Labor peace threatened by rift between owners

Before NFL owners can come to terms with the players' union, they first must settle some differences among themselves.

Updated: March 6, 2006, 9:47 AM ET
By John Helyar | ESPN.com

As the National Football League and its players try to close their differences, another dueling set of economic interests must also try to close theirs: the NFL owners. The NFL's long era of labor peace is in danger of blowing apart, not just because Gene Upshaw wants a bigger piece of the revenue pie, but because small-market owners like Buffalo's Ralph Wilson and Jacksonville's Wayne Weaver do, too.

The NFL has enjoyed labor harmony like no other league since its 1993 collective bargaining agreement, which created the current salary cap and free-agency rules. The agreement has quietly been renewed four times. This go-around, however, Commissioner Paul Tagliabue has been playing a far more difficult game of three-dimensional chess.

Number one is with the NFL Players Association, which wants a bigger piece of the revenue pie. Number two is with his owners, among whom a $100 million-plus gap has grown between the teams with the most revenues and those with the least. Number three, arguably, is with the NFL's stakeholders: Sponsors and broadcasters, fans and municipalities. Tagliabue must convince them that any changes these negotiations produce will preserve the economic and competitive parity that has fueled the league's 13-year growth surge.

"Here is a substantial and growing difference between the high and low revenue teams and it's a significant issue," says Dean Bonham, a sports-business consultant who worked for Jacksonville in its recent renegotiation of the Jaguars' stadium lease. "It has to be resolved or they're headed for the kind of disparity we've seen in Major League Baseball."

The economic backbone of the NFL has been broad-based revenue-sharing ever since 1961, when then-commissioner Pete Rozelle convinced teams to split network TV money equally. Franchises could thus exist in markets as disparate as New York and Green Bay because national broadcast rights provided clubs with a common, equal economic foundation. The national TV deals are still by far the greatest source of income for NFL teams, with each receiving about $85 million last year.

What has changed is the amount of locally generated revenue, which as recently as 1993 was paltry enough that the union didn't press to include it in "designated gross revenue." (That's the pool of money that determines the salary cap.) The stadium-building boom since then, however, has produced facilities which throw off huge sums of cash: from suite leases, naming rights, corporate sponsors and a cornucopia of other income-producing opportunities. Locally generated income has grown from 12 percent of total league revenue to 20 percent, according to league officials.

It's not just the union that wants to tap into these lush revenue streams, but a growing number of owners. This is unshared revenue, and this is what has opened the yawning gap, between the league's haves and have-nots. "The teams in smaller markets, like Jacksonville and Cincinnati, got their stadiums first," says Marc Ganis of Sportscorp Ltd., who has consulted on a number of NFL stadium deals. "Then it was the big markets' turn -- Boston, Houston, Philadelphia, and soon New York and Dallas. The disparities between markets have become magnified."

That's because the teams in bigger cities have more corporate fat cats and can command more for their premium seating. The New England Patriots lease their suites for $100,000 to $300,000 a year, according to a team spokesman. Some of the Indianapolis Colts' suites go for as little as $34,000, according to the sports division of Fitch Ratings, which rates stadium bond issues. Reliant Energy pays $10 million a year to hang its name on the Houston Texans' stadium. RCA has been paying the Colts only $1 million a year for stadium "naming rights," according to Fitch.

A team like the Rams, which ranked among the top six NFL franchises in revenue after its 1995 move from Los Angeles to St. Louis, is now in the bottom half of the league, according to Ganis. Its once-enviable stadium deal has been eclipsed by those of bigger markets. A team like the Jaguars recently had to overhaul its lease with Jacksonville, in an effort to keep within hailing distance of bigger market teams. According to union officials, high-revenue teams like Washington and Dallas spend about 40 percent of their gross on player payroll, while low-revenue teams like Indianapolis spend about 70 percent on payroll.

The last time things seemed this out of whack was back when distressed franchises like the Rams, Cleveland Browns and Houston Oilers were hop-scotching around the country looking for greener pastures in St. Louis, Baltimore and Nashville, respectively. The league initiated some programs that helped settle things down: a supplemental revenue-sharing program, which makes a $40 million pool available to low-end clubs and its G-3 stadium program, which since 1999 has extended nearly $700 million to help clubs finance new facilities. But even with a 53 percent increase in TV rights fees about to kick in, guaranteeing $3.7 billion per year through 2011, the league has lurched out of economic equilibrium again -- all because of the growth of unshared revenue. "The tectonic plates get out of whack and start to grind against each other," says one league official.

In 2004, Commissioner Tagliabue formed an owners' economic study committee, which so far has mostly just laid bare the economic fault lines among the owners. The committee is chaired by Texans owners Bob McNair, who is every bit the new-breed owner. He paid $700 million for his expansion franchise and must run it aggressively to make it pay off. On the other end of the spectrum is the Pittsburgh Steelers' Dan Rooney, whose father founded the team for a fee of $2,500 in 1933. They may play the same game, but it's almost as though they aren't in the same business.

It's not that most high-revenue teams are dead set against broadened revenue sharing. According to a league official, McNair's committee has been kicking around formulas calling for sharing anywhere from 20 percent to 34 percent of now unshared local revenues. But owners who have privately financed new stadiums want their debt and other expenses taken into account, not just their gross.

Bob Kraft vaulted his New England Patriots from dead last in the NFL in revenue, at the time he bought the club in 1994, to near the top of the league after opening Gillette Stadium in 2002. But he also took on $350 million of debt. And high-powered entrepreneurs like the Cowboys' Jerry Jones, who maximize every revenue opportunity extant, say they refuse to subsidize less driven ones. Make the "have nots" meet certain business performance standards, they declare, before being eligible for "welfare." (Yes, that sort of pejorative occasionally gets tossed around in these heated discussions among multi-millionaires.)

The entrepreneurs can neither understand nor abide an old-guarder like Cincinnati Bengals owner Mike Brown, who decided against putting a company's name on his new stadium -- and pocketing big bucks -- and instead named it Paul Brown Stadium, in honor of his father. Says one team executive: "It's a philosophical split, as well as an economic one."

There's another aspect to the debate, too: is the revenue disparity really here to stay, unless owners change the way they divide the pie? Or is this just a transitional period, which doesn't call for structural change? The big-revenue owners point to "poor" clubs like the Indianapolis Colts and Arizona Cardinals, which have new stadiums in the works and which will no longer be laggards. The Green Bay Packers moved onto sold financial footing after revamping Lambeau Field, along with making it more a year-round tourist attraction. The team -- the only one in the NFL to publicly report its financials -- made a net profit of $25 million in its 2005 fiscal year, ended last March 31. But small-market owners don't generally buy the "transitional" argument. Some now openly, bitterly note that they helped finance the cash-spewing big-market stadiums, by approving G-3 financing, and they deserve a return on their investment.

It takes a two-thirds vote of owners (24 of 32) to change the revenue-sharing formula, and that's tough enough. But it's harder still because nearly half of the NFL owners (14) are new since 1993. They bought their pricey franchises and built their costly stadiums under the assumptions and economics of the current system. It's hard to blame the New Guarders for resisting change, especially when the Old Guard's interests seemed so closely aligned with the union's. But the fact is that the NFL's foundation was laid, at key junctures, by owners who put the league's overall interests ahead of their own.

If Wellington Mara hadn't sacrificed his New York Giants' TV rights in order to allow Rozelle to sell a national network package to CBS, the league would never have enjoyed its first great growth spurt in the 1960s. Many billions of dollars later, this may be another key juncture.

"You've got institutional memory butting up against the realities of leveraged debt," says Michael MacCambridge, author of an authoritative NFL history, America's Game. "In the past, the people with institutional memory have held sway, but that doesn't necessarily mean it will be that way this time."

John Helyar is a senior writer for ESPN.com

John Helyar

Sports Business
John Helyar is a senior writer for ESPN.com and ESPN The Magazine. He previously covered the business of sports for The Wall Street Journal and Fortune magazine and is the author of "Lords of the Realm: The Real History of Baseball."

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