CBA: A Boon for Big Business

Friday, March 30, 2007

Abstract:

Objective: The objective of this paper is to determine if the Collective Bargaining Agreement (CBA) and its modifications have been successful in creating competitive parity in the National Football League (NFL), which would spark financial growth.

Methods: The paper documents the win-loss records of NFL teams prior to and following the implementation of the salary cap. Using this data, the year-to-year record change and the standard deviations of the records were determined.

Results: The data exemplifies that although complete competitive parity was not achieved by the CBA and its modifications, the spread of records around the mean record, eight wins, has decreased resulting in a greater competitive balance then previously seen.

Conclusion: Despite failing to create parity in terms of the teams’ records, the CBA and its associated contractual changes have resulted in enough of a decrease in disparity to enhance competitiveness, which bolstered entertainment value and fan enthusiasm. In addition, this allowed for single agency bargaining and marketing rights with sponsors and broadcasting corporations.

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The primary objective of the CBA, used by the NFL, was to benefit the lower market teams through the sharing of assets thereby creating financial parity. Pete Rozelle, the commissioner of the NFL, was responsible for the first CBA. On the importance of the CBA, Rozelle stated “Rather than saying that the commissioner is hired by the owners and therefore is subservient to them, you have to look at whether or not the players are getting a fair shake.”[1] He believed that the appointment of the CBA was necessary because it not only guarantees all teams will be propitious and it gave the players a bargaining relationship with the league, ensuring they would obtain a reasonable amount of league profits. He persuaded the individual owners to pool their profits and resources in order to create a product that was greater than the sum of its parts. This idea, known as the “League Think”[2] philosophy, was first used in 1961. Using this concept, the owners gave up their individual local television rights and combined them as a league-wide broadcasting package, which was sold to CBS. This marked the creation of a CBA in the NFL.

By splitting profits amongst all the NFL teams, financial parity had been created, which had the potential advantage of increasing the competitiveness of the league and making all teams profitable. Because revenue pooling was unfair to the larger market teams, as it caused their profits to become similar to the lower market teams, the league divided the revenue sources into two components. One was Defined Gross Revenue, which was all the income that was to be shared between all of the teams, and the second was Excluded Defined Gross Revenue, the income from the teams’ individual markets, which was to be kept by the individual teams. This allowed larger market teams to remain more successful than smaller market teams. But by decreasing the range of income disparity, all teams were profiting annually. As the popularity of football increased and the benefits of this revenue model became more apparent, all teams felt the implementation of the CBA was appropriate and successful.

The players formed the NFL Players Association (NFLPA)[3] which has adjusted overtime in order to insure their opinion would be represented. It was formed in 1956 with the goal of assuring themselves they would obtain a fair and adequate percentage of league revenue. In 1970, the American Football League Players Association (AFLPA) merged with the NFLPA. This was the result of a 1966 merger agreement between the two leagues, which was finally put into action in 1970.[4] Eventually, both sides, the owners of AFL franchises and the AFLPA along with the owners of NFL franchises and the NFLPA, agreed that merging the two leagues would create a more profitable and more successful enterprise. This would replace a system in which all participants were battling for rights to players, marketing and broadcasting rights.

Disagreements between the owners and the NFLPA have led to multiple player strikes in an attempt to force the owners’ hands to give the players what they desire. The players’ first strike for pension benefits, in 1968, led to a new CBA, which guaranteed veteran players a minimum salary of ten-thousand dollars.[5] After the AFLPA and the NFLPA merged with John Mackey, a Tight End for the Baltimore Colts, as president[6], the new NFLPA immediately called a strike, which lasted two days. This prompted the owners to agree upon a new CBA, which guaranteed veteran players a minimum salary of thirteen-thousand dollars.[7] This was union President John Mackey’s first action; however, his most pivotal contribution to the modern NFL was his being the first player to challenge the limited free agency system. He did this by filing an antitrust suit, against the NFL on its restraints on player movement. The antitrust law states that concentrations of wealth and economic resources are illegal because monopolies and trusts eliminate price competition, preventing the economy from having the choice to find the best costs, as there is only one commonly overpriced cost. The individual team’s monopolies of their players’ services harmed the welfare of the players, as it eliminated price competition for their work, creating undesirable salaries for the players. Mackey’s target was the Rozelle Rule, which requires a team to provide “fair and equitable”[8] compensation to the team that lost the player. Mackey believed this prevented competition over players. As they were stuck with their old teams, this limited their bargaining power. In essence, the Rozelle Rule made free agency meaningless in the NFL. Mackey won his case. Both the lower Federal and the Appeals Courts rejected the NFL’s claims that all of the best players would go to the wealthier teams and more attractive cities, eliminating the competitive balance, by ruling that the restricted free agency violated antitrust laws. However, Mackey’s victory was short lived as the player’s union and the owners negotiated a new CBA that retained many of the restrictions lost in the John Mackey case. As antitrust laws do not apply to agreements, the courts could not deem the CBA a violation of the antitrust laws. Mackey had officially lost his case. Although John Mackey was unsuccessful in his immediate objective, he was an inspiration for the future players to denounce free agency in the NFL.

John Mackey’s attempt led to future strikes by the NFLPA, which eventually accomplished his goal. An instance of this was in 1987, the players held a strike for twenty-four days. The NFLPA sued the NFL over the restricted free agency system and the NFLPA was defeated in its attempt to revise free agency by eliminating the compensation teams had to pay in order to sign a free agent. They intended to jump start the nonexistent free agent movement. Their primary evidence was that Norm Thompson [9]was the only player to change teams through free agency from 1977-87. They claimed that this occurred due to the high and unreasonable compensation the Rozelle Rule forced teams to pay in order to sign a player. An example of this compensation was when the Redskins signed Wilbur Marshall, a free agent from Chicago in 1988. As the CBA expired in 1987, the Redskins believed they were exempt from paying competition.[10] They were forced to give Chicago two first round selections, as the rules from the previous CBA were still in place and no new agreement had been reached at the time. This shows the extreme extent of the compensation teams have to pay, as two first round picks are pivotal to the building of a successful franchise.

In order to create an unrestricted free agency system, the NFLPA took its case against the owners, known as the Powell case, to the court. The NFLPA declared the restraints on free agency as violations of the antitrust law. They argued that the Rozelle Rule eliminated competition for players by forcing teams to give up numerous draft choices, in order to sign just a single player. Competition would make the contracts more favorable to the players, as teams would compete to sign the players who were able to choose which team they signed with. The court ruled against the player’s union, as there was a labor exemption of the owners from the antitrust law in the last CBA. Although expired, the CBA would remain in place until a new agreement was negotiated. As the labor exemption requires the existence of a union representative, the NFLPA decertified itself as the players’ representative. They believed that an absence of a bargaining relationship with the league would make the owners liable under the antitrust law. In order to counter this tactic, the NFL created a Plan B free agency, which allowed only ten of the forty-seven players on the teams’ rosters to become free agents, continuing to restrict the best players from becoming free agents. By preventing players from reaching free agency, it steered them away from big money, obviously much to their dismay. This impelled eight players to file an antitrust suit challenging Plan B. The jury found it to be too restrictive, but instead of appealing the verdict, the league decided to rid itself of any vulnerability to the antitrust rule. The owners wanted to renegotiate CBA, but the NFLPA felt otherwise, leading to a strike, which ended when the NFLPA lost its negotiating power. This happened when the owners brought in replacement players, neutralizing the negative effects of a strike on the league and forcing the players to renegotiate the CBA in order to retain their jobs. The two sides negotiated for the next five years, finally agreeing to a new CBA in 1993. This CBA benefited both sides. The veteran players were granted a real free agency system for the first time and the owner’s had a salary cap to regulate the individual team’s player expenses, preventing excessive over- and under-spending. The rules of the NFL free agency were that players with up to three years of experience still had draft –choice compensation placed upon them in order to be signed by the teams, called restricted free agency. Players with four or more years of experience had no compensation placed on them, called unrestricted free agency. There is also a rookie salary cap designed to limit the amount teams spend on them. The 1993 CBA was renegotiated in 2002, retaining most of the 1993 CBA’s principles, but the players received fifty-eight percent of the broadcasting and attendance revenue. This CBA was extended through 2007 with the salary cap expiring in 2006, and the labor deal was extended six years in 2006, granting the players fifty-nine and a half percent of all income. [11]

As financial parity was one of the original reasons a CBA was created, the CBA of 1993 implemented a salary cap to prevent teams from over or under spending in the new unrestricted free agency. The salary cap limits the maximum amount a team can spend, preventing larger market teams from overspending to draw the fans’ interest. The salary cap also limits the minimum a team can spend, so all teams will have a similar chance of success. Furthermore, it ensures the players are receiving their fair share of league profits. In addition, because teams had limited money to spend on players, the NFL had to create a minimum salary for the players.[12] This prevented teams from not paying the backups and overspending on the players who are expected to make an impact.

Flaws have been exposed from both sides’ intentions for enforcing a salary cap. The league intentions for the salary cap failed as it was aimed to be a hard cap, but over time it has become a soft cap. Teams used signing bonuses[13] as a loophole in the salary cap and the rookie cap. The signing bonus is not fully counted toward the salary cap in the year in which it is paid to the player, but it is extended over the duration of the contract. For instance, if a three year contract is signed with a 3 million dollar bonus, the player would receive three million dollars up front. However, this money would only be counted one million per year against the salary cap each year. On the players’ side, the salary cap failed because the limitation placed on expenditures mandated by the salary cap had caused teams to cut several veteran players in order to be able to afford their star players. On the positive side, the competition created by free agency also increased the value of contracts for impact players. The combination of the two results in teams paying large amounts of money to sign the marquee in-demand free agents. This leaves less money to pay the other players.

Despite its controversial status, the salary cap had achieved its original goals and accomplished other objectives as well. The financial equality created by the salary cap resulted in parity amongst the teams in terms of talent. The competitive balance has made the outcome of the games more unpredictable, increasing fan interest. The intra-season changes from unsuccessful teams to successful teams have significantly increased since the establishment of the salary cap. Because of the growth of fan interest, no other sport’s revenue growth has paralleled the NFL’s, showing the players’ salaries have increased with competitive balance. In addition, the salary cap prevents the differences in Excluded Gross Revenue from interfering with and destroying the competitive nature of the game. By installing a CBA in football, the owners and NFLPA intended to create financial balance, financial strength, and financial stability. The CBA required all the teams to share revenue, making lower market teams more likely to succeed and be profitable. The marketing approach to a sports franchise is based on entertainment value as opposed to use-value (e.g., a washing machine) or symbolic-value (e.g., a Porsche as opposed to a Chevrolet). This entertainment value is based in large part on competition and unpredictability, which prompts spectator interest. The agreements reached by the owners and the players have led to a competitive league, causing greater unpredictability of game outcomes and increased marketability.

In order to prove the hypothesis stated above, all the standings[14] from years 1978 (when a sixteen game schedule was implemented) through 2005 (the last completed year of the NFL) were inserted into an Excel spreadsheet. Years 1982 and 1987 were excluded because they were strike years, which disrupted the constant variable of a sixteen game schedule. The points scored, points allowed, percent, divisions, and losses categories were then removed as they were superfluous data, leaving only the wins and ties. The teams were then alphabetized with their respective total wins, found by adding the wins with one-half of the ties, adjacent to them. This created a spreadsheet entitled “Wins and Ties.”

Four more spreadsheets were then created, entitled “Wins>8,” “Wins=8,” “Wins<8,” style=""> winning more than eight games would define a winning season. On the spreadsheets “Wins>8,” “Wins=8,” “Wins<8,”>@if(Wins and Ties!B3>8,Wins and Ties!B3 ,0) was used to find the total wins. B3 represented the total wins of the corresponding year on the “Wins and Ties” sheet. If the wins were greater than eight, then they are shown on the chart. If not, a zero was placed in that cell. The “Number of Teams” column was found by the formula @if(B3>0,1,0). If a team’s wins and half the ties added up to more than eight games, that team became eligible to be included into the aforementioned squeeze spread sheet, as a one was placed into the “Number of Teams” section. The Following Year’s Wins section is found by inserting the formula, @if(B3>0,'Wins and Ties'!E3,0), into the cell. B3 represented the wins, and if these were greater than zero, the team would have won more than eight games because the previous formula filters the data, so it only included numbers that are greater than eight. If the team’s wins were greater than zero, the team’s results for the following year (E3) were shown, and if not a zero was displayed in the cell. It was necessary to make sure the expansion teams were aligned with their previous teams. Then the results in the individual columns were added together.

The “Squeeze” spreadsheet was found by adding the sums of each column with the corresponding figures for all of the twenty-five years. The raw results were separated into three categories, all years (1978-2004), pre salary cap years (1978-1993), and salary cap years (1994-2004). For each of those three categories, the following were found: Total Wins, Average of Wins, Amount of Eligible Teams, Average Subsequent Year Wins, Standard Deviation, and Standard Deviation in Following Year. Then, a sum formula was used to add the corresponding columns in the three respective spreadsheets (Wins>8,Wins=8,Wins<8),>(FYW-TW)/2. Finally, the standard deviation, the amount of wins a team was away from eight, was found by subtracting eight from the average win per team. The standard deviation of the following year would be found by subtracting eight from the Following Year Wins Average column. The completed “Squeeze” chart can be found in appendix 1. On first observation, the above graph made from the “Squeeze” spreadsheet shows that there is an increase in parity between team records, after the salary cap was put into effect. Before the salary cap was established, the percentage-win records of average and above average teams would decrease from year to year, while the percentage-win records of below average teams would increase. This demonstrated an expected correctional pattern based on then existing rules of player replacement and game plan adjustments. However, the changes were incremental, at best. Prior to the cap, the mean number of year-to-year wins for above average teams would fall from 10.58 to 9.11 games, a decrease of 1.47 games or a 9.2% absolute change, compared to a decrease of 1.83 games (from 10.69 to 8.86 games), an 11.4% absolute change, after the cap. The year-to-year percentage wins for an average team (8/16 games) decreased by 0.08 to 7.92 wins (0.5% absolute change) pre-cap to a decrease of 0.36 games (2.3%) post-cap. The increase percentage-win for below average teams records shifted from 1.64 year-to-year increment (10.3%) to 1.97 (12.3%), following the cap.

However, on second look, the “Squeeze” spreadsheet shows that the original CBA, contrary to common belief, failed to create complete parity in terms of the teams’ records. Certainly, the modifications to the CBA, mainly the salary cap, were successful as they had a modest leveling effect on the range of records amongst the teams, but there still was a consistent pattern of win percentage in that the above average teams remained above average and below average teams remained below average from year to year.

The above graph illustrates the greatest impact the CBA and the salary cap had on the NFL, the decrease in the disparity of records between the winning teams and the losing teams, respectively, in the following year. The standard deviation from the average win total in the NFL, eight wins, had decreased from year to year, particularly after the salary cap was put into motion. Before the salary cap, teams whose records showed more than eight wins had a standard deviation of 2.58, and the following year it would drop by 1.11 to 1.47. Teams with a record of eight wins, which originally had a standard deviation of zero, would drop to 7.92 wins, a standard deviation of 0.08. Finally, teams whose records showed less than eight wins had a standard deviation of 2.89, and the following year it had decreased by 1.64 to 1.25. These results conclude that the teams’ with more than eight wins, eight wins, and les than eight wins win totals would be within 1.5 games of eight games the following year. More pertinent, however, was that after the salary cap had been put into use, teams’ standard deviations had substantially decreased. This was exemplified by the average of the teams, whose records showed more than eight wins, had a standard deviation of 2.69. But the following year, their standard deviation dropped by 1.83 to 0.86. In addition, the average of teams whose records showed eight wins won 7.64 games the following season, a standard deviation of 0.36. Finally, the mean of teams whose records contained less than eight wins, had a standard deviation of 2.72. But the following year’s standard deviations decreased by 1.97 to 0.75. All of the specific groupings of team success one year were within plus or minus one game of eight the following year, showing there is very little disparity in the NFL, although the classes of success are not changing. The average wins of successful teams was still at an apex of the league, the average teams were still in the middle, and the lower-tier teams were still at the bottom, therefore there is no real parity present. The only difference in the win totals between years is that the range of win totals between all teams’, regardless of success, has substantially decreased. This proved my hypothesis as the modifications to the CBA have created a competitive, although uneven league. This causes greater unpredictability of game outcomes and increased marketability.

Despite failing to create parity in terms of the teams’ records, the CBA and its associated contractual changes have resulted in enough of a decrease in disparity to enhance competitiveness, which bolstered entertainment value and fan enthusiasm. In addition, this allowed for single agency bargaining and marketing rights with sponsors and broadcasting corporations. With the result of an apparent increase in team competitiveness and a very real increase in revenue (from $970 million in 1989 to $5.8 billion in 2005), the CBA promoted enhanced entertainment value for the fans and increased profits for owners and player. As a result, the CBA and its modifications to be regarded as a judicial change by the NFL and all sides involved.

[1] Pete Rozelle Quotes. [Online] Available http://www.brainyquote.com/quotes/authors/p/pete_rozelle.html, December 3, 2006

[2] Massey, Cade. Revenue Sharing and the Salary Cap in the NFL: Perfecting the Balance. [Online] Available http://www.law.vanderbilt.edu/jetl/articles/vol8no3/Moorhead.pdf, October 16, 2006.

[3] About Us: NFLPA History. [Online] Available, http://www.nflpa.com/AboutUs/NFLPA_History.aspx October 18, 2006

[4] AFL-NFL Merger. [Online] Available, http http://www.answers.com/topic/afl-nfl-merger October 25, 2006

[5] Weisman, Larry. NFL players ecstatic for long-awaited labor peace. [Online] Available http://www.usatoday.com/sports/football/nfl/2006-03-08-labor-deal-reaction_x.htm?csp=34&POE=click-refer, October 25, 2006.

[6] Sportslaw History: The John Mackey case. [Online] Available http://www.sportslawnews.com/archive/history/HT8.html, October, 24, 2006.

[7] Weisman, Larry. NFL players ecstatic for long-awaited labor peace. [Online] Available http://www.usatoday.com/sports/football/nfl/2006-03-08-labor-deal-reaction_x.htm?csp=34&POE=click-refer, October 25, 2006.

[8] Sportslaw History: The John Mackey case. [Online] Available http://www.sportslawnews.com/archive/history/HT8.html, October, 24, 2006.

[9] Staudohar, Paul D. Salary Caps in Professional Team Sports [Online] Available

http://72.14.205.104/search?q=cache:I93__DVarz8J:www.bls.gov/opub/cwc/archive/spring1998art1.pdf+wilbur+marshall+compensation&hl=en&gl=us&ct=clnk&cd=3&client=firefox-a October 30, 2006

[10] Staudohar, Paul D. Salary Caps in Professional Team Sports [Online] Available

http://72.14.205.104/search?q=cache:I93__DVarz8J:www.bls.gov/opub/cwc/archive/spring1998art1.pdf+wilbur+marshall+compensation&hl=en&gl=us&ct=clnk&cd=3&client=firefox-a October 30, 2006

[11] Weisman, Larry. NFL players ecstatic for long-awaited labor peace. [Online] Available http://www.usatoday.com/sports/football/nfl/2006-03-08-labor-deal-reaction_x.htm?csp=34&POE=click-refer, October 25, 2006.

[12] Staudohar, Paul D. Salary Caps in Professional Team Sports [Online] Available

http://72.14.205.104/search?q=cache:I93__DVarz8J:www.bls.gov/opub/cwc/archive/spring1998art1.pdf+wilbur+marshall+compensation&hl=en&gl=us&ct=clnk&cd=3&client=firefox-a October 30, 2006

[14]NFL History. [Online] Available http://www.nfl.com/history/standings, October 12, 2006.

CBA: A Boon for Big Business

Friday, March 30, 2007

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