By Jake Fisher
The Washington Post reported two weeks ago that NFL television ratings are the highest they’ve been in 20 years. Obviously, this is good news for business.
The National Football League, as a business, is the king of the sports world. The NFL raked in $7.6 billion in 2008, making it the planet’s richest league. But the NFL, just like any business in a recession, is not immune to downturn. Like the Corleone family had the Tattaglias, the NFL business has its own daunting obstacles.
Possibly the greatest threat to the NFL’s short-term economic stability is the potential lockout in the 2011 season. Let’s take a look at the debate surrounding this impending work stoppage and the history of sports lockouts/strikes to see how NFL business could be affected.
In May 2008, the NFL owners unanimously voted to opt out of the collective bargaining agreement, signed in 2006. The owners’ decision was influenced by a number of factors, including grievances with the league’s revenue sharing structure, player wage restrictions, and rookie pay scale. Right now, owners contribute about 60 percent of projected league revenue toward player compensation. The owners are probably looking to shave a couple percentage points off this figure. As Jerry Jones noted in September, some owners are also upset with the current revenue sharing structure, which forces teams, even successful small market teams, to pay and “subsidize” less successful teams, both in small and large markets. As an ESPN article suggested, owners believe that the 2006 CBA has directly deflated their profits.
One result of opting out is that the 2010 season will operate without a salary cap/floor. Because the CBA expires after the 2010 season, if no agreement between the owners and NFL Players Association is reached, a lockout will occur in 2011. A fan’s worst nightmare—no NFL on Sunday—could turn into a reality.
THE UPPER HAND:
So, who has the bargaining power in this owner-player struggle? I think it’s hard not to consider the owners as the Goliath. There are only 16 NFL regular season games, compared to 162 games in Major League Baseball and 82 games in the National Basketball Association. What follows is that out of the major North American sports leagues, the NFL generates the smallest percentage of its revenue from ticket sales. This acts as a bargaining chip for NFL owners because ticket revenue is one of the most variable revenue streams and the first to go in the event of a lockout. If NFL owners do not depend on ticket receipts, then a lockout is not as detrimental.
The NFL generates most of its revenue through lucrative media deals. According to the Nielsen ratings, in 2008, five of the top 10 single-event television broadcasts were NFL-related. Because of this, television networks pay a premium for NFL content. Currently, about half of total NFL revenue comes from deals with CBS, FOX, NBC, ESPN, DirectTV, and radio. It is believed that money from the DirectTV deal, which ends up being around $1 billion a year, is guaranteed in 2011, even if an NFL season does not occur. Though details of some of the other contracts are not released, the NFL may have provisions where it receives some money from the other networks, even if games are not played. A large fixed revenue stream seems like a pretty substantial bargaining chip for the owners.
If the NFL lockout does occur, what could be the consequences? The last time the NFL CBA battle was this heated was in 1987, when NFL players went on strike. The owners used replacement players for several games, and television ratings saw a decrease of about 20 percent in the first week of using replacement players, according to the New York Times. It’s hard to analyze the impact of the strike on the NFL in 1987, however, since the strike only really lasted for less than a month.
It may be more helpful and relevant to look at the more recent 2004-05 NHL lockout as a reference point. According to Forbes, NHL teams actually saw a growth in value following the lockout because the fixed number guaranteed for player wages out of league revenue fell from about 66 percent to 54 percent. If NFL owners get their way and shave a few percentage points of the current 60 percent figure of player payroll to revenue, then perhaps NFL teams will see a value increase as well. Attendance figures from ESPN also note that NHL attendance did not suffer too much from the NHL lockout. The median team attendance in 2004 was 16,719. In 2006, the year immediately following the lockout, the median team attendance actually grew to 17,025. The median attendance has grown gradually over the past several years and in 2009, the median team attendance was 17,532.
Despite emerging relatively unscathed in the areas of team value and attendance, the NHL felt the most pressure from the lockout in the area of television ratings and revenue. The NHL television revenue/ratings had never been on par with the NFL, MLB, or NBA, but after the lockout, television revenues dipped even more.
In 2004, before the lockout, the NHL was coming to the end of a solid five-year, $600 million deal with ABC/ESPN. Since the lockout, the NHL has aired on NBC, but games are relegated to just a Saturday afternoon slot. The contract with NBC also stipulates that NBC pays no rights fees; instead the network and the NHL have a revenue-sharing agreement. As far as cable broadcasts go, NHL games are now hidden on the VS channel. The deal with Versus is a step down from the deal the NHL had with cable partner ESPN before the lockout.
Taking a look at the 1994 MLB strike may also be helpful in forecasting the effects of an NFL lockout. According to ESPN, average MLB attendance was 31,612 in 1994 before the strike occurred. In the next year, attendance dropped to 25,260. Attendance did not get back to 30,000 until 2000. ESPN also notes that, “operating revenue was cut from $1.87 billion in 1993 to $1.2 billion in 1994 and didn’t reach its former mark until 1997.”
For MLB, unlike the NHL, team value and attendance did seem to take hits. From the research I’ve done, it also seems like MLB television revenue dropped after the lockout. It has been reported that the price paid by Fox for a new MLB television deal in 1995 was substantially smaller than the price CBS paid in the early 1990s.
It is certainly hard to extrapolate from the NHL lockout and MLB strike to the potential NFL lockout. If history repeats itself, however, an NFL lockout may correspond to a drop in television revenue when contracts are renewed over the next several years. This would be especially disappointing for the league, because the NFL’s wealth depends so much on its current television contracts. A percentage decrease in NFL television revenue would have a much larger negative effect than the same percentage decrease in NFL ticket receipts. The effect on attendance and team value could also be up in the air. If the owners succeed in lowering the amount paid to players, team values could rise. If the public image of the NFL is damaged enough to reduce demand for the sport, then team values could go down. For attendance, the top NFL teams probably won’t see a decrease because games are sold out and feature long season ticket waiting lists. Some NFL teams, like the Jaguars, who have been struggling to fill the stands, may take major hits in ticket revenue.
Any way you look at it, the impact of the NFL lockout will be complicated. For now, I’d just suggest just sitting back on Sunday and enjoying nine hours of NFL games. We might not have that luxury forever.