Running head: NFL COLLECTIVE BARGAINING AGREEMENT

NFL Collective Bargaining Agreement

Coen De Heus
Sho Takaki
Kai Tin (Michael) Lee
Giorgio Varlaro
Ithaca College
NFL COLLECTIVE BARGAINING AGREEMENT

Abstract

Labor issues in the National Football League (NFL) have been widely publicized this

spring (2011). The researchers in this study felt that some of the topics essential to the labor

negotiations where still not publicized widely enough, thus needed further research. Due to this,

the researchers used financial and security valuation theories to try and establish whether the

NFL owners were right in their opinion to cancel the CBA extension of 2006 by the spring of

2008.

Over the last decade, the NFL has grown from a multi-million dollar business to a multi-

billion dollar business. Owners have more and more interest in the business side of the sport,

which could be seen with the rapid rate of new stadiums being erected in NFL cities. These

stadiums increased revenue, and increased team values, which is crucial to the owners.

Furthermore, TV contracts have progressively gotten larger, seeing earnings reach in the billions

within the last century. With an even spread of revenues across the league, due to their labor

agreement, every NFL owner has reaped the benefits of this system as seasons have progressed.

The main balancing factor of revenue is player costs. After the labor issues in the 1980s,

the owners and players combined to create the Collective Bargaining Agreement (CBA) in 1993.

Since then this deal has been extended multiple times, with varying conditions, but financial

success caused an overwhelming increase for both sides as wages and NFL team values grew

consistently. However due to the owners’ choice to opt out of the CBA in 2008, it is clear that

the balance is gone. Legal battles, which mainly revolve around anti-trust law, prove to

strengthen this point.

This study analyzed franchise values of the 32 teams in the National Football League

from 2003 to 2009. Based on the NFL franchise value data from Forbes.com, a repeated measure

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ANOVA and a simple linear regression were used to examine the changes in NFL teams’ values

over time and the impact of the NFL CBA on team value changes. In addition, simple line graphs

were created to compare the discount rates of the market with the data collected on the NFL

annual team value growth. This research was done under two main hypotheses. One hypothesis

is that the value of the NFL franchises improved significantly less under the latest CBA,

compared to the situation in the previous CBA and compared to the risk-free rate and major

stock markets in the United States. The other hypothesis is that the average team values

increased over the last six years have significantly diminished.

The owners’ annual increase in team value diminished by about six percent after the

extension of the CBA in 2006, but diminished even more after opting out in 2008. Even though

there are some issues with the data in this study, it is likely the discovered trends were part of the

information owners had on their franchises. It appears that based on the data available to this

study, the owners made the proper decision to cancel the CBA, since the latest extension had not

increased financially as much as in years prior.

Introduction

The NFL and its players are in debate over a new Collective Bargaining Agreement

(CBA). Both sides claim that the other is simply making too much money. When reading popular

media articles, it is often suggested that teams are either losing money or making money, but

enough information isn’t present to decipher which is more significant. This minute difference

between losing or making money is often the basis for public debate on which side should

prevail in these negotiations. In this paper we will suggest a different approach. As each NFL

franchise is a for profit organization, we will argue that it is reasonable to expect more than just a

minor annual gain. Then using information from what owners expect as a return on investment,

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we’ll examine whether the owners made the right decision to opt out of the latest CBA extension

(of 2006) in 2008. This decision will be analyzed using expected and achieved rates of return on

franchise values.

Literature Review

NFL Collective Bargaining Agreement

All of the current NFL franchises, besides the Green Bay Packers are privately owned.

Due to this, annual financial statements do not have to be administered to the public. Since the

Green Bay Packers are the only team in the National Football League (NFL) which provide a

financial statement, this increases the difficulty to establish whether the NFL is in crisis mode.

Furthermore, the Packers, who had a franchise value of $1 billion last season, are in the middle

of the pack within the 32 member league (NFL Team Valuations, 2010). For outsiders it is thus

difficult to establish the variance of team values and financial data of the other NFL teams. With

scarce financial information available, it will be important to rely on secondary sources such as

the Forbes Team Valuations. The previous Collective Bargaining Agreement (CBA) of the NFL

was initially negotiated in 1993 after the league missed a total of 24 regular season games in the

80’s (nine games in 1982 and 15 games in 1987) (Lee, 2010). In that agreement, free agency and

a hard salary cap were instilled into the league to maintain competitive balance. Since that time,

the agreement has been extended numerous times until the owners opted out in 2008.

The CBA essentially defines the labor-management relationship between the National

Football League Players Association (NFLPA) and the National Football Leagues Management

Council (NFLMC) (Redding & Peterson, 2009). In the NFL, 224 players enter the league

through a draft system where teams can obtain exclusive rights to a player through a signed

contract. Other rookies enter the league through free agency. Before free agency took affect after

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the 1993 CBA agreement, the drafting team had maintained exclusive rights throughout a

player's career with the reserve clause and Rozelle rule intact (Fuhr, 2001). After 1993, the new

agreement granted restricted and unrestricted free agents far greater ability to negotiate with

other clubs. This resulted in a change in player’s earned salaries because their abilities could be

competed for in the open market once their original rookie contract expired. Free agency

provided an increase to player salaries, seeing the average player salary of $55,000 in 1977

increase to $1 million in 1997 (Fuhr, 2001). However, in exchange for accepting free agency, the

owners could limit player payrolls because the agreement set to only allow a hard cap. Under a

hard salary cap, no team could go above a certain sum of money without being penalized the

following season. Due to this cap, there is little variance in a team's spending on player salaries

(NFL.com, 2008; Lee, 2010; Davis, 2011).

The 2006 extension, which could have been valid through the 2012 season, provided both

the NFL and the NFLPA the ability to shorten the CBA by one or two years if the current deal

wasn’t working. As stated, in 2008 the NFL and its 32 members opted out of their current

agreement and wanted to keep negotiating a new agreement for the 2011 season and beyond,

thus trying to figure out if a better model could be used (NFL.com, 2008). Negotiations

continued until March 4, 2011 when the previous CBA agreement expired. A 24 hour extension

was executed, which turned into a seven-day extension, but ultimately both sides were unable to

reach a new deal. Due to this, the NFLPA applied to decertify as a collective bargaining

maneuver, which basically meant they were not a union anymore so further negotiations could

not continue. In reaction to the players decertification, the NFL made the decision to lock out the

players, thus forcing both sides into court where anti-trust laws would be argued (Bell, 2011).

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The issues between the NFL and NFLPA are threefold, namely to readjust revenue

sharing, a possible increase in the number of regular season games, and to incorporate a rookie

wage scale (Redding & Peterson, 2009). The biggest issue both sides cannot agree on is the

revenue sharing. The previous CBA deal favored the players, seeing them receive 60 percent of

the league's nearly $8 billion in revenues after $1 billion was taken off the top for the owners. In

the new agreement, the league was asking for an additional $1 billion off the top before the

revenues were split because the clubs complained about growing expenses due to stadium

construction, increased operating costs and improvements to respond to the interests and

demands of their fans (NFL.com, 2008). Furthermore, the league also wanted to change the

players current 60 percent of total revenues earned to 55 percent (Berman, 2011).

When dealing with the increasement of regular season games, from 16 to 18, the owners

sought for the players’ approval because it would bring more revenues to the league (Redding &

Peterson, 2009). If an 18-game regular season was agreed upon, two preseason games would be

eliminated and replaced with regular season games in August. The league said that fans did not

like the quality of preseason games, so it would be in the best interest of the league to make a

change (Berman, 2011). Players, who currently average 3.4 years in the league, did not like the

idea because they believed an 18-game regular season would potentially shorten their career and

opportunity to make money. Furthermore, the idea was thought to also undermine players' safety

and health benefits. Under the previous CBA, players could receive post-career health care after

playing three years in the league. With the amount of games increased, this number would surely

go down, thus giving less players benefits after they retire. The NFLPA projects the average

career span would decrease to 2.8 years with an 18-game regular season (Berman, 2011).

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The final argument which is keeping the league and its players from a new agreement is

the inclusion of a rookie wage scale. The league wants to implement a wage scale because the

first round picks of the draft are believed to be paid an exorbitant salary compared to proven

veterans. An example of this could be seen in 2010 when the No. 1 overall pick Sam Bradford

received a $78 million contract from the St. Louis Rams. What was even more remarkable about

the contract was the $50 million guaranteed in a league which uses incentive based contracts to

keep base salaries to a minimum (Berman, 2011).

In sum, the NFL and NFLPA are trying to negotiate a new CBA which is primarily

focused on how much owners can limit player costs and on how much revenue players can gain.

These factors are among the main influences of the business model of an NFL franchise, and

thus the potential team value. This is significant as owners have only limited avenues of

personally gaining of NFL teams, as we will explain in later sections, increasing team values is

the most important.

Economic Framework of the NFL

The most current Collective Bargaining Agreement was claimed to be insufficient

because it wasn’t generating enough revenue for the league. NFL owners, as stated by Murphy

and Topel (2009):

“Appear to be claiming that they are not earning enough to be able to afford their

costs. It appears they are focused on net operating income, i.e., they are claiming

that they are not making enough money because net operating income is ‘too

low’” (p. 2).

When looking at the typical incoming revenues for an NFL franchise, normally media

rights (television and radio), ticket sales (including luxury boxes), concessions, parking, and the

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sale of team emblems are present (Leonard, 1998). As for the team’s top expenditures, these

include player compensation (salaries, bonuses, benefits, etc.) and operating expenses (employee

salaries, equipment and facility costs) (Leonard, 1998). Both revenues and expenditures have

gone up since the last CBA was renewed in 2006.

The confusion of who had a better deal in the last CBA doesn’t allow key stakeholders or

the public to put pressure on the league or its players to come to a new deal. Information

provided by the NFL and the players are contradictory, thus upholding the current equilibrium in

public opinion. Leonard (1997 & 1998), Fuhr (2001), Redding & Peterson (2009), Miller (2009),

and Johnson (1988) have looked at the NFL and franchises values. The general consensus is NFL

franchise values have substantially raised. However the question whether this assertion has held

under the latest CBA remains unanswered.

Stadiums are of great essence to the value of a team. From 1991 to 2004, the NFL saw

the average age of a stadium decrease from 18.5 years old to 11.2 (Miller, 2009). This was due to

sports teams often claiming that they needed a new facility to remain competitive. That might

have been true, but research by Leonard (1997), Fuhr (2001) and Miller (2009) reveal that new

stadiums were built by teams because it increased attendance and allowed for the incorporation

of luxury seats. Team owners in the NFL do not have to share revenues for concessions, luxury

seating or venue advertising (Leonard, 1998). As stated by Fuhr (2001), “a new stadium adds

considerably to the profits and values of the franchise. Not only does attendance generally

increase, but revenues also increase due to luxury seating” (p. 319). The recent move of

incorporating luxury seating has allowed owners to increase profits through price discrimination,

thus reaping higher revenues (Fuhr, 2001). In the NFL this could be seen with the New York

Giants and New York Jets in 2008. Both franchises gained an extra $125 million, resulting in a

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21 percent increase in team value with the incorporation of a new stadium (Ozanian, 2008). This

increase in value came directly from a sponsorship deal and luxury seating. Examples like this

can be found across the league.

When looking at television contracts, the NFL enjoys a lofty position amongst other

professional sports leagues and has claimed it sport as “America’s Game” in recent years

(Redding & Peterson, 2009). Also, Redding & Peterson (2009) state that:

“Entering the 2007 season, the NFL had television contracts in place with the

following television rights holders with annual values as follows: ESPN ($1.1

billion through 2013), Fox ($712 million through 2011), CBS ($622.5 million

through 2011), NBC ($660 million through 2011), and DirecTV ($700 million

though 2010 and $1 billion per year 2011-2014)” (p.95).

Media revenues in the NFL average out to $2.1 billion before owners even sell a ticket.

Since 1994, media contracts have contributed to over two-and-a-half times the amount of gate

receipts, as opposed to 34.5 percent back in 1974 (Leonard, 1998). Due to the increasing media

figure, researchers have provided more evidence that teams are making profits from the ever-

increasing value of their franchises (Fuhr, 2001). To show this in figures, before the NFL started

raking in $2.1 billion from 2007-present, the league was earning $17.6 billion from 1998-2006

(Fuhr, 2001).

Contrary to the notion that NFL owners make money, the average franchise value has

only risen 13.9 percent since the CBA was extended in 2006 (Gaines, 2011). 13.9 percent is a far

cry from the franchise value rise from $279 million to $1.022 billion since 1998. Furthermore,

NFL franchise values are actually down more than $500 million within the last two years. Only

two teams, the Cowboys and Giants have reached at least eight percent annual growth on average

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in the previous four years, while 23 teams have averaged less than four percent growth during

the same time period (Gaines, 2011). Even worse, the Jaguars, Lions and Rams have lost value

since 2006. Evidence like this suggests that NFL Executive Vice President and Chief Financial

Officer Ray Anderson was correct in saying that, “for every dollar of new revenue generated by

the league since the CBA was renewed in ’06, the league has lost $0.06 and the players have

reaped $0.75” (Redding & Peterson, 2009, p.102).

Financial Valuation

For the purpose of this study, we claim to argue that owners of sports franchises should

be seen as investors who invest in assets. Whether this analogy is perfect is debatable, as owners

willingly overpay for teams, which can be referred to as an “ownership premium” (Vine, 2004;

Humphreys & Mondello, 2008). Investors, whether it is in the stock market or in the less visible

underhand market, consistently put a value on potential assets. If the asset to them is more

valuable than the current price of the asset, investors will 'strike' and buy the asset. Similarly,

when the asset is in their possession, they will evaluate it. If the asset's price becomes higher than

the value they feel the asset is worth, it is likely to be sold. Using these investment principles for

valuation indeed appear to be a valid approach to look at what value owners expect from their

teams (Alexander & Kern, 2004).

However, while many businesses value their assets of cash flow, income, or revenue

generated, sports franchises appear to operate in a somewhat different framework. For most

sports franchises annual operating losses do not necessarily mean decreases in business value,

which is contrary to most non-sports businesses (Humphreys & Mondello, 2008). Compared to

most businesses, sports franchises are overpriced, at least according to the limited information

available (Humphreys & Mondello, 2008). In fact, estimates suggest that owners pay about 27

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percent over valuation models based on assets and annual operating income (Vine, 2004). This

overpricing is suggested to be the utility an owner gets from the status of owning a franchise

(Humphreys & Mondello, 2008). While the value of a sport franchise might be overpriced the

moment an owner makes the transaction, this does not mean the owner isn’t expecting a return

on investment. Indeed over the period between 1969 and 2006 teams increased their franchise

values by an average of 15 percent per year (Humphreys & Mondello, 2008). Thus while

negotiating with the NFLPA over a new CBA agreement, owners might complain about financial

hardships, but owning a franchise should average out to be profitable with what has just been

suggested.

It is therefore crucial to understand what leads to value in businesses, or at least be able to

understand how these are assessed by operators in the market. Forbes Magazine annually

assesses the value of sports franchises, based on the often limited information available. Even

though this valuation is a difficult task, it appears that Forbes' values are relatively accurate

(Murphy & Topel, 2009). Forbes collects data from inside sources, public data, and peripheral

companies, as many teams have transactions with public companies. Based on this information

Forbes runs their valuation analysis, with the core foundations of operating income and revenue

generated at the stadium of the franchise. It is essential to realize that this valuation is trying to

establish an average team value (Forbes, 2009). Forbes is trying to exclude other potential assets,

such as television networks, so individual teams within the league can be compared

(Badenhausen, Ozanian, & Settimi, 2009).

In finance and investment education, valuation is taught in one of three ways: discounted

cash flows, relative valuation, and option pricing (Damodaran, 2006). It appears that Forbes uses

a combination of each. Franchises tend to be in a consistent flux regarding their operations.

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Either teams have just moved into a new stadium, are moving into a new one soon, or are

looking to optimize their current stadium by adding new premium seating. This probably forces

Forbes analysts to compare the profitability of one stadium to the other, and also to other sports

entertainment venues in the same region. Each investor in the market can be expected to evaluate

the options available. Based on this valuation the investor selects which asset would be most

profitable at this current moment at current prices (Ross, 1976). This last part is significant, as

every investor also has an expected annual increase of value in mind, called the discount rate

(Penman, 2007). Owners of NFL teams do not only expect to break even with their franchises,

they expect a certain amount of financial increase annually.

Generally, investors can reap the benefits of owning an asset in two ways. They can earn

dividends or they can sell the stock (Murphy & Topel, 2009). The Green Bay Packers do not pay

any dividends and for the rest of the NFL it is not know how much dividends the owners reap

from their operations. One of the assumptions in financial valuation is that it generally does not

matter when and how much a dividend is paid. While investors will see paid dividends as a

positive signal for the financial health of operations, earnings reported far outweigh the value of

dividends (Liu, Nissim, & Thomas, 2007). Above all, the price of the asset will have discounted

these 'negative' streams of cash flow (Penman, 2007).

A plethora of options exist which establish the proper discount rate for an asset. The

discount rate is the basic indicator of what the owner, or potential owner, of the asset expects in

cash generated from the asset (Penam, 2007). This discount rate can be divided in two parts, the

risk free rate and the risk premium. The risk free rate is a widely accepted interest rate that one

can get from investing in the most riskless assets available (Ross, 1976; Penman, 2007). It is

extremely difficult to establish the risk free rate because it is continuously changing (Penman,

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2007). It is important to understand however that this rate indicates that asset holders always

have the option in something with minimal or no risk. Any asset will thus at least need to

outperform this standard (Penman, 2007).

More important than the discount rate is the risk premium that is set. This risk premium is

an indication of the annual growth on equity expected by an investor, when added to the risk free

rate (Penam, 2007). Risk premium is an indication of how much risk one expects in an asset, thus

the higher the risk, the higher the premium expected. The logic behind this is that when it is more

likely an asset will not pay out its initial price, the more possible returns an investor plans to

expect. If an investor then spreads the investments in strategically placed, though risky,

investments, the investor should be guaranteed gains above a certain level (Penman, 2007). One

of the challenges of this study will be setting the appropriate discount rate based on these risk

premiums. It appears that investing in an NFL franchise has been a generally secure operation,

however that can change over time (Murphy & Topel, 2009). Over the last fifteen years the

values of franchises have increased dramatically, something not observed in the decades

previous to these years (Murphy & Topel, 2009).

A final notion on valuation ought to be made. The total value of a team will concern both

debt and equity assets. An owner is only concerned with the equity side of the equation (Murphy

& Topel, 2009). This is a valid way of assessing the financial viability of the venture. Since debts

always have to be paid off first, their discount rates are rigid, thus the variability of value for a

company will generally lie in the changes in equity. The expected rate of return can be skewed

positively by taking on debt at a rate below the owner's discount rate (Penman, 2007). However,

across teams the discount rate on equity taken on its own is expected to be stable, so the ease of

attaining this rate could be affected by the franchises' debt position, yet that does not

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significantly alter the expectations of the equity position. This study will thus focus primarily on

the gains in equity by the owners, as it is nearly impossible to find accurate debt interest rates per

team.

Current Development of NFL Franchise Values

Forbes annually publishes a list of estimated sport franchise values. Over the history of

the publication, until 2007, the list did not show any decreases in NFL franchise values. Due to

this, the image of sport franchise values as a growing entity needs to be reevaluated.

Furthermore, through 2009 the league as a whole decreased in value (Badenhausen, Ozanian &

Settimi, 2009). A prevailing reason for this decrease could be due to a lack of possible investors.

The value of a franchise is affected by the lack of potential investors (Badenhausen, Ozanian &

Settimi, 2009). It appears that the recession may have affected the league in this way, since

annual operating income managed to rise. A possible explanation may thus be that costs increase

faster than the revenue generated within sports franchises. As argued, player costs are among the

highest for a franchise, and player costs are highly affected by the CBA. If this is true, the

owners were right to reject the CBA since their financial position needs to improve. Furthermore,

it is arguable that even a slight increase in franchise value might not be enough as owners expect

to outperform the risk-free options in the market. If these messages of a lack of profitability

spread throughout the market, this could possibly lead to even less interested investors, which

brings to the forefront a need for change in the CBA.

Methods

Participants

This study researched team values consistent with the National Football League (NFL).

The NFL includes 32 separate teams throughout separate cities in the United States. Separating

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franchises in the NFL are conferences and leagues, which are based on geographic location. The

conferences consist of the American Football Conference (AFC) and National Football

Conference (NFC). Each conference consists of 16 teams, which are further broken down into

four divisions, the North, South, East and West (NFC North, NFC South, NFC East, NFC West,

AFC North, AFC South, AFC East and AFC West).

Materials

The data regarding the NFL were gained from the Forbes Web site (www.forbes.com).

Forbes Web site offers data which includes: team value, one-year value change, revenue and

operating income of all NFL franchises. The data looked specifically from 2003 to 2008 which

directly associated with extensions with the Collective Bargaining Agreement. The data used

from Forbes were chosen for this study because annual financial information of NFL teams is not

documented publicly. Each NFL franchise, except the Green Bay Packers is a private entity, thus

financial information cannot be examined because it is not accessible. The only instance where

NFL financial information is distributed is in the court of law. This is why the National Football

League Players Association (NFLPA) is asking the owners to provide current financial data in

response to complaints by the NFL owners financial difficulties. In response to the NFLPA’s

request, the owners declined to provide current financial information. Although it is best to use

the direct data to analyze the economics of NFL team ownership, it was found through a study

done by Murphy & Topel (2009) that comparisons of Forbes data with the financial information

from the Green Bay is reasonably accurate. Hence, we decided to use the Forbes data for this

study, assuming that Forbes data is a good predictor of NFL financial information (Murphy &

Topel, 2009).

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Design

A repeated measures ANOVA was used in this research because it is appropriate as a

design when the same participants participate in all conditions of an experiment (Field, 2009). In

this study’s case, the same participants were the NFL teams and the experiment was the 2006

CBA. This was not a controlled experiment, but a so-called natural experiment. The change in

the independent variable and other variables can be observed, but cannot be affected. The

repeated measures ANOVA were conducted by looking at each team’s annual increase in team

value. The one dependent variable used was the team value annual increase percentage. As for

the independent variable, time was used in this repeated measures ANOVA design. This test was

executed to explore whether any of the average annual increase percentages of team value have

changed over the years, when compared to the rest of the average annual increases.

In addition, we wanted to examine the relationship between CBA (independent

variable) and the team value annual increase percentage (dependent variable), thus a simple

linear regression was chosen for this research. Two models of simple linear regression were

conducted with a dummy variable (CBA). Model one separated the time period between 2003 to

2009 into two time periods, and model two used three time periods, thus two dummy variables

were needed. The period before the 2006 CBA extension was chosen as the baseline. Model one

allowed us to compare the team value annual increase percentage before the 2006 CBA

extension and after the 2006 CBA extension. Model two allowed us to compare the data pre-

extension (until 2005), post-extension (until 2007), and post-cancellation (2008 and after).

Finally, simple line graphs were created to compare the discount rates of the market

with the data collected on the NFL annual team value growth. For the purpose of this study we

have selected a variety of possible discount rates. The first rate looked at was economic growth.

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The reasoning for these rates is that if one does not outperform the general economy, the relative

value of a person goes down, thus a person relatively loses profit. The indicators chosen here are

inflation rates and GDP Growth. However it can be argued that this is below what individuals

discount at.

Owners of professional teams are generally wealthy enough to be significant players in

the stock market. Two of the premier stock market indexes were chosen as well, namely the Dow

Jones Index and S&P 500, as used in Murphy and Topel (2009). Furthermore, with the

exceptional growth rate of the NFL, this creates a low risk for potential investors, which is being

sought for as a comparable discount rate. Governmental bonds are among the most risk free

bonds, and tend to generate fairly low interest, thus for this study we chose the highest

government interest rate, a AAA bond. Comparing the growth of team values against these

discount rates should give us a much better image of the situation.

Hypothesis

1: Under the latest CBA, the value of sports franchises improved significantly less, compared to

the situation in the previous CBA; compared to the risk-free rate and major stock markets in the

United States.

2: The average team values increases over the last six years have significantly diminished.

Results

Mauchly’s test indicated that the assumption of sphericity had been violated (χ² (14) =

34.253, p < .05). The Greenhouse-Geissor correction on the degrees of freedom shows that team

value increase was significantly affected by time (F (3.33, 103.17) = 45.025, p< 0.01). The data

shows that generally the annual growth in team values has decreased over time. The increase

over time between 2006, 2007 and 2008, did not significantly differ from each other. Nor did the

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increase in 2005 differ from 2006 and 2008. The increase between 2003 and 2004 was relatively

larger than all the other years, while the increase between 2008 and 2009 was relatively the

smallest.

In the regression analysis the variance predicted that 30 percent (R2 = .304) of CBAx

(after 2006) accounted for dTV (the team value annual increase percentage). The model appears

to fit the data, thus having a greater explanation for the error in the model (F = 83.141, p < .001).

The CBA appears to have had a negative impact of 7.9 percent on team values in this model (B =

-.079).

Model 2 appears to have better explanatory power (R2 = .359) than model 1 by explaining

about 6 percent more. This model also fits the data significantly (F = 52.847, p <.001). Both of

the dummy variables were found to be significant. The CBA extension predicted about a 6

percent less annual increase in team value. After canceling the CBA it got even worse with the

data predicting about 9.8 percent less increase annually, compared to the situation before the

CBA extension in 2006.

Table X
Regression table Model 2

B SE B

Constant 0.142 0.007

CBAx -0.06 0.01

CBAy -0.098 0.01

Notes: R2 = .359, p <.001

Murphy and Topel (2009) used graphs to provide significant value increases for team

owners (Murphy & Topel, Fig 9, p.13). In our opinion, the graph reflecting the indexed values

for team value and the S&P 500 show a discrepancy not reflecting reality, as relative increases

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are accrued and thus cannot give valid conclusions in single year differences. We argue that the

following sections and graphs will give a better, more nuanced image.

Figure X shows the change in value for each security, or discount rate, for each of the

years measured. This image already gives some indication pertaining to the research question.

While the NFL has had higher increases in value for most of the years, this is not so for every

year, and the gap with the government bonds decreased. In 2009 the government bond yielded

even better than the NFL team value increase. Even worse, the national GDP grew faster than the

NFL.
Annual Change
0.2

0.15

0.1
AVG NFL
0.05 DJI
Inflation
Delta

0
S&P 500
2004 2005 2006 2007 2008 2009
GDP Growth
-0.05
Max AAA Bond
-0.1

-0.15

-0.2
Year

Figure X
Annual change of the security

If we plot a graph in the same style as Murphy and Topel (2009), taking 2003 as the

initial index value, and running the graph through 2009, it shows a fairly similar picture. The

NFL consistently outperforms the other securities and discount rates. See Figure X.

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 NFL COLLECTIVE BARGAINING AGREEMENT
Indexed Values
170
160
150
140
AVG NFL
Index (2003 = 100)

130
DJI
120 Inflation
S&P 500
110
GDP Growth
100 Max AAA Bond
90
80
70
2003 2004 2005 2006 2007 2008 2009
Year

Figure X
Indexed Values with Index 2003 = 100

However herein lies one of our main critiques. The stock market had a negative year in

2005, which significantly skews this line downward. In fact, it seems that in 2006 and 2007 the

stock market indicators at least were able to keep up with the NFL team values. This is

significant since these are the years after the CBA extension and before the owners canceled that

same CBA. In effect these are the years the owners probably based their decision upon. In order

to look at that period we plotted another indexed graph, however this time setting the 2005

values at 100. See Fig X.

Indeed this graph shows us two important trends affecting the owner's decision. First, the

stock market was able to outperform the NFL between 2005 and 2007. The significance lies in

that this is the period the owners used to make their decision to opt out of the CBA. Adding to

this, the period between 2005 and 2009 saw governmental AAA bonds outperform NFL team

values. In laymen terms, if an owner invested in these bonds, their value would have gone up

more than owning an NFL team did. Looking at the data presented in Murphy and Topel (2009)

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NFL COLLECTIVE BARGAINING AGREEMENT

and this paper, it appears that this is something that owners did not experience for over a decade,

if not longer.

Indexed Values
140

130

120
AVG NFL
Index (2005 = 100)

110 DJI
Inflation
100 S&P 500
GDP Growth
90 Max AAA Bond

80

70
2005 2006 2007 2008 2009
Year

Figure X
Indexed Values with Index 2005 = 100

The following final graph, taking 2007 as the index year, reveals that after canceling the

CBA in 2008 the situation got worse, see Fig X. While the whole market collapsed, as shown by

the Dow Jones Index and the S&P 500, NFL team values barely grew more than total GDP

growth. Obviously the current market conditions should worry current NFL owners. As

mentioned earlier in this paper, if the teams earn lower rates of return, the interest in buying a

team, or the demand, will go down. This decrease in effect leads to lowering the price of buying

an NFL franchise in the future, thus starts a downward spiral. This resulting downward spiral

causes owners to have to cut costs, which leads to a lowering of opportunities for players to

potentially generate income.

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 NFL COLLECTIVE BARGAINING AGREEMENT
Indexed Values
120

110

AVG NFL
Index (2007 = 100)

100
DJI
90 Inflation
S&P 500
80 GDP Growth
Max AAA Bond
70

60
2007 2008 2009
Year

Fig X
Indexed Values with Index 2007 = 100

Discussion

The results of the repeated-measure ANOVA analysis showed that the increase between

2003 and 2004 was relatively larger than all the other years, while the increase between 2008 and

2009 was relatively the smallest. This information suggests that after the latest CBA was

extended, annual increase in team value diminished. Furthermore, after the cancellation of the

latest CBA, the increase in team value diminished even more. These results confirm our

hypothesis which states that under the latest CBA, the value of sports franchises improved

significantly less over the last few years. The current franchise business situation thus has a lot

more depth than sometimes argued. Owner’s are mostly still earning money. However that is not

everything to this story. Owners have seen their annual increases in value dwindle to almost zero

in 2009. This is an obvious reason for concern. Most business models count on a slow steady

growth. It may be that the growth of values is just regressing to the norm, as the years before

2004 were through the roof (Gaines, 2011), however it seems only logical that the current trend

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NFL COLLECTIVE BARGAINING AGREEMENT

is worrisome to the NFL owners. The sample of the last few years is coinciding with poor

economic conditions, and the economy is slowly recovering, it is thus very difficult to say what

the effect should be on the CBA. The data does show why owners would be worried.

A regression analysis was used to discover if using financial information from the CBA

was a significant determinant of team value change after 2006 and 2008 respectively (the CBA

was extended in 2006 and then opted out of in 2008). Looking at the difference between 2006

and 2008 is important when trying to determine if the owners were correct in their decision to

opt out of their current labor agreement. Team owners look at their franchises like investments.

If business is good and opportunity is prevalent, slight changes need to be made to the current

business model to make it more efficient. However, if business is struggling and investments

opportunities are low, this causes concern by the owners in the investment.

With this known, the large drop off between the Beta values in 2006 (-.060) and 2008

(-.098) provides some intuition in the owners. The relative decrease is significant, showing that it

is enough for the owners to notice. Over a four year period (2003-2007) the labor model allowed

owners to see increases in their team values, on average, just not as fast as they might have

hoped regarding the previous years. As mentioned before, the 2008 and 2009 years fell in the

middle of a heavy recession, this was not the case in 2006 and 2007. Over the post-CBA

extension period, owners saw their annual increases in team value diminish by about six absolute

percentage or about 42 percent. It seems reasonable that more factors influenced the owners’

decision to cancel the CBA agreement, but what they saw in their franchises’ values must not

have encouraged them to keep the current CBA.

This paper was not written as a rebuke to Murphy and Topel (2009) rather we felt it was

an important backbone of our own research. It was our intention to bring more nuances to some

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NFL COLLECTIVE BARGAINING AGREEMENT

of the points that Murphy and Topel (2009) made. Owners in the NFL, as well as the players

have a somewhat different playing field than most other companies in the market. Namely they

operate in a monopsony and monopoly where both talent and employers are limited (Kahn,

2000). However the owners also operate in another market, the capital market, which is guarded

by the principles of the free market. This combination leads to the situation where owners need

to protect their capital in the franchises. Owners rarely generate cash in dividends from their

teams, and are therefore completely dependent on team value increases. If team values do not

increase at a rate enough to interest other owners this situation can have a serious effect. Not

only do owners run the risk of losing money, but the employees run this risk as well. Whether it

is by contraction (cutting a team) or by cutting players and staff. It is thus essential to

understand the financial situation for the owners of NFL teams.

The graphs in the results section show the nuance we expected to find. Except for the last

year in our data owners did increase their franchise value. The question is however whether this

is enough of an increase to keep other owners interested. It appears that this might not be the

case. This led to the owners canceling the CBA in 2008, even before the economy collapsed. The

economy collapse probably led to even more problems for the owners since less potential

investors would be able to afford an NFL team. The graphs indicate that the owners have some

legitimate reasons to cancel the CBA of 2006, and the players should better understand these

reasons for the sake of their own futures.

Conclusion

A repeated measures ANOVA analysis and regression provided significant information

which suggested that NFL owners had information which justified a need for a change in their

current labor agreement with the players. The owners annual increases in team value diminished

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NFL COLLECTIVE BARGAINING AGREEMENT

by about six percent after the extension of the CBA in 2006. Also, the general trend between

showed diminishing returns for the owners between 2003 and 2009, is a worrisome trend. Even a

trend which might be valid enough not to extend the CBA.

It is also clear that more factors than just the change in team values led to the owners

canceling the CBA, this study only provided 35 percent variance. This could be due to

limitations within this study which relate to Forbes data used, depth leverage, and the small

timeframe used to predict trends within the current economy. Forbes, which is an excellent

predictor of business trends, does not have access to all the financial data in the NFL, which

makes estimating value significantly more difficult. Another problem is debt leverage, were NFL

owners finance part of their franchises with debt. Their reason for this is that it leads to much

higher gains to the owners, if they outperform the annual income rates. Leveraging makes it

difficult to assess what the actual rates of return were for the owners, and what the discount rates

were. Finally, this study only looked at how the CBA predicted team values in the NFL from

2006-2009, which does not provide the depth of information needed to provide accurate

estimations as to whether the owners’ decision to opt out of the 2008 CBA was applicable.

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