners to upgrade facilities or build new stadiums - something that hurts everyone, especially fans.

 

Next up: the players' perspective.

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