CHAPTER FIVE

Revenue Sharing and Competitive Balance

INTRODUCTION

No matter the structure, all professional sports leagues are deeply concerned about the same two basic issues: competitive balance and revenue sharing. With an understanding of the background and structure of leagues provided in the previous chapters, the reader can now give greater attention to revenue sharing policies and competitive balance issues. One way of thinking about revenue sharing is to define it as the amount of revenues earned by members of a professional sports league that are shared by all league teams, regardless of the teams’ contributions to the generation of these revenues. Another way to consider revenue sharing is to focus on the amount of money that teams pay each other for the right to play each other.

The history of revenue sharing is interesting. The equalizing of television revenues was first proposed at the MLB owners meetings in 1952 by Bill Veeck (then the owner of the small-revenue St. Louis Browns): “It is my contention that the Browns provide half the cast in every game they play. Therefore, we’re entitled to our cut of the TV fees the home club receives for televising our games. Morally, I know I am right, and I plan to fight this thing to the end.”¹ To this, Brooklyn Dodgers owner Walter O’Malley responded: “You’re a damned communist.”² Veeck’s retort was telling:

Ultimately, Veeck lost this argument, and his proposed 50-50 split of television revenues was voted down by the MLB owners. Nonetheless, an important seed was planted in the mind of baseball executive Branch Rickey that would prove important when he became one of the entrepreneurs behind the contemplated Continental League later in the decade. Rickey proposed using a 33% team–67% league split of television revenues. His guiding philosophy that provided the rationale for revenue sharing was that: “any rule or regulation that removes or tends to remove the power of money to make the difference in playing strength is a good rule.”⁴

Although the Continental League was never launched, it, too, was influential in the evolution of revenue sharing, because it provided the basis for sports entrepreneur Lamar Hunt’s proposal for the pooling and equal sharing of television revenues in his newly formed American Football League.⁵ The AFL ultimately adopted this proposal and sold its pooled television rights in 1960 for $8.5 million over 5 years, which provided each of the 10 teams in the league with $170,000 annually. Comparatively, the television rights in the established, rival NFL were sold by the teams on an individual basis. In 1960, the Baltimore Colts had a $600,000 per year contract with NBC and 9 of the 12 NFL teams had contracts with CBS. The teams acted as competitors in the television marketplace rather than as a unified entity. The New York Giants received $175,000 and the Green Bay Packers only $75,000 from CBS for their broadcasting rights. This is especially relevant given what the startup AFL teams were receiving. This led NFL Commissioner Pete Rozelle to adopt the “League Think” philosophy that became a hallmark of his longtime tenure as commissioner. He successfully persuaded even the largest NFL teams to sacrifice their short-term revenues for long-term growth. This required some teams to forsake—at least in the short-term—hundreds of thousands of dollars in television revenues. He was able to convince them that the strength of the league as a collective entity was more important than the strength of any one team. When legal precedent prevented the NFL from entering into the league-wide television contract that Rozelle envisioned, he successfully lobbied Congress for the passage of the Sports Broadcasting Act of 1961, which allowed for the pooled sale of national television rights by sports leagues. The NFL then entered a 2-year contract with CBS that paid $4.65 million per annum, or $387,500 per team.

The leagues vary in the degree of revenue sharing that they engage in. Further, it is safe to say that there is a fair amount of dispute within each league as to the appropriate level of revenue sharing. The central issues in revenue sharing tend to be the composition of the revenue pool that is shared; that is, which revenues are considered central (paid directly to league) as opposed to local (paid directly to clubs); the local revenue streams that are shared (if any); the amount of sharing (if any) of these local revenues; and the allocation rules used to distribute the shared revenues. This last issue has several alternatives: providing a larger allocation to the teams that have lower local-revenue-generating capabilities; giving an equal allocation to all teams in the league; and making a larger allocation to teams with the highest revenues or the most wins. The latter alternative approaches raw capitalism and is used by the English Premier League, which allocates its national television revenues via a formula that gives the better-performing teams on the field the highest allocations, which increases the absolute revenue differences between clubs. This is a good example of the balance of seeking to equalize revenues while encouraging competition.

Revenue sharing gives rise to moral hazard opportunities. Revenue sharing should reduce opportunistic behavior among profit-maximizing teams by making clubs dependent on each other. However, franchises are not entirely intradependent (even in the NFL), and differing owner motivations means that some are profit maximizing, whereas others are more interested in winning, prestige, ego, and so on. This diversity of owner interests mitigates the effectiveness of revenue sharing in curbing opportunistic behavior by league owners. This opportunistic owner behavior occurs in the form of both “sharking” and “shirking.”⁶ Sharking is seen in the independent owner action that is initiated to increase the wealth of the individual club at the expense of the overall league welfare. A prime example of this behavior is the undermining of league-wide marketing contracts by teams negotiating their own lucrative marketing agreements, putting compliant teams at a competitive disadvantage. Shirking occurs because revenue sharing creates incentives for a lack of effort among teams, who can free ride the efforts of other teams. Some owners may field uncompetitive teams and undermonetize those club revenues that are shared with other teams. It is difficult to successfully address either form of this opportunistic owner behavior. Getting offending teams to voluntarily accept the league’s governance mechanisms is unlikely, litigation is suboptimal, and increasing the amount of revenue sharing only creates additional shirking opportunities.⁷ Leagues have taken divergent paths in attempting to do so.

The NFL has the most aggressive revenue sharing system, a product of historical necessity and the aforementioned foresight and leadership of longtime commissioner Pete Rozelle. The NHL has the least amount of revenue sharing and, at present, the largest number of struggling franchises of any of the leagues. Over the years, various proposals to increase the level of revenue sharing in the NHL have been met derisively by the owners, with the typical response beginning with an owner standing up and saying, “Comrades!” This is in reference to the highly socialistic nature of revenue sharing. Perhaps this underscores the notion that sports leagues are simply different than other types of businesses. Revenue sharing in the NBA and MLB falls between these two extremes, although it is hardly any less controversial. The owners in the NBA and NFL determine the league revenue sharing policy unilaterally, whereas MLB and NHL owners must collectively bargain with the players’ union over the terms of their revenue sharing. This is another peculiarity of these sports leagues—the employees have a say in how their employers divide up their revenues. This is because revenue sharing impacts player salaries. All leagues equally divide national media, sponsorship, and licensing revenues among the teams. See Table 1 for MLB team financial data and Table 2 for NFL team financial data.

Sharing of gate receipts varies by league. The percentages allocated among the home and visiting teams and league offices have fluctuated over time as well. In the NFL, 66% of gate receipts are retained by the home team and 34% is pooled and shared among the visiting teams. The NBA and NHL are far more capitalistic in their policies, with NBA home teams retaining 94% of the gate receipts (the other 6% is given to the league office) and NHL home teams keeping all of the gate receipts. MLB adopted a radically different revenue sharing system for its local revenues in its 2002 collective bargaining agreement and continued it in its extension covering the 2007–2011 seasons. This is particularly noteworthy given that more than 75% of MLB revenues are local in nature. MLB teams pool 31% of their local revenues after deducting for their stadium-related expenses, including debt service and rent. These net local revenues are then redistributed equally among all 30 teams. This accounts for roughly 65% of the revenue sharing funds. The remaining 35% of the revenue sharing funds is generated by creating a baseline revenue figure for each team that is based on the average of a team’s net local revenues in the prior seasons and its projected net local revenues in the future seasons. This is used to create a fixed revenue component for each team that cannot increase or decrease unless a team moves into a new stadium. The team then contributes revenue to the pool based on this figure. This system incentivizes teams to increase their local revenues. Overall, MLB has redistributed between $325 and $450 million each season as a result of its revamped revenue sharing plan.

According to former MLBPA Executive Director Don Fehr, “Revenue sharing in MLB is designed to solve competitive imbalance that could result if it did not occur due to revenue imbalances amongst the clubs.”⁸ MLB owners and executives believe that the plan has increased the league’s competitive balance. After the 2006 Detroit Tigers made the playoffs for the first time since 1987, MLB Commissioner Bud Selig remarked, “I believe that the Tigers are the perfect manifestation of our improved economic climate. I have no doubt that this would not have been attainable a decade ago without our system of revenue sharing.”⁹

In MLB, revenue sharing is designed to affect salaries and wages by transferring revenues from wealthy teams that could otherwise be spent on player salaries to poorer teams so as to allow them to increase their spending on player salaries. However, no mechanism is in place to ensure that the latter occurs. Thus, it is believed that several teams use their revenue sharing receipts to engage in profit-taking rather than to improve the club on the field. It also creates perverse incentives, because some clubs will not engage in risk-taking and entrepreneurial behaviors.

Revenue sharing of local revenues besides gate receipts is practiced differently in the NBA, NFL, and NHL than it is in MLB. Local revenue streams such as luxury box premiums, local media contracts, local advertising and sponsorship/signage revenues, and naming rights are generally not shared in these leagues. The home team keeps 100% of these revenue streams. This policy is currently being reviewed by both the NFL and NBA.

A larger amount of revenue sharing was adopted in the NHL as part of the collective bargaining agreement that ended the 2004–2005 lockout. The NHL needed to create a pool of revenue from the largest-grossing clubs and some playoff revenues in order to afford some smaller-revenue teams the ability to spend within the payroll range. The philosophy underlying the NHL’s revenue sharing plan is best explained by Deputy Commissioner Bill Daly, who stated, “Our view on revenue sharing has always been that you only need revenue sharing to allow all clubs to afford representative and competitive payrolls, and that’s what this revenue sharing does…. The idea is to subsidize clubs on a revenue basis to get them to the point where they can afford to be a quarter of the way up the payroll range. That would be a minimum commitment on revenue sharing.”¹⁰ A club in the bottom half in revenue can spend any amount on payroll and still be eligible for partial revenue sharing, but any club spending over the midpoint is not eligible for the entire amount of revenue sharing available to them.

The revenue sharing plan is funded by league-wide revenue, playoff gate receipts, escrow funds, and the top-grossing clubs. This creates an interesting method of maintaining competitive and economic balance. The revenue sharing also is designed to make sure all clubs maximize local revenue. Mindful of the moral hazard opportunities discussed earlier (read: shirking), Deputy Commissioner Daly remarked, “You don’t want a revenue sharing program that doesn’t incentivize performance.”¹¹ A team must meet a number of qualifiers in order to receive revenue sharing funds. Clubs such as Chicago, Anaheim, and the New York Islanders that are located in markets with 2.5 million or more television households are ineligible to receive revenue sharing funds, even if they fall in the lower-revenue bracket. Since the completion of the third year of the collective bargaining agreement in 2007–2008, clubs also have to grow revenues faster than the league average and have attendance of 75% of capacity to receive their full revenue sharing allotment. As of the 2008–2009 season, they have to be up to 80% of capacity. Teams not meeting revenue sharing marks receive 25% less the first time that they fail to do so, 40% the second time it occurs, and 50% the third. This qualifier led to the Columbus Blue Jackets being penalized $2.25 million for having flat revenue growth versus the league’s 7% growth in 2007–2008. The recipients of the revenue sharing funds tend to be located in the nontraditional hockey markets in the United States. Illustrative of this, the Nashville Predators received a league-high $12 million in revenue sharing in 2008, with contributions from (among others) teams located in hockey-mad Canadian markets: Toronto ($12.0 million), Montreal ($11.5 million), Vancouver ($10.0 million), Calgary ($6.0 million), Ottawa ($1.0 million), and Edmonton ($0.8 million).

Revenue sharing in the NBA is guided by a somewhat different principle. Here, the philosophical question underlying revenue sharing is: “Are there well-managed teams that cannot make a profit due to market factors?” If so, then revenue sharing money should be distributed to them; the revenue sharing pool is funded by part of the escrow and luxury tax payments and in part by teams based on the amount of local revenue generated. In other words, the focus is on profitability rather than revenues and on the limitations faced by some markets in which NBA teams are located. The NBA utilizes a multivariate regression model that determines each team’s optimal team business performance levels. Teams that are underperforming their market’s potential cannot receive funds. It should be noted that the revenue sharing system is not based on market size; rather, it is based on market performance. The NBA redistributes $49 million to teams (no more than $6 million to any team in 2008–2009 and up to $6.6 million in 2010–2011) that are performing above market potential but are still deemed to be disadvantaged (i.e., losing money). This is an increase from previous seasons, as it distributed $14.8 million in 2005–2006 and $30 million in 2007–2008.

Revenue sharing in the NFL has been particularly challenging for the owners. Given that there is no proven correlation between high revenue teams and winning percentage or between high payroll teams and winning percentage, it is fair to ask whether the revenue sharing system in the NFL is suboptimal. The answer depends on who one is talking to—an owner from previous generations or the new generation, or an owner from a smaller-revenue club or a larger-revenue club. When asked if it was problematic, Dan Rooney, the legendary owner of the Pittsburgh Steelers, replied, “We’re not there yet. Any team can win and does win. But we might reach a point somewhere down the line where that’s not the case anymore.”¹² Although the NFL considered a number of different options to varying degrees in the prelude to the 2006 collective bargaining negotiations, including sharing all team revenues equally, forcing teams to cover the full labor cost impact of their own local deals, and expanding the local revenue shared to encompass more revenue streams beyond gate receipts, it ultimately chose what many observers contend is a temporary solution—increasing the supplemental revenue sharing pool in March 2007. The owners replaced the previous supplemental pool of $30 to $40 million per year with a system that requires the 15 highest revenue generating teams to create a pool of $430 million from the 2006–2009 seasons to subsidize the 15 lowest revenue generating clubs. The agreement redistributed $100 million in 2006 and $110 million per year for 2007–2009. The owners also established qualifiers that a team must meet in order to receive these supplemental funds: actual player costs higher than 65% of team revenues, gate receipts of at least 90% of the league average (or it faces a deduction off of their share), and ineligibility after a move into a new or renovated stadium costing more than $150 million and for any new owners. This temporary agreement is certainly suboptimal and is largely a product of the league’s politics. Any revenue sharing plan must be approved by three-quarters of the league owners. In other words, a bloc of nine owners can reject any plan that they deem unsuitable. With significant differences between league owners based on the longevity of their ownership and the markets in which their teams are located, it is not difficult for a voting bloc of nine to emerge and unite against any one revenue sharing plan.

Table 1   MLB 2001 Team-by-Team Revenues and Expenses Forecast (in Thousands)

Source: MLB Updated Supplement to The Report of the Independent Members of the Commissioner’s Blue Ribbon Panel.

Note: Player compensation includes 40-man roster costs and termination pay.

The consolidated loss, when $174,234,000 of nonoperational charges such as amortization of debt are added in, comes to $518,966

Source: Forbes 2009 NFL Team Valuations.

The issue of competitive balance is similarly vexing to sports leagues.¹³ Perhaps the best way to think about competitive balance is in its alternative—competitive imbalance. Competitive imbalance can take several different forms, all of which are arguably bad for the league as a collective. The first is if one team dominates the top position in a league over an extended period of time (i.e., dynasties).¹⁴ This is bad for the league, because although casual fans may be drawn to the league because of the excellence of the one team, this interest will wane over time because there is little uncertainty of outcome. In addition, fans of the other teams in the league may unite for a period of time to rally against the dynasty, but their interest will wane if their team does not have a realistic chance of winning a championship over a prolonged period of time. A predictable league ultimately becomes of little interest to its followers.

Closely related to this is the second form of competitive imbalance: domination of the top of a league by the same teams over an extended period.¹⁵ For example, Celtic or Rangers have won the Scottish Premier League title every year since 1986. Again, there is little uncertainty of outcome, and fans of other teams will ultimately lose interest.

A final form of competitive imbalance is the domination of the bottom of a league by the same teams over an extended period.¹⁶ This is bad for a league, because fans of those teams will lose interest in the team and sport, and bringing them back into the fold will require a substantial on-field improvement; that is, contending for a championship. Habitually losing teams also impose costs on the rest of the teams in the league in that their contests against the weaker teams are less attractive and thus typically prevent them from maximizing their revenues in these games.

Leagues use a number of mechanisms to promote competitive balance, including a reverse-order draft in which the worst teams are given an increased opportunity to select the best incoming talent in the league’s entry draft; salary caps and floors, which are designed to compress the range of team spending on playing talent such that all teams are spending relatively close to one another on their athletes; luxury taxes, which penalize teams that spend beyond a proscribed threshold on player salaries in an effort to rein in teams inclined to spend excessively; relegation and promotion, which incentivize teams to win championships so that they may be promoted to a higher level of competition and reap the financial rewards and disincentivize losing contests to prevent the financial harms associated with demotion to a lower level of competition; and revenue sharing, which theoretically provides teams with an increased ability to spend more on player salaries and thus remain more competitive than they would be in the absence of the receipt of these revenues.¹⁷

In the first selection, Richard Sheehan examines the revenue sharing practices that have been adopted by professional sports leagues, as well as the economic principles upon which these profit-maximizing endeavors are based. The author proposes a two-part tax on a franchise’s costs and its win–loss record to enhance the effectiveness of these revenue sharing models.

After Sheehan’s passage, the competitive balance issues facing sports leagues are addressed by economists Allen Sanderson and John Siegfried. In their article, “Thinking About Competitive Balance,” they consider various aspects of this often thorny topic. Next, the broad revenue sharing model adopted by the NFL is considered by Clay Moorhead. The development of the NFL’s revenue sharing system is instructive for current sports business leaders because, as previously noted, the league’s revenue sharing plan is considered a significant part of why the NFL is currently considered to be the most successful of the professional sports leagues. Despite this success, problems remain in the system, including threats posed by opportunistic owner behavior. In recent years, there have been increasing complaints by owners in some markets complaining that the revenue sharing model is not as successful as it used to be and should be revamped. This is often raised in the context of collective bargaining and the need for greater revenues to be retained and shared by the owners rather than passed on to the players.

Finally, Stefan Kesenne investigates the intersection of revenue sharing and competitive balance in his aptly titled article, “Competitive Balance in Team Sports and the Impact of Revenue Sharing.”

Notes

1.  Michael MacCambridge (quoting Branch Rickey), “A Light Bulb Came On,” America’s Game, Anchor.

2.  Michael MacCambridge (quoting Walter O’Malley), “A Light Bulb Came On,” America’s Game, Anchor.

3.  Michael MacCambridge (quoting Bill Veeck), “A Light Bulb Came On,” America’s Game, Anchor.

4.  Id.

5.  Id.

6.  Daniel S. Mason, Revenue Sharing and Agency Problems in Professional Team Sport: The Case of the National Football League. Journal of Sport Management, Volume 11, Issue 3 (July 1997).

7.  Id.

8.  Don Fehr, Remarks at the Executive Directors’ Panel at the 2005 Annual Conference of the Sports Lawyers Association, May 21, 2005.

9.  Eric Fisher (quoting Bud Selig), “A Difficult March into a Golden Era,” Sports Business Journal, October 4, 2006.

10.  Andy Bernstein, Inside the Complex NHL Deal, Sports Business Journal, August 1, 2005, at p. 01, http://www.sportsbusinessjournal.com/article/46287.

11.  Id.

12.  Mark Maske and Thomas Heath (quoting Dan Rooney), “NFL’s Economic Model Shows Signs of Strain,” The Washington Post, January 8, 2005.

13.  Id.

14.  George Foster, Stephen A. Greyser & Bill Walsh, The Business of Sports: Cases and Text on Strategy and Management. South-Western College Pub 29 (2005).

15.  Id.

16.  Id.

17.  Id. at 30–32.

INTRADEPENDENCE: REVENUE SHARING AMONG CLUBS

KEEPING SCORE: THE ECONOMICS OF BIG-TIME SPORTS

Richard G. Sheehan

First, all four leagues on average have been and remain very profitable. The average return to major league professional franchises has been greater than the average return to stocks. Second, profits are not evenly distributed. In each league, some franchises earn substantial profits while other franchises barely break even or lose money…. Third, owners have different motives for buying and owning a professional sports franchise. Some are in it primarily for the money while others are in it primarily for wins or ego or civic pride. And fourth, not all major league franchises are competently managed. Some franchises … have not been well run, assuming that the objective is to make money or to win games.

The conclusions that each league makes a substantial profit but that the profit is unevenly distributed suggests that some revenue sharing may be appropriate. When a league has an average profit rate over 15 percent but some teams are losing money, there might be a problem in the distribution of league profits, and some mechanism to share league revenues might be appropriate. In fact, each league already has some revenue sharing. For example, all leagues equally divide national television revenues, regardless of a team’s number of TV appearances, record, or drawing power. Another example is a league’s centralization of the licensing process…

This chapter considers three questions on revenue sharing. First, how much revenue has been shared in each league. Second, why should any revenue be shared? That is, is there an economic justification underlying revenue sharing and how can the problems associated with revenue sharing be overcome? And third, is there a specific proposal for revenue sharing that begins to address two of the most important problems facing professional sports: (1) How can revenues be split between rich franchises and poor without destroying the incentives for the rich to keep generating prolific revenues? (2) And how can anyone reconcile the split among owners where some focus primarily on the bottom line and others focus primarily on winning? …

CURRENT-REVENUE SHARING ARRANGEMENTS

What revenues currently are shared? For all leagues, the ground rules are strikingly alike. National media money is shared while local media money generally is not; licensing money accrues to the league and is shared while any local advertising money is not; sharing of gate receipts varies by league while luxury box income generally is not shared. NFL gate receipts are split 60-40, with the home team receiving a greater amount justified on the basis of the costs of putting on the game. At the other extreme, the NHL home team retains the entire gate. In the NBA the home team keeps 94 percent of the gate while the league receives the other 6 percent.

….

In terms of total revenue generated per franchise, the NFL leads all leagues … Major League Baseball (MLB) is second in revenues…. Gate receipts are the largest component of MLB receipts … followed by other revenues (primarily stadium revenues) … and local media…. The NBA’s two largest income sources are gate revenues … and national media…. The NHL relies most heavily on gate revenues … and other revenues (again, primarily stadium revenues) ….

Comparing the leagues, the advantage of the NFL clearly lies in its television contracts…. Based on national media revenues, MLB is no longer the national pastime and is not even number two. The NBA now has that honor…. Where baseball is still the most popular is in terms of attendance and gate receipts, where it easily outdistances all other leagues. Perhaps the surprises here are that the NHL has the second highest gate receipts, surpassing the NBA, and that the NFL with so few games still has close to the same gate receipts as other leagues.

In the NFL, the two largest revenue categories, TV money and gate receipts, are split relatively equally. Thus, the NFL has the greatest degree of revenue sharing…. In contrast, the NHL has the smallest national media revenues, the smallest licensing revenues, and no split of gate revenues. Thus NHL revenue sharing was the lowest … MLB and the NBA fall between these two extremes…. In the NBA, the percentage sharing of the gate is relatively small, but national media money is shared and is relatively more important for NBA franchises than for MLB franchises.

Another perspective on the distribution of revenues is given by the range of revenues in a league. How do the revenues of the richest and poorest franchises compare? … The results indicate a wide range for all four leagues, smallest in the NFL…. Given the importance of TV money to the NFL, this result should not be a surprise. Regardless of how a franchise is run, TV money gives all NFL teams a solid revenue base.

….

What may be most noteworthy about the maximum and minimum revenue numbers is the observation that New York City teams lead in all leagues except the NFL, the league with the most revenue sharing. New York City teams have natural revenue advantages over … Buffalo and Salt Lake City. However … this revenue advantage has not led to more victories and has led to only marginally greater financial success. New York City teams have both higher revenues and higher costs…. Market size may play a minor role, but it is a long way from the whole explanation of profits, wins, or anything else. Whether a team wins and whether it is well run both contribute more to financial success.

THE ECONOMIC LOGIC UNDERLYING REVENUE SHARING

Should there be revenue sharing? Is there any economic justification underlying revenue sharing? For an economist the answer is simple. In MLB, for example, the Yankees and the Brewers take the field to play a game. They create a win, a loss, and entertainment. It is a classic example of a joint product. The fans and the media pay for the entertainment while one of the teams ends up with a win and the other gets a loss. The product obviously is shared, and since the Yankees and Brewers must cooperate to produce it—in terms of agreeing on ground rules—the financial rewards are appropriately shared. But how are the Yankees and Brewers to split the revenues?

Three issues underlie this apparently simple question. First, you have a set of accounting issues: do you split gross revenues or net and how do you define the revenues to be shared? …

Second, there are equity concerns. What is a “fair” split of the revenues between the Yankees and the Brewers? … Efficiency arguments made below weigh heavily against an equal split of local revenues. Before considering efficiency, however, there is an equity argument against equally splitting local revenues. In any league we should expect the first franchises to be located in the most profitable cities. New York, Chicago, and Los Angeles have franchises in all leagues (temporarily except the NFL) and sometimes multiple franchises. Detroit, Boston, Philadelphia, and San Francisco also have franchises in all leagues. When you buy an expansion franchise, you should know that it is unlikely to generate the revenue stream of many “old guard” franchises. Thus, it would be disingenuous in MLB for expansion franchises in Colorado or Florida to argue that they deserve a share of Yankees’ or Dodgers’ revenues when the new owners should have known at the outset that they would be among the marginal franchises in the league….

Third and most importantly, how can you undertake revenue sharing while not destroying economic incentives? How can you undertake revenue sharing and give owners or potential owners a greater incentive to pursue profits, victories, and the long-run economic health of the league? From an economic perspective, the interesting question about revenue sharing is its efficiency implications. The simplest way of viewing revenue sharing is to think of it as a tax. The general rule in economics is that any tax will distort economic incentives. In this case, we can put the distorting effects of taxes to an advantage. Many things could be taxed, for example, total costs, total revenues, player payrolls (the owners’ favorite), or even wins and losses. What is taxed will effect how owners will react to the tax and will impact how owners, players, and fans will fare.

….

There are fixed costs associated with running a franchise. For example, a MLB franchise has a minimum payroll of $2.5 million [Ed. Note: the 2010 minimum was $10.0 million] given the roster size and the minimum salary. Taxing this amount or any fixed cost has no impact on a franchise’s operations and is incompatible with revenue sharing. A tax on anything other than incremental costs or revenues is simply bad economics as far as changing incentives is concerned.

A second example of how not to tax has been proposed by some small-market MLB owners. This tax would split all local media money equally among all franchises…. More problematic is the question of incentives. What would happen the next time the New York Yankees’ media contract is up for renegotiations? How much incentive do the Yankees have to bargain aggressively for a higher fee …? The moral: equally splitting local revenues would likely have devastating long-run impacts on those revenues. Thus this tax also is bad economics.

ECONOMICALLY JUSTIFIED TAXES TO IMPLEMENT REVENUE SHARING

So how can we set a tax that would be good economics? Let me state the requirements for a good tax system, given the problems facing all leagues. (1) Profits are healthy but are unevenly distributed. Implication: some revenue sharing is necessary, and a tax must fall more heavily on profitable franchises. (2) Owners have different goals; some focus more on wins and others on profits. Implication: two types of taxes are necessary, one on those seeking victory and another on those seeking profits. (3) Taxing revenue will make owners reluctant to take steps to “grow” revenues coming into the league. Implication: avoid taxing revenues; where possible, tax costs instead. (4) Taxes should allow markets to operate without introducing additional distortions. Implication: when players’ salaries are determined in a competitive market, there is no need to separately tax this component of costs.

With these suggestions, let us consider a two-part tax, on a franchise’s total costs and on its win–loss record. First, consider the “cost” tax and three fundamental questions. Why tax costs rather than revenues? What costs should be taxed? And how high a tax rate is appropriate?

Revenue sharing could be undertaken either by taxing a franchise’s revenues or its costs. To date, revenue sharing in all leagues has been done by taxing revenues…. Taxing a franchise’s revenues ultimately depresses the league’s revenues and both owners and players suffer in the long run. In contrast, taxing costs strengthens owners’ existing desires to control costs and to increase profitability. Owners will be better off even if players are not.

What costs should be taxed? Any tax would appear appropriately levied with respect to all costs and not just player salaries, assuming owners are serious about getting a handle on costs and are not simply out to break a union…. While the focus is on all costs, the tax itself should be levied only on incremental costs. For example, if the average costs in a league were $50 million, it would make sense to tax a franchise only on its costs in excess of $50 million, or on its incremental or marginal costs. The goal of the tax is to provide an incentive to keep expenditures below some level.

Now the focus on incremental costs requires some additional explanation, and that explanation is related to how high the tax rate should be and what is the need for revenue sharing in the first place. The tax rate cannot be too high or it will have ugly incentive effects. With a high enough tax rate we could have all franchises fielding a whole new team of rookies each year. But we do not need a tax rate all that high to obtain the desired effect of restricting costs. The main point underlying revenue sharing is that a game creates both a win and a loss and the winner receives more revenues than the loser. Thus, the winner imposes an economic cost on the loser. What is that cost? The answer varies by sport and even by team within [a] sport….

There is some question on what costs should be taxed. The argument made earlier emphasized placing the tax on all costs rather than just on players’ salaries. There remains a question of whether this tax should be placed only on costs above some threshold, a so-called “luxury tax” or whether it should be placed on all costs…. For simplicity assume all clubs spend the same amount and are equally com petitive. Then one owner attempted to buy a championship by increasing spending. His additional expenditures make his team more competitive and presumably cost other owners money. Those incremental expenditures should be subject to a tax. There is no reason why only expenditures, say, 30 percent above the average impose costs on other franchises.

…. Two numbers are important. First, how much does it cost to win one more game? … Second, how much revenue does a franchise lose when the team loses one more game? … The appropriate tax rate is simply the ratio of the revenue sacrificed with one additional loss divided by the cost of winning one more game, or how much one owner’s incremental expenditures cost another in lost revenues.

….

Perhaps the most important feature of this type of tax is that it begins to address one of the major problems underlying much economic strife in sports: the problem of differing owner desires. Some owners primarily want profits and some victories. How does this tax address that? Owners that want victories and championships will still choose to spend more…. As they spend more and perhaps win more they also impose costs on other owners that place a higher value on profits. Presumably the money from the tax on costs will be used to reimburse those owners who choose not to increase spending and who end up losing more frequently. Owners that want championships can still attempt to buy them if they wish, but only to the extent that they compensate other owners for the costs of losing.

Now this “cost” tax by itself is not the entire solution. Of course, all owners want both wins and profits, but the relative importance placed on each may differ dramatically. The tax above is on those that want to win and are spending freely to do it. They have to pay a penalty for the costs they are imposing on those that want profits. Those who want to win can still spend as freely as they want, but they must internalize the costs they impose on other owners. But owners who primarily want profits also impose costs on other owners. Why? They have little incentive to field a competitive team unless profits are at stake….

League revenues will be higher in the long run when the games and the races are tight, although any one team might be able to reduce short-term expenditures and lose games but gain profits. What can be done to reduce this incentive? One suggestion: tax less-successful franchises. Give owners who focus only on profits a greater incentive to win. In some cases, franchises have effectively stopped trying to field a competitive team…. Taxing their losses would likely stimulate more interest in winning and may increase league profitability.

The first tax takes the Steinbrenners … and taxes them for their free-spending ways. The second takes the Bill Bidwells (owner of the Arizona Cardinals) and Tom Werners (Chairman of the Boston Red Sox and former owner of the Padres) and says field a competitive team or pay a price. The former says of the win-at-all-cost owners pay attention to those concerned with profits. The second says of the only-profits-count owners that you must also be concerned with the on-the-field competition. Thus both sets of owners must move closer to a common middle ground that explicitly gives weight to both controlling costs and fielding a competitive team. Both types of owners may continue with their original focus, but the economic incentives push them toward a compromise. Furthermore, a compromise between the owners is a prerequisite for an agreement with the players.

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What is to be done with this revenue? Given that all leagues face a problem not of insufficient profits but of an unequal distribution of profits, it would seem reasonable to take the revenue raised and return it to franchises with revenue below the league average. What mechanism you employ should not seriously weaken poorer franchises’ incentives to generate their own revenues. Consider a mechanism that returns taxes proportionately to all franchises with revenues less than the league average…. These franchises have experienced real financial difficulties. This system of taxes and revenue sharing would help them all. It would not guarantee them profits, however.

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The nature of these taxes is to subsidize teams that are well run and yet still have difficulty making ends meet…. This tax system, with low tax rates and a carefully selected base, cannot bail out a club … that is awash in red ink. It can do two things, however. It can and does reward those clubs that are “doing things right” or fielding a competitive team at a relatively low cost. It also provides an even greater incentive for owners to be financially prudent and exercise appropriate oversight over fielding competitive teams. In a word, this set of taxes cannot give all owners the same set of incentives. However, it does bridge the current chasm between those in the league primarily as a business and those in it primarily as a hobby.

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REVENUE SHARING IN THE NFL

Virtually all NFL franchises have been quite profitable. One can make the argument that the NFL’s success is rooted in their revenue sharing, even as different owners appear to have very different objectives. With the NFL’s current revenue sharing arrangements, there is little reason or justification for additional revenue sharing. There is, however, a strong case against allowing owners like Jerry Jones to cut their own deals with whomever they choose. Ultimately, Jones’ deals with Nike and Pepsi, for example, reduce the value of the league’s deals with Reebok and Coke. When the league’s deals through its marketing arm, NFL Properties, come up for renewal they will be negotiated downward and total league revenue may fall.

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Jerry Jones quite likely can make more money marketing the Cowboys on his own than he will receive from the Cowboys’ share of NFL Properties income. Jones may well have the panache to run NFL Properties substantially better than it currently is being run. Jones, however, is totally off base when he says that the average franchise is better off doing its own marketing than going through NFL Properties. With 32 franchises each doing its own marketing, the competition for deals with prime sponsors like Nike will likely drive the value of those deals down for most teams. Teams like the Cowboys and 49ers may be better off but most teams will lose, and many smaller-market teams could lose dramatically. Is the average NFL owner better off with a marketing monopoly and shared profits or with 32 marketing competitors? With apologies to Ben Franklin, NFL owners had better hang together or else competitive markets will hang them all separately.

CONCLUSIONS

What is the bottom line on revenue sharing? Revenue sharing can be simply an out-and-out attempt by small-market franchises to expropriate the wealth of richer teams…. If that is the case, for most of us it may be interesting theater but it is not interesting from either a finance or a sports perspective.

Revenue sharing does have a strong economic justification based upon the cooperation required between teams to generate league revenues. Since the game is a joint effort, economic theory can be employed to suggest how revenues can be split to provide positive rather than negative incentives….

The system of taxes and revenue sharing presented here addresses a fundamental problem of sports: that owners are in it both as a business and as a hobby and the weights that different owners place on these two goals sometimes differ dramatically. Taxing both excess costs and excess losses should move owners to roughly the same page in the playbook and should reduce losses at competently managed small-market franchises. This system of taxes also has the potential to reduce tensions between players and owners. Owners would have an incentive to more carefully monitor all costs, including player payroll, because of the cost tax. But owners also would have an incentive to make sure they field a competitive team because of the loss tax.

COMPETITIVE BALANCE

THINKING ABOUT COMPETITIVE BALANCE

Allen R. Sanderson and John J. Siegfried

In an era in which inequalities of wealth and opportunity are constantly at the forefront of public policy discussions in the United States, in the world of professional sports, many high-profile economic events also seem to turn on issues of inequality: between owners and players over the distribution of economic rents; among owners over the distribution of gate receipts, broadcast revenues, and talent; and among mayors, taxpayers, owners, and league officials over figurative level playing fields with regard to the provision of state-of-the-art venues.

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Simon Rottenberg (1956) long ago noted that “the nature of the industry is such that competitors must be of approximately equal ‘size’ if any are to be successful; this seems to be a unique attribute of professional competitive sports” (p. 242; see also Rottenberg, 2000). Although the absolute quality of play influences demand and absolute investments in training are socially efficient (Lazear & Rosen, 1981), the relative aspects of demand and quality of competition also loom large in sports. In cases when consumer demand depends, to a large extent, on interteam competition and rivalry, the necessary interactions across “firms” (i.e., teams) define the special nature of sports. Contests between poorly matched competitors would eventually cause fan interest to wane and industry revenues to fall. But potential arms races—or rat races—are possible and maybe even inevitable (Akerlof, 1976; see also Whitney, 1993).

In the 1990s and early 21st century, while some social scientists wrung their hands over apparent widening inequality of income in the United States and between developed and third-world nations, sports economists, commentators, fans, and owners (at least among the also-rans) lamented the perceived widening inequality of wealth and championships among teams, especially the large-market, high-revenue, and/or high-payroll teams versus their country-cousin kin in baseball.¹ The distribution of playing talent, team revenues and salary expenditures, and competitive balance dominate sports and sports-business conversations whenever a team with the highest payroll (or an owner with the deepest pockets or a decidedly different utility function) wins a championship, whenever a franchise extracts a new publicly funded ballpark from its community on the threat of relocating, or whenever an apparent dynasty emerges…

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Also in 1999, Baseball Commissioner Allan H. “Bud” Selig convened a panel of well-known individuals to study the impact of revenue disparities on competitive balance. It produced a lengthy report, “The Commissioner’s Blue Ribbon Report on Baseball Economics” (BRR) (Levin, Mitchell, Volcker, & Will, 2000), that noted large and growing revenue disparities, which, in turn, affected balance.⁵ In addition to more quantitative theoretical and empirical measures of competitive balance (see below), the Blue Ribbon panel also defined competitive balance qualitatively: In the context of baseball, proper competitive balance should be understood to exist when there are no clubs chronically weak because of MLB’s financial structural features. Proper competitive balance will not exist until every well-run club has a regularly recurring hope of reaching postseason play. (Levin et al., 2000, p. 5)

Broadcaster Bob Costas (2000) chimed in with similar laments. MLB conducted a national poll of 1,000 fans in late 2001 that purported to indicate that competitive imbalance was a serious problem in the minds of 75% of respondents; 42% of them indicated they would lose interest in the game were more teams not to have a realistic chance of winning. Summarizing the results, Sandy Alderson, MLB’s executive vice president, said, “We have a competitive-balance problem. This is something the average fan cares about. They don’t care if owners are losing money. They do care if it translates into negative consequences for their teams” (Rogers, 2001, p. 1).

Although certainly not unique to this particular period or sport, the complaint of woeful imbalance has become more common in the last few years with the lack of significant revenue sharing or a firm payroll cap in MLB relative to the National Football League (NFL), identified as the culprit. Increased player freedom, through which an owner could hire the best players and, at least in the short run, buy a championship, is seen as an accomplice. Apart from the obvious owners’ interest in limiting bidding for players and the equally obvious interest among players in that not being allowed to occur, payroll caps, salary caps, luxury taxes, increased revenue sharing, and restructured draft systems are touted as ways to constrain competition and thus improve competitive balance among teams.⁶ League restrictions on both the geographical relocations of teams and the mobility of players across teams, in addition to having more self-serving purposes, also affect balance….

In the sections below we attempt to lay out what one might mean by competitive balance, review the theoretical and empirical scholarship and popular contributions with regard to its various dimensions, and describe the natural forces and considerations as well as institutional rules and regulations that contribute to observed distributions of playing performances. We also compare, at various junctures, the situation in baseball versus other sports leagues including college athletics and individual sports.

COMPETITIVE BALANCE IN THEORY AND PRACTICE

Every sport and sports league has had to confront the fundamental issue of relative strengths among competitors. There has not been a uniform, one-size-fits-all approach or set of rules to resolve this problem. Inasmuch as uncertainty of outcome is a key component of fan demand, wide disparities in inputs and, thus, in likely outcomes are seen as inimical to the long-term health and financial viability of the individual enterprise. How to handle weak teams or inferior opponents—to prevent lower quality competitors from free-riding on higher quality rivals—can be as much or more of a problem as dealing with perennially strong ones, because there is at least some interest in seeing the very best individual performers and teams.⁷

Boxing segments fighters into weight classes and employs rankings and ladders to create bouts with equally matched opponents. Auto racing, track competitions, and swimming use qualifying times to ensure competitive fields. Tennis produces seedings based on previous performances in the expectation that the strong will play the strong in later round matches. Claiming races in thoroughbred racing is a mechanism designed to have horses of approximately equal ability entered into the same event. Except for the occasional novelty or promotion, women do not compete against men. Periodic structural changes or modifications in the rules of play, such as elimination of the center-jump and adoption of a shot clock in basketball and altering the height of the mound or changing the effective strike zone in baseball, have been used to tilt the playing field to achieve a certain objective and to prevent some competitors from exploiting particular advantages or decreasing fan interest in the contests. Another example is restrictions on athletes’ use of performance-enhancing substances.

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For English soccer, Szymanski (2001) has shown that the growing financial disparity between clubs has had no impact on imbalance. How closely payroll and market size correlate with winning—including, of course, the determination of the causal relationship—is arguably one of the most important questions about competitive balance. It is also essential to evaluate the relationship between market size and team payroll, which is often inaccurately assumed to be tight.

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THE NATURAL DEMAND FOR AND SUPPLY OF BALANCE (AND IMBALANCE)

Apart from the constraints leagues place on competition to ensure balance (factors discussed later), which may have the complementary effect of increasing and/or redistributing revenues, there are also natural forces that influence the distribution of outcomes. One obstacle to reducing inequality in sports leagues could be, paraphrasing Pogo, that we may not only be content with the current imbalance but also actually prefer it to the alternatives. Or, at a minimum, we are conflicted and willing to let natural (and unnatural) forces and inertia, rather than explicit interventions, determine outcomes. In economic and sporting walks of life, we have a preference for a positive correlation between effort and reward. To reward the statistically better individual or team for its prior achievements, we tip some balances in its favor—playing more games at home, higher seeds or a better lane, an extended playoff series rather than a single winner-take-all contest. The more evenly matched two opponents are, the higher the probability that a random element—a poor call by an official, a bad bounce, a key injury, or pure luck—will determine the outcome.¹² Thus, the premise that the demand for games is greater, ceteris paribus, the greater the degree of uncertainty conflicts with our sense of justice that the better team win. Luck is the way we account for the success of people and teams we do not like, but it is not a factor that we generally want to determine our income distributions in society or our champions in sporting contests.

On the other hand, we have strong identifications with and sympathies for the true underdog. We want David to knock off Goliath, at least on occasion (unless, of course, Goliath plays for us—Chicago was quite content with the Bulls’s domination in the 1990s, and Yankee fans have few quibbles with the alleged imbalance in baseball). Nowhere is this better exemplified than in popular sports movies that feed off imbalance. Films such as Rocky, Hoosiers, The Mighty Ducks, and Major League cater to these instincts. (And, after all, the play was called Damn Yankees, not Damn Cubs.) As much as one may loathe a bully, selling tickets to an event in which he has some chance of being upset is marketable. Dynasties and storied franchises, such as the Yankees, Celtics, Packers, and Red Wings, are not without their advantages in terms of fan interest.

The world is replete with examples of healthy inequality more extreme than the current levels in baseball. State lotteries are popular despite daunting odds. Although just 25 of the nation’s 400 graduate schools grant a third of all new Ph.D.s each year, the industry maintains diversity and vitality while competing implicitly head to head. Other comparable concentrations and inequalities abound: Live theater, world-class symphonies, and first-rate art museums are not evenly distributed across the landscape.

In sports, virtually all teams win at least a fourth of their games and few win more than two thirds of the time. Victories—and losses—are not inevitable. In leagues with 30 teams, the probability of winning the ultimate prize—a World Series or Super Bowl—with equal distributions of talent in any given year is .033; thus, a team or city could expect to garner a championship about once a generation. The difference between that periodicity and a dynasty can be as little as a factor of three in that, in the latter instance, a team may win a championship once a decade instead of once per generation.

Sports fans’ memories are selective and the rate at which they fade appears to be small. That a team last won a Super Bowl or World Series more than a decade ago may seem like yesterday. (Many Chicago fans think of the Bears as a championship team, even though their only Super Bowl win occurred in 1986.) Stadiums and arenas are replete with banners from past conquests—in most cases many years removed. Fans don sweatshirts and caps that evoke past memories as much as current realities. That, coupled with our basic hope-springs-eternal (or wait-until-next-year) spirit, fueled with optimism about the most recent draft choice or free agent acquisition, buoys the soul—and ticket sales. Scully’s (1995) empirical validation of serial correlation in sports and his admonition that fans should be patient reinforces our natural instincts and outlooks. In a society that confronts substantial inequality in its daily experiences, the current level of imbalance in baseball may not be intolerable.

In addition to these many factors contributing to the observed inequality of outcomes, whatever the metric, there are several other possible explanations for competitive team imbalance. The following examples are but a few such considerations.

Differences in Population and Preferences

The demand for beachwear in Ft. Lauderdale dramatically exceeds the demand for swimsuits in Buffalo and also in St. Augustine, yet no one seems to worry about bikini imbalances. Indeed, we would probably be puzzled if such sales in Ft. Lauderdale did not exceed combined receipts in Buffalo and St. Augustine by a large margin. Although the populations of Buffalo and Ft. Lauderdale are similar, the per capita demand for bathing suits is greater in Florida than in upstate New York presumably because of greater utility in use. And, although St. Augustine and Ft. Lauderdale share the same climate and accessibility to beaches, the population of Ft. Lauderdale is many times larger than that of St. Augustine. Geographic differences and preferences exist with regard to types of foodstuffs consumed, automobiles driven, and television programs watched.

So, too, is this true for winning sporting contests. Residents in some locations may be willing to pay more to have a more successful local team (e.g., per capita willingness and ability to support a winning ice hockey team is undoubtedly greater in Ontario than in Florida), especially if there are few other recreational, entertainment, and/or cultural amenities close at hand. Population disparities between areas hosting teams can create differences in aggregate willingness and ability to pay even when individual customers in the various host cities have identical tastes.

These differences could be equalized if teams in sports leagues were free to move to areas where the marginal revenue per win is higher than in their initial location. The resulting competition between teams in the same league within a metropolitan area would dilute the incremental revenues earned by the original incumbent and reduce financial disparities among the teams. The collection of Australian rules football teams in Melbourne, the concentration of baseball teams in Tokyo, and the density of premier-league soccer teams in London illustrates the possibility.

Team movements that would help to equalize marginal revenues do not occur, however, because each of the professional men’s team sports leagues in North America exercises a form of collective control over member team movements. Incumbents in the larger cities or those cities where fans are willing to pay more for winning are loath to share their revenues with immigrants from smaller communities or from locations where success on the playing field is less important to the residents. They are protected from incursions either by league constitutional provisions protecting their home territory or by their ability to form coalitions sufficient to prevent other teams from moving into their host community. In short, the competitive imbalance that emanates from the monopoly control of home territories by incumbents arises from the conduct of the leagues’ member teams themselves, because they are unwilling or unable to introduce competition into areas where favored incumbent teams earn considerable economic rents….

These disparities, and even the large market versus small market distinction, would disappear if expansion occurred within an existing cartel league, a rival league formed, and/or some judicial action broke up the cartel (as the resulting smaller leagues, in search of new markets, spawned new franchises).¹⁴ New York City is considered a large market and Kansas City a small one, in part, because the ratio of teams to population is so dissimilar. Migration of existing franchises and/or the creation of new ones located in larger metropolitan areas would equalize these ratios in sports leagues much as retail establishments and other social amenities equalize in more traditional, competitive markets, such as fast-food outlets and swimsuit retailing.

Willingness to Act on Differences in Fan Tastes

In addition to different preferences for winning, fans who live in different areas may differ in their willingness to act on those preferences (Porter, 1992). The more fickle are fans, the more their willingness to buy tickets depends on the local team’s on-field success, the greater is the marginal revenue from the local team’s winning additional contests, and the greater is the incentive for a team to expend resources to secure more highly skilled players. A profit-maximizing league could exploit fickleness by strengthening teams located where fans are less loyal and, in turn, weakening teams where fans will turn out regardless of the success of the local franchise. This would not bode well for the Cubs and Steelers. If a league did this, however, the distribution of playing talent could be inefficient because it is configured in response to fans’ willingness to act on their preferences rather than on the basis of the preferences themselves.

Moreover, in addition to caring about the on-field success of the home team, fans often have preferences regarding dominance that are independent of which team dominates. That is, the competitive balance distribution itself is a public good. Everyone must live with the same overall distribution, and individuals may have strong preferences about the shape of that distribution. Some may prefer imbalance—even sufficient to create dynasties whether they love them or love to hate them. Others may prefer a league in which almost all teams win about half of their contests.

Although fans may have views on what the general distribution of competitive balance should look like, these views may fluctuate over time. As the real income levels of sports consumers have risen over the second half of the 20th century (Siegfried & Peterson, 2000) and the typical fan has moved further up an increasingly dispersive income distribution, fan preferences toward the overall distribution of competitive balance could migrate toward more imbalance in game outcomes, as well.

Differences in Player Tastes

Differences in team playing skills can arise even if there are no differences in the population base of team territories, in fan fickleness, or in fan preferences toward home-team winning or dynasties, because players also have preferences. Players may have a preference for living in certain areas (e.g., Florida or Southern California) and may be willing to sacrifice part of their salary to do so. Or they may see more lucrative endorsement opportunities in areas with relatively stronger media markets….

Network economies can also affect the distribution of playing talent. Players may accept a lower salary to be on a team with greater odds of winning a championship thereby further enhancing the talent of the contender….

Consider, in the extreme, how players might distribute themselves across teams if their salaries were zero. Would they join teams to balance playing talent? College football and basketball may provide some guidance as to what might happen because players’ compensation is relatively constant across universities. There, the attractive new prospects gravitate toward perennial winners to enjoy greater prospects for on-field success, to play with more talented teammates, and to gain more media exposure.

The Trade-Off Between Winning and Uncertainty

Competitive balance is thought to affect attendance of fans through its influence on winning and fans’ response to winning. It is well established that home attendance rises when a team wins more games or matches and declines when it loses.¹⁶ Winning teams also attract more fans when they play on the road. The Yankees attract a crowd when they visit other American League cities whether it is because fans love to hate a winner, wish to see marquee players, or the Yankees have a following in other locations. As the mobility of our population has increased in the post-World War II years, fans of particular teams more frequently reside outside their home territory. Similarly, superstation broadcasts have created national Braves and Cubs fans. Although that phenomenon does not affect home attendance much, it can affect away attendance and television ratings. The extent to which owners of stronger teams take these factors into account depends on league rules for sharing gate and television revenues. The Detroit Red Wings draw huge crowds on the road because they are an elite team of established (read: older), talented players and because former residents of Detroit maintain their affinity for the team and attend games that the Red Wings play on the road. This generates incremental revenue for other National Hockey League (NHL) teams but does not affect incentives facing the Red Wings management, because, in the NHL, visiting teams do not share in gate receipts and there is little national television revenue.

Competitive balance may also affect attendance negatively at games of teams that are relatively weak, because fans view them as out of the running for a championship (as opposed to any individual contest on any given day). If this occurs when the revenue sharing rules are confined largely to home and visiting teams, the owners of the higher revenue teams may ignore the external impact of imbalance on the league’s overall revenues until it reaches the point where the integrity of the overall competition is called into question and fans abandon the sport altogether. The addition of wild-card teams and smaller divisions or conferences, which both increase the number of teams eligible for the playoffs, are innovations designed to retain fans across more cities longer in the regular season by increasing the uncertainty of ultimate outcomes.

Character of the Events Themselves

In the 1980s and 1990s, responding to fan demand driven in part by higher incomes, professional sports franchises repositioned their product by increasing the emphasis on complementary noncontest services and amenities to blur further the distinction between sports and entertainment. (The short-lived Xtreme Football League [XFL] may have overshot that moving target.) Although the Dallas Cowboys Cheerleaders predate the 1980s, they are a vivid representation of the movement. New stadiums that include upscale restaurants, batting cages and other amusements for children, museums, Jumbotron scoreboards with instant replay and promotions, fireworks, and even a swimming pool (in Phoenix) reduce the relative importance of the game in the overall recreational package. Intermission entertainment at basketball, ice hockey, and football games is now standard fare including contests for fans, minishows by well-known musical artists, trampoline groups, and scoreboard video clips…. Luxury boxes and exclusive access areas increase the value of being seen at the game relative to seeing the game.

As the relative importance of the game itself diminishes in the entertainment package, competitive balance becomes a less important determinant of demand. So long as the tendency to broaden the entertainment experience is similar across locations of differing revenue potential, however, this phenomenon, like revenue sharing, should not have more than a modest effect on competitive balance.

Complementary Economic Theory

Traditional economic arguments for what prevents one owner from amassing an all-star line-up in an effort to win every contest and the championship turn on notions of self-interest and the inevitable diminishing marginal returns to, and the increasing marginal cost of, victories. Hence, some natural mechanisms constrain the extent of imbalance in most leagues. That assumes, however, that there are both effective ways to blunt possible negative externalities and that owners, deep down, are profit maximizers.

Common practices within sports leagues to ensure some semblance of a level playing field with regard to the distribution of talent across teams—reverse-order draft systems, various attempts to constrain players’ salaries, revenue sharing—are also at odds with how economic theory generally views peer effects and the optimal sorting of workers. Where spillovers are significant, high-ability workers are more valuable to other high-quality workers, and workers should be more homogeneously sorted.¹⁷ The assignment problem involves how to sort heterogeneous units into groups so that output is maximized (see Becker, 1973; Guryan, 2001; Koopmans & Beckman, 1957; Kremer, 1993; Saint-Paul, 2001). Whether in general production processes, law firms, or marriages, higher ability workers, colleagues, or spouses are more productive when grouped with other high-ability people. Because similar quality workers are more productive when sorted into the same firm, a firm with higher quality workers may not be willing to employ lower quality workers even if those workers would work for less pay.

The general application of this sorting principle in sports implies, for example, that an all-star shortstop’s productivity is higher if he is paired with an all-star second baseman. Moreover, on-the-field traits carry over into the clubhouse and social settings where discipline, motivation, attitude, and joint monitoring can be important, as well. If this proposition is true, when practiced in sports, it should lead to inequality in the distribution of talent—some teams should have good players, other teams poor ones, and competitive imbalance should emerge. (Within baseball organizations, the farm system may serve as a sorting mechanism, and across-team trades and free-agent signings may represent, in part, attempts to capture potential peer-effect gains.) In some sense, then, sports leagues may be fighting an uphill battle in trying to stem the tide of nature and market forces pushing toward imbalance.

INSTITUTIONAL ARRANGEMENTS AND COMPETITIVE BALANCE

Many institutions or off-the-field rules of the game are negotiated every time a collective bargaining agreement (CBA) is renewed. These changes may affect the degree of competitive balance in any professional sports league.

Payroll Caps and Luxury Taxes

Payroll caps and so-called luxury taxes on payrolls create an incentive for owners of teams in higher revenue locations to hire less talent than they would in the absence of these constraints. In the extreme, a binding ceiling on total payroll limits the amount of talent a high-revenue team can accumulate. As a by-product, a firm payroll cap also increases the profits of high-revenue teams. Its impact on competitive balance depends on the extent to which the cap is below the free-market payroll level of the highest payroll team that also dominates on the field (read: Yankees).

One danger of payroll caps is that they may be porous (e.g., the NBA cap that includes a well-known loophole—the Larry Bird exemption—designed to preserve team unity, or the NFL, in which, for 2002, accounting conventions permitted virtually every team in the league to be over the cap), and they create a temptation for violating the rules (e.g., the Minnesota Timberwolves paid a large fine for paying Joe Smith off the books in excess of the cap). A system in which cheaters are more successful than those who play by the rules may be even less inviting than one in which teams fortunate enough to own rights to high-revenue areas are more successful. Moreover, payroll (and salary) caps do not extend to complementary inputs, so successful coaches … can command a sizable sum for managing a team on which the total payroll, and even individual salaries, may be frozen.

A less drastic version of the payroll cap is what has come to be known in professional sports as a luxury tax on payrolls…. The rationale is that fielding a highly paid team is a luxury for one owner that imposes negative externalities on other franchises. This makes sense if the tax becomes effective at the point where incremental talent on the high-revenue team creates a league-wide net negative impact that might be ignored by the owner of the high-revenue team, because, under league revenue sharing rules, he or she bears little of the cost of an over accumulation of talent. If the tax rate accurately reflects this internal externality, it creates an incentive for the high-revenue team owner to balance his or her gain against the cost to third parties. The trick, of course, is to impose the tax rate at the proper payroll level and to fix the rate such that it internalizes the externality.

To be accepted as fair, luxury tax revenues usually compensate those who bear the burden of the externality. This tax in MLB is, indeed, structured properly to achieve these goals, although no one knows whether the threshold payroll, the tax rate, and the beneficiaries of the redistribution are properly identified.

Salary Caps

The NBA [Ed. Note: and the NHL as well] is the only U.S. men’s professional sports league currently using individual player salary caps to control team expenditures. Maximum salaries are based on seniority in the league. Salary caps emerged from the NBA’s collective bargaining with the players’ union in 1998 and early 1999 at least partly in reaction to the league’s leaky team payroll cap.

Individual salary caps limit a team’s payroll to the product of the roster size times the cap for the most senior players—not a significant constraint. Individual salary caps based on seniority are unlikely to have much of an impact on competitive balance because a high-revenue team can sign a complete team at the highest allowed salary thereby accumulating an entire team of the most desirable players in the league. This is not likely to happen, however, because the most expensive team one can buy is also an old team. A team can assemble a more competitive roster paying less than the maximum.

If league rules constrain salaries, free agent players’ choices of which team to join will turn more on their personal preferences including desirable places to live and prospects for endorsements and a championship. Individual salary caps are likely to increase competitive imbalance because they encourage players to rely more on their preference for joining a winning team than on differences between salary offers. Salary caps will, however, limit the payroll of the high revenue teams, because they are the teams that would have bid above-cap salaries to acquire the more talented players. Individual player salary caps probably help the highest revenue teams increase both their profits and their playing talent.

Revenue Sharing

Revenue sharing (see Marburger, 1997) reduces the financial incentive of each franchise to acquire more talent, because the payoff to winning is constrained by the share paid to other franchises. Sharing revenues that are sensitive to playing success blunts the incentive to win for all franchises—those in low-revenue potential locations as well as those in New York.

Because the demand for winning may vary across communities with the intensity of competition for playing talent (fans in some communities find it more satisfying to win when there is a dogfight for talented players), revenue sharing can affect competitive balance. If fans in high revenue-potential locations are relatively more sensitive to winning when competition for players (from all teams) is more intense, then increased revenue sharing will improve competitive balance, because the incentive to acquire better players will be muted further for high revenue-potential teams. Of course, if the fans in high revenue-potential locations are less sensitive to winning when competition for players is more intense, then expanded revenue sharing will exacerbate competitive imbalance. Contrary to popular belief, the effect of revenue sharing on competitive balance, although likely modest, could go in either direction.

If revenue sharing blunts the incentive for all teams to bid aggressively for talented players thereby muting salary differentials between more and less talented players, non-pecuniary considerations will loom larger in free agents’ decisions between competing offers. If players value the opportunity to play on championship contenders for reasons beyond financial rewards, increased revenue sharing could thus lead to greater competitive imbalance—a result likely to surprise many people.

The premier men’s professional team sports leagues engage in a variety of revenue sharing arrangements. The NFL is the most socialistic, sharing revenues from its huge national television contract and merchandise sales (almost) equally and gate receipts 66/34 to the home and visiting teams, respectively.

The two baseball leagues modestly share local revenues. Ice hockey and basketball share the fewest revenues; in both the NHL and the NBA, the home team retains all gate receipts. A relatively new wrinkle in baseball is dynamic pricing (called variable pricing in the press)—long a feature in other industries, including airlines and hotels, through which ticket prices vary not only by quality of the seat location but also by day of the week, month, and, now, opponent…. To the extent that Kansas City can charge fans more for a popular opponent like the Yankees, this represents implicit revenue sharing that narrows inequality in team revenues across a league and thereby promotes more competitive balance.

Number of Teams and Relocation Restrictions

… [T]he core of the competitive imbalance problem is the differences in population and tastes for sports among metropolitan areas coupled with each league’s artificial restriction on team movements. Let the teams move to wherever they like and the differences in revenue potential will dissipate and competitive balance will improve.¹⁹ Yes, high revenue-potential teams will be less profitable, but if protecting the profits of teams fortunate enough to have the largest demand for their local monopoly is the goal, then explain the contraction on that basis.

To the extent that a competitive balance-targeted policy also affects profitability by restraining team payrolls, it may also affect the number of teams. Limitations on team payrolls make lower revenue-potential locations viable prospects for joining the league and, in turn, tempt owners who pocket league initiation fees to expand the number of marginal franchises and, thus, by their own conduct, reduce competitive balance.

Reverse-Order Player Drafts²⁰

.…

To the extent that teams are free to transfer player contracts, the initial allocation of property rights—whether to the worst team in the league or the best team in the league—implies no difference in the ultimate allocation of player resources and, hence, competitive balance. Unless there are constraints on player sales, a player new to the league who is expected to generate a greater marginal revenue product at a franchise with high revenue potential than at one with low revenue potential will end up playing for the high revenue-potential franchise, either by initially signing with it or because the lower revenue-potential franchise sells his contract to the high revenue-potential franchise.

….

Other Revenue Enhancements

Luxury box revenues, stadium naming rights, field advertising, and other local revenue sources can affect competitive balance if they are not proportional to other revenues between teams. If stadium naming rights and luxury box revenues, for example, constitute a higher ratio to gate receipts for higher revenue-potential teams, these added revenues will increase the disparity between teams and may exacerbate competitive imbalance. On the other hand, naming rights and luxury box revenue are not likely to be sensitive to team performance. Although a team in a high revenue-potential location may enjoy more of these peripheral revenues than one in a lower revenue-potential area, unless the revenue is linked to improved team performance on the field, there is no incentive for the team to spend the revenue enhancement on improving its talent level.

Structure of the Competition

Much in the same way that financial arrangements can affect balance between competitors, so, too, can the nature and structure of the contests themselves.²² How pole positions in auto racing, lane assignments in swimming, brackets in tennis tournaments, or starting gates in thoroughbred races are determined can influence outcomes. In team sports, comparable issues turn on how home field, court, or ice is established for contests and the length of the series.

Lengthening a series reduces the probability that the weaker opponent will win; increasing the number of playoff rounds and the percentage of teams eligible for a championship reduces the chances that the best team will capture the championship (Sanderson, 2002)…. Reducing the number of playoff teams—say, by reverting to only one American League and one National League division in baseball—with the winner of each league meeting in the World Series would ensure that the teams with the best regular-season record met for the championship, but this would entail serious trade-offs—for example, a loss of excitement late in the season and forgone playoff revenues.

….

A final “macro” structural change that would replace the weakest teams with stronger ones, long familiar in soccer (European football), is the operation of open leagues with promotion and relegation. Closed leagues, when combined with reverse-order drafts and revenue sharing, tend to reward failure and punish success, whereas open leagues reward success and punish failure (see Dobson & Goddard, 2001; Noll, 2002; Rosen & Sanderson, 2001.)

….

Notes

1.  Protests of the New York Yankees’s payroll in 1999 included Kansas City fans turning their backs when the Yankees came up to bat and then filing out of Kauffman Stadium in the third inning. Similar greetings accompanied the high-salaried Alex Rodriguez in 2001 when he returned to Seattle now as a member of the Texas Rangers.

….

5.  Comments on and criticism of the Blue Ribbon Report (BRR) and its conclusions include articles by Ross (2002), Eckard (2001a), and Schmidt and Berri (2002).

6.  A century ago, of course, the reserve clause was the principal mechanism employed by owners—allegedly to ensure balance: Outright collusion that restrained bidding for free agents was the tool of choice in baseball 20 years ago. Organizing new leagues, such as Major League Soccer (MLS) and the Women’s National Basketball Association, as single entity structures is a more recent manifestation of similar goals. Limits on roster size are often thought to enhance competitive balance by preventing some teams from stockpiling talent; however, there is little literature on this subject and scant empirical support for that contention.

….

12.  Questionable officiating during the National Football League (NFL) playoffs arguably determined Super Bowl opponents in both 2002 and 2003.

14.  See Ross (1989) and Baade and Sanderson (1997) for arguments and proposals for breaking up existing leagues into smaller entities.

….

16.  Syzmanski’s review of the literature (in press) showed that empirical support for the correlation between winning and demand exists but that it is weaker than usually assumed. In his 2001 Economic Journal article on English soccer, Syzmanski (2001) found that match attendance appears to be unrelated to competitive balance.

17.  The authors are indebted to Todd Kendall for pointing out this literature and complementary arguments.

….

19.  Of course, the purchased right to operate in exclusive territories is commonplace and expected in franchise operations and many other commercial areas and, generally, may serve efficiency purposes not just in professional sports.

20.  Additional draft dimensions include supplemental drafts, similar to expansion drafts, at the conclusion of regular seasons and, for MLB, the inclusion of non–U.S. players in the annual amateur draft. We do not treat either of these variations in our article.

….

References

Akerlof, G. (1976). The economics of caste and of the rat race and other woeful tales. Quarterly Journal of Economics, 90(4), 599–617.

Baade, R. A., & Sanderson, A. R. (1997). Cities under siege. In W. Hendricks (Ed.), Advances in the economics of sport, Vol. 2 (pp. 77–114). Stamford, CT: JAI Press.

Becker, G. S. (1973). A theory of marriage. Journal of Political Economy, Part I, 81, 813–846.

Costas, B. (2000). Fair ball: A fan’s case for baseball. New York: Broadway Books.

Dobson, S., & Goddard, J. (2001). The economics of football. New York: Cambridge University Press.

Eckard, E. W. (2001a). Baseball’s Blue Ribbon Report: Solutions in search of a problem. Journal of Sports Economics, 2(3), 213–227.

Guryan, J. (2001). Estimating peer effects in the workplace: Evidence from random pairings in professional golf tournaments. Manuscript in preparation.

Koopmans, T. C., & Beckman, M. (1957). Assignment problems and the location of economic activities. Econometrica, 25, 53–76.

Kremer, M. (1993). The O-ring theory of economic development. Quarterly Journal of Economics, 108, 551–575.

Lazear, E., & Rosen, S. (1981). Rank-order tournaments as optimum labor contracts. Journal of Political Economy, 89, 841–864.

Levin, R. C., Mitchell, G. J., Volcker, P. A., & Will, G. F. (2000). The report of the Independent Members of the Commissioner’s Blue Ribbon Panel on baseball economics. New York: Major League Baseball.

Marburger, D. (1997). Gate revenue sharing and luxury taxes in professional sports. Contemporary Economic Policy, XV(2), 114–123.

Noll, R. G. (2002). The economics of promotion and relegation in sports leagues. Journal of Sports Economics, 3(2), 169–203.

Porter, P. K. (1992). The role of the fan in professional baseball. In P. M. Sommers (Ed.), Diamonds are forever: The business of baseball (pp. 63–76). Washington, DC: The Brookings Institution Press.

Rogers, P. (2001, December 18). Baseball’s flaw: Lack of competitive balance. Chicago Tribune, pp. 1, 6.

Rosen, S., & Sanderson, A. (2001). Labour markets in professional sports. The Economic Journal, 111(469), F47–F68.

Ross, S. F. (1989). Monopoly sports leagues. Minnesota Law Review, 73(3), 643–761.

Ross, S. F. (2002). Light, less-filling, it’s blue-ribbon. Cardozo Law Review, 23(5), 1675–1704.

Rottenberg, S. (1956). The baseball players’ labor market. Journal of Political Economy, 64, 242–258.

Rottenberg, S. (2000). Resource allocation and income distribution in professional team sports. Journal of Sports Economics, 1(1), 11–20.

Saint-Paul, G. (2001). On the distribution of income and worker assignment under intrafirm spillovers, with an application to ideals and networks. Journal of Political Economy, 109, 1–35.

Sanderson, A. R. (2002). The many dimensions of competitive balance. Journal of Sports Economics, 3(2), 204–228.

Schmidt, M. B., & Berri, D. J. (2001). Competitive balance and attendance: The case of Major League Baseball. Journal of Sports Economics, 2(2), 145–167.

Scully, G. W. (1995). The market structure of sports. Chicago: The University of Chicago Press.

Siegfried, J. J., & Peterson, T. (2000). Who is sitting in the stands? The income levels of sports fans. In W. S. Kern (Ed.), The economics of sports (chap. 3, pp. 51–73). Kalamazoo, MI: UpJohn.

Szymanski, S. (2001). Income inequality, competitive balance, and the attractiveness of team sports: Some evidence and a natural experiment from English soccer. The Economic Journal, 111(469), F69–F84.

Szymanski, S. (in press). The economic design of sporting contests: A review. Journal of Economic Literature.

Whitney, J. D. (1993). Bidding till bankrupt: Destructive competition in professional team sports. Economic Inquiry, XXXI, 100–115.

REVENUE SHARING IN THE NFL

REVENUE SHARING AND THE SALARY CAP IN THE NFL: PERFECTING THE BALANCE BETWEEN NFL SOCIALISM AND UNRESTRAINED FREE-TRADE

Clay Moorhead

I.   THE PRE-GAME SHOW: AN INTRODUCTION

Since its inception in 1961, the revenue sharing system utilized by The National Football League (“NFL”) has been instrumental in propelling the League to the forefront of professional sports in America.¹ In the early 1960s, Commissioner Pete Rozelle ushered in an era of collectivism among the individual team owners that came to define the NFL’s economic approach for the next four decades. Relying on the collective outlook that became known as the “League Think” philosophy, Rozelle convinced the individual owners that by pooling their resources and sharing their profits, they would be able to provide a product that, as a whole, was much more valuable than the sum of its parts.²

The idea took off in 1961 when Rozelle successfully persuaded the individual owners to give up their local television broadcasting rights and instead sell all broadcasting rights together as a national package; the proceeds were then split evenly among each NFL team.³ From 1961 onward, the League’s continued commitment to the equal sharing of television revenues has remained the foundation of the NFL’s revenue sharing system.⁴ Furthermore, the financial parity that resulted from this collective philosophy enhanced the competitiveness of the League as a whole, thereby fostering the massive popularity still enjoyed by the League today.⁵

For nearly forty years, the NFL’s revenue sharing system remained largely unchanged as NFL owners were content to rely on the success that revenue sharing brought to the League as a whole.⁶ During this period, the individual owners were completely satisfied with the revenue they received under the revenue sharing system, and they were largely unconcerned with trying to garner any type of competitive financial advantage over their fellow owners.⁷ In recent years, however, there has been a significant erosion in the NFL’s collective mentality largely due to the development of sources of unshared revenue, known as “local revenue,” which enables certain teams to gain a competitive advantage by utilizing this unshared revenue that is unavailable to some of their less fortunate counterparts.⁸

Although the NFL and its member-clubs shared more than eighty percent of the roughly $5.5 billion in total League revenue generated during the 2004 season [Ed. Note: league revenues were approximately $8.5 billion in 2009], there has recently been a dramatic increase in unshared local revenue, which is threatening the future financial parity of the League.⁹ Furthermore, because most sources of local revenue are directly tied to a team’s stadium ownership and its market size, the League’s current revenue sharing system has created an environment in which the most profitable teams are better situated to capitalize on unshared local revenue, thereby exacerbating a widening revenue gap between those teams at the top and those at the bottom.

The current revenue sharing system utilizes a two pronged approach to distribute League revenue, but it also carves out an exception for sources of unshared local revenue. The two prongs of the revenue sharing system can be distinguished by the source of revenue and amount shared under each category, as well as the various documents that govern their existence. The first category comprises the sharing of revenue generated by licensing and sponsorship agreements, and this category is governed by a recently approved accord among NFL owners known as the “Master Agreement.”¹⁰ The second category covers the sharing of all revenue that is generated by the actual playing of games on the field, and this category is governed by a combination of provisions in the Collective Bargaining Agreement (“CBA”) and the NFL Constitution and Bylaws (“NFL Constitution”).¹¹ This second category, which includes television broadcasting deals and gate receipts from stadium attendance, is responsible for a strong majority of the total revenue shared between the League and its individual franchises.¹²

Furthermore, while these categories can be viewed as two components in a greater revenue sharing system, it is important to note that they were not developed together, but instead are separate outgrowths of the NFL’s greater collective mentality. As a result, the system does not necessarily fit flawlessly together, which makes any comprehensive analysis of the overall system a somewhat difficult task. Nevertheless, under their respective governing documents, both categories treat League revenue in a similar fashion by distinguishing those revenue sources that are subject to sharing from those local revenue sources that remain unshared….

….

This note argues that the League must reform the current revenue sharing model in order to correct the widening revenue gap between the lowest and highest revenue teams, which if not adequately addressed soon could severely impair the future popularity and success of the NFL. Part II describes the emergence of revenue sharing in the NFL; its evolution due to past challenges initiated by profit-oriented owners; and the details of the current revenue sharing system in place today. Part III establishes how the emergence of unshared “local revenue” has eroded the NFL’s collective mentality, thereby causing a variety of problems for the League. Part IV proposes a solution intended to effectively alleviate the League’s growing financial inequalities while at the same time maintaining the important incentives created by a reasonable amount of unshared revenue. In particular, this section proposes a redistributive formula that allows for a healthy level of unshared local revenue, but simultaneously prevents extreme financial inequalities by redistributing excessive local revenue to those teams most in need.

On March 8, 2006 … the NFL owners and the NFLPA reached a last-minute labor agreement, which included significant reforms to the revenue sharing system….

With their backs against the wall, the owners were forced to postpone the official start of the 2006 season and extend the March 3rd free agency deadline in order to find a way to reach an agreement that now preserves the current salary cap system, which would have otherwise expired at the official start of the 2006 season.¹⁸ Largely surrendering to the demands of the players union, the owners not only approved a six-year collective bargaining agreement, but they also reached a corresponding revenue sharing deal, which the NFLPA had astutely required as a condition of its final offer for reaching a new labor pact.¹⁹

… [T]he League’s newly adopted plan appears to be somewhat of a quick-fix, which will still face many of the same issues raised in this note, and has already garnered criticism from both ends of the revenue sharing debate.²¹ Finally, it is worth noting that the new guard of profit-oriented owners, who strongly opposed the idea of increased revenue sharing, appear to have reluctantly embraced the “League Think” philosophy by putting the League ahead of themselves, and recognizing that the value of their individual franchise is directly tied to the overall health of the League.

II.   FIRST AND TEN: THE EVOLUTION OF REVENUE SHARING IN THE NFL—FROM ITS ORIGINS TO THE LEAGUE’S CURRENT SYSTEM

A.   The Emergence of the “League Think” Philosophy

The NFL’s collective “League Think” philosophy emerged in the early 1960’s as the brain child of then Commissioner, Pete Rozelle.²² Rozelle convinced the League’s founding owners, such as George Halas of the Chicago Bears and Wellington Mara²³ of the New York Giants, to relinquish their control over local television broadcasting rights, and instead combine these rights into a national package.²⁴ According to Rozelle’s plan, the League would then sell this national package to the television networks, and the proceeds of the sale would be split evenly among each NFL franchise.²⁵ Rozelle argued that by pooling resources and sharing revenue, the “League Think” philosophy would stabilize the competitive balance within the League, thereby making its product more marketable over the long run; and as a result, ensuring the viability of the League as a whole.²⁶

Explaining that the profitability of each individual team was necessarily tied to the success of the League as a whole, Rozelle convinced the owners that their individual profits would increase by putting the interests of the League ahead of their own.²⁷

The NFL owners ultimately agreed to sell their television rights to CBS as a national package, but the resulting contract between the NFL and CBS was voided by a 1961 federal circuit court decision finding that the contract violated antitrust laws.²⁸ Responding to the circuit court’s decision, seventy-two days later Congress passed the Sports Broadcasting Act, which enabled professional sports leagues to negotiate television deals as single units, thereby creating an antitrust exemption that has revolutionized the sports industry.²⁹ In 1962, armed with the recently enacted antitrust exemption, the NFL and CBS entered into a contract whereby CBS paid the NFL $4.65 million per year for two years in exchange for the exclusive rights to broadcast all NFL games played during that period.³⁰ As a result, the popularity of the league exploded with television ratings soaring fifty percent in the second year of the contract.³¹ Furthermore, the NFL’s next contract with CBS reflected the League’s rapidly growing popularity through a payout of $14.1 million per year, more than triple its previous contract.³²

Over the next two decades, the NFL continued to grow, especially with the 1970 merger of the NFL and its upstart rival, the American Football League (“AFL”).³³ Despite the League’s continued growth, however, the NFL’s business model and that of the individual teams changed very little.³⁴ Throughout the 1980s, the NFL owners were content to sit back and collect their ever-increasing, equal shares of the national television deals,³⁵ while also sharing the gate receipts generated by crowded stadiums.³⁶ The profits accumulated by the individual teams were heavily dependent on the revenue generated by the league as a whole, and the individual owners were not overly concerned with gaining a competitive advantage by increasing their own team’s relative revenues.³⁷ According to current Baltimore Ravens President Dick Cass, “‘There were not as many revenue opportunities ….’ Most owners “didn’t control the stadiums, they didn’t control concessions, they didn’t control parking. Sports sponsorships weren’t a big deal.’”³⁸ Under this business model, the opportunities for teams to generate their own revenue were virtually nonexistent, and the only way for teams to maximize their profitability relative to other teams was to cut costs—namely, player salaries.³⁹

B. The Evolution of the Revenue Sharing System: Historical Challenges

While the general structure of the NFL’s cooperative approach remains an integral part of the League today, challenges to the League’s collective mentality, which began in the 1990s, have revolutionized the predominant business model currently utilized by the NFL and its owners. As former NFL Commissioner Paul Tagliabue explains, the NFL remains committed to maintaining its cooperative structure because “clearly, the attractiveness of the league is not dependent on any one team or small group of teams…. It’s a total league. That was the philosophy from the early ’60s onward, and it’s continued.”⁴⁰ The business model followed by the NFL owners, on the other hand, has drastically evolved in recent years due largely to an emerging faction of owners who believe that teams should be given greater control over their revenue in order to better market themselves.⁴¹

One of the first and most influential owners to challenge the NFL’s “League Think” philosophy was Jerry Jones, an oil and gas tycoon who paid $140 million for the Dallas Cowboys franchise in 1989.⁴² Initially, Jones focused his confrontations with the League over the issue of national sponsorship and marketing deals, which at that time were exclusively controlled by the League’s profitable arm, NFL Properties.⁴³ Jones criticized his take from the national sponsorship deals as inadequate for the marketing power of his particular franchise.⁴⁴ Jones basically felt that he could do a better job of marketing his team by negotiating local deals, instead of relying on the League to market his team as part of the total package of the League.⁴⁵

In 1995, Jones directly challenged the League by entering into local sponsorship deals with Pepsi and Nike, despite the League’s supposedly exclusive deals with Coke and Players Inc., the licensing arm of the NFLPA.⁴⁶ The brash move by Jones prompted the NFL to file a lawsuit against the Cowboys for $300 million.⁴⁷ The League labeled Jones’s conduct as “ambush marketing deals” and sought a ruling that would enjoin the Cowboys from violating their agreements with NFL Properties regarding the NFL’s exclusive control over team logos.⁴⁸ Jones responded by filing a $700 million counterclaim against the League, accusing the NFL of preventing teams from marketing themselves.⁴⁹ In late 1996, the two sides ultimately reached a settlement that allowed the Cowboys to keep their new sponsorship deals. More importantly, it opened the door for other NFL teams to secure their own local sponsorship deals.⁵⁰

Jones’s ability to successfully challenge the League in the area of local sponsorship not only created a new source of unshared revenue for individual teams, but more significantly, it marked the beginning of an erosion in the collective mentality that has dominated the League for so many years.⁵¹ The current ramifications of this settlement between Jones and the NFL are illustrated by the co-existing marketing deals currently held by both individual teams and the League as a whole. For example, Pepsi and Coors are now the “official” soft drink and beer of the NFL, giving each company the right to use the NFL logo and the logos of the 32 individual franchises in national advertising.⁵² Individual teams, however, now may arrange their own local deals with other vendors, such as Coke and Budweiser.⁵³ While Jones’s victory over the NFL was limited to the area of sponsorship and marketing deals, his incentive-based arguments have gained some support from a few of the other owners, and the League has ultimately been forced to re-evaluate the two-prong current revenue sharing system.

C.   The Current Revenue Sharing System in the NFL

The current revenue sharing system in place in the NFL today can be separated into two basic subsections or categories. The first category comprises the sharing of revenue generated by licensing agreements such as sponsorships and marketing deals, as well as League merchandise sales. This licensing element is governed by the recently enacted “Master Agreement,” which is an extension of the “NFL Trust,” an agreement between owners with origins dating back to the collective mentality that emerged in the 1960s.⁵⁴ Under the Master Agreement, the NFL retains most of its control over the team logos used by the 32 individual franchises, and the League has reserved some of its power to determine how each individual franchise can use its own logo.⁵⁵ The new agreement, however, does not simply preserve the status quo regarding local sponsorship deals, but instead also gives individual teams greater freedom to control their own local marketing revenue.⁵⁶ Nevertheless, because the Master Agreement was not unanimously approved by all the team owners, there is some uncertainty about whether the agreement will be binding on those owners who voted against it.⁵⁷

The second more commonly known category of the revenue sharing system is comprised of all the revenue that is generated by the actual playing of the games on the field.⁵⁸ Unlike the Master Agreement, this category is not governed by a single document, but instead by a combination of provisions from both the NFL Constitution and the CBA. This second category, which includes the television deals covering the rights to broadcast NFL games as well as the gate receipts generated by stadium attendance, comprises the strong majority of the total revenue shared among individual NFL franchises.⁵⁹

Although this second category generates the vast majority of the revenue shared by NFL teams, both aspects of the revenue sharing system represent the collective “League Think” philosophy that has played such a central role in the success of the NFL.⁶⁰ Despite their common goal, however, the monetary disparity between these two categories cannot be ignored. For example, under the system in place at the end of the 2004 season, the licensing element only generated between $4 and $5 million for each team, whereas the national television deals alone generated $80 million per team.⁶¹ Notwithstanding the actual disparity in the contribution that each category makes to the overall revenue shared by the individual NFL teams, it is important that they be recognized as part of the same general system because they are inseparably connected by the League’s greater collective mentality. Furthermore, as a number of owners noted when voting in favor of the Master Agreement, its approval was a significant gesture in reaffirming the importance placed upon the League’s commitment to revenue sharing.⁶²

1.   The Master Agreement’s Contribution to the Revenue Sharing System

The new Master Agreement determines which categories of licensing are exclusively controlled by the League and conversely, how individual franchises can supplement their income with unshared licensing and sponsorship agreements.⁶³ Under the Master Agreement, the most significant sponsorship category exclusively controlled by the League is on-field sponsorship deals.⁶⁴ The NFL currently has onfield deals with Gatorade, the Pepsi-owned sports drink, [Reebok] and Motorola Inc., which supplies headsets worn by NFL coaches.⁶⁵ These … companies are the only corporate sponsors whose brands are allowed on NFL sidelines.⁶⁶

While the Master Agreement clearly restricts the ability of individual owners to enter into sponsorship deals that might conflict with League-wide sponsors, the agreement also recognizes the victory Jerry Jones achieved in 1996 by providing some flexibility for individual teams to negotiate their own local sponsorship deals.⁶⁷ These local sponsorship deals serve as an important source of unshared revenue, which has increasingly drawn the attention of team owners seeking to obtain a competitive advantage over the rest of the League. According to the Master Agreement, the League can sell the rights to use the 32 team logos collectively only within an exclusively League-controlled sponsorship area.⁶⁸ Otherwise, the individual teams legally own their own logos and are free to negotiate their own local marketing deals using their logos.⁶⁹ Furthermore, teams can establish their own retail shops to sell team apparel, and unlike the massive quantity of merchandise sold by the League itself, any apparel sold at team stores generates unshared revenue streams.⁷⁰ Therefore, teams that create their own retail shops can take advantage of their marketability by keeping all of the revenue generated by these stores.

Under the Master Agreement, the individual franchises and the NFL itself equally share all the revenue that is generated by League merchandise sales and exclusive League-wide sponsorship deals.⁷¹ In recent years, the individual teams received between four and five million dollars a year, but that figure is expected to at least double under contracts already signed by the League.⁷² The NFL agreed to extend its sponsorship agreement with Pepsi in 2002, under which Pepsi is obligated to pay $440 million in rights, fees, advertising, and marketing through 2011.⁷³ Pepsi will pay the League an average of sixteen million dollars a year, which is about one-third more than under its previous contract; other advertising obligations could push the total value of the deal over $550 million.⁷⁴ Furthermore, the League also recently extended its sponsorship deals with Gatorade and Visa, which should further contribute to the increasing amount of shared licensing revenue.⁷⁵

Despite mounting concern that there should have been an overhaul of the entire revenue sharing system before proceeding with the Master Agreement, in the spring of 2004 the owners passed the fifteen year-long agreement by a vote of twenty-six to three (with three abstentions).⁷⁶ Prior to the vote, the Raiders, Redskins and Cowboys, which at the time were the three teams expected to vote against the agreement, all expressed their belief that they would be bound only if they voted in favor of the agreement.⁷⁷

Following the vote, however, the question still remains whether the agreement is binding on those owners who voted against it. Jerry Jones has publicly maintained that he is not bound by the Master Agreement because he voted against it.⁷⁸ The League, on the other hand, expressed the converse view that any vote on matters of League policy requires a three-quarters majority, or twenty-four team owners, at which point the policy takes effect and becomes binding on all NFL teams.⁷⁹ Other team owners have supported the League’s position. As Cleveland Browns President Carmen Policy explained, “anybody who feels a league, a partnership, cannot bind itself by a three-fourths vote is calling for anarchy.”⁸⁰

Furthermore, the League specifically structured the Master Agreement to inoculate its ultimate approval from any legal challenges by owners like Jerry Jones.⁸¹ In particular, the Master Agreement gives individual franchises ownership of their own logos, and teams no longer need League approval before entering local sponsorship deals.⁸² Additionally, the League also tried to placate owners like Jones by expanding the geographic constraints placed on each team’s marketing territory, an area within which a given team is free to enter into their own local sponsorship deals.⁸³ Previously, teams were prevented from marketing beyond a seventy-five mile radius around their home city, but the Master Agreement now allows teams to market throughout their entire state, provided they do not reach within a seventy-five mile radius around an in-state competitor’s city.⁸⁴ When considering these characteristics of the Master Agreement, it would seem that there is not an especially great probability of an owner challenging the Agreement. It is impossible, however, to predict whether an owner like Jerry Jones might be offered a deal attractive enough to entice him into challenging the Master Agreement.

In the end, the question of whether the Master Agreement is binding on those owners who voted against it remains unanswered, but if the conflict were to come to a head, there could be major ramifications throughout the League. The likelihood that Jones would prevail on such a challenge is relatively slim because the argument articulated by the League and owners like Policy has plenty of merit. Furthermore, there are policy reasons why Jones’ argument should fail, such as preventing an increase in significant economic inequalities, which threaten the competitive balance that has been so instrumental to the NFL’s success.⁸⁵

Although there is no clear answer regarding what would happen if Jones challenges the Master Agreement, League sources have speculated that Jones might initiate a challenge by seeking a Cowboys sponsor which conflicts with an exclusive category reserved for League-wide action under the Master Agreement.⁸⁶ A likely scenario would be for Jones to negotiate a local on-field sponsor that conflicts with the League-wide on-field sponsorship deals already negotiated with companies like Gatorade and Motorola.⁸⁷ If Jones indeed decides to challenge the Master Agreement, the League would most likely respond by filing a lawsuit against Jones for violating the terms of the Agreement. The question would then become whether a three-quarters vote by the team owners is in fact binding on every team regardless of whether a specific team voted against the Master Agreement. Finally, in the event that Jones successfully challenges the limitations of the Master Agreement, there would not only be a substantial monetary loss for the NFL’s revenue sharing system, but more importantly, it would create a symbolic rift in the foundation of the League’s revenue sharing philosophy.

2.   The Second Category of the Revenue Sharing System: Television Revenue and Gate Receipts

The second category of the revenue sharing system, which comprises the vast majority of the total amount of revenue shared each year, consists of all the revenue generated by the actual games on the field. This general subsection of the revenue sharing system is governed by a series of provisions in both the CBA and the NFL Constitution….

The two major revenue sources … are: (1) the proceeds from the sale of television broadcasting rights and (2) “gate receipts … including ticket revenue from “luxury boxes, suites[,] and premium seating subject to gate receipt sharing among NFL Teams.”⁹¹

While the equal sharing of television broadcasting rights is relatively straightforward, the sharing of gate receipts is more complex and deserves further explanation. First, it is imperative to distinguish between “ticket revenue” from luxury boxes, which is “subject to gate receipt sharing among NFL teams,” and non-ticket luxury box revenue, which is not subject to revenue sharing, and is therefore coveted by owners as a source of supplemental unshared revenue.⁹² This distinction is based on the idea that luxury boxes can be sold in such a way that they are not considered part of normal ticket sales, and thus are not considered gate receipts subject to revenue sharing.⁹³

Next, it is important to establish the precise manner in which gate receipts subject to revenue sharing are actually shared among the individual franchises. The NFL Constitution provides, “The home club shall deliver to the League office the greater of $30,000 for each regular season and preseason game, or [forty percent] of the gross receipts after the following deductions….”⁹⁴ While this provision establishes a floor of $30,000 that must be shared by the home team for every game, in today’s market, forty percent of gross receipts will invariably exceed $30,000, thereby automatically triggering the forty percent option.⁹⁵ Under the old system of gate receipt sharing, the ticket revenue for a particular game was shared roughly sixty-forty between the home and visiting team respectively with none of the ticket revenue reaching beyond the two teams participating in that particular game.⁹⁶

Although it would appear that gate receipts should be shared according to the sixty-forty split, certain deductions afforded to the home team cause the visiting team’s share to diminish to thirty-four percent of gross receipts. The NFL Constitution establishes that in addition to deductions for federal, state, and municipal taxes on ticket sales, the home team is allowed a significant deduction for “stadium rental allowance equal to fifteen percent (15%) of the gross receipts after deducting the taxes.”⁹⁷ As a result of these deductions, the home team ends up giving the League thirty-four percent of the gross receipts for each home game (forty percent of the eighty-five percent remaining after the deduction for the stadium rental allowance).⁹⁸ Under the old system of gate receipt sharing, which was in place through the 2001 season, the League would then remit the thirtyfour percent directly to the visiting team that played in that particular game.⁹⁹

In 2001, however, the NFL adopted a resolution amending its Constitution with the following language, “beginning with the 2002 NFL season, all regular season and preseason game visiting team shares shall be pooled and shared equally among the 32 Member Clubs.”¹⁰⁰ This amendment to the revenue sharing of gate receipts should increase the redistributive effect of the League’s revenue sharing system, and serves as a further indication of the NFL’s commitment to the “League Think” philosophy. Under the old system, a popular team like the Dallas Cowboys could take advantage of the sellout crowds that it helped draw to opposing stadiums by keeping the entire thirty-four percent of gate receipts for itself. Conversely, perennial cellar-dwellers like the Arizona Cardinals, who drew far smaller crowds while on the road, experienced a competitive disadvantage because their visiting team share (“VTS”) was undoubtedly smaller than that of the Cowboys. By pooling each team’s VTS, and then redistributing the total amount equally among the individual franchises, the 2001 modification of gate receipt revenue sharing should help ensure greater financial equality throughout the league.

In opposition to this redistributive effect, financially-minded owners like Jerry Jones would argue that individual teams should be able to take advantage of their marketability, and should not be forced to carry the burden of less marketable teams. Despite the apparent justification for such an argument, the redistribution of revenue from teams at the top to teams at the bottom has become necessary for the continued economic success of the League; especially because the current economic inequality in the NFL has reached such critical levels that the future viability of lower-revenue teams is in serious doubt.¹⁰¹

3.   Television Revenue: The Foundation of the NFL Revenue Sharing System

The two major revenue sources … television revenue and gate receipts, compose the entire second category of the revenue sharing system. As previously noted, these two revenue streams generate the vast majority of the League’s shared revenue, which amounted to a total sharing of more than eighty percent of the approximately $5.5 billion in total League revenue from the 2004 season.¹⁰² [Ed. Note: The NFL reported $8.5 billion in revenue in 2009.] While gate receipts undoubtedly play a critical role in the League’s revenue sharing system, it is the national television deals that operate as the heart and soul of revenue sharing in the NFL.

From the first equally shared national television deal arranged in 1961 to the current national television package, the equally shared proceeds generated by the NFL’s television broadcasting rights have always been the single largest contributor to the League’s revenue sharing system.¹⁰³ Furthermore, the League’s television revenue has grown exponentially over the years, starting at $4.6 million for the two year contract signed in 1961, and climbing all the way to $17.6 billion for the recent eight year package that expired after the 2005 season.¹⁰⁴ [Ed. Note: The NFL subsequently signed television deals with CBS, Fox, NBC, ESPN, and DirecTV through 2013 for an average of $3.7 billion per year.] This tremendous growth in the NFL’s equally shared television revenue represents a self perpetuating indication of the League’s success as a whole. The competitive parity resulting from the League’s revenue sharing system in general has unquestionably bolstered the success and popularity of the NFL by ensuring that in any given year almost every team has a chance to make the playoffs.¹⁰⁵ As a result of the League’s immense popularity, television networks have been willing to pay endlessly increasing sums of money to secure NFL broadcasting rights, which in turn has ensured the sustainability of the League’s revenue sharing system, and thereby the continued success of the League as a whole.

The equal sharing of television revenue has become a symbol of the League’s unparalleled success, and its commitment to the “League Think” philosophy…. In contrast to the extreme financial and competitive inequalities that have plagued other professional sports leagues like Major League Baseball, the NFL’s ability to maintain its unmatched popularity has largely been the result of the League’s commitment to revenue sharing.¹⁰⁷ The recent emergence of new sources of unshared revenue, on the other hand … have completely transformed the financial realities of the League by enabling individual franchises to gain a competitive advantage through the exploitation of unshared revenue.¹⁰⁸ Furthermore, the drastic increase of these sources of unshared revenue has led to extreme levels of financial inequality throughout the League, which now threaten the continued viability of the NFL’s current economic system.

III.   THIRD AND LONG: THE HARMFUL EFFECTS OF “LOCAL REVENUE” AND THE DESPERATE NEED FOR REVENUE SHARING REFORMS

A. Unshared “Local Revenue” and the Erosion of the NFL’s Collective Mentality

The advent of these unshared revenue sources … not only drastically altered the landscape of the revenue sharing system in the NFL, but has also revolutionized the business model followed by team owners throughout the League.¹⁰⁹ Abandoning the old passive business model where owners promoted equality and were content to rely on revenue sharing as their primary source of income, teams have increasingly sought to maximize their competitive advantage by exploiting as many sources of unshared revenue as possible. Art Modell, who joined the League in 1961 as the majority owner of the Cleveland Browns and left … after selling his share of the Baltimore Ravens, articulated this change in the League’s mentality when he said, “The values have changed. We were comrades in arms. We were partners. That doesn’t happen now. Everything is revenues and profits.”¹¹⁰

With the growing emphasis on profits, teams have increasingly turned to … the following list of unshared revenue sources: “revenues derived from concessions, parking, local advertising and promotion, signage, magazine advertising, local sponsorship agreements, stadium clubs, luxury box income other than that included in subsection 1(a)(i)(1).”¹¹¹ Aptly labeled “local revenue,” these unshared revenue sources have been harnessed by expedient owners to supplement their income, and they have had a profound impact on multiple facets of the NFL with mixed results for the League as a whole. While the incentives created by these sources of unshared revenue have helped the League grow by promoting the construction of new stadiums, the drastically increasing nature of local revenue, which is generally more easily utilized by larger market teams, has led to a widening revenue gap between the League’s rich and poor teams.¹¹²

Following the lead of business-driven owners like Jerry Jones, owners throughout the league have recognized that most of the major sources of local revenue stem directly from the ability of individual franchises to gain control over the stadiums in which they play.¹¹³ With owners drooling over the unshared revenue streams generated by controlling stadium parking, concessions, signage, and luxury box income, the League has experienced a significant trend with regard to the construction of new stadiums and the renovation of old ones.¹¹⁴ …

In their relentless pursuit of local revenue, profit-hungry owners have discovered creative ways to not only help finance stadium projects, but to make the completed stadiums even more lucrative with regard to unshared local revenue. It is in this context that the distinction between luxury box “ticket revenue” and non-ticket revenue becomes extremely significant. Luxury boxes, which provide first class amenities like catering and a private bar, are usually leased to a corporate customer for extended periods of time (usually at least an entire season), typically giving the lessee access to the luxury box for all stadium events including those performances unrelated to the NFL, such as rock concerts or other professional sporting events.¹¹⁷ Therefore, any franchise that owns its own stadium can keep most of the substantial revenue generated by these expensive luxury box lease arrangements.¹¹⁸ Conversely, teams that have unfavorable leases with a municipality or other entity that owns the stadium are at a competitive disadvantage because they are missing out on enormous streams of unshared revenue.¹¹⁹

….

Jerry Jones is quick to proffer his view that these stadium-related sources of unshared revenue are good for the League. Stressing his incentive based arguments, Jones explained, “If you don’t have some unshared revenues, those stadiums never get built because of all the debt. You think people are going to build those stadiums if they were sharing the revenue 32 ways? No. Why did they get built? Because of the incentive.”¹²⁵ While it is hard to argue that unshared local revenue has not had some positive effects on the current state of the NFL, it is important to weigh the positives and negatives associated with unshared revenue in determining what is best for the future of the League. There is no doubt that in today’s economy there is a need for some unshared revenue in order to provide incentives for teams to market themselves and to help generate beneficial externalities like stadium construction. Too much unshared revenue, on the other hand, is detrimental to the League because it will inevitably lead to a widening gap between revenue-rich teams with favorable stadium situations and revenue-poor teams with unfavorable stadium situations.

1.   “Local Revenue” as the Cause of “Franchise Free Agency”

At first glance, all this additional revenue and all these new stadiums might appear to be nothing but a good thing for the League, but upon closer inspection it becomes clear that there are some significant concerns lurking just behind the glare of the bright new stadium lights. The incessant quest for unshared revenue by NFL owners has been largely responsible for a phenomenon known as “Franchise Free Agency.”¹²⁶ This phenomenon, which is characterized by the recent relocation of numerous franchises seeking more lucrative stadiums in which to play, has not only drawn the attention of significant scholarly analysis, but has also prompted Congress to propose numerous bills attempting to prevent franchises from arbitrarily abandoning their home city simply to secure a more profitable venue.¹²⁷

….

Despite Congress’ inability to enact any of these bills into law, the prevalence of the proposed legislation indicates that “Franchise Free Agency” is a legitimate concern for the nation as a whole. Furthermore, the large scale of this political response is undoubtedly driven by significant unrest among NFL fans, which poses a direct threat to the future popularity and success of the League.

In addition to the negative reaction that franchise relocation has on the NFL’s fan base, the lure of unshared local revenue generated by favorable stadium deals has eroded the NFL’s “League Think” philosophy, and, in certain circumstances, has hurt the League as a whole. The relocation of the Rams from Los Angeles to St. Louis serves as a perfect example of the detrimental effect that an individual team’s pursuit of local revenue can have on the League.¹³⁷ The advent of unshared local revenue has created a situation where an individual owner’s best interests are no longer necessarily aligned with the best interests of the League. In the case of the Rams, the franchise moved from the much larger market of Los Angeles to the much smaller market of St. Louis mainly because St. Louis offered a better stadium situation that would generate more unshared local revenue for the team.¹³⁸ While the team itself benefited from the move, the League as a whole suffered because St. Louis’s smaller market means that fewer people watch the Rams on television, and this reduced audience thereby generates smaller television ratings when compared to the ratings that could have been achieved had the Rams remained in Los Angeles.¹³⁹

Since the Rams only absorbed a small portion of that decrease due to the revenue sharing system, the increase in local revenue made the move worthwhile for the team, but the aggregate effect for the rest of the owners made the move more costly for the League as a whole.¹⁴⁰ Consequently, the emergence of local revenue has indirectly prevented the League from capitalizing on the Los Angeles area fan base and the enormous revenue opportunities presented by the nation’s second largest market. As a result, the League cannot maximize its evenly shared television revenues, which thereby hurts the revenue sharing system, and more importantly the League as a whole.¹⁴¹

B.   The Widening Revenue Gap and the Salary Cap System

The most detrimental consequence resulting from the emergence of unshared local revenue has been the widening gap between the League’s revenue-rich teams and its less prosperous counterparts.¹⁴² ….

The major source of this widening revenue gap, much like “Franchise Free Agency,” is the increasing need for owners to secure beneficial stadium deals in order to capitalize on unshared local revenue.¹⁴⁵ As in the case of the New York Giants [Ed. Note: before moving into a new stadium in 2010], teams that are stuck in unfavorable stadium arrangements cannot take advantage of local revenue, and therefore experience a significant competitive disadvantage.¹⁴⁶

… By comparing the enormous local revenue opportunities of a larger market team like the Redskins, who own their own stadium, and the limited local revenue possibilities for a smaller market team … who do not control their stadium, the source of the NFL’s current revenue gap becomes readily apparent.

Although the increasing economic inequalities in the NFL seem relatively clear, it is also important to recognize some of the arguments against revenue sharing made by those owners who have financed some or all of their stadium acquisitions through private debt. These owners argue that one must think in terms of net profits, not total annual revenue, because the large amount of debt incurred to buy the stadium initially negates much of the apparent advantage.¹⁵³ For example, the Philadelphia Eagles, who in 2003 moved into a new $512 million stadium, must allocate more than thirty million dollars a year to service their debt.¹⁵⁴ This argument criticizing too much revenue sharing is adeptly characterized by a statement attributed to Daniel Snyder of the Redskins. Snyder reportedly said, “I’ll share my revenue whenever they’re ready to share my debt.”¹⁵⁵ Owners like Snyder, who has roughly $300 million in debt left from his $800 million acquisition of the Redskins and their stadium in 1999, argue that since they were the ones who put up the initial capital, they are entitled to reap the benefits of stadium ownership.¹⁵⁶

While there is undoubtedly some merit to these arguments, it is important to note that in the context of acquiring a large market NFL stadium or franchise, there is little in the way of the risk that would normally be associated with a leveraged investment, largely because of the current economic state of the League as a whole. In 2003, every single franchise experienced a net profit; furthermore, the revenue of the League as a whole has increased by a factor of greater than five over the past fifteen years.¹⁵⁷ The strength of the League’s current economic outlook is illustrated by the fact that traffic on the NFL’s Internet site surpasses that of other pro leagues, its television broadcasts outpace prime-time averages, and its especially devoted fans buy more than ninety percent of available tickets.¹⁵⁸ Furthermore, the League generated … the most income produced by any of the four major U.S. professional sports leagues.¹⁵⁹

When one considers these astounding statistics in relation to the structural reality of the League, it is impossible to ignore that the value of an individual franchise is completely dependent on the success of the League as a whole because without the League, each individual franchise would be worthless. Although the owners who financed their own stadiums would argue that they deserve greater returns because they bore the risk of their leveraged investment, this argument is largely mitigated by considering the minimal amount of risk actually incurred. Therefore, since an individual owner does not bear much financial risk when his franchise leverages its investment in stadium infrastructure, asking the more profitable teams to share a small portion of local revenue with their less prosperous counterparts is not an unreasonable request, especially because the value of an individual franchise is necessarily tied to the success of the League as a whole.

1.   The Failure of the Salary Cap System and the Resulting Competitive Inequalities on the Field

While the competitive advantage gained through stadium ownership serves as the largest catalyst for the widening revenue gap, the economic disparities that exist between the individual teams also adversely affect the ability of lower-revenue teams to remain competitive on the field…. The discrepancy in the percentage of income that a given team can spend on player salaries has a huge impact on the ability of lower-revenue teams to compete with higher revenue teams in the high-priced free agent market.¹⁶¹

… Owners critical of too much revenue sharing have been quick to point out that those teams in a superior financial position have not necessarily experienced a competitive advantage on the field….¹⁶⁴ Notwithstanding the inability of the Cowboys to “buy” their success, it would be completely ridiculous to argue with the statement made by Atlanta Falcons owner Arthur Blank, that “at some point there is a correlation between what you’re paying your players and your ability to compete.”¹⁶⁵

….

C.   The NFL’s Current Reaction to the Problems Posed by “Local Revenue” and the Widening Revenue Gap

The widening revenue gap created by both the emergence of local revenue and the salary cap system has sparked considerable debate amongst the NFL owners. The owners of lower-revenue teams … have expressed their belief that under the League’s current economic model these less prosperous teams cannot compete with their revenue-rich counterparts who are better equipped to capitalize on the local revenue opportunities created by stadium ownership.¹⁷⁵ According to lower-revenue teams, the revenue gap is reaching such a critical level that their future economic viability will soon be in serious doubt, and therefore the League must find a way to better redistribute some of the local revenue that has created this economic discrepancy.¹⁷⁶

Conversely, the owners of high-revenue teams like the Redskins and Cowboys argue that if teams are forced to include their local revenue in the total amount of revenue shared by the League, it will eliminate any incentive for less prosperous teams to market themselves.¹⁷⁷ As Cowboys owner Jerry Jones explains, “The big concern I have is not how to equalize the disparity in revenue[,] but how to get the clubs that are not generating the revenue to see the light.”¹⁷⁸

There is some merit to Jones’s argument since poor management decisions by lower-revenue teams might be partially to blame for their inferior economic position. However, in deciding whether to reform the current revenue sharing system, the NFL must also consider some of the economic factors that are beyond the control of the lower-revenue owners, such as stadium ownership and market size. Since a team’s potential marketability is directly tied to the size of its local market, teams like the Cowboys and Redskins can take advantage of their larger markets to increase their unshared local revenue through both local sponsorship deals and local stadium revenue.¹⁷⁹ At the same time, playing in a large market does not necessarily guarantee that a team will be able to capitalize on sources of local revenue, because that team might be stuck in an unfavorable stadium situation…¹⁸⁰ Therefore, when evaluating the need for revenue sharing reforms, the NFL should not only consider the inherent economic disparities that exist between small and large market teams; it must also factor in the realities surrounding every team’s ability to secure a beneficial stadium deal.

The NFL has taken a variety of steps to help address some of the problems that have been created by the emergence of local revenue and the resulting increase in the revenue gap. Some of these League initiatives are specifically designed to combat the increasing economic inequalities within the NFL, while others focus more on addressing some of the indirect effects of local revenue, such as “Franchise Free Agency.” In order to facilitate the construction of new stadiums, the League adopted a program set forth in Resolution G-3 of 1999 (“G-3 Program”), which has loaned $650 million in League money to help eight different stadium projects, all of which were funded by a combination of public and private financing.¹⁸¹ [Ed. Note: The NFL loaned nearly $1.4 billion to help finance 11 stadium projects through 2008.] This G-3 Program is meant to promote stadium construction, which could potentially benefit lower-revenue teams by enabling them to build new stadiums and thereby better capitalize on local revenue. Although the program does seek to eliminate some of the local revenue-related incentives that contributed to the emergence of “Franchise Free Agency,” this program may actually reduce the overall amount of shared revenue, and is therefore not well suited to address the overarching problems created by the widening revenue gap.

In order to qualify for G-3 financial assistance from the League, a stadium project must be financed by public–private funding, and the amount that the League will contribute is directly tied to the amount of the individual franchise’s private contribution (“Private Contribution”) to its own stadium project.¹⁸² The allocation of League funds to the financing of a G-3 stadium is technically in the form of a loan, but it is repaid directly out of the visiting team’s share (“VTS”) of the luxury box and club seat revenue.¹⁸³

Similarly, in the context of a non-G-3 stadium, luxury box and club seat revenue can also be exempted from VTS, provided it is used for the direct financing of the non-G-3 stadium’s construction.¹⁸⁴ However, notwithstanding this similar treatment of certain luxury box revenues, there are additional benefits that accrue to those owners who qualify for the G-3 Program. In particular, the G-3 Program should reduce a team’s cost of capital by eliminating some of the transaction costs that would otherwise be required to secure financing from a private institution. Therefore, under the G-3 Program, the League is in essence simply making private loans easier for the individual owners to obtain by exempting ticket revenue that would otherwise be shared with the visiting club, and instead using that revenue to pay off the loan. This arrangement promotes stadium construction because owners can partially finance the building of their new stadium with revenue that they otherwise would have been forced to share with the visiting teams had they remained in their old stadium.¹⁸⁵

One of the principal intentions of the NFL’s G-3 Program is to encourage large market teams to stay in their home city (instead of moving to a smaller market) by offering favorable loans that help the teams finance their public-private stadium projects.¹⁸⁶ This is implied by the language establishing the precise amounts that the League will loan to a participating franchise under the G-3 Program. The exact provision is enumerated in the subsequent Resolution JC-1 adopted in 2003, which extended the life of the G-3 Program, and provides in part:

While the G-3 Program helps both small and large market teams finance public-private stadium construction, the program favors large market teams by providing them with much larger loans. This favorable treatment given to the largest market teams is meant to provide incentives for those teams to remain in their home cities, which benefits the entire NFL by enabling the League to capitalize on the increased television revenue generated by these larger markets.

The G-3 Program undoubtedly provides universal benefits that help all franchises looking to utilize public–private financing in the construction of a new stadium. Furthermore, by encouraging teams to remain in the largest markets, this program should help to increase the League’s television revenue, which is shared equally, and therefore should benefit the League as a whole. However, an increase in equally shared television revenue confers the same benefit upon every team notwithstanding their relative financial positions. This program therefore does not help to alleviate any of the inherent economic inequalities that exist in smaller market cities. In fact, this program might actually exacerbate the economic disparities that currently exist in the League today by helping large market teams better capitalize on local revenue at the expense of smaller market teams who, under this program, do not enjoy the same level of League subsidies. Instead of redistributing some of the advantages enjoyed by large market teams that can more easily utilize their marketability to generate more local revenue, the G-3 Program actually has the effect of giving the large market teams an additional leg up on their smaller market counterparts.

In addition to the G-3 Program, the NFL has also created a “supplemental” revenue sharing pool, which would appear far better suited to combat the widening revenue gap that threatens the League’s current competitive balance. The so-called “supplemental” revenue sharing pool, created under the salary cap system, redistributes roughly forty million dollars a year in local revenue to a small number of lower-revenue teams.¹⁸⁸ Typically, each year six to nine teams draw from the “supplemental” pool, which has grown from eighteen million dollars to its current mark of forty million dollars.¹⁸⁹ [Ed. Note: In 2006, the NFL increased the amount of supplemental revenue sharing to $110 million each year that is distributed to 15 teams.] Despite its potential to help alleviate the League’s widening revenue gap, the “supplemental” revenue sharing pool has proven insufficient to keep pace with the dramatically increasing nature of the economic disparities in the NFL.¹⁹⁰ … Moreover, when this figure is considered in relation to the gap in annual revenue between the NFL’s richest and poorest teams, which has well exceeded the $100 million mark, the “supplemental” pool’s inadequacy in dealing with the exponentially increasing economic disparity becomes apparent.¹⁹²

Notwithstanding the League’s marginal attempts to counteract the various harmful effects that stem from the recent growth in local revenue, these emerging unshared revenue streams no longer simply threaten to bend the rules of the NFL’s collective philosophy. Instead, the revenue sharing system itself appears to be on the brink of a complete fracture.

….

IV.   FOURTH AND GOAL: SUPPLEMENTAL REDISTRIBUTION—A PROPOSED REFORM TO THE NFL’S REVENUE SHARING SYSTEM

On the one hand, there is no doubt that the NFL’s collective approach to its revenue sharing system played an integral part in the continually growing success and popularity of the League as a whole. On the other hand, the existence of some unshared revenue is also undeniably important in today’s economy because it provides incentives for teams to market themselves. Forcing the individual teams to share all of their local revenue would not be beneficial for the League as a whole because it would completely eliminate any incentive for teams to seek a competitive advantage, thereby enabling some teams to simply coast on the coattails of their more committed brethren.

Maintaining the status quo, however, is also not an option because the extreme economic disparities that exist between high and low revenue teams will soon render the future economic viability of the lowest-revenue teams untenable. Furthermore, the owners cannot avoid reforming the current revenue sharing system because the NFLPA demands a portion of unshared revenues…. Therefore, in order to maintain the incentives provided by unshared local revenue while at the same time preserving the basic revenue sharing structure that has so adequately proved the test of time, the NFL and its owners should consider an economic formula that redistributes some portion of the unshared local revenue from those teams on top to those at the bottom.

Although the League has been largely unsuccessful in the few attempts that it has made to neutralize some of the harmful effects associated with the growth in unshared local revenue, it is important to carefully consider the limited action that the NFL has taken because it is helpful in providing guidelines for a more comprehensive reform of the revenue sharing system as a whole. First, it is important to identify the two major competing interests that must be balanced by any attempt at reform, namely: (1) the need for some unshared revenue to provide incentives for teams to market themselves; and (2) the need to preserve the basic revenue sharing structure that has fostered the success and popularity of the League by ensuring enough parity to establish the correct competitive balance among the individual NFL teams.

….

V.   THE POST-GAME SHOW: A CONCLUDING SUMMARY

For over forty years, the NFL’s collective “League Think” philosophy has played a central role in establishing and maintaining the competitive balance that fostered the massive popularity and success still enjoyed by the League today. In particular, the League’s two-pronged revenue sharing system has proven the test of time by adapting to the prevailing economic forces that have helped shape the course of the NFL’s financial model. While the emergence of too much unshared local revenue currently poses a variety of threats to the League’s continued financial and competitive stability, local revenue is not by nature a corrosive force. If properly harnessed, local revenue can help the League’s financial model evolve by incorporating the increased incentives that should enhance the League’s overall product as individual owners strive to improve the marketability of each individual franchise. However, when unchecked, the lure of unshared local revenue can entice an individual owner to maximize his own benefits at the expense of the League as a whole. Under these circumstances, the individual owners benefiting from local revenue are often blinded by their own success, and they fail to recognize that the success of their individual franchise necessarily depends on the success of the League as a whole.

The League’s revenue sharing system was originally designed to ensure that the League’s success always came before that of an individual franchise. However, when the development of new economic forces threatened the sustainability of this collective principle, the League’s financial system was forced to evolve. For example, the salary cap was adopted in 1994 to help sustain the competitiveness of the League’s overall product by combating market inequalities that revenue sharing alone could no longer control. Similarly, the NFL’s current financial system, which includes both revenue sharing and the salary cap, is not adequately suited to address the threats posed by the excessive growth of local revenue. This enormous growth of local revenue has now combined with natural market inequalities like market size and stadium ownership to create a widening revenue gap between the richest and poorest teams. The expanding nature of this revenue gap now threatens the competitive balance that has previously ensured the sustained success of the League’s overall product, and must therefore be addressed before inflicting irreparable harm upon the popularity and success of the League. In order to adequately address these growing revenue disparities, the League’s financial system must once again evolve by incorporating a redistributive formula that maintains a proper level of unshared local revenue, and redistributes excessive local revenue to those teams most in need. Much like the creation of the salary cap, the adoption of this formula will help the NFL’s financial system improve by simultaneously capturing the positive incentives associated with a healthy level of local revenue, while also preventing the corrosive effects of excessive local revenue.

Notes

1.  Sanjay Jose Mullick, Browns to Baltimore: Franchise Free Agency and the New Economics of the NFL, 7 MARQ. SPORTS L.J. 1, 1 (1996).

2.  Id.

3.  Id.

4.  See Stefan Fatsis, Can Socialism Survive? The All-For-One, One-For-All Ethos of Pro Football Has Made It the Envy of Other Sports; The NFL Is Fighting To Make Sure It Stays That Way, WALL ST. J., Sept. 20, 2004, at R1 [hereinafter Fatsis, Can Socialism Survive?].

5.  Mullick, supra note 1, at 12.

6.  Fatsis, Can Socialism Survive?, supra note 4.

7.  Id.

8.  Id.

9.  Id.; Mullick, supra note 1, at 1.

10.  The Master Agreement is basically an extension of the NFL Trust, which was a virtually identical agreement among owners regarding the sharing of licensing revenue with origins dating back to the emergence of the “League Think” philosophy in the 1960s. See Stefan Fatsis, Dallas Owner Again Challenges NFL’s Licensing, WALL ST. J, Apr. 2, 2004, at B3 [hereinafter Fatsis, Dallas Owner]. Cf. Daniel Kaplan, Tagliabue: NFL Trust Survival “a Done Deal,” STREET & SMITH’S SPORTS BUSINESS JOURNAL, Mar. 29, 2004, at 1 [hereinafter Kaplan, Tagliabue].

11.  See NFL CONST. art. 10.3; see also NFL, NFL COLLECTIVE BARGAINING AGREEMENT 2002–2008 art. XXIV, 1-4, available at http://www.nflpa.org/Agents/main.asp?subPage=CBA+Complete [hereinafter CBA]; Fatsis, Can Socialism Survive?, supra note 4, at R2; Ira Miller, Revenue-sharing Rates as a Hot Topic, S.F. CHRONICLE, Mar.28, 2004 at, C2 [hereinafter Miller, Revenue-sharing Rates].

12.  Miller, Revenue-Sharing Rates, supra note 11, at C2.

….

18.  Before the new labor agreement was approved, the now-defunct CBA would have lasted through the 2007 season, but the current 2006 season would have been the last one subject to the salary cap, which would have therefore expired along with the start of the 2006 season.

19.  Kaplan, NFL Owners, supra note 17, at 1; Kaplan, Chaos and Compromise, supra note 17, at 1; Mullen, Winding Road, supra note 17, at 1.

….

21.  See Kaplan, NFL Owners, supra note 17; Kaplan, Chaos and Compromise, supra note 17 (discussing unhappy owners, who are already expressing various criticisms of this new plan, including some of the lowest-revenue owners who have criticized its failure to include all local revenue within the revenue shared between teams).

22.  See Fatsis, Can Socialism Survive?, supra note 4, at R3; Mullick, supra note 1, at 1.

23.  The author would like to pay his respect to the family of the late Giants owner Wellington Mara, who passed away on October 25, 2005 at the age of 89. In addition to being a wonderful person, Mara has been widely recognized as one of the NFL’s most influential and beloved owners, whose foresight helped pave the way for the League’s revenue sharing system and the resulting success still enjoyed by the NFL today. See Daniel Kaplan, Pro Football Loses a Giant Leader, STREET & SMITH’S SPORTS BUSINESS JOURNAL, Oct. 31, 2005, at 4 [hereinafter Kaplan, Pro Football Loses].

24.  Fatsis, Can Socialism Survive?, supra note 4, at R3.

25.  Id.

26.  Mullick, supra note 1, at 1.

27.  Id. at 1-2.

28.  See United States v. NFL, 196 F. Supp. 445, 446-47 (E.D. Pa. 1961);Fatsis, supra note 4, at R3; see also WTWV, Inc. v. NFL, 678 F.2d 142, 144 (11th Cir. 1982) (describing the history behind the decision in U.S. v. NFL and stating that the contract with CBS was actually meant to mimic a similar broadcasting agreement already arranged by the NFL’s upstart competitor, the American Football League (“AFL”)).

29.  WTWV, 678 F.2d at 144; Fatsis, Can Socialism Survive?, supra note 4, at R3.

30.  Fatsis, Can Socialism Survive?, supra note 4, at R3.

31.  Id.

32.  Id.

33.  Id.

34.  Id.

35.  In 1982, the NFL signed national TV deals with CBS, NBC, and ABC, which when combined generated a total of $1.89 billion in revenue for the NFL through the 1986 season. NFL TV Rights: The Escalation of Television Rights Fees for the NFL:, SPORTS ILLUSTRATED.COM, Nov. 8, 2004, http://sportsillustrated.cnn.com/2004/football/nfl/wires/11/08/2024.ap.fbn.nfl.tv.rights.chart.0268 (on file with author).

36.  Fatsis, Can Socialism Survive?, supra note 4, at R3.

37.  See Mullick, supra note 1, at 12-13.

38.  Fatsis, Can Socialism Survive?, supra note 4, at R3.

39.  Mullick, supra note 1, at 13.

40.  Fatsis, Can Socialism Survive?, supra note 4, at R3.

41.  See id. at 3-6.

42.  Id. at 3.

43.  See Miller, Revenue-sharing Rates, supra note 11, at C2.

44.  See Fatsis, Can Socialism Survive?, supra note 4, at R3-R4; Miller, Revenue-sharing Rates, supra note 11, at C2.

45.  Sam Farmer, NFL Reviews Matter of Trust, L.A. TIMES, Mar. 28, 2004, at D1.

46.  Id.

47.  Id.

48.  Id.

49.  Id.

50.  Id.

51.  Fatsis, Can Socialism Survive?, supra note 4, at R4.

52.  Id.; see Fatsis, Dallas Owner, supra note 10, at B3.

53.  Fatsis, Can Socialism Survive?, supra note 4, at R4; Fatsis, Dallas Owner, supra note 10, at B3 (stating that Coke is poured in 19 NFL stadiums whereas Pepsi is only poured in 12 stadiums).

54.  See Fatsis, Dallas Owner, supra note 10, at B3.

55.  Id. Under the NFL Trust, the League actually owned each team’s logo, and teams had to get League permission before entering into their own sponsorship deals. Kaplan, Tagliabue, supra note 10, at 1. Under the newly enacted Master Agreement, teams now legally own their own logo, which was intended to insulate the Master Agreement from any legal challenges by those owners who voted against it. Id. See, e.g., infra text accompanying notes 81-84.

56.  See id.

57.  See Farmer, supra note 45, at D1; Fatsis, Can Socialism Survive?, supra note 4, at R1.

58.  See CBA, supra note 11, art. XXIV, 1(a)(i)(1).

59.  See Miller, Revenue-sharing Rates, supra note 11, at C2.

60.  Id.

61.  Farmer, supra note 45, at D1; Miller, Revenue-sharing Rates, supra note 11, at C2.

62.  See Miller, Revenue-sharing Rates, supra note 11, at C2.

63.  See Fatsis, Dallas Owner, supra note 10, at B3; Kaplan, Tagliabue, supra note 10, at 1.

64.  Fatsis, Dallas Owner, supra note 10, at B3.

65.  Id.

66.  Id.

67.  Id.

68.  See id.

69.  See id. As further explored below, this is a somewhat significant difference between the Master Agreement and its predecessor, the NFL Trust. See, e.g., infra text accompanying notes 81-84.

70.  See Daniel Kaplan, Divide on Revenue Sharing Persists in NFL Trust Debate, STREET & SMITH’S SPORTS BUSINESS JOURNAL, Feb. 23, 2004, at 1 [hereinafter Kaplan, Divide on Revenue Sharing]; Farmer, supra note 45, at D1 (stating that New England, Washington, Dallas, and Tampa Bay have all established retail shops to sell team gear).

71.  Kaplan, Divide on Revenue Sharing, supra note 70, at 1; Kaplan, Tagliabue, supra note 10, at 1.

72.  Miller, Revenue-sharing Rates, supra note 11, at C3; see Jeff Duncan, Licensing Deal to Continue As Is, TIMES-PICAYUNE, Mar. 31, 2004, at 2. The statistics used above to illustrate the monetary value of licensing revenue shared in recent years were calculated under the NFL Trust not the Master Agreement, but overall numbers should not be significantly different under the Master Agreement.

73.  Fatsis, Dallas Owner, supra note 10, at B3.

74.  Id.

75.  Id.

76.  Id.; see Miller, Revenue-sharing Rates, supra note 11, at C2.

77.  Miller, Revenue-sharing Rates, supra note 11, at C2. Oakland Raiders President Amy Trask articulated the Raiders’ position when she said, “our general counsel has advised the league that on April 1 [2004] the right to our marks and logos reverts to us.” Kaplan, Tagliabue, supra note 10, at 1.

78.  Fatsis, Dallas Owner, supra note 10, at B3 (mentioning that Jones said that turning over marketing rights to the League has been an individual club decision in the past, and quoting Jones as saying, “[league-wide deals] are well and good as long as each club, of its own volition, participates in those deals …. I’m saying I have my logos and marks and can do what I want with them.”).

79.  Id.

80.  Miller, Revenue-sharing Rates, supra note 11, at C2.

81.  Kaplan, Tagliabue, supra note 10, at 1.

82.  Id.

83.  Id.; Daniel Kaplan, Texans Lead The NFL in Marketing Statewide, STREET & SMITH’S SPORTS BUSINESS JOURNAL, Sept. 13, 2004, at 3 [hereinafter Kaplan, Texans Lead].

84.  Kaplan, Tagliabue, supra note 10, at 1; Kaplan, Texans Lead, supra note 83, at 3.

85.  See discussion infra Part III.B for a description of the widening revenue gap in the NFL and its potential consequences for the success of the League.

86.  Fatsis, Dallas Owner, supra note 10, at B3.

87.  Id.

….

91.  CBA, supra note 11, art. XXIV, 1(a)(i)(1)-(2) (emphasis added); see NFL CONST. art. 10.3 (stating, “all regular season (and preseason network) television income will be divided equally among all member clubs of the League”); Fatsis, Can Socialism Survive?, supra note 4, at R2.

92.  See CBA, supra note 11, art. XXIV, 1(a)(i), (iii); Mullick, supra note 1, at 15-17.

93.  See discussion infra Part III.A explaining the role that unshared non-ticket luxury box revenue plays in the revenue sharing system.

94.  NFL CONST. art. 19.1(A).

95.  See Alan Ostfield, Seat License Revenue in the National Football League: Shareable or Not?, 5 SETON HALL J. SPORT L. 599, 604 n.22 (1995) (stating that for the $30,000 option to kick in, gross receipts would have to be less than approximately $89,000, which is extremely unlikely considering that the average gross receipts for 1990–1995 was around $1.5 million).

96.  Id. at 603-04.

97.  NFL CONST. art. 19.1(A)(1)-(2).

98.  See Ostfield, supra note 95, at 603-04.

99.  Id.

100.  NFL, NFL Res. G-1 (2001) (stating that “the term ‘visiting team share’ shall mean the portion of gross receipts currently required (in the absence of a waiver) to be paid to visiting clubs under Article 19.1(A) of the NFL Constitution and By-Laws in respect of regular season games”).

101.  See discussion infra Part III.B for a detailed analysis of the NFL’s current economic inequality.

102.  Fatsis, Can Socialism Survive?, supra note 4, at R1.

103.  Farmer, supra note 45, at D1; Miller, Revenue-Sharing Rates, supra note 11, at C3; Mullick, supra note 1, at 12.

104.  Jarrett Bell, NFL Tug-of-War, supra note 14, at C1.

105.  Fatsis, Can Socialism Survive?, supra note 4, at R1.

….

107.  Mullick, supra note 1, at 12.

108.  See Fatsis, Can Socialism Survive?, supra note 4, at R1-R2.

109.  See Mullick, supra note 1, at 14-18.

110.  Fatsis, Can Socialism Survive?, supra note 4, at R2.

111.  CBA, supra note 11, art. XXIV, 1(a)(iii). The language “other than that included in subsection 1(a)(i)(1)” is referring to “ticket revenue from ‘luxury boxes’ … subject to gate receipt sharing.” Id.

112.  See discussion infra Part III.B explaining that unshared local revenue has been a major cause of the widening revenue gap.

113.  See Fatsis, Can Socialism Survive?, supra note 4, at R6-7; Mullick, supra note 1, at 14-18.

114.  See Fatsis, Can Socialism Survive?, supra note 4, at R4; Mullick, supra note 1, at 14-18. See discussion infra Part III.C describing the League’s efforts to facilitate the construction of new stadiums.

….

117.  See Gavin Power, Luxury Boxes Do Score Big, S.F. CHRONICLE, June 24, 1995, at D1.

118.  See Mullick, supra note 1, at 16-17.

119.  See Giants Want A Stadium That Says ‘Amenities,’ N.Y. TIMES, Feb. 13, 2005, 8, at 1 [hereinafter Amenities, N.Y. TIMES].

….

125.  Bell, NFL Tug-of-War, supra note 14, at 2-3C.

126.  See Mullick, supra note 1.

127.  Don Nottingham, Keeping the Home Team at Home: Antitrust and Trademark Law as Weapons in the Fight Against Professional Sports Franchise Relocation, 75 U. COLO. L. REV. 1065, 1078–79 (2004).

….

137.  See id. at 1070.

138.  Id.

139.  Id.

140.  Id.

141.  From speaking with Steve Underwood, the Executive Vice President, General Counsel and Executive Assistant to the Owner of the Tennessee Titans, the author has gained firsthand knowledge of the significance that NFL insiders place on the current financial void left by the League’s inability to place a franchise in the nation’s second largest market, Los Angeles.

142.  Fatsis, Can Socialism Survive?, supra note 4, at R2.

….

145.  Bell, NFL Tug-of-War, supra note 14, at 1C

146.  Id. at 3C. For a detailed discussion of the Giants stadium situation see supra text accompanying notes 120–121.

….

153.  See Fatsis, Can Socialism Survive?, supra note 4, at R6; Bell, NFL Tug-of-War, supra note 14, at 4C.

154.  Fatsis, Can Socialism Survive?, supra note 4, at R6.

155.  Id.

156.  Id.

157.  Id. at R1-R3.

158.  Id. at R3.

159.  Id. at R1. The four major leagues are baseball, basketball, football, and hockey.

….

161.  See Fatsis, Can Socialism Survive?, supra note 4, at R5; Bell, NFL Tug-of-War, supra note 14, at 1C-2C.

….

164.  Id. [Fatsis, Can Socialism Survive?,] at R6.

165.  Bell, NFL Tug-of-War, supra 14, at 4C.

….

….

175.  See discussion supra Part III.B.1.

176.  See Miller, Revenue-Sharing Rates, supra note 11, at C2. As Colts owner, Jim Irsay argued, “There are many teams that realize they cannot go forward like this. It’s become that big of an issue.” Fatsis, Can Socialism Survive?, supra note 4, at R2-R3.

177.  Fatsis, Can Socialism Survive?, supra note 4, at R6.

178.  Id.

179.  See discussion supra Part III.B.

180.  See supra text accompanying notes 121–122.

181.  NFL, NFL Res. G-3 (1999) [hereinafter NFL Res. G-3]; Fatsis, Can Socialism Survive?, supra note 4, at R4; Glenn Dickey, Mayor Sets Stadium Deadline, S.F. CHRONICLE, Oct. 24, 2004, at C1. The original G-3 plan established in Res. G-3 was set to expire after the 2002 NFL season, but the League extended and reaffirmed the G-3 Program in NFL Res. JC-1 (2003) retaining all of the original principal parameters set forth in Res. G-3.

182.  NFL Res. G-3, supra note 181; NFL Res. JC-1 (1) (2003) [hereinafter NFL Res. JC-1] (stating “the League shall make a loan to the affected Club to support such project based on the amount that the affected Club has committed to such project as a private contribution (the ‘Private Contribution’)”).

183.  NFL Res. G-3, supra note 181; NFL Res. JC-1, supra note 182; Dickey, supra note 181, at C1.

184.  NFL Res. G-3, supra note 181; NFL Res. JC-1, supra note 182; Dickey, supra note 181, at C1.

185.  This arrangement provides the incentives for stadium construction at the expense of the revenue sharing system by funneling revenue away from the sharing system, and into the pockets of individual clubs.

186.  NFL Res. G-3, supra note 181; NFL Res. JC-1, supra note 182; Dickey, supra note 181, at C1.

187.  NFL Res. JC-1, supra note 182 (emphasis added).

188.  Bell, NFL Tug-of-War, supra note 14, at 4C; Fatsis, Can Socialism Survive?, supra note 4, at R6; Miller, Revenue-Sharing Rates, supra note 11, at C2.

189.  These statistics are derived from the observations of Harold Henderson, who is the NFL’s Executive Vice President for Labor Relations. See Bell, NFL Tug-of-War, supra note 14, at 4C.

190.  Id. Since 1990, the size of the revenue gap has increased by a factor of about twelve. Fatsis, Can Socialism Survive?, supra note 4, at R6.

192.  Bell, NFL Tug-of-War, supra note 14, at 4C.

IMPACT OF REVENUE SHARING ON COMPETITIVE BALANCE

COMPETITIVE BALANCE IN TEAM SPORTS AND THE IMPACT OF REVENUE SHARING

Stefan Kesenne

One of the major concerns of league administrators in the professional team sports industry on both sides of the Atlantic has always been the competitive balance in the league. Although the empirical research does not always confirm the importance of a balanced competition (see Borland and MacDonald, 2003), it is generally accepted that an excessive imbalance in sports competitions will have a negative impact on spectator interest. In the literature, different measures have been proposed to improve the competitive balance. Among these regulations, revenue sharing has been the most controversial one. The proposition that revenue sharing does not affect the distribution of playing talent among profit maximizing teams, has been challenged by many sports economists since the article of Rottenberg (1956) and the formal proof of the proposition by Quirk and El Hodiri (1974).

In dealing with the impact of revenue sharing on competitive balance, it is important to realize that there are important structural differences between the US major leagues and the EU national leagues. The US leagues are closed monopoly leagues with no possibility of relegation or promotion and with a more or less constant supply of talent at a give[n] moment of time. US teams are playing more than just one home and one away game against other teams. Most US major leagues organize play-offs after the regular season. North America does not organize international championships for the winners of the national league championships, such as the Champions League or the UEFA cup [now known as the Europa League] in European soccer. Also, Europe does not have any kind of rookie draft system. Nevertheless, the analysis in this review applies to both league structures if a few important differences are taken into account as will be discussed below.

The aim of this paper is to present an overview of the main findings from economic theory regarding the competitive balance in a league and the impact of revenue sharing. No discussion of the empirical evidence is included. In the next sections, we start with the basic model specification. In the following sections, the main determinants of competitive balance and the impact of revenue sharing are analysed and some policy implications are discussed. The last section concludes.

MODEL SPECIFICATION

The model describes a single monopoly league in professional team sports. The clubs are located in large or small markets, where they hold a local monopoly position. Relocation is excluded. Clubs are wage takers on a competitive player market. The season revenue of each club depends on three important variables: the size of the market, which affects the drawing potential of the club for supporters and players, the winning percentage of the team, because supporters prefer to watch a winning team, and the uncertainty of outcome. Spectators’ interest and match attendance are assumed to fade if the winning percentage of a team becomes too high so that there is not enough uncertainty of outcome. The winning percentage of a team depends on its relative playing strength, which is a function of the number of playing talents of the team compared with the other teams in the league. On the cost side, the total season cost of a club consists of the cost of capital and the cost of playing talent.

….

[I]nitially, the winning percentage has a positive but decreasing marginal effect on club revenue, but that the effect can turn negative in case of an excessive competitive imbalance.

….

COMPETITIVE BALANCE AND REVENUE SHARING

The most important factor that affects the competitive balance in a league is the difference in the size of the market where the clubs are located. The larger the market, in terms of population size and density, the larger a team’s drawing potential for spectators and players. However, it is obvious that many other factors affect the competitive balance in a league, and the impact of revenue sharing…. Four major factors will be discussed:

The Objectives of the Clubs

In the US literature, the usual assumption is that all clubs are profit maximizers, meaning that they are trying to maximize the difference between total season revenue and total season cost (see Noll, 1974; Scully, 1989; Fort and Quirk, 1995) … However, some European sports economists assert that professional soccer clubs are utility maximizers (see Sloane, 1971). A more operational variant of the utility maximization assumption is called win maximization. Kesenne (1996, 2000) argues that clubs are trying to maximize their winning percentage under the breakeven constraint or a given profit or loss rate. A club can be profitable without being a profit maximizer. The only way to maximize the winning percentage is to maximize the playing talent of the team….

In addition, economists in the US have their doubts about the profit maximizing assumption in the major leagues (see Zimbalist, 2003). Rascher (1997) introduced a model assuming that professional sports clubs are maximizing a linear combination of profits and wins…. In addition, this utility maximization model allows a club to be profitable without being a profit maximizer.

These different club objectives have an important impact on the competitive balance in a league. To show this, we will consider only the two extreme cases of profit maximization and win maximization … assuming that clubs only differ in the objectives of the owners, one can derive that the distribution of talent is more unequal if all clubs are win maximizers, compared with a league where all clubs are profit maximizers.

….

If clubs are profit maximizers, the linear demand curves for talent are given by the marginal revenue (MR). The marginal revenue is the extra revenue of one more talent in the team; profit maximizing clubs are only interested in hiring more talent if the extra revenue is higher than the unit cost of talent….

The linear demand functions of a win maximizing club are given by average revenue (AR). The average revenue is the revenue per unit of talent. If clubs are win maximizers under the breakeven condition, they will hire talent until the average revenue equals the unit cost of talent…. The distribution of talent … in a win maximization league is more unequal than in a profit maximizing league. It follows that regulations to cure the imbalance are more needed in a win maximization league. Moreover, it can be shown that, in a win maximization league, also total league revenue is lower than in a profit maximization league, where playing talent is more efficiently allocated. The distribution of playing talent in a win maximization league is causing a welfare loss. Players are employed in the team where their productivity is not at the highest possible level (see Kesenne, 2000). Another consequence of win maximization is that the unit cost of playing talent is higher … because win maximizing clubs spend all their revenue on talent so that the market demand for talent in higher.

… [T]he distribution of playing talent is different if one club is a profit maximizer and the other is a win maximizer. If the small market club is a win maximizer and the large market club is a profit maximizer, the competition will be more balanced…

The next question is how revenue sharing changes the distribution of talent…. It can be shown that, in a profit maximization league, gate revenue sharing does not affect the competitive balance (Rottenberg, 1956; Quirk and El Hodiri, 1974; Fort and Quirk, 1995). All clubs equally reduce their demand for talent, because they all have to share the extra match revenue from an extra talent with each visiting club. Consequently, also the unit cost of talent goes down….

In a win maximization league, however, it can be easily seen that revenue sharing improves the competitive balance. Given the breakeven constraint, the small market club will increase its demand for talent as long as it benefits from the sharing arrangement, while the large market club lowers its talent demand. The impact of revenue sharing on the equilibrium unit cost of talent in a win maximization league is less obvious. Because the large market club reduces its demand for talent and the small market club increases its demand for talent, the outcome depends on the relative size of the demand shifts. Because the downward shift of the demand curve of the large market club is smaller than the upward shift in the small market club, the unit cost of talent will go up. The reason is that revenue sharing moves the distribution of talent in the direction of the profit maximization equilibrium, where total league revenue is at its maximum level given the efficient allocation of talent. An alternative explanation is that the large market club has more talent.

….

The Spectator Preferences

When clubs only differ in market size, the large market club dominates the small club in terms of talent. However, clubs can also differ in the preferences of their supporters for a more balanced competition…. it is possible that the small market club dominates the large market club. An important implication of this situation is that, if the small market team dominates, the distribution of playing talent in a profit maximization league is more unequal than in a win maximization league (see Kesenne, 2004a).

….

This situation has consequences for the impact of gate revenue sharing. In a profit maximization league, the proposition still holds that revenue sharing does not change the distribution of talent. In a win maximization league, gate revenue sharing still improves the competitive balance but, in this situation, now the ill-performing large market club profits from the sharing arrangement to the disadvantage of the well-performing small market club. The reason is that the small market club has the largest budget if it dominates the large market club. Moreover, in this scenario, gate revenue sharing implies a loss of total league revenue, because the distribution of talent is moving away from the most efficient allocation of talent.

…. the interest of spectators can also be influenced by the absolute quality of the teams (see Marburger, 1997) or by the winning percentage of the visiting team. Certainly in the small European countries, where many supporters travel with their team to watch the away games, the winning percentage of the visiting team can be an important determinant of club revenue….

The Specifics of the Sharing Arrangement

The two most important sharing arrangements, gate sharing and pool sharing, can have a different impact on competitive balance. A gate sharing arrangement implies that the revenues from the ticket sales of every single match are shared between the home and the visiting club…. The 60/40 gate sharing in NFL (the National Football League in the US) is the best example of this kind of arrangement.

In a simplified pool sharing system, all clubs contribute a certain percentage of their total season revenue in a pool, which is managed by the league and equally distributed among all clubs….

The sharing of broadcasting rights in the North American major leagues and in most European national soccer leagues are examples of this sharing arrangement. However, both sharing systems are identical, apart from the value of the share parameter, if there are only 2 clubs in the league, but they clearly differ in the realistic case of more than 2 teams. It is also possible that some club revenues are not shared. Fort and Quirk (1995) have shown that … gate sharing can also worsen the competitive balance if some club revenues, such as local broadcasting rights, are not shared. Kesenne (2001) has shown that … gate sharing improves the competitive balance in a profit maximization league, whereas pool sharing does not change the balance.

In a win maximization league, revenue sharing always improves the competitive balance, whatever the specifics of the sharing arrangement. Nevertheless, if an imbalance shows up where the small market club dominates the large market club, revenue sharing punishes the well-performing small market team and lowers total league revenue. Therefore, one might consider another sharing system, which is not based on the size of the budget, but on the size of the market…. In this case, money is taken away from the large market club and given to the small market club. This sharing arrangement not only has the advantage of establishing a more balanced competition in the scenario where the large club dominates the small market clubs, it also avoids the disadvantage that the small market club is punished for performing better than the large market club. Moreover, this sharing arrangement always increases total league revenue by reducing the welfare loss, because it moves the win maximization equilibrium closer to the profit maximization equilibrium….

The Hiring Strategies of Clubs

In most studies, to the best of our knowledge, the explicit or implicit assumption is made that the supply of talent is constant (Quirk and El-Hodiri, 1974; Fort and Quirk, 1995; Vrooman, 1995). Moreover, it is assumed that team managers also take the constant supply into account when hiring new talent, because they know that one extra talent not only strengthens the own team, but also weakens another team in the league….

In a recent paper, however, Szymanski and Kesenne (2004) argue that the constant-supply approach is not a realistic option in Europe with its many open national soccer leagues, certainly after the Bosman verdict of 1995 by the European Court of Justice in Luxemburg, which established a free move of players between the countries of the European Union. Given the increased international player mobility in Europe, the supply of talent in each national league is variable. But even if the supply is constant, it is questionable if it can or will be fully internalized in the hiring decisions of the owners. Moreover, it is more realistic to assume that the hiring strategy of one team depends on the strategy of the other teams, which is a scenario that should be approached by game theory…. The explanation can be found in the negative external effects that clubs cause on each other when hiring new talent. In the competitive equilibrium approach, it is implicitly assumed that these external effects are fully internalized, that is, they are taken into account in the hiring decisions of the clubs, so that they are neutralized. In the game theoretic approach, these externalities are not internalized. Because the large club has a higher marginal revenue, the negative external effect that the small club causes on the large club is larger than the external effect that the large club causes on the small club, so that the small club is better off in the game theoretic approach.

….

[O]ne can see that the win maximization league shows a more unbalanced competition than the profit maximization league.

… Szymanski (2003) has also shown that revenue sharing improves the competitive balance if the sharing arrangement is such that a fixed sum is contributed to a prize fund awarded to the winning team. Again, revenue sharing improves the competitive balance if clubs are win maximizers. As long as the sharing arrangement implies that money is transferred from the large budget club to the small budget club, it causes an upward shift of the small club’s average revenue curve and a downward shift of the large club’s average revenue curve.

DISCUSSION AND POLICY IMPLICATIONS

If a reasonable degree of competitive balance is important for spectators, what can league administrators conclude from the findings of economic theory regarding the impact of revenue sharing? One of the first things to find out is if clubs are profit or win maximizers. So far, the empirical tests have not been of great help. All tests, based on the ticket pricing rule or the size of the price elasticity, do not reject the hypothesis of profit maximization, but they do not reject the win maximization hypothesis either, because the pricing rules turn out to be the same in both scenarios (Kesenne, 2002).

In general, the case for revenue sharing in a profit maximization league is not very strong. In the benchmark scenario of Rothenberg (1956) and Quirk and El Hodiri (1974), revenue sharing does not affect the competitive balance. Moreover, the distribution of talent is optimal if clubs are profit maximizers, so that revenue sharing, which leads to a less efficient allocation of talent, is not needed. So far, to the best of our knowledge, the impact of revenue sharing in the most realistic scenario has not been analysed. This scenario should include a league with more than 2 clubs, where club revenue is affected by both the winning percentage of the home and the visiting team, where the revenue sharing system is based on the sharing of gate receipts, the pool sharing of broadcasting rights and the non-sharing of some other revenue, and where the talent supply can be fixed or flexible, but analysed in an appropriate game theoretic setting. Some partial results, taking onto account deviations from the benchmark case, show that revenue sharing can improve or worsen the competitive balance, which leads to the general conclusion that the impact of revenue sharing on the competitive balance can be expected to be rather limited in the profit maximization scenario.

According to most American economists, this scenario seems to apply to the North American major leagues, where clubs are assumed to be profit maximizers, and the supply of talent is constant and internalized into the hiring strategy of the owners. Some club revenues are shared, like gate receipts in NFL (National Football League) and MLB (Major League Baseball). Also federal broadcasting rights are pooled and redistributed, while local television rights are not shared.

If all clubs are win maximizers, the theory shows that revenue sharing is effective in establishing a more balanced distribution of talent among large and small market clubs. Moreover, it can be expected that, without any sharing, the distribution of talent in a win maximization league is more unequal than in a profit maximization league. Also, the distribution of talent without sharing is suboptimal in terms of total league revenue, because of the inefficient allocation of talent among clubs. In the national soccer leagues in Europe, where clubs are assumed to behave more like win maximizers, revenue sharing will be even more appropriate after the abolition of the transfer system by the Bosman verdict. The small market clubs, being net-sellers of talent on the transfer market, complain about a dramatic loss of revenue. If the transfer market has partially functioned as a redistribution system between large and small market clubs, revenue sharing might remedy the weak financial position of the small market clubs. However, in European football, the combination of national leagues and the European Champions League is a serious obstacle to any revenue sharing arrangement on the national level. In the small football countries, like Holland or Belgium, the big clubs are not willing to share revenue with the small clubs, because this will further weaken their position in the Champions League where they have to face the rich clubs of the Big Five (England, Spain, Italy, Germany and France). The growing gap between the Big Five and the other European countries, on the one hand, and the growing gap between the bigger and the smaller clubs in the national leagues, on the other hand, is a serious threat to the competitive balance and the health of European football.

CONCLUSION

The competitive balance in a league, which mainly depends on the distribution of playing talent among clubs, has been a central issue in the economics of professional team sports. It turns out that the size of the market is the most important, but not the only factor affecting the talent distribution. Also the objectives of the clubs, the supporters’ preferences, the talent supply conditions and the specific sharing arrangements can affect the competitive balance and the impact of revenue sharing. A survey of the economic theory suggests that revenue sharing in a profit maximization league can be expected to have only a minor impact on competitive balance, whereas revenue sharing in a win maximization league clearly improves the competitive balance.

References

….

Borland J., & Macdonald R., (2003), Demand for Sport, Oxford Review of Economic Policy, 19(4), 478–502.

Fort R., & Quirk J. (1995), Cross-subsidization, incentives and outcomes in Professional Team Sports Leagues, Journal of Economic Literature XXXIII, 1265–1299.

….

Kesenne S., (1996), League Management in Professional Team Sports with Win Maximizing clubs, European Journal for Sport Management, 2(2), 14–22.

Kesenne S., (2000), Revenue Sharing and Competitive Balance in Professional Team Sports, Journal of Sports Economics, 1(1), 56–65.

Kesenne S., (2001), The different impact of different sharing systems on the competitive balance in professional team sports, European Sports Management Quarterly, 1(3), 210–218.

Kesenne S., (2002), Club Objectives and Ticket Pricing in Professional Team Sports, Research Paper 2002-018, Economics Department, University of Antwerp.

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Discussion Questions

1.  Describe the revenue sharing agreements in each of the four major professional sports leagues.

2.  Are the current revenue sharing arrangements in each league optimal or suboptimal? Explain.

3.  What is the ideal amount of revenue sharing for a league to engage in? Explain.

4.  Why do owners seek to undermine league welfare by not complying with league policies?

5.  How much revenue is shared in each league?

6.  Why should revenue be shared among the teams in a league?

7.  Is there an economic justification underlying revenue sharing? How can the problems associated with revenue sharing be overcome?

8.  Sheehan’s tax plan calls for the taxing of those teams that are not competitive. What are the reasons for doing this? Would this be effective? Why or why not?

9.  How did Commissioner Rozelle ensure a stable ownership of NFL franchises? Is this still effective today? Why or why not?

10.  In each professional sports league, where does the majority of team revenue come from? Will revenue continue to grow? Why or why not?

11.  What are some of the differences in how American and European leagues handle issues of competitive balance?

12.  What are some ways that leagues can protect against free-riding, “profit-taking” owners who would threaten competitive balance?

13.  If you were starting up a new league, which revenue streams would you share? Which would you leave to the individual clubs? What incentives would motivate your decisions?

14.  When determining who should get revenue sharing funds, should leagues focus on teams’ total revenues (NHL model) or profitability (NBA)? What incentives does each plan create?

15.  What are the financial interests of a rich team subsidizing one or more of its poor brethren in a league?

16.  Open leagues can rely on carrots (revenue sharing) and sticks (relegation) to promote competition. Is this a more effective way of ensuring competitive balance? Why or why not?

17.  Does Richard’s Sheehan’s “loser tax” fix the free-rider problem in league revenue sharing, or does it take tax money from a rich team’s right pocket and transfer it to its left pocket?

18.  As teams and leagues find additional revenue streams, how should those streams be treated for purposes of revenue sharing? Should leagues try to find a common standard for all future revenue streams, or deal with each new one as it arises?

19.  Now that the NFL is a multibillion-dollar industry, is it still reasonable to ask big-market clubs to share lucrative revenue streams for the good of “League Think”? If not, how would you incentivize these owners to continue to act for the good of the league?

20.  If a team/city has a rabid fan base that will pay more for a good team, should its teams have more money to spend in order to reward that support?

21.  If NFL teams share revenues, should they also share debt (particularly from new stadium construction that increases team revenues)? Is the G-3 program a sufficient sharing mechanism in this way?

22.  Does equitable distribution of revenues necessarily lead to equitable distribution of talent?

23.  What other factors besides revenue sharing can affect competitive balance?

24.  How can revenue sharing solve competitive imbalance if, in Kesenne’s words, some teams are “profit maximizers” and others are “win maximizers”?

25.  How can you determine if an owner is a profit maximizer, a win maximizer, or some combination of the two?

26.  How are revenue sharing decisions in international sports (such as soccer) affected when multiple leagues compete against each other for talent?