May 27, 2008


Understanding Salary Caps and Why The NFL opted out (Mark Cuban, May 25th 2008, Blog Maverick)

The idea behind having a cap is that when total revenues for the league go up, then the amount of money available to players should go up as well. Makes perfect sense for a hypothetical league where BOTH local and national revenues per team are consistently equal.

Unfortunately, in this day and age, while national revenues per teams are split equally, the amount of revenues generated locally per team varies enormously market by market. This is a huge problem for salary cap based leagues.

Why does this create a problem ? Because in the biggest of big markets, significant increases in revenues can increase the value of the salary cap by more dollars than some other teams can increase their local revenues.

So in our hypothetical league, lets say there is a team in Metropolis, a big city, that just signed a TV deal for its preseason games, increased their ticket prices, and added a huge video board , that when all is said and done, for the next season, will add a total of $ 40mm in revenue.

Another big market just opened their new stadium, which now seats 100k people and has 200 suites that they are charging an arm and a leg for because their teams is on a roll, having made the playoffs the last couple years, with what appears to be a bright future. In this first year of the stadium, they expect to add 100mm in local revenues more than they had last year.

In BFE, one of the smaller markets in the league, they just had a terrible season. Although they have a stadium they moved into just 8 years ago, they have no pricing elasticity for tickets or advertising, and in fact their attendance is declining. As a result, despite the additional TV revenue they will get from the new TV deal the league has signed, they will see a decline in total revenues of 5mm dollars this year and if they don't have a good season, revenues could decline further in future years.

For the sake of this example, we will assume the other 17 teams had a net revenue impact of zero

Overall the business for this hypothetical league is good. Their national TV deal just renewed, and merchandise and advertising sales are great. At the national level, total league revenues will increase 5mm per team, or 100mm dollars.

So in this hypothetical example, to figure out the how the cap would change, we would take the 40mm increase that Metropolis had , add it to the 100mm dollar change for the 2ND big market team, add to it the 100mm dollar increase from the new national TV deal and then subtract the 5mm decline that BFE had, for a net increase of 235mm for the league. Then to get the salary cap increase, we multiply that number by 50pct ($117.50) and divide by 20 teams. So the salary cap would increase by $ 5. 875k from 50mm to 55.875mm per team.

As you can quickly figure out, for the teams with new, big market size TV and stadium deals, the increase in the cap is no big deal. For those teams from BFE, who don't have pricing elasticity or markets that can support stadiums that seat 100k, things are not so good. Every year seems to bring an increase in the salary cap , which their local fans and their own desire to win pressures them to spend up to, yet their total revenues never seem to keep up with.

Add to this pressure, the design of how contracts are structured so that teams which perform the worst and have the least pricing elasticity, get the highest draft picks and must write out checks for huge signing bonuses for their rookies, who they have no idea whether or not they will preform. Its not that they don't want the high draft picks, but there is no question that their financial risk equation escalates dramatically.

These same teams, also feel the greatest pressure to sign new free agents. Again, which carry significant financial risk with big upfront payments, and on field performance risk. There is no template for winning and the stress levels go way up when its eating up every dollar you have to try to win. always trade your high picks and almost never sign free agents, but that's what bad teams need to do. In fact, that's what the Patriots have done, though even they panicked last year --after losing in a Championship game no less--and signed Adalius Thomas, who was okay but not worth big money.

Posted by Orrin Judd at May 27, 2008 12:00 AM

Except that having most teams start trading high picks and not signing free agents opens the league up to collusion charges from the players unions.

Posted by: Brandon at May 27, 2008 11:51 AM

There is no NFL players union to speak of. The owners showed how easy it is to break them with replacement football. Only the uniforms matter.

Posted by: oj at May 27, 2008 12:59 PM

I would like to point out that the Cardinals make plenty of money every year. Strategy - don't pay high salaries to star players (except for just one or two to ensure that the others are unhappy); and sign only other teams' castoffs and backups as free agents (plus an over-the-hill star every now and then).

Posted by: Brandon at May 27, 2008 6:43 PM