Salary Cap Nuggets - No. 4: How does the CBA deal with league revenue for the purpose of calculating salary cap?

This series is called Salary Cap Nuggets because ‘nuggets’ is such an interesting word in English. It calls to mind chicken nuggets - tasty, bite sized and easy to eat. But it also calls to mind gold nuggets - small, but valuable.

The salary cap is a product of the Collective Bargaining Agreement (CBA), which is a 301-page contract between the NFL Owners and the NFL Players Association. In these articles, I try to explore just one or two small parts of the NFL salary cap defined in the massive CBA. Hence, Salary Cap Nuggets - small, bite-sized, easy to digest, yet valuable information for NFL fans.

The goal is to, one bite at a time, get a clear understanding of the salary cap.

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Click this link for handy access to all the Salary Cap Nuggets

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The authors of Crunching Numbers explain the calculation of league revenue (used for calculating salary cap) beginning on page 23. The league revenue is split between the owners and players following prescribed formulas.

The 2011 CBA developed a formula tied to total revenues that is used to calculate Player Costs. While these formulas are beyond the scope of anything we need to know regarding the salary cap, it is still good to have a fundamental understanding of some of the components that go into the revenue calculation.

League revenues are divided into three revenue buckets, which are distributed in various proportions to the equation. The three buckets are:

• League Media,
• NFL Ventures/Postseason, and
• Local Revenue.

A key fact is a bit buried in the excerpt above — the fact that different proportions apply to the three revenue buckets. The splits are not 50/50, and the actual proportions amount to hundreds of millions of dollars.

I expect that one of the key elements in the next CBA negotiation may revolve around the revision of the revenue distributions. A minor change of even half a percent can have a huge impact on the division of money between the owners and players.

But our focus in this Nugget is to understand the revenue that makes up the three buckets, and how that revenue is split between owners and players.

Let’s get a look at the THREE REVENUE BUCKETS

LEAGUE MEDIA

League Media [is] the largest of the three buckets.

This category consists primarily of the high cash flows that come from billion-dollar contracts with television and radio networks.

For League Media, we consider the rights paid by FOX, CBS, NBC, ESPN, DirectTV, Westwood One, and Sirius Satellite Radio. There are also provisions to include revenues from international deals in the future.

The payout ratio is 55% paid to the players while 45% goes to the owners.

So far, this looks like a pretty generous split, with the players getting the lion’s share of the largest piece of the revenue pie.

NFL VENTURES/POSTSEASON

NFL Ventures is comprised of all the various media and marketing branches of the NFL.

This includes the NFL Network, Red Zone Channel, NFL.com, NFL Films, NFL Properties, and NFL Digital Gamepass.

Postseason revenues are the money made by the NFL in conjunction with the operation of postseason (playoff) football games outside of the contracted money in the League Media bucket.

It is important to note that the TV revenues for the Thursday Night Football package falls into this category rather than the prior one.

Why is this important? The payout ratio is the inverse of the League Media bucket, with only 45% going to the players while 55% goes to the owners.

Okay, so far I’ve got this down as:

• revenue from external media agreements (except for Thursday Night Football) going 55% to the players; and
• revenue from NFL media sources (plus Thursday Night Football) going 45% to the players.

That seems simple enough.

LOCAL REVENUES

Local Revenues captures all the revenues not included in the other two buckets.

Once again, I’m impressed by the practicality and elegance of the CBA and its definitions. Similar to the breakdown of Player Costs into two buckets that we looked at in Nugget #3, where “Player Benefit Charges” was defined simply as Player Costs that are “not Salary Cap Charges”, here, the CBA identifies “Local Revenues” as ‘everything else’. This kind of allocation of costs and revenues in the agreement makes it easy to implement.

This [Local Revenues] is primarily the money that clubs earn and negotiate on an individual basis rather than as a bundled package sold by the NFL. For example: Teams negotiate their own radio contracts and preseason game packages. They earn money for ticket sales and concessions every Sunday they have a home game.

This category has 40% being paid to the players and 60% staying with ownership.

This is where you will hear griping from some NFL owners, since teams in large markets generate more local revenue than teams in smaller markets [but the revenue is shared equally].

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Consider this quote from a 2015 article in the Atlantic, titled, America’s Socialist Sports League: The NFL

Because revenues are spread evenly across franchises, owners don’t gain much financially when their teams win.

The NFL equally shares its nearly $5 billion of national television revenue among all its teams. It also shares a substantial portion of its ticket and merchandise revenue, but not revenue from suites, sponsorships, or naming rights. All of this means that the link between a team’s record and the revenue it brings in is quite weak.

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Fans tend to think of each team as an independent business engaged in business competition with 31 rival teams that mirrors the on-field sporting competition. In fact, the owners are more like partners, mostly (not completely) cutting one big pie into equal pieces, one for each of the 32 owners.

The 32 franchises are designed to be mutually supporting and collectively and individually profitable. The owners are not trying to drive the other franchises out of business. On the contrary, it is in every owner’s interest to have 32 healthy, thriving teams contributing to the overall good of the league.

To summarize how the CBA deals with leage-wide revenue used in Salary Cap calculations, let’s just recap the three buckets and applicable splits:

This information is key to the calculation of the NFL’s unadjusted salary cap each season. Revenue sharing between players and owners is a central pillar of the collectively bargained labor agreement that controls the NFL and allows it to enjoy its anti-monopoly exemption.

A key idea to wrap one’s head around is that franchises are not giving owner’s money to players when they sign them to contracts. The money already belongs to the players, as prescribed by the CBA, and that portion of league revenue defined as belonging to the players cannot be taken away by the owners.

It’s not voluntary; it is a contractual obligation.

The NFLPA has already collectively bargained to get it.

The process of negotiating and signing contracts is simply the mechanism by which the money is divided up among the players.