The Most Boringest Story Ever: The NFL Business Model

With all this talk of collective bargaining, potential lockouts, anti-trust lawsuits and a missing 2011 NFL season, it made me curious about the NFL as a business. You hear bits and pieces about revenue streams, divisions of money and caps but it is all somewhat confusing and mysterious. One of the things that makes the NFL balance sheet such an unknown is the fact that it is a private enterprise so its books and balance sheets are not open for public scrutiny. Except for one team. The Green Bay Packers are owned by their local community and thus their financial information is available for analysis.

So first a caveat: I'm not an accountant nor a financial analyst of any kind. But for some reason I think I can understand and relay to fans some of the facts about how the NFL works financially. The fact that I don't do this for a living will hopefully make the final result somewhat comprehensible to the average person who did not attend business school. The bulk of the information here is summarized from an excellent paper published last year by Jake I. Fisher titled "The NFL's Current Business Model and the Potential 2011 Lockout". This paper is based primarily upon the financial information made available from the Packers. I found it very interesting but your mileage may vary.

The Republic of NFL

In 2008, the NFL raked in an amazing 7.6 billion dollars. For comparison this is about the same as the Gross Domestic Product of the nation of New Guinea and there are around 60 countries which have GDPs that are lower. Green Bay's share of this total pie is about $248 million. Of that amount $147 million (59%) is generated from the league office which is almost exactly in line with what has been revealed by various league officials. This league money comes from several sources: TV and radio revenues, road-game ticket receipts and NFL properties sales. TV and radio contracts are negotiated by the league for all the team's games as a whole and then distributed back to the teams evenly.

Road-game ticket revenue distribution is a bit more complicated. Home teams are allowed to keep 60% of ticket receipts while the other 40% goes into a fund to be redistributed evenly to all the teams. To understand how this works imagine a league with two teams: Green Bay and Dallas. Let's say ticket sales in Green Bay amount to $1 million and in Dallas $2 million. Under the sharing system Green Bay and Dallas would keep $600,000 and $1.2 million respectively. The other $1.2 million would go into a fund to be redistributed equally. In the end, Green Bay would end up with $1.2 million and Dallas with $1.8 million total. So a larger stadium or higher ticket prices greatly benefit the home team but also benefit visiting teams.

The total revenue breakdown for the 2008 Packers looks like this:

Tickets: $47.3 million (19%)
Local Media, Parking & Concessions: $13.2 million (5%)
Marketing & Pro-Shop (licensing, products, etc.): $43.7 million (18%)
NFL Properties: $36.5 million (15%)
Private Boxes: $12.8 million (5%)
Television & Radio: $94.5 million (38%)

A couple of interesting observations from this is that most of the revenue is generated outside of the local area in the form of NFL media and properties revenue. This is unique to the NFL amongst all the other professional leagues in the US as the other leagues let home teams keep more of their local ticket revenues (the NBA and NHL allow 100%) and the NFL has very large TV/properties revenue as compared to ticket revenue.

Serving The Pie

So the Packers take this huge amount of money and just throw a big party in downtown Green Bay right? Well maybe this year, but there are a lot of expenses that have to get disbursed out of that pile of cash.

Players Salaries: $138.7 million (61%)
Sales & Marketing: $23.3 million (10%)
Team Expenses: $26.4 million (12%)
General & Administrative: $31.7 million (14%)
Game Expenses: $7.7 million (3%)

This is a total of about $228 million in expenses which leaves $20 million income. The percentages noted are of the total expenses. Player salaries represent the bulk of team expenses at 61%. It would be interesting to know how this compares to normal industries or small businesses (hint, hint...). It is possible to know how it compares to other sports. The NFL average for player salaries as a percentage of total team expenses is 57%. Baseball's percentage is about the same while the NBA has the highest percentage going to players at 60%. Hockey directs around 54% towards its players. Only the NFL and NHL have hard salary caps. One fairly great mystery in these expense numbers is the exact use of funds in the various categories. Where are coaches (and in the Browns case past coaches) salaries? Are there any capital costs included? Are training facilities and operations funded out of one of these categories? What about player benefits?

Conclusion

The NFL makes a whole lot of money and it spends a whole lot of money. Players get a fairly large chunk of NFL revenue. Because teams get a fairly large amount of their revenue from the NFL central pool and this pool is more or less evenly distributed, they have to control their expenses fairly carefully to stay profitable. The salary cap is a very important in controlling the largest and most variable expense. You can see why the owners are so in love with the cap. Rookie salaries have been a greatly destabilizing factor, and with the cap, both owners and veteran players are seeing this affect their incomes.
Another thing that isn't really covered in Mr. Fisher's paper is the billion dollars that the owners take off of the top of revenues before any distribution. This money is reportedly used for capital expenditures such as building and renovating stadiums. One of the big issues in the current talks between owners and players is that the owners want to skim another billion dollars off of the top as cities and municipalities are not likely to be ponying up millions for new stadiums in the current political environment.
Roger Goodell has announced a revenue goal of $25 billion by the year 2027. This is very aggressive but the NFL's growth rate of around 8% a year seems to indicate that it might be reachable.