In praise of 'socialism with cheerleaders'

Don't get too worked up over those talks between the NFL owners and players and the threat of a locked-out season. The National Football League is one of the most sucessful monopolies in history, on a par with OPEC in oil and DeBeers in diamonds.

The various participants in the football cartel - and in that, I include the players - now seem to have some disagreements over how their monopoly profits are to be divided. My guess, however, is that none is stupid enough to jeopardize $9 billion in annual income over a percentage point or two.

The secret to the NFL's success is its ability to maintain the legal structure of 32 supposedly independent teams while operating with most of the advantages of a single business entity. As with many successful monopolists, its focus has been on expanding its market without having to lower its prices. In a very disciplined way, it has added teams, extended the length of the season and increased the number of nationally televised games each week of the season. It has been so skillful in playing one city off another that it squeezed taxpayers for $500 million a year in stadium subsidies for many years. And it has so cleverly structured the sale of television rights that networks routinely wind up overbidding, allowing the league to capture virtually the full value of its monopoly.

Equally impressive is the way the NFL has avoided unproductive competition among members of its cartel. This includes an agreement in which 80 percent of league and team revenue is pooled and shared equally among the 32 franchises. It also includes a salary cap and salary floor for all teams, along with some limits on free agency, which ensure that all clubs can retain "franchise players" and field a competitive team. Even the players are incentivized to focus on "growing the pie," with a unique collective-bargaining agreement that guarantees them 60 percent of all revenue beyond the first $1 billion.

"Socialism with cheerleaders," is how the Chicago Tribune once described it.

During the recent recession, however, the NFL has hit something of a wall, as revenue growth has slowed, profits have declined and some of the air has come out of inflated team values.

Financially pressed cities and states are no longer willing to subsidize new stadiums or stadium upgrades.

A number of teams have encountered price resistance from ticket holders, particularly season ticket holders, whose overall number is declining.

Perverse competition has developed around the signing of draft picks, resulting in pay for untested rookies that exceeds that of star veterans.

Meanwhile, some of the more aggressive and innovative owners, who have found ways to increase their teams' revenue, are starting to resent how much of that revenue they are forced to share with other teams.

It is against that backdrop that the current contract negotiations are playing out.

To justify future increases in ticket prices and television rights, the owners want to extend the regular season by converting two preseason outings into games that count. The players moan and groan about the additional injuries that might result but, in the end, will allow themselves to be bought off with more money for post-retirement medical care. Nor will they offer much resistance to a proposal to cap rookie salaries, which would benefit lower draft picks and veterans near the bottom of the pay scale.

The real bargaining will come over the owners' demand to reduce the share of revenue going to players under the existing contract. The owners cite the need to stem the recent decline in profits and to provide funds necessary for stadium construction and upgrades.

On the former, the owners are likely to find little sympathy, either from the public or the players. The recession is ending. Tough it out.

On the latter, it is certainly reasonable that if the players are to share in any increase in revenue, they ought to share in the cost and risk of the investments that will produce such revenue. The same might be said for the league's growing investment in the NFL Network, a cable venture that over the long term is meant to capture from the broadcast networks more of the profit from video distribution of its games. One way for the owners to achieve that risk-sharing with the players would be to subtract half the value of those investments from the revenue pool, while keeping the players' share of that pool (59.5 percent) the same. That would give negotiators for each side the chance to declare victory. Getting a new agreement with the players may turn out to be easier than resolving some of the tensions among the owners themselves over how much teams must share their locally generated revenue. The current collectivist setup protects not only smaller market teams but poorly run teams as well, according to Stephen Ross, who studies the economics of professional sports leagues at Penn State. Ross thinks the fans, the players and the league would all be better off if owners had more incentive to find more innovative ways to "grow the pie" than simply raising ticket and concession prices and adding more skyboxes.

In the market for other goods and services, of course, there's no need to incentivize innovation. Old-fashioned competition does the trick. But if there is to be only one professional football league that matters - and that is clearly what the public prefers - then the next-best arrangement is one that keeps the teams competing on the field but collaborating in the marketplace. Each professional sport strikes that balance somewhat differently, but none more effectively than the National Football League.

Steven Pearlstein is a business and economics columnist who writes about local, national and international topics.
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