Over the past 90 years, the National Football League has outgrown its roots as a collection of under-financed midwestern teams and is now the single most popular ongoing entertainment enterprise in the US. This year the NFL recorded some of its highest television ratings ever. Beyond the league’s 32 franchises there are a host of subsidiary enterprises, including an all-NFL cable network, sports-talk radio, fantasy football and gambling (much of it “illegal”), merchandising, and so on. If you ask the typical NFL sycophant, the league’s success will last forever — nothing will ever bring down Lord Football!
Except, of course, the people who actually run the NFL. Which is why we’re less than a month from a league-imposed “lockout” that could conceivably deprive millions of their entitlement to football come the fall of 2011. Wait, what?
How can a business be so popular — and profitable — yet prepare for such a self-destructive act. Unlike most labor showdowns, this isn’t the product of political rabble-rousing by the workers. The NFL Players Association, the union, was content with the collective bargaining agreement they signed with league owners in 2006. It was the owners who not only terminated that agreement early — they are now demanding radical changes to the present labor system.
One major rallying cry is the lack of a so-called “rookie wage scale.” The NFL likes price controls. Check that — the NFL loves price controls. The owners prefer to restrict the mobility of its workforce as much as possible. In and of itself, this is not morally objectionable or contrary to free-market principles. All employers have budgets for their businesses. And a sports league is almost by necessity a cartel in that it represents a partial “merger” of firms with respect to certain aspects of their common business.
The problem here is that the “rookie wage scale” smells an awful lot like red herring. Superficially, it sounds weird that the NFL would grind a multi-billion dollar industry to a halt over the lack of wage controls for a handful of entry-level employees. Yet the NFL has gone out of its way to sound the alarm bells. Last month Green Bay Packers President Mark Murphy wrote a panicky editorial in the Washington Post lamenting the plight of the poor owners:
Rookies should be paid fairly, but they should not be among the highest-paid NFL players before playing a single down. Teams don’t like it. Veterans and retired players don’t like it. Fans don’t like it. And the players’ union shouldn’t like it, either.
Earlier this year, Sports Illustrated published a list of the 50 highest-paid American athletes. Five 2009 NFL rookies were on the list, averaging nearly $21 million in total income for their rookie year. Every other athlete on the list was a proven veteran.
Our current system of paying rookies doesn’t make sense. In 2009, 256 drafted rookies signed contracts calling for $1.2 billion in compensation with $585 million guaranteed. This year the numbers increased to $1.27 billion, including $660 million guaranteed, for 255 draft choices.
No other business operates this way, and no other union gives its entry-level hires such privileges. The system is so bad that some teams no longer want picks in the top part of the first round of the NFL draft. The cost is too high, especially if a player taken that early turns out to be a bust.
The purpose of Murphy’s article was to focus press and public anger against the players. Indeed, the NFL’s entire public-relations strategy during the present labor negotiations has been almost Marxist: Generate middle-class resentment against players who earn exorbitant salaries to play a mere game.
What Murphy neglected to mention was that in the same year that those 256 rookies earned $585 million in guaranteed compensation, the NFL owners cleared a profit of over $1 billion. In fact, the NFL’s profitability isn’t tied to labor costs at all — but more on that later.
Even under the current agreement, there are limits on overall rookie compensation. The expiring CBA provides for complex formulae used to limit how much rookies receive. Murphy and his bosses want to go a step further and literally dictate what every player makes before they enter the league. This is what the NBA actually does: set maximum salaries based on the point where a player is selected in the rookie draft. As Murphy admitted, the goal is “eliminating individual negotiations” with players and their agents — whom Murphy also paints as part of the problem.
All this begs the question of how the league got itself to this point. Let’s take one of the players on that Sports Illustrated list Murphy referred to. Matthew Stafford, the Detroit Lions quarterback, signed a rookie contract in 2009 that guaranteed him just under $27 million in signing bonuses and base salary. Murphy says this is outrageous — Stafford hadn’t even proved himself on the field before getting such an enormous paycheck.
But who is responsible for this? Um, the NFL owners, that’s who. The union didn’t put a gun to Detroit’s head and make them pay Stafford $27 million. To the contrary, the NFL insisted on a labor system that produced this outcome. Now they’re trying to blame everyone but themselves.
As noted above, NFL owners want to avoid player “free agency” at all costs. Murphy’s actually on the money when he says “no other business operates this way” when it comes to new hires. No other business would get together with its competitors and allocate the most promising talent to the worst performing firms. You know how the Lions came to sign Stafford to a $27 million contract? Because the team lost every single game the previous season.
The NFL Draft goes in inverse order of team performance so that the worst teams always pick first. Once a club “drafts” a player, no other club may negotiate a contract with that player. If the player refuses to sign with the club that drafted him, he must wait a year and is subject to being “drafted” a second time.
What this does is create a monopoly on both sides of the equation. The Lions draft Stafford. Stafford is stuck in that he can’t sign with any other NFL team, but the Lions are also stuck in that they can’t go back and take the next-best-available player. So that’s one reason you end up with seemingly large rookie contracts.
Another factor — which you don’t see in most other businesses — is that these so-called entry-level workers are in fact known commodities long before they sign their first NFL contract. There’s an entire sub-industry built around the NFL Draft. Starting with heavily marketed college games and extending to pre-draft activities like the NFL Scouting Combine, and culminating in the television Draft itself, rookie players are subject to a level of hype that has no real non-sports equivalent. All of this is reflected in the value of the top rookie contracts.
If the NFL wanted to reduce incoming player costs without resorting to the blunt instrument of wage scales — a system more common to a government teacher’s union than a robust free-market enterprise — the league could simply switch to a less hype-driven system. Sure, there’s nothing the NFL can do about college football. But instead of a televised Draft, why not simply hold a closed-door silent auction where each team could submit bids for the players it wants? This would fulfill the NFL’s stated goal of eliminating agents and protracted “holdouts” from the process, while ensuring a more rational allocation of incoming players.
But the NFL would never do such a thing for two reasons. One, the league won’t give up the hype. Just this year the league expanded the Draft to three days and aired the first round on Thursday night in primetime for the express purpose of increasing hype.
The second reason is that any deviation from the present system is declared a threat to “competitive balance.” In fact, when the union proposed to accept a rookie wage scale in exchange for allowing players to become unrestricted free agents after three seasons, the owners rejected in out of hand — because allowing free agency that quickly would destroy their vaunted “competitive balance.”
So what of this? Is “competitive balance” essential to the NFL’s success? Most people are conditioned to uncritically accept this as truth. I don’t. In one sense, competitive balance is a mirage: as a commenter to one of my prior posts noted, there are 256 regular season games in the NFL each season, which means no matter what you do the combined record of all teams is 256-256 (barring ties). Everything naturally pulls you towards the median.
There’s an easy way to demonstrate this. I examined the starting orders for the past ten NFL drafts (2001–2010). I noted the teams with the first ten selections in each Draft (excluding trades); this reflects the ten worst-performing teams from previous season. This essentially produces a table of the bottom-third of the NFL from each of the past ten years.
In theory, perfect “competitive balance” would mean each team appears in the top ten about three times. Of course, that’s not what I found. It turned out that the results produced a near-perfect bell curve: Eight of the 32 NFL teams had a top-ten position three times, 12 had it more than three times, and 12 had it less than three.
The aforementioned Lions were the worst overall performer, holding a top-ten Draft position in 8 of 10 years. This provides further insight into Matthew Stanford’s sizable contract. He was going to a team with a history of poor management and poor on-field performance. The Lions were desperate for a star quarterback to rebuild the team around.
From his perspective, Stafford was taking an enormous risk playing for a team that would almost certainly continue to be bad (the Lions are 8-24 since drafting him) at a difficult position that tends to produce just as many failures as successes. Add to that the average NFL career is about four seasons, and suddenly you realize that Mark Murphy’s protests notwithstanding, players like Stafford are far from typical “entry-level hires.”
Ultimately, the comparatively high salaries for top rookies reflects the price of the NFL’s decision to subsidize poorly managed franchises in perpetuity. It has nothing to do with unscrupulous agents or a union unwilling to impose more bureaucracy on its members. It’s about the league failing to remove ownership groups with a demonstrated record of incompetence. All the talk of a rookie wage scale and overpaid players is just an attempt to create a scapegoat.
If you look at the distribution of top-ten orders that I mentioned above, you’ll actually find that many of the teams on the low end of the distribution — the teams one or no top-ten draft positions in the previous decade — actually made a higher-than-average number of overall draft selections. Teams like New England (1 top-ten appearance) and Philadelphia (0) routinely acquire multiple additional picks from other teams through trades. That reflects smart management practices. If “competitive balance” was really the NFL’s top concern, it would ban such “unscrupulous” attempts to game the system.
For that matter, if allocating top player talent through an inverse-order Draft is really so effective, then why not apply the same principles to coaches, general managers, and other executive talent? Why should a hot, up-and-coming coach be allowed to auction his services off to the highest bidder? After all, a coach often has more direct impact on a team’s competitiveness than a single player taken in a Draft, even a quarterback in most cases. Shouldn’t the Detroit Lions of the world be given the same exclusive right to monopolize the services of a potentially great coach as it would a player?
Of course, the players, coaches, and general managers are the real entrepreneurs of professional football. The owners — and their handpicked commissioner — are mostly just bureaucrats. They contribute little to the creation of the actual product or customer value. Yet they hold the political reins of the entire operation. That will be the subject of another post later this week.