professional sports finance (idea)
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|Professional sports leagues are a complicated business. Players are paid millions of dollars, yet are still employees who may have no control over where they will be living from year to year, or even from month to month. The financial system surrounding these leagues are often the topic of hot debate. So, this writeup is going to attempt to explain some of the terms and practices surrounding professional sports and money. A quick note: for the purposes of this writeup, I'm only going to consider MLB, NFL, NBA, and the NHL.
Many people have heard the words collective bargaining agreement, salary cap, luxury tax, and revenue sharing, but what do they all mean? Basically, a collective bargaining agreement is a contract between a players' union and the owners of the teams. A CBA is what keeps a professional sports league from violating antitrust laws. Most CBAs establish rules about schedule, preseason, postseason, drug testing, and trading. These are all pretty standard and usually don't cause much conflict. However, CBAs also contain rules regarding money, and everybody argues over money. That's where the rest of these terms come in.
A salary cap is a set of rules regarding how much a team can spend on salaries per year. Usually, salary caps are figured on a variable scale that changes from year to year, depending on factors such as expected revenue, previous revenue, interest rates, and inflation. The purpose of a salary cap is to keep the league competitive. A salary cap is supposed to prevent a team from winning simply by buying the best players. The NBA and the NFL are currently the only leagues that do this. However, they do it in different ways. The NFL uses what is called a hard cap. A hard cap has no exceptions. Every team in the league must be under the cap amount. The NBA, however, has a soft cap. A soft cap has a number of exceptions that a team can use to spend more money on players or to retain players that are eligible for free agency. Teams in the NBA are nearly always over cap, while teams in the NFL are always under.
A luxury tax is designed to do the same thing as a salary cap, but through a different method. It doesn't restrict the amount of money a team can spend on players, it just penalizes a team for spending more than a set amount. This money is then split up amongst the other teams in the league. Baseball is the only team that currently uses a luxury tax, and, as of this writing, the New York Yankees, the Boston Red Sox, and the Retarded Angels of Anaheim are the only teams that pay it. A luxury tax is usually a compromise between the players' union and the owners when they can't agree on a salary cap.
Revenue sharing is a financial agreement between teams, not players and owners. The purpose of revenue sharing is to even the playing field again. Money is sent from teams in big markets, who make a ton, to teams in small markets, that don't. This is supposed to keep the teams in the small markets competitive, even though they don't make the same scratch as the big guys. Say you're the Yankees. You sell out Yankee Stadium every game for an entire season. You make more money on merchandise than the US Mint. You have your own sports channel, and people pay you to watch it. Now, say you're the Detroit Tigers. You can't even spare enough cash to watch the Yankees' channel. You're playing in Detroit, for chrissakes. How can you even attempt to play at the level of the Yankees? Simple. The Yankees give you money so you can stay afloat (and they have somebody to beat). That's revenue sharing.
So, how does this all play out? Well, it's a very complicated situation at best. Players are generally opposed to any kind of salary cap, because that means they make less money. They also don't want any sort of maximum salary and want the minimum salary to be as high as possible. Major market owners are usually opposed to a luxury tax, because it takes money out of their pockets. They also don't like revenue sharing, because they're paying other teams just for being in the same league. A salary cap is fine with them, but they're usually the ones driving up salaries anyway, so it isn't critical. Small or mid market owners (the majority of owners) are for any or all of the above. They like revenue sharing because they can make money without having to move the team, they like salary caps so they can keep their good players, and they like luxury taxes because it keeps the big guys from getting too big. And the fans? They like anything that keeps the seats cheap and the players playing.
There are differences between how different sports do things, however. Baseball, for example, realized how devastating a player strike is in 1994, and basically rolls over for the players on just about every topic. It takes a lot of effort and public outcry to get the players to budge on an issue. The recent steps towards steroid testing are a prime example. People were accusing Sammy Sosa, Barry Bonds, and Mark McGwire of using steroids in the late 90s, during the home run races. However, it's taken baseball 5 years to really do anything about it. Why? The popularity of those players has rejuvenated baseball after the 94 strike. The players knew it, and if they didn't want steroid testing, there was no way the owners could make them be tested.
Football is much different. When the players tried to exert some clout by striking in 1987, replacement players were used mid season. The players were only on strike for 3 weeks, and returned very quickly. That year, records were set for postseason games and television ratings, teaching the players that people didn't care about them, they cared about the sport. As a result, football has pioneered most of the financial ideas discussed in this writeup, because the owners acted on their advantage. Football is now also the professional sport with the longest streak of continous seasons without labor dispute.
The NBA has fairly good labor relations between players and owners. The only labor dispute in the history of the sport was a lockout in 1998-99 and resulted in the soft cap that is now in place. The reason the league got along so well is that there is always money in basketball. Playing basketball games is cheap. Actually putting on a basketball game is relatively cheap, as hardwood doesn't get torn up by cleats, need to be watered, or melt. Also, ticket prices for basketball are some of the most expensive in professional sports. However, basketball's growing salaries led to an eventual labor dispute in 1998-99, which transferred power back to the owners, somewhat. Basketball still has one of the best owner-player relationships in professional sports.
Hockey is different. Hockey is the smallest of all of the professional sports, yet has some of the worst possible labor relations. Players and owners absolutely refuse to see eye to eye on any collective bargaining agreement at this point. Players are totally opposed to any idea of a salary cap, while owners aren't willing to listen to any proposals without one. People on both sides are missing the point, which is that hockey isn't popular enough to get away with this kind of crap. If the current situation isn't resolved, hockey will become the first professional sport to lose an entire season to a labor dispute.
Update: Hockey lost an entire season to a labor dispute. The Stanley Cup was not awarded for the first time since 1919. Eventually, players caved to a salary cap and rollback, along with many other changes.
One more quick note: The difference between a lockout and a strike is who initiates it. A lockout is started by the owners, who lock the players out of whatever. A strike is started by the players who refuse to play for whatever reason. The major difference between a lockout and a strike is that during a lockout, the owners cannot use replacement players, while during a strike, they can.
So there you have it. Now you, too, can know what the screaming heads on ESPN are going on about during off season labor disputes.