NFL Owners walk away from the bargaining table. Is a lockout on the way? Plus some other NFL news…

NFL Owners walked away from the bargaining table on Wednesday and immediately canceled the second day of meetings with the NFL Players Association (NFLPA) on Thursday, as well as canceling an owners meeting which was scheduled for next week.  This means that after two years the owners and players still have not come to any agreement about a new contract, and thus moved one step closer to the lockout which many are dreading.  Gary Roberts, editor-in-chief of “The Sports Lawyer told USA  Today that with the current way things are going, as well as the standard of such labor disputes, that the owners and the players will probably not come to an agreement till September.  So what’s the big issue that is causing the problems?  Well as stated earlier here on the blog, the NFL wants to take back an additional $1 billion a year from the players (bringing the amount they take from one to two billion), the players want more financial transparency from all of the teams.  Some other issues on the table include: Revenue Sharing, Drug Testing, Rookie Wage Scale, an Expanded schedule to 18 games, better benefits for retired players, a new salary cap agreement, and international play.  I think some of these issues like international play could probably be easily agreed upon, but the expanded schedule and new salary cap agreement are probably going to be quite difficult to negotiate.

We are exactly three weeks away from March 3rd, the day when the current Collective Bargaining Agreement (CBA) expires.  In a league which has become some powerful from a financial standpoint, the owners and players both have a lot to lose if there is no agreement until September (or possibly later).  Projections are that the league would be out about $1 billion if they do not get going until September, and thus miss the preseason.  If a new CBA takes longer, the league would lose out on a lot of ticket, concession, and other revenue which goes along with the playing of regular season games.  The players also would lose out on a lot.  The issue isn’t just one about losing potential earnings and not having paychecks worth a good deal of money, but come March 4th, the players will lose their insurance coverage.  Really both sides stand to lose quite a bit if the lockout continues for a long time.

The owners do have a bit of insurance though.  Through various television deals, the NFL owners have guaranteed themselves $4.5 billion even if there is a lockout (that’s about $140 million per team).  The players tried to block the owners from getting this money, which they dubbed “lockout insurance”, however courts ruled that this money belongs to the owner and will not block them from getting it.

In a final piece of NFL news Anschutz Entertainment Group (AEG) owners of the Staples Center and the aforementioned Sprint Center in Kansas City have signed a deal with Farmer’s Insurance giving the insurance company naming rights for the new stadium they are planning to build in Los Angeles to hopefully attract an NFL franchise.  The deal is rumored to be worth around $700 million and would be a 30 year naming deal if the stadium was built.  Current estimates have the stadium construction costs at around $1 billion, thus these naming rights would cover 70% of these estimated costs.  While the NFL owners complain to players that they don’t have the money to build new stadiums because of the poor economy and the high salaries of players, AEG has gone out and shown the NFL that in some markets, the demand is high enough for a stadium project to potentially be worth private investment.

Probably the best moment of all of this lockout stuff in the last two weeks?  When Chad Johnson (Ochocinco) pictured above appeared at the State of the NFL address as a member of the media (he started his own media company, the Ochochinco News Network) and proceeded to try to grill NFL Commissioner Goodell about the lockout demanding that Goodell give an honest answer when this deal would get done.  Goodell of course dodged the question with an answer that really didn’t give a true answer.

All signs point to no deal anytime soon.  If the NBA goes to a lockout as well, the NHL may be the only major professional sport league playing in the winter next year in North America.

NBA Labor Issues

Following up on Nick’s post one week ago regarding the labor unrest in two other NA pro sports leagues, there is an article on TSN.ca regarding the NBA’s current labor negotiations.

The league has submitted a proposal to the Players Association that would dramatically reduce the amount of money that is given to the players. Currently the players receive 57 percent of overall league revenues, and the proposal calls for players to receive less than 45 percent.

The league proposal also calls for players to take a big pay cut calling for a 33 percent cut in rookie salaries, a cut in the minimum salary by 20 percent, and the veteran maximum deal being less than 60 million over the life of the contract with most of that money being non-guaranteed. According to the source of the article, the proposal is designed to move the NBA from a soft salary cap to a hard salary cap.

I find it hard to believe that the Players Association would accept this big paycut and this situation will be interesting to examine in the coming months. What I also see here is not only the owners trying to keep more money from themselves, but also the NBA attempting to improve the competitive balance of its league. Fort and Quirk (1995) in their classic JEL paper say that the only league policy to improve competitive balance is an enforceable, hard salary cap. Research in competitive balance also shows that the NBA has the worst competitive balance among the four professional leagues in North America. This proposal I believe is a strategic attempt by the NBA to also attempt to improve the competitive balance of the league that would result in higher league revenues (which the owners would then pocket more than in the current collective bargaining agreement).  If the league is unsuccessful in its attempt to enforce the hard cap, which Fort and Quirk say is a big problem for the league, the owners still pocket more money.  Sounds like a win-win situation to me.

The NFL’s Uncapped Season

Following up on my post from Monday, things could be very interesting in the NFL next season, from a sport finance perspective.  A new collective bargaining agreement (CBA) between the league and the NFL Players Association, the players union, was signed in 2006.  This CBA was scheduled to run through 2012, but there was a re-opening clause that was exercised by the league last year.  The terms of the 2006 CBA includes a clause that the final year of the agreement will be played with no salary cap.  The intent of this clause was to encourage the sides to agree to a new CBA before the old one ran out, since an uncapped year will have uncertain effects on both players and owners.  This added uncertainty can  be avoided by signing a new CBA before the old one expires, avoiding a work stoppage.  Mark Maske has a nice article in the Washington Post about the events surrounding the NFL’s CBA next season.

It now appears that a new CBA will not be signed any time soon, so the 2010 NFL season will proceed without a salary cap.  Note that the NFL salary “cap” is actually a salary “band” because it contains a minimum player payroll of $111 million per team in addition to the “capped” maximum.  Both will be eliminated in March 2010, so teams can either sign free agents willy-nilly or shed players to their hearts content (this is relatively easy to do in the NFL where most salary is not guaranteed.) Economic theory tells us that teams will increase or decrease their payroll if it increases their profitability; more wins do not automatically translate to more profit – it depends on the marginal cost of an additional win and the marginal benefit of an additional win for each team.  There is no reason to expect that every team would increase profits by adding talent and increasing payroll, especially since the largest source of revenues in the NFL, money from the huge national television contracts, is the same for each team no matter how many games they win.

There is no simple way to predict what the effect of the elimination of the salary cap will have on team performance.  Rottenberg’s “Invariance Principle” predicts that on-field outcomes in professional sports leagues are not affected by changes in property rights like salary caps or reverse-entry drafts.  If the Invariance Principle applies here, then the on-field outcomes in the NFL next season will not be affected by the lack of a salary cap.  However, empirical support for the Invariance Principle is spotty, so we have little theoretical guidance to tell us what might happen.

Salary Caps in European Football?

I have read several recent articles suggesting that salary caps are being considered in European professional football leagues.  For example, Goal.com reported last month that FIFA vice-president Jack Warner had recently called for a salary cap to “level the playing field” in domestic European leagues.  Then, a couple of weeks ago, the New York Times ran a profile of former footballer Michael Platini, now head of UEFA, and his quest for salary caps in Europe.  Platini has a power grab in mind that would involve amending EU competition law to let him get control of football.  According to this article:

His ambition is to level the playing field between rich teams, those with television contracts and billionaire owners, and the small fry who rely mostly on fan support.

He would like to rein in teams like Real Madrid, which spent $433 million this summer just to buy the rights to four superstars, and the big name teams from the high-level English Premier League. Some of these, like Chelsea and Manchester United, are bankrolled by sugar daddies from Russia, the United States and the United Arab Emirates, who pour in two to three times the teams’ income to make them great — or so they hope.

These articles trot out the same old story that has been used in North American sports leagues for years: spending on players is out of control, and competitive balance is suffering as a result of payroll imbalance.  The only solution is a salary cap, and then all will be right in the world.

Yeah, right.  Unfortunately, economic theory predicts that salary caps will have no effect on competitive balance.  According to the standard model of league behavior, a salary cap results in lower pay to players, higher profits for teams, and no effect on imbalance on the field.  If you are looking for a reference to this prediction, see “Cross-Subsidization, Incentives, and Outcomes in Professional Team Sports Leagues” by Rodney Fort and James Quirk (Journal of Economic Literature, Vol. 33, No. 3 (Sep., 1995), pp. 1265-1299). Like the reserve clause and reverse-entry drafts, salary caps make teams richer at the expense of players.  Personally, I would rather see more money in the pockets of players, and less going to billionaire owners.