For the majority of its existence,\u00a0the National Football League (NFL) served as a \u201ctax exempt, not-for-profit trade association promoting the interests of its\u00a0members.\u201d Even after shedding a tax status deemed as a \u201cdistraction\u201d (and target of congressional inquiry) in April of this year, the NFL \u201ctrade association\u201d has continued to \u201cpromote the interests\u201d of each of its members\u2026 to the tune of over $12 billion in total revenue in 2014, including $7.2 billion consolidated at the league level that was distributed\u00a0evenly to\u00a0all 32 franchises.<\/p>\n
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.<\/p>\n
Using data from the league\u2019s only publicly-owned franchise, the Green Bay Packers, the financial breakdown for one individual\u00a0league “member”\u00a0in 2014 is roughly:<\/p>\n
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 \u201cAmerica\u2019s Game\u201d, the NFL\u2019s centralized approach is a leading contributor to the NFL\u2019s 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 \u2013 a strategy which ensures the NFL is consistently a \u201cnational\u201d brand and not a regional one built loosely upon the successes of a few \u201cmajor market\u201d teams. The NFL also has a strict salary cap that restricts a team\u2019s 53 player contracts to a set limit adhered to by all franchises. Accordingly, the NFL firmly believes its \u201csocialist\u201d strategy ensures there is economic AND performance parity among all 32 teams \u2013 a parity that leads viewers to believe that every time they tune in to watch a game on\u00a0TV or show up to a stadium on Sunday, that every team truly has a chance to win every game.<\/p>\n
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) \u2013 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\u00a0incentivize its lowest-performing members \u201cdo their part\u201d 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\u2019s constant relocation threat – the perpetual \u201copening\u201d for a struggling NFL franchise to call Los Angeles “home” instead.<\/p>\n
While it is my belief that an airtight\u00a0alignment 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\u2019s centralized operating model sits its commissioner, Roger Goodell, whose individual salary of \u00a0over $35M is a testament to both the financial success of the league and his status as the league\u2019s pivotal figure. Central to the NFL\u2019s structure is a belief that the league’s public image needs to be carefully curated and its narrative tightly controlled\u2013 and that this is best achieved through a single voice. Through a collectively bargained agreement (CBA) with the NFL Player\u2019s 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,\u00a0that their contracts should be \u201cguaranteed\u201d (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 \u201cjudge, jury and executioner.\u201d<\/p>\n
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\u2019t get enough of their favorite teams\u2019 and players\u2019 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\u2019t 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 \u201csponsored\u201d ventures\/vices and the quality of officiating and of\u00a0the league’s\u00a0\u201cintegrity of the game\u201d investigations (Deflategate) \u2013 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. \u00a0Many critics bearish about the NFL\u2019s ability to sustain unprecedented revenues and staggering growth feel that the NFL\u2019s 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.<\/p>\n
Of course, despite all of the aforementioned concerns, the NFL is as popular as ever and\u00a0even amidst\u00a0some\u00a0widespread \u201coutrage\u201d 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,\u00a0tripling 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\u2019s top line in ten years\u2026assuming, of course, the\u00a0NFL is responsive enough to these challenges to ensure that this gravy train doesn\u2019t derail before it even makes it to 2025.<\/p>\n
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Sources:<\/p>\n
http:\/\/www.guidestar.org\/organizations\/13-1922622\/national-football-league.aspx<\/p>\n