The highly successful NFL business model

Monday 8th February 2010
NFL.jpg

Today is the NFL Super Bowl, the final of the American Football season. It is the biggest annual day in world sport and America’s most-watched television broadcast.

The event has an audience of about 130 million people (just exceeding the UEFA Champions League soccer final) and is rated by Forbes as worth US$379m, making it also the most lucrative annual sporting event in the world.

But what makes the competition so successful is the unique way the NFL (National Football League) is run – as a socialist business model.

The NFL competition has 32 teams – each of them privately-owned franchises – and is set up to ensure any team can win “on any given Sunday”.

They do this in three ways.

Firstly, about 70% of each team’s revenue is shared equally among all teams. This includes money from TV deals, sponsorships, ticket sales and merchandise.

Secondly, there is a limit that teams can spend on players’ annual salaries. In 2009 this figure was $127m for a maximum squad of 53 players.

Thirdly, the order in which teams select new players to the competition, known as the NFL Draft, works in inverse order – meaning the last placed team picks first, and the winner of the Super Bowl picks last.

All this evens out the competition by ensuring there isn’t a huge gap between rich and poor teams. It means all teams are financially viable and athletically competitive, which keeps supporters coming back because the games remain interesting.

This is in stark contrast to England’s Premier League – the richest soccer league in the world – which has no salary cap and very little revenue sharing. Here, the same teams dominate the competition every year, while the poorer and less successful ones lose support and flirt with bankruptcy.

On the surface it all seems very ‘un-American’ – the idea of wealth redistribution in a staunchly capitalist country. But during the last decade the NFL has outperformed its fellow sports in almost every measure and delivered record crowds at an average 90% capacity.

And the winning formula has been great for business. Five of the teams are valued at over US$1 billion and another 17 are on the cusp. Only three other sports teams in the world are valued at more than $1 billion: baseball’s New York Yankees, and soccer’s Manchester United and Real Madrid.

A lot of this is to do with risk. The business is perfectly hedged, which means one team’s losing season and poor revenues is offset by another team’s bumper year. Along with handsome revenues ($6.5bn annually), this financial certainty keeps NFL team values high as there is little chance of any going bankrupt.

The NFL’s management has other key strategies too. They negotiate all their TV contracts as a single entity, rather than letting the big cities dominate like in the other sports.

TV rights are distributed between four networks of NBC, CBS, Fox and ESPN to keep them competitive, and the right to broadcast the Super Bowl is rotated between three of them.

Additionally, management always tries to leave one major city without a team in the 32 to keep the current host cities on their toes (teams can move locations and change names if need be). This puts pressure on state and local governments to inject public money into stadium upgrades.

For example, Los Angeles, America’s second-largest city, hasn’t had a team since 1994. But the NFL has made far more money by using LA as a threat, than by actually putting a team there.

There are always downsides though. Cincinnati was accused of free-riding during the 1990s after being the fifth-most profitable team but winning the fewest games. And some owners have complained that the revenue sharing is too high.

However, these are the minority cases, and the NFL has allowed teams to keep profits from some high-growth revenue streams, like luxury boxes, to ensure the winning desire is maintained.

The other top three sports of baseball, basketball and ice hockey have all tried to imitate the model but without much success. They’ve only agreed to limited revenue sharing and salary caps because rich teams simply don’t want to compromise.

American football also has an element of luck. Being the most violent of the four sports, the average player lasts no more than four years as a professional. This means there’s minimal threat of player strikes over pay that have plagued the other sports and cost ice-hockey an entire season in 2005.

But luck counts for little. Indeed, rather than going to the winning quarterback of the Indianapolis Colts or the New Orleans Saints, today’s MVP could go to the NFL management for keeping their sport on top, and creating and executing an unbeatable formula.

By The Casual Truth

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