Tuesday, February 15, 2011

Great Paper On NFL's Business Model, Centralized Revenue & the Lockout

Harvard student Jake I. Fisher wrote a paper entitled, The NFL’s Current Business Model and the Potential 2011 Lockout.

This paper is terrific, as it very clearly outlines the NFL's business model with its focus on centrally generated revenue as a way to create and maintain parity. The paper concludes that the NFL business, driven by centrally generated and equally shared revenue, such as TV deals and merchanding revenue, has effectively controlled product distribution, distributed risk throughout the league and maintain economic and competitive parity. All this equals by far the best run business of the four major sports in North America.

I invite you to read this very clear and easy to consume paper. I hope he got an A+.

Here are some of the highlights from the paper:

Economic parity exists in the NFL because teams do not deviate widely in their revenues or costs. About 60% of league revenue is nationally generated and split evenly, with only a 40% window for teams to differentiate their top lines.  

As a percentage of the league average, the standard deviation in team revenue in the NFL is 12% on average from 2006-08. The MLB value is 25% (from 2007-09), the NBA value is 25%, and the NHL value is 24%.

The NFL obtains three major benefits by modeling its business around centrally generated revenue:

(1) The first is that the NFL can consolidate power and exercise wide reaching control over the distribution of its product.

(2) The second major benefit of the NFL’s centralized model is that the league can distribute risk among all 32 teams.

(3) The third major benefit of the NFL’s centrally oriented business model is that the league can maintain both economic and competitive parity among its teams.

Fisher looked at the Packers financial statements. Since the team is publicly owned, those records are available to the public. This is what he found:

Centrally generated revenue includes things such as road game ticket receipts, NFL Properties revenue (league merchandising and licensing) and television and radio deals.

The Green Bay income statement shows that $147 million of its $248 million in revenue (59%) is generated by the NFL league office. The 60/40 split is consistent with league-wide distribution.

The $147 million in centrally generated revenue that the Packers receive consists of road game ticket receipts, NFL Properties revenue (merchandising, licensing, etc.) and television and radio deals. Of Green Bay’s $47 million in ticket revenue, $17 million is sourced from road games.

This breakdown exists because the NFL has a 60/40 policy whereby the home team keeps 60% of gate receipts and gives 40% of receipts to a pool, which is then distributed evenly among the 32 teams. The NFL has the most comprehensive system of shared gate receipts. The NBA and NHL do not share ticket sales, and MLB home teams keep 85% of ticket revenue.

Unlike the NFL, the NBA, MLB, and NHL are more oriented on gate receipts and local media. The NFL generated $1.68 billion in local gate receipts in 2008, which is 22% of its total revenue. The NBA share of gate receipts to total revenue is 32% (2008-09), the MLB share is 37% (2008), and the NHL share is 42% (2008-09).

On the lockout, Fisher concludes that because of its centralize revenue business model, the NFL may be in a better position to absorb a work stoppage and has the upper hand in these negotiations.

To read more, click here. The NFL model of parity is in stark contrast to baseball, where generally only the
rich teams make it to the playoffs by virtue of a different revenue sharing model and no cap.

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