On a recent Sunday evening the lights went out on the New York Giants and the Dallas Cowboys as they played a crucial division game in a brand new stadium that cost more than $1 billion to build. After a 12 minute delay the electricity was restored and the game was completed, but this event may well have given the NFL, its players, sponsors, and fans, a flash forward into what things could look like this time next year.
The National Football League is currently thriving. Television ratings are the highest they have been in more than 20 years. A mix of golden boys like New England’s Tom Brady, polarizing media figures like Minnesota’s Brett Favre, and up and coming stars such as Tennessee’s Chris Johnson have fans tuning in more than ever before. Meanwhile, successful franchises in key markets, including two in the New York area, are propelling weekly figures upwards to new heights. Too, workplace fantasy football leagues have brought a new wave of watchers to couches and barstools everywhere who may not have been followers of the game just a few years back.
Over the last decade, the NFL, as a business, has become the king of the sports world. It pulled in $7.6 billion in revenues in 2008, the latest figure available. This amount makes it the richest league in sports. Additionally, it has closed the gap on Major League Baseball as far as America’s past time is concerned. True, baseball will probably always be number one in most American’s hearts due to its rich history and implied father and son rituals, but bloated contracts and biceps forged during the steroid era have left the door open for football to make up some ground.
With everything going in the right direction, one would think no entity would want to do anything to rock the boat. But nothing could be further from the truth. League owners and the NFLPA, the players association, agreed to a collective bargaining agreement in 2006. The duration of the contract was for several years, but the owners had an option to vote out of the pact in 2008, which they did. As a result, the current year is being played without a salary cap, and if no agreement can be reached a lockout will occur in 2011.
The first question that comes to mind for most is why would the owners want to risk such an occurrence? One grievance is with the league’s revenue sharing structure. Successful teams are forced to subsidize those that are struggling regardless of the size of their market. Both Value Line and the media in general do not view this as a viable reason to risk cancellation of games, however. It is more likely that player wages are causing the hang up. According to team owners, who operate under old-time business practices and have refused to open their books to the public in any way, are currently contributing 60% of their revenues for player compensation. Undoubtedly, they are looking to reduce this proportion.
So with the league and its owners represented by Commissioner Roger Goodell, the players, and their union, under the leadership of union president DeMaurice Smith, the two parties are at a stalemate and we are more than half way through the 2010 season. Historically, among the major sports, lockouts are often responded to with lower offers from sponsors and ticket sales tend to decrease due to the backlash of disgruntled fans. Also, ratings slip initially, which for the NFL would result in fewer dollars coming its way from television contracts.
But what affect will a lockout have on the league’s sponsors who pay hefty amounts of money for monikers beginning with “The official (insert product here) of the NFL”? Round about figures for the league and the companies it does business with are beginning to roll in, and none of them are pretty.
Anheuser-Busch Inbev (BUD) became the official beer sponsor of the National Football league in May of this year by paying $1.2 billion for a six-year contract. This position had been held by MolsonCoors (TAP) for the past several years and will be relinquished after the 2011 Super Bowl, which will be played in early February. For BUD, this represents the largest advertising deal in company history. Although the league and this company have not released any terms that have been agreed to if a lockout occurs, it is obvious that concessions by the NFL will be necessary if no games are being played.
In the same vein, PepsiCo (PEP) is on board for over $1 billion in fees to promote its Pepsi, Frito-Lay, Tropicana, and Gatorade brands. These deals are set to also expire in February of 2011. Speculation in the advertising world was that the NFL was set for another monstrous payday, however, with the threat of not having a season now a real possibility, negotiations are firmly being placed on the back burner.
Verizon (VZ) aggressively wrestled the NFL exclusive wireless partner tag away from Sprint Nextel (S) earlier this year via a $720 million pact. Included in this agreement were the rights to broadcast games on its V-Cast network, and also the use of NFL players in its commercials. The Indianapolis Colts’ Peyton Manning was particularly desirable because he has proven his acumen as a pitch man for a number of products over the last decade. Regardless, if the entire 2011 season is locked out, Verizon Wireless has the ability to sue for breach of contract and could seek up to $750 million in damages.
Electronic Arts (ERTS), whose EA Sports arm forked over a hefty sum a few years back to buy the Madden NFL franchise of video games that are immensely popular with fans of football has already requested a $30 million reduction in its licensing payments due to the potential lockout.
Additional deals of this nature with companies ranging from General Motors (GM) to Papa John’s (PZZA) are hanging in the balance, and an early report has stated that corporate partners are already demanding discounts, while others have threatened to pull out entirely. Late season sponsorship of high-profile events like the league’s annual All-Star game, the Pro Bowl, are still very much in the air, and the unhappiness of Corporate America is anticipated to escalate if we get late into this season and no signs of progress surface.
Still, the companies with the most money invested are the television networks. The NFL will continue to receive the portion of the $4 billion in television rights fees that would be paid if the season went on as planned. Owners have said this would be used for employee contract cost, stadium upkeep, and such, but this sum will eventually have to be repaid to the networks if the games are not played. In the absence of football, the desire to watch television on a Sunday afternoon decreases dramatically. Undoubtedly, the league’s television partners; CBS Corp. (CBS), Fox, NBC, and ESPN (The latter three parent companies are NewsCorp (NWS), General Electric (GE - Free General Electric Stock Report), and Disney (DIS - Free Disney Stock Report), respectively), will be leading the charge to try to promote labor peace. DirecTV (DTV), which exclusively offers the NFL Sunday ticket, which shows all the out-of-town games going on that day in a subscription package, is also on the hook to suffer a meaningful setback if the season were to be cancelled.
In spite of all the money that could be lost, all recent indications are that the owners are bracing for a lockout. In early November, The Sports Business Journal reported that the 32 clubs have agreed to the formation of a $900 million lockout fund. This war chest will be made up with $28 million contributed from each team. This amount is said to be being partially financed from savings the league reaped by not paying non-healthcare benefits (life insurance, pension plans) to players this year. All signs point to a scenario where management will hunker down until players concede on the salary front. The fact that the league has retained the same counsel that locked out the National Hockey League a few years back also bodes ill for an agreement.
It is difficult to take sides in a war where millionaires are fighting with billionaires, but public support appears to be firmly behind the players. Football is a different animal than other sports. The average tenure in the league is 3.6 seasons, and there are far more players earning the league minimum then those making the big bucks. Long-term health problems the players face can wipe out earnings in a short span. Too, contracts are not guaranteed like in baseball and basketball. They truly do need to earn as much as they can, while they can.
But it comes down to a simple case of the people at the top looking down at their bottom lines and not being satisfied with the figures they see. Owners want to pay their workers less and squeeze as much profit out of their businesses as possible. Certainly, any investor can get behind such a process. Nonetheless, we think the owners would be wise to consider why the aforementioned companies have chosen to invest so much capital with their product. Behind the scenes bookkeeping, margins, and revenue growth are all fine, but the sponsors get on board to connect with a growing fan base. Any extended work stoppage would be extremely detrimental to the strong bonds the NFL has formed with these fans (see major league baseball circa 1994). If and when the labor dispute is eventually resolved, what is left of the league may not be as appealing or useful to the corporate titans that helped it get to where it is today, and sponsors may not be as eager to once again team up.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.