Posted by John Vrooman on Friday, February 3, 2017 in National Football League, UEFA Football.

Interview with Finanz und Wirtschaft. 

1. What makes the NFL so successful as a business model?

The NFL is a perfectly syndicated and fully diversified sports league cartel because of extensive revenue sharing among natural competitors. As a means for its own survival the NFL business model of “league think” was formed a half century ago in the NFL v. AFL rival league war of the 1960s. The NFL has since co-evolved with a TV media, and by 1967 the NFL had surpassed MLB as America’s favorite sport.

According to the survivalist solidarity philosophy of “league think,” individual team owners realized that any single club in a sports league is ultimately only as strong as its weakest opponent. Art Modell, one of the original team owners (Cleveland Browns/Baltimore Ravens), accurately described the league as “a group of fat-cat Republicans who vote socialist on football.”

In effect, the NFL is virtually the perfect risk-free portfolio because each club shares gate (match-day) revenue (66/34) with an opponent who has exactly the opposite, negatively correlated zero-sum win-loss fortunes. As a result, the NFL can diversify risk through space and time more efficiently than the US Government.

More importantly, a special US Congressional anti-trust exemption in The Sports Broadcasting Act of 1961 awarded the NFL cartel power to negotiate media rights fees collectively and shares 100 percent of its media revenue equally among all 32 teams regardless of club merit, popularity or TV-market size. As a result, the NFL syndicate equally shared about two-thirds of its current $13 billion in revenues in 2016.

Over the last two decades however, an increasing number of larger-market clubs have sought to exploit the asymmetric revenue sharing loophole that excludes or shelters venue specific revenue derived from sponsorships, concessions, rights fees and luxury suites from the league’s revenue sharing base.  

As a result of the venue revenue loophole, exclusive if not opulent luxury stadiums have become the driving force behind revenue inequality among NFL clubs since the 1990s. Unfortunately, public stadium funding subsidies have also become the major reason for a relocation-extortion shell game being played out by the unregulated NFL cartel on its own home markets.

Over the last twenty years of the luxury venue revolution the NFL has engaged in classic monopoly-cartel exclusion by charging half as many and more affluent game-day fans more than twice as much for their luxury ducats. As a result of classic Cowboy capitalism, unshared venue revenues have now grown to more than 20 percent of total NFL revenue.

On the cost side (since 1994) the NFL owners have also enjoyed absolute cost certainty from a hard (unavoidable) cap for player salaries set at slightly less than half of all NFL revenues. The 2016 player salary cap of $155 million per club compares rather favorably for the club to the $205 million average per club for the current annual TV rights fees through 2022 and the average club revenue of around $400 million each in 2016.

Because of the extensive risk diversification on the revenue side and absolute payroll certainty on the cost side the NFL monopoly/monopsony cartel has become a cash cow money machine whose franchise values have increased at an exponential rate of 11.5 percent since 1990. This value growth is over twice the rate of the S&P 500 Index, the most efficient competitively diversified rate available to US investors. (Please see attached graphic where both values have been normalized to 1 in 1991.)

1. How is the business of the NFL different from other US sports leagues like the MLB, NBA or NHL?

The institutional constraints of the Big 4 North American sports leagues are distinctly different.

While the NFL unshared local/shared national revenue split is 33/67, the MLB ratio is more balanced at 50/50; NBA is rapidly evolving to 60/40 and NHL is the least egalitarian at about 80/20 in local/national shares. The value distributions of the franchises are weighted averages of local team and national league revenues based on these shares.

The average values of NFL teams are about $2.4 billion on average annual revenues of $380 million in 2015. By comparison MLB clubs are worth about $1.3 billion on revenues of $280 million; NBA clubs are worth about the same as MLB on lower current revenues; and NHL clubs are worth an average of about $600 million on revenues of $150 million.

The values of all clubs in all Big 4 NA leagues are increasing at exponential rates because of the recent explosion in TV rights for all Big 4 leagues. The current explosion in media rights is caused by the big league monopoly power enjoyed by each Big 4 NA league together with the technological shift from live broadcast TV to streaming new digital media. NA sports programming has become a commercial advertising gold mine for the TV networks because it is now the only live show in town.

NFL media revenue is almost all equally shared national revenue, regardless of merit or appearances (compared to European football’s basic 50/25/25 solidarity/merit/appearances split). Local media is insignificant in the NFL, and each of the other three leagues derive about half of their media revenue from local or regional TV revenues and the other half from equally shared national media.

Both the NFL and NHL have imposed hard (unavoidable) player salary caps at about 50 percent of league revenues (NFL since 1994 and NHL since 2005). The NBA has imposed a soft avoidable cap at about the same 50 percent ratio but has recently tweaked an extremely progressive payroll luxury tax at about 53 percent of league-wide basketball related income that now serves as a de facto hard player payroll cap. MLB has the strongest players’ union and (therefore) no payroll cap. MLB does have a modest luxury tax since 2002 that only constrains the chronic large markets offenders (NY Yankees and more recently the LA Dodgers) whose payrolls exceed a cap set at about two-thirds of average MLB club revenue.

Many of the economic or institutional differences are derived directly form the nature of the games themselves and the relative length of seasons. The NFL has the shortest regular season with 16 games compared to 82 for the NHL and NBA and 162 games for MLB. The fewer number of games per season gives the NFL an excess demand advantage in season ticket bundle pricing and ticket demand inelasticity with respect to winning or losing games. Almost all of the NFL game tickets are sold out season tickets, while the other 3 leagues are about 50/50 split between season and game-day tickets.

1. For the 2016 season, NFL viewership is down. Is this just a temporary occurrence? Or could this be the beginning of a long term downward trend?

There are multiple causes for the 25 percent to 30 percent decline in NFL viewership for 2016. First, the NFL media markets are oversaturated. The vertically integrated NFL cartel may have effectively outsold its own media product, which may indeed be declining in popularity among unplugged digital cord-cutting media users. The oversaturation of multiple NFL games on multiple nights is in turn related to the networks and cable sports channels trying to pay for the media rights fees explosion mentioned earlier.

The demand for traditional NFL programming may have also deteriorated as a reflection or adverse reaction of internal governance failures on the recurring if not chronic issues of spousal abuse and player concussion syndromes. This is particularly true for the newest NFL demographic of women fans.

In the name of competitive balance, the quality of the NFL game itself has also deteriorated into the random mediocrity of equally bad teams beating each other. Traditional media fan bases have suddenly shifted from devoted fans of traditional football to newer less traditional fantasy fans who could care less about the quality of the games themselves, or the performance of any team other than their own fragmented fantasy squads.

The irony is of course that the economic strength of the mighty and powerful NFL may also lead to its own slide into mediocrity. Extensive revenue sharing may reduce financial risk among clubs but it also reduces the incentive to win. Hard salary caps may lock down player costs but they also destroy team chemistry, excellence and continuity.

The success of unbalanced domestic leagues throughout Europe that are perennially dominated by a few powerful clubs raises the empirical question that optimal competitive balance for sports fans may obtain at less than absolute random equality of teams for the per se sake of competitive balance.

1. What are the most important new trends in the business of American sports?

After two decades, the sports luxury venue extortion game has come full circle in all of the North American sports leagues including the adolescent Major League Soccer (roughly equivalent to second division European Football). While the stadium shell game is not a new, the venue gentrification cycle is now beginning to repeat for venues with prematurely short economic lives of about 20 years. The newer vintage of “smart stadiums” are fully equipped with Wi-fi and wired for the new age of digital media.

Because of the excess (inelastic) demand for tickets, the NFL using a personal seat license (PSL) pricing scheme that forces season ticket holders to pay an upfront fee equal to the present value of future season ticket discounts. This price discrimination scheme shifts major shares of stadium construction directly to the season ticket holders. For example, a $1000 season ticket is equivalent to an upfront $5000 PSL paid for a $500 season ticket.

Because of the negative excess (elastic) fluctuating demand for ducats in the other big leagues, MLB and NBA/NHL to a lesser extent are using a computer driven dynamic pricing schemes where primary (original) ticket prices fluctuate in synch with expected demand to mimic secondary market (ticket touts) prices. This price discrimination scheme captures the money left on the table by conventional uniform pricing. PSLs are not effective in MLB, NBA and NHL and dynamic pricing is ineffective in the NFL.

The major new trend of course are the changes in new media driven by the technology of the digital streaming revolution and the slow demise of conventional broadcast/cable and satellite media platforms. All of the traditional cable companies are merging with potentially competing internet providers, and all of the leagues are vertically integrating into the production of digital new media.

1. What are the main differences between the sports business in North America compared to the sports business in Europe?

The main differences between NA and European sports leagues derives from the historical and institutional configuration of the leagues themselves. European league membership is open through the process of promotion and relegation, while NA leagues are closed, restricted and exclusionary with arbitrarily inflated relocation fees and expansion membership fees.

As a result, European fan interest remains relatively strong up and down the league table throughout the season. By comparison in NA sports leagues, fans for the bottom teams in the standings lose interest after midseason and their teams lose incentive and often coast to the finish line, waiting for next year.

The expansion of UEFA Champions League over the last two decades creates a unique problem for European Football. Since its modern conception in the early 1990s, UEFA has consistently expanded Champions League to proactively prevent the natural economic evolution of a European Super League.

Unfortunately, the natural progression to a European meta-league will probably not go away in spite of UEFAs attempts to appease the big clubs from the big Euro leagues. Ironically over the next decade, the pure polarizing economics of European football in combination with the new technology of digital media will ultimately result in the breakaway of “the big clubs” to form a relatively closed Super League of European Football, probably very similar to the National Football League.

The other major difference concerns the open and competitive talent market for European Football compared to the closed non-competitive labor markets for North American leagues. As a result of the open international football market, no European team or league operates in economic isolation. By comparison closed and separate NA leagues form non-competitive cartels that wield major monopoly power over their fans and media providers and unmatched monopsony power over their players.

If EPL, Bundesliga or Ligue I shares revenue 50/25/25 (solidarity/merit/popularity) then ultimately all Euro leagues will ultimately share revenues in the same proportion—even Serie A and La Liga.

Euro leagues do not have NA league-specific hard salary caps, but UEFAs Financial Fair Play (FFP) payroll cost restrictions apply to all of Europe across the political boundaries of domestic leagues.

FFP actually constrains the payrolls of European low-revenue teams because the cost “caps” are constant percentages of individual team revenues, whereas NA caps constrain high revenue teams because uniform payroll caps are constant percentages of the average team’s revenues.

As a result, FFP ironically serves to aggravate competitive imbalance, whereas NA hard caps increase competitive balance (perhaps at the expense of team quality) by limiting the revenue advantages of large market clubs. This is yet another open-market gravitational force pulling the big clubs as if by continental drift toward the inevitable unification of European Football.

“The economic solution is to allow the top tier of European football to naturally break away, and then horizontally reunite the politically divided domestic base with open international leagues throughout the European Union. This is not ugly ‘Americanization’ or greed over grass roots: it is rather the Europeanization of European Football.” (John Vrooman, Theory of the Beautiful Game, 2008).

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