The NFL, FCC, CBA, Start Up Leagues, Sub-Prime Mortgages and You

Is it possible that the future economics of the NFL could be influenced by the FCC ? Absolutely.  Does the NFL and all professional sports leagues have something in common with the Sub Prime mortgage mess and the collapse of home prices. Absolutely.   Could both of these, along with the recession impact whether or not you will be able to watch your favorite professional sport in 2011 ? Absolutely.

Sports fans probably are not paying attention to what is happening with broadcast television.  The over the air broadcast networks, all of which are the biggest customers of the NFL (CBS, NBC, Fox and ABC/ESPN) are now pushing TV Providers (cable, telco and satellite), to pay retransmission fees. In other words, the broadcast networks want to be paid for every TV Provider subscriber, just like cable networks get paid.  It’s a reasonable request in many ways. But there is a flip-side.

The ability to send their network signal over the air to TVs (to be received without paying a TV Provider) is a right that is regulated by the FCC. The FCC is also in charge of the Broadband Initiative in the US.  Whats the connection ?  The same spectrum that the broadcast networks use to send their digital tv signal over the air to TVs could be re-allocated to the broadband initiative.  Which is more important to US Citizens, over the air TV stations or more wireless broadband bandwidth  ?  Its a simple question with no simple answer.  What is absolutely certain is that a very convincing argument could be made that wireless bandwidth is more important than over the air TV.

If this argument wins, the amount of spectrum to TV stations could be minimally cut, impacting the picture quality of their signal. It could be reduced substantially, severely impacting the quality, leaving just enough for a basic Standard Definition quality signal, or it could be cut 100pct with a subsidy being provided so that that the formerly over the air signals could be received over the broadband bandwidth or from an existing TV Provider. In any of these scenarios. it could be a big problem for the NFL. All NFL regular and post season games are currently broadcast on over the air stations.  If the business and delivery of those over the air stations changes substantially, the economics of the NFL could change substantially.

Do you think the NFL and the NFL Players Association are building this scenario into their models as they negotiate their new CBA (collective bargaining agreement) ? They should, it has a far better than zero chance of occuring in the next 5 years.

Which leads us to the most prolific problem that all professional sports leagues currently have, they are HORRIBLE when it comes to managing risk.

Lets continue with the NFL.  The hardest job in professional sports is the assessment of  player skill. The second hardest job is determining how to allocate salary to players in a manner that builds a  championship team. The difficulty of talent assessment and salary is amplified for rookies.  No professional sports league has been smart enough to negotiate the ability to work out and play potential rookies against existing league players. Why not ?

In the case of the NFL rookie draft pick salaries and bonuses are basically a function of what was paid for the same draft position in previous years.  Thats stupid. Rookie signings are 100pct risk, yet their guaranteed salaries are often higher than established all stars at the same position. Even worse, much of that amount is paid up front in the form of a bonus.   Again, poor risk management by the league when they negotiated their Collective Bargaining Agreement.

I have written in the past about the  significant problems inherent with the CAP based system that the pro sports leagues use.  Its a killer for small and medium sized markets. Combine the problems of a CAP system with the significant risk of rookie and overall player evaluation and salaries and pro sports leagues actually face a better than zero chance of having teams go out of business. We have seen bankruptcies in the NHL. If pro sports leagues don’t do a better job of risk management, it could get worse.

What about the players side ?  They have kicked ownership’s ass in every league. Contrary to what some agents have said, professional athletes have taken advantage of leagues inability to manage risk and their desire to win.  Agents like to argue that pro sports should be an open market like the film industry. Well guess what, it is.  Im sure players would love it if all the agents in pro sports pooled the money they made from the players and started their own pro leagues.  If the economics were great and players were underpriced, in any league,  how fast would savvy businesspeople rush out to start new leagues and pay the star attractions of every league more ?

Instead, when leagues like the UFL start, they work to complement the NFL by taking players that are no longer in the league or trying to get there.  Basketball and hockey leagues arent formed in the US to compete, they survive overseas where a significant source of revenue and profits is in selling players to pro sports leagues here in the US. Again, another example of the inefficiency of how players are paid and how risk is assigned in professional sports in the US.

The same could be said about buying a team. You dont see agents buying teams in cap driven leagues.

If you want to understand more about value and athletes, look no further than Mixed Martial Arts.  I met with a lot of people who repeatedly told me that the UFC underpaid their athletes.  That by paying the best fighters more,  you could draw the same size crowds to arenas and buyers to PPV. It was an expensive lesson to learn how wrong they were.  Pro sports are just one of an unlimited number of entertainment options.  To get MMA fans to pay to watch a fight or to get them to the arena  is not just about having the best fighters, its about great marketing. Its about making a very significant investment in brand building and showmanship. Its about understanding how to connect to fans.  Its a lesson in recognizing that while the leagues or in this case the UFC enable their best to become big stars, they recognize that the business behind the stars must be vibrant and profitable before anyone can be successful.  The same can be applied to the big 4 professional sports.  Unfortunately it doesn’t appear that many in the big 4 sports leagues, whether agent, player, management or owner have come to recognize this fact.

A word of caution to  NFL players and their agents as they negotiate a new CBA. As I wrote about 5 years ago, up till the current recession, the only time I had seen a group self inflict a loss of  more than 1 Billion Dollars was when NHL players locked out of an entire season and lost more than that in salaries and benefits. Money they will never , ever get back.  The amounts of money at risk for players this time around will be far greater.  Ownership may lose some money in a lockout. Players lose all their earnings.  As owners in the NFL and NHL recognize that they have taken on too much risk in the past, the likelihood of a lockout increases. Players and their agents should be very careful how they balance the risks and rewards they ask for in a new deal.

Which makes all of this analogous to the Sub Prime Mortgage mess that helped put us in this Great Recession.

There was so much money being made in banking and syndicating loans that everyone who had money at stake ignored the risk involved.  They modeled their finances thinking that there was no way housing prices could drop 30pct. They modeled their businesses thinking there was no way 10pct or more of the loans they bought could default.  They bought bonds in companies they thought could never go out of business.

All of these things that never happened until they did,  in hindsight,  were not complete surprises. The surprise was that the ratings agencies, the bankers, the brokers, the mortgage syndicators, every one involved with the buying and selling of money ignored things they never should have ignored.

That is what the NFL and other pro leagues need to remember. You cant ignore risk. Nor can you assume 100pct of the risk and hope the real bad stuff never happens.  The NFL and its owners, since we are using them in our example, are assuming 100pct of the risk of the economy falling again. They are assuming 100pct risk of their bigggest TV customers having their primary delivery systems eliminated. They are assuming 100pct of the risk of trying to convey money from big markets to small markets to try to compensate for an irrational cap system. They are assuming 10opct risk on the capital invested in their franchises, PLUS capital they may have to add to cover any losses.

The players side ? While individual NFL players take on significant risk, the players as a whole take on ZERO risk.  If their membership just shows up for games, 53 guys on each team are getting paid.  They never have to give the money back or  contribute capital to make up losses.

The solution ? Its a system where risks and rewards are allocated properly. Owners should take on more risk than players because they have more upside from franchise appreciation. They shouldnt take on all the risk. Nor should players be excluded from sharing in the upside of equity appreciation. Im not saying that for example players earn a share of the sale price when an NFL franchise is sold. There are a variety of ways to track or index appreciation of franchises that rewards players that can work better and more efficiently.  When the index appreciates the economics available to players appreciate. When the index depreciates, the amount available to players should be reduced as well.

The bottom line of the bottom line is that its time for a new model for professional sports.  Merely changing the values of the current model is a recipe for potential disaster.  Black Swan events happen in professional sports and always will.

20 thoughts on “The NFL, FCC, CBA, Start Up Leagues, Sub-Prime Mortgages and You

  1. Looks like we could have a blog-o-match… Either way, I would love to hear what these minds have to say.

    Comment by lakeshowbaby -

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  3. Pingback: Mark Cuban thinks Players Should Take on Equity Risk | UzoNYC

  4. scurtisrobbins – I tried to erase Darius MIles from my memory. A sarcastic thank you for bringing that rich scumbag back into my life.

    Comment by nathanielpark -

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  6. There’s a certain amount of risk in any major endeavor and sports is no different. Why should it be? Even better, why should it try to find a “safer” way to manage the player’s salaries? That’s as much a topic of discussion as is the record sales of an artist. Think of it as a revitalization in the interest of the fan; it wasn’t that long ago that the NFL and NHL were tanking because the people were bored with them. “The Currency of the Community”

    Comment by thecza -

  7. Agree with Marcus. While CBAs are necessary to get around anti-trust issues they are no good for the top talent in the league except insofar as they make the league better. Everybody wins if the league wins and the players know this. I doubt the players are standing in the way of revenue sharing. The players also know that professional sports teams are not businesses in the traditional sense. An owner of a pro sports team gets more than just a revenue stream and potential profits. Pink Floyd knew this in the 70s and everyone knows it today. This leads the players to take harder positions than revenue seems to support. The fact is that in the USA, owners have a good thing. There really isn’t any competition anymore to the NFL, NBA and MLB. If you want to get into the top leagues you need to buy a team or an expansion franchise. Compare this to the free for all in the pro soccer leagues in Europe. Try making a buck there. I feel for owners in the USA, but as long as there are people who will pay a premium to be associated with pro sports I don’t see how things will change. I doubt the poor risk managers who own sports franchises had similarly poor skills in the businesses that made them the money to be able to play real fantasy sports.

    Comment by themightypuck -

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  9. Mark, of course you know much more about this than I do, but anyone who owns a business is taking on 100% risk. If you take out loans or contract out work, you are still bound to those loans regardless of the success or failure of your endeavor. It goes with the territory. It just seems like ownership is approaching things all wrong from an outside looking in point of view. It seems like owners are attempting to artificially manipulate the market. For instance, LeBron is going to get a max contract regardless of where he chooses to sign, but owners are trying to manipulate what that max can be. How much is too much for what he could mean to a franchise?

    There should be a cap but there should never be a floor. The cap helps to keep competitive balance between large and small market teams. I’d hate if the NBA was like the MLB and an owner could go out and pay Howard, Dirk, Bron, Kobe, and Paul to play on the same team and dominate the league all earning max salaries. At the same time there shouldn’t be anyone forcing an owner to spend beyond his means.

    It appears there should be a better revenue sharing program within the leagues. I understand these are individual franchises, but the NBA is one league. It is better for the whole if all teams are successful. One team should have 300 million in revenue and another team 100 million in losses. Good owners should be able to reap the benefits of their hard work, but the league is still one entity. The league should possibly look to either relocate or retract teams that are historically not profitable. If a city can’t support a franchise it just can’t support it.

    As far as contracts for players there are ways to fix the issue. There should also be a mandatory two-way opt-out clause put into every contract at the 3 year mark. That way if you sign a guy that is under performing then you have the right to opt out of the contract, but if ownership made promises to the player to entice him to sign he also has a right to opt out. The catch is that if the player opts out he can’t sign for more money or years with the same team or elsewhere. Also, teams should be able to label certain players as franchise players to place them in a different salary bracket than other players. Guys like Dirk, Bron, Kobe, and Wade are the guys that bring fans to the stadium. Those guys should be able to be in a separate salary bracket then the Battiers and Bruce Bowens of the league. Sure those guys are important, but they aren’t driving revenue for the league. That could also help with competitive balance. If each team is allowed two franchise designations, then that would help spread the worth of players throughout the league. If a team feels there is a player out there that they could market around and would help draw fans then they would have an advantage in signing that player by offering him a role as a franchise player and putting him in a different salary bracket. Those players could count differently against the cap in some way that people smarter than I could come up with. Just different ways of thinking out of the box.

    Comment by marcus439 -

  10. NFL players take on zero FINANCIAL risk. If you could work out a plan in which the owners can share some of the physical risks (crippling injuries, brain trauma, etc.) then I’d bet that the players will gladly take a part of the financial burden. Things like the NFL’s rookie salary structure need to be fixed but there doesn’t need to be a wholesale change.

    This goes doubly for the NBA. The man who signed Desagana Diop to a five year, 31 million dollar contract with no team options is correct – the NBA owners are HORRIBLE at managing risk. All of these owners are crying poverty but once the offseason hits, they’ll be throwing max deals at players that don’t deserve it.
    Limit the length of contracts and figure out a better buyout system or make contract partially guaranteed and things should be fine. After that, it’s on the owners.

    Comment by soulhonky -

  11. Mark,
    very interesting post. I agree that something is wrong as players have too much power to negotiate, but there are a couple of reasons for this as well. Like anywhere in business, it’s supply and demand that determines power and prices.
    Supply is limited, at least as far as presumably very talented rookies are concerned. Demand is nearly unlimited, as in any league all teams except for one try to improve their position compared to last year, and given the deep pockets of some of the owners they have the possibilities to go for it.
    I am a strong supporter of free markets, but in sports it seems to be healthy for the big 4 sports that they are regulated. Just look at those sports that are not regulated, like e.g. the European soccer leagues. While in the big 4 in the US, many team owners actually earn money with their franchises, that is seldom the case in European soccer. The clubs are no franchises, so there is are no big steering options for the league organizations. There are no drafts, it’s a free market. There are no salary caps. And: Since the so-called “Bosman Verdict” there are no limitations for players trying to switch teams.
    Another result is that this limits the balance of the league teams. On my blog I ran an analysis comparing the NFL to the top two soccer leagues in Europe.

    From MC> You change the system to protect the EPL owners from themselves

    Actually only five teams never appeared in the Super Bowl during the 43 years of its existence, with 18 different teams winning it (I wrote the post prior to this year’s Super Bowl). In Spain, over the same 43 years period Real Madrid and FC Barcelona won a combined 31 titles (and only 5 other teams shared the remaining 12 trophies), meanwhile in the English Premier League the “Big Four” (Arsenal, Chelsea, Liverpool FC and Manchester United) also won 31 titles.
    (If you want to read on: )
    However, Manchester United’s debt is at 1.1 billion US Dollars, while Liverpool F.C. is at $ 400 million Dollars (both teams actually belong to US owners). Chelsea would be in the same range without the financial help of their Russian billionaire owner. The European football organization UEFA surveyed 650 clubs all over Europe: 50% are making losses, 20% make huge losses (spending 120 per cent of their revenue) every year.
    That does not make any sense, but as long as huge egos run clubs, not business minded people, this is not going to be changed without an outside intervention or regulation.
    You care about risk taking; they only care about their place in sports history. How you want to argue with this kind of guys?

    Comment by businessgametime -

  12. I’ve always thought that NBA contracts should begin with a stabilizing base pay, followed by lots of potential opportunities to earn more. Earn is the operative word.

    It seems strange that someone like Darius Miles, who dogged it through rehab and returned to the team overweight and unprepared, was guaranteed the same amount as a guy like, say, Zach Randolph, who by all reports worked hard to recover from his microfracture. Why can’t teams track practice hours, number of made free throws per day, etc.? If a guy has a season ending injury, he should be protected by this “base pay,” and by the time he puts into rehabbing or even film study, but the fact that a guy can make 20 million for essentially doing nothing is indeed a broken system.

    NBA players should earn a handsome salary for being elite and talented entertainers, but continued incentives would keep players from mailing it in after landing big contracts.

    Comment by scurtisrobbins -

  13. Not all games are broadcast over the air. MNF is on ESPN and 1 game a week is on the NFL Network. This may also be part of the goal in the NFL network. The NFL needs to come to an agreement with the big 3 cable providers, but should over the air networks go down, I’m sure that deal would be done in a day.

    Comment by caffeinebuz -

  14. “All NFL regular and post season games are currently broadcast on over the air stations.”

    …except for Monday Night Football on ESPN and all the Thursday games on NFL network.

    Comment by bprussell -

  15. For the NFL, the fight isn’t between owners and players but between the haves and have nots in ownership. You could have a number of teams going below the salary floor this season to not only hoard cash for 2011 but to service debts elsewhere(as with the $1.1bn debt service the Glazers have with ManU)

    I wrote about it at my blog a few weeks ago:

    Comment by alecpappas -

  16. You can’t pay players based on winning. Bonuses, sure, but not base salary. People claim officiating is unfair as it is (especially in the NBA), just imagine how bad it would be if the players’ pay would be on the line.

    Rookie salaries are ridiculous. Especially in the NFL.

    Mark, I’m curious to your thoughts on leagues like MLB with no salary cap. Does ownership take on more risk under those circumstances?

    Comment by nathanielpark -

  17. Big MC!

    In something completely unrelated to your blog (sorrrry): My friend, a huge Mavs fan, just told me of your existence. I’m very inspired. Remember how you wrote about the sport of business? I hope you’re working hard. . .because I’m gunning for the revenue streams. I work long hours and love the taste of late night coffee! I’m looking forward to the day we can meet as rivals.


    Comment by 2asdf -

  18. Doesn’t rewarding players for a franchise’s success give an unfair advantage to large market teams?
    from MC> you wouldnt reward for a teams success, but for the leagues success

    Comment by illpoint -

  19. Why don’t pro athletes get paid on based on the number of games they win? What incentive do they really have to win and give it they’re all?

    That question may be off topic but the topic got me wondering.

    Comment by mattsmithe -

  20. Great points have been made but are people really going to listen.

    Comment by tasha -

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