Elephant in the Room

Posted by on Thursday, January 10, 2019 in National Football League, NCAA Football.

Interview with Bloomberg News. / NFL Draft Graphics.

Given your expertise in NFL and its CBA, curious if you might be able to do some rough calculations on how much Clemson QB Trevor Lawrence might be losing out on by having to spend at least the next two seasons in college before being eligible for the NFL Draft. Consensus seems to be that he’d be a high pick if he were to leave today, which obviously gets him paid earlier, gets him to his second contract younger, etc.

There are forces pulling the salary of the top pick in the draft in several directions but the ultimate monopsony (one buyer) power of the NFL could weigh heavy on the cost of a two year delay of the start of the NFL career for the promising Clemson QB.

There are mitigating factors that escalate the NFL rookie salary to compensate for the delay. As specified in the current CBA 2011-2020 the first year minimum salary of $480K in 2018 goes to $495K in 2019 and  $510K in 2020. All minimums are bumped about $15K for the remaining 2 years of the current CBA.

$15K may seem like chump change compared to the $15 billion revenue from the richest sport League in the world but under the rookie wage controls of the current “deal,” this all that will be left of the rookie salary pool for the players selected after round one.

Overall the earnings package for the top pick has increased at about 6.16 percent since the beginning of the current CBA in 2011. (see the graph red trend line). The package for next year’s (2019) top pick should probably be slotted around $34.69 million with most of that guaranteed.

The contracts for the rest of the players selected in Round 1 decline in a predictable way in accordance with what I call the inverse square root rule. Simply divide the contract of the top pick by the square root of the pick in question. So the fourth overall pick would make an estimated one-half of the first pick. By the time the draft gets to round 2 there is not much left of the rookie pool for the remaining draftees except the NFL minimum.

All of the paper gains would of course be erased by the adverse time value of money foregone by the delay. The net result would be a loss of about 10 percent of the income available from a free labor market entry.

There are other positive externalities to the delay for the player such as skill development (improved accuracy and defense recognition) and marketing of the player skills in a highly visible quasi-professional NCAA format. Clemson, ESPN and the ACC could always enjoy the side benefits of a prolonged quasi-amateur quasi-pro career for Georgian Trevor Lawrence.

But the ultimate and unfortunate problem in this case is the coincidental timing of the probable beginning of Lawrence’s career with the negotiation of a new CBA after 2020. The incredible monopsony power of the NFL has been revealed in each of its negotiations with the NFLPA.

Without question the NFLPA is the weakest of all of the major sports unions. It has lost all encounters (strike or lockout) with NFL management and its only free agency victory in 1992 came after it decertified and sued the owners for antitrust violation in civil court. Even then the NFL owners “gave” the players free agency backed up and blocked by a hard salary cap in the CBA 1993.

In the “negotiation” of the settlement to the most recent lockout the owners pitted the veteran players v. the rookies in the approval of rookie wage scale in the current CBA. Overall the players are still being paid less than 50 percent of revenues but less and less of the largesse goes to players under their initial rookie draft contracts. This created the segmented labor market that has frozen rookie salaries to a fraction (one-third) of their worth after 2011. (see graph).

The really bad news for Clemson QB Trevor Lawrence and his classmates throughout quasi-professional D1 football is that the current rookie capped labor market tier is probably better than the one the owners will ultimately impose and the veterans will accept on their behalf, sight unseen in the new CBA after 2021.

From a top-line perspective, when you say the delay would cost a high pick roughly 10 percent — is that taking into account the likely shakeout of the new CBA? And is there a rough estimate of career earnings used to calculate that or does it roughly hold true whether he plays for 6 years or 16?

Roughly 10 percent is simply the reduction (actually 11%) in the present value of the contract or series of career contracts after the two year delay for Trevor Lawrence’s eligibility, regardless of the length of the same career.

PV = FV/(1+r-g)^t where PV = present value, FV=future value, r = risk adjusted discount rate = 12 percent (my usual), g = growth rate = 6 percent (from the graph), and t= 2 years for the delay in question 2019 to 2021. So the stream of future contracts PV = FV/1.06^2 or PV = .89 FV. Most of the contracts are negotiated now in terms of PV of the contracts which adjusts for the time value of money.

This estimate also assumes the CBA goal posts are not moving like they did from 2010 to 2011-2020 in the attached graphic. If the rookie labor market before 2011 could be considered “free” then it could be easily argued by demonstration that NFL players are currently being paid less than a third of their worth under the monsopsonistic regime of the current CBA.

Most other estimates can show that the monopsony (one employer) power of the NFL cartel allows it to pay its players on average about forty percent of their economic worth. (60 percent of NFL revenue has nothing to do with the competitive quality of the team.)

The NFL players are the most exploited of the professional athletes, either in the League or working their way through the quasi-pro NCAA Power 5 Conferences. The new CBA is the elephant in the room.

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