Professor Blue: The CBA - The Primary Gripe (Owners' Perspective)
by LovinBlue on Mar 17, 2010 1:00 PM EDT
in Colts Analysis
14 comments
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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Thank you for this simple and elegant example
The fan in me tends to root for the players – the MBA I earned makes me root for the owners. I think you’ve cleared up a lot of questions and look forward to the player’s perspective.
The players are looking at the numbers that the owners make, and that their peers make, and say “We’re sacrificing our bodies and lives for this. We deserve more.”. The owners see the actual proportion of their revenue that player salaries consume, and conclude that the players are overpaid.
The solutions are obvious, but difficult.
1) Rookie salary cap. No rookie, not even a first overall pick, should make the kind of money they do. It’s unjustifiable. You can’t say that anyone drafted in the first round of this year’s draft deserves a Peyton Manning-type contract, but they’ll get it anyway. I’d say that the contracts should be structured based around a guaranteed minimum salary, with heavily incentive laden contracts that ensure that the good players get paid, and the bad players get bounced with little to no consequence.
2) Cost sharing. If the players want a bigger part of the revenue pie, fine. They can share in the cost of building and maintaining stadiums too.
3) Change the Franchise tag. Guarantee that a player can’t be tagged in consecutive years.
4) Allow for players to be dismissed without a cap hit for off the field issues. If I make an ass out of myself outside of the office, my manager can fire me. There’s no reason that the same can’t be done for football.
We rise. They fall.
Proud to have my own tag on KSK
http://monkeybiziu.deviantart.com
Especially number 4
In any other job you can be fired for cause like that with little or no compensation. That might really reduce the problem players. Teams can quickly get rid of players that are doing things that are a black eye for the league. There should be strict rules around how it is done, but teams shouldn’t have to pay millions of dollars to players when they are committing illegal acts.
An expert is someone who knows more and more about less and less until they know everything about nothing...
I especially agree with #1.
Sharing costs is fine, as long as they (players) qualify for the same tax benefits as the owners.
"I throw, you catch. It's NOT that hard!"
Peyton Manning, SNL, 2007
by peytonsthebest on Mar 17, 2010 2:43 PM EDT up reply actions
well said.
- has always drive me nuts. But I think the NFLPA has their teeth sunk in deeply on this one and won’t let go. Not sure why. Of their roughly 2,000 members, maybe 1/7 are rookies and less than half are guys in years 1-3 (i.e. most affected by the rookie cap). You’d think that vet leadership would stand up and say “dammit, guys, we feel for you. We were rookies too. But you have yet to produce and you’re breaking the machine—if you think you’re hot shit and the teams do too, then make it incentive-based and proove your worth, like the vets have already done.”
off my soapbox.
I hate Joe Namath. That's how long I've been a Colts fan.
weird format
sorry about that. “drive” should be “driven” and ot sure why my #1 was bulleted/offset.
I hate Joe Namath. That's how long I've been a Colts fan.
I liked Nate Dunlevy's explanation
of why other players might applaud big contracts. His example focuses on Manning, but it could be argued that there is a similar effect with rookies.
Another thing to consider – while in most professions, more experience translates into better performance and higher pay. In football, more experience often translates into banged up bodies and just plain ole’ aging… and lower performance.
How can you not love a team that does this?
These posts are great
Good job LB.
"It's the greatest job in the world until Peyton comes off the field and you think his thumb might be broken and there's three minutes left in the AFC Championship Game and you're down by three to New England and you haven't taken a snap all year. Yeah, it's a great job until that point." - Jim Sorgi
Nicely done, LB
Appreciate the research time/effort you put into this.
Careful what you wish for... a government big enough to give you everything you want is a government big enough to take everything you have.
AWESOME
I see a HBS case study in the future. Unless that school in Philly publishes their own….
Very nicely done. Reminds me of classic Hollywood accounting—everybody wants a percentage of the gross (which is crazy, but of course when $1 Billion movies “never show a profit” you can undersdtand why—everything is expensed from the director’s new BMW to the third associate producer’s mistress’s nose job). And with the “bankable” superstar system in Hollywood, it’s understandable that certain folks get 10-20% of the gross because they generate the sales, while others don’t.
But the NFLPA is trying to lift their whole membership into that category—essentially saying everybody gets paid based on the same principles as Mel Gibson/Tom Cruise/Manning/Brady—a cut of the gross. It’s worked so far, but may not be, um… sustainable.
While this may impinge on your medical career, it’s well worth it.
I hate Joe Namath. That's how long I've been a Colts fan.
Nice dig at Wharton, the oldest and best business school in the world
(and incidentally, the program that Donald Brown chose this offseason). Though I’ll bet there are already cases covering the NFL; I did one in Marketing that covered the NHL, so there’s that.
Anyway, yeah, there is potentially a little bit of The Producers going on here, isn’t there? The assumption, though (and this is a bit of a spoiler to my upcoming posts), is that media contracts and ticket sales greatly outweigh investment costs. There’s also the fact that costs to build stadia are not borne entirely by the owners. And of course you have to consider the valuation of NFL teams and the potential reward to an owner who sells (albeit in a highly illiquid market).
How can you not love a team that does this?
The key to all happiness (and most bankruptcies)
O. P. M.
When other people’s money funds a significant chunk of the stadia (sweet use of the proper plural—I got dinged for this on a report at work once when a boss asked “What the hell’s a stadia?”), yet owners get the lion’s share of those revs/profits… and the TV contracts essentially flow through and you know the players will get 60% of THAT, all you have to do as an owner/manager to be profitable is control expenses. other people are funding the whole damn thing. (Including the giant debt load on your franchise acquisition).
Those in big markets can pad their bottom lines with seat licenses, merch, marketing tie-ins.
Of course running a WINNING org and running any old team and keeping it in the black are two different animals. OPM or not, you need the right personnel to actually run the ship and mx the proper metaphors. (gratuitous Polian worship)
What makes the market even more illiquid than for a “typical” $1B asset is that it’s a franchise and the other members of the club get to veto your potential buyer (gratuitous Rush Limbaugh knee in the groin). So say you decide to sell—it might take a year to ID a handful of potential and capable buyers, then they get vetted by the Feds, the NFL owners, the NFLPA, Vegas, the Gambinos, the EU, the SEC, the Pac-10, and Elvis, etc before final approval. Then of course their financing has to come through after several bank mergers and collapses in the interim. Like trying to sell an apartment in the Dakota in NYC—you might have 20 buyers lined up, but if the board doesn’t like their look, tough. I’d like to be an NFL owner, but I’d HATE to be a buyer or seller. A bout as much fun as running for political office and having all your grocery lists scrutinized by The Enquirer.
I hate Joe Namath. That's how long I've been a Colts fan.
by Bobman on Mar 19, 2010 3:29 PM EDT up reply actions 1 recs
My only compliant...
… is that i want more erudite analysis from a well studied writer. Keep up the good work, Lovin’!
------
"How can a pickup truck contain enough mass to unfold into a towering machine? I say if Ringling Brothers can get 15 clowns into a Volkswagen, anything is possible."
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