Thursday, September 5, 2013

Broadcast Revenue and Competitive Balance in the NFL

The NFL receives much credit for achieving the highest degree of competitive balance among American team-sport leagues. This is after all the league that shares all television broadcast revenue equally among its teams and strictly enforces a hard salary (actually payroll) cap. Any number of methods used to assess competitive balance confirm the competitive balance superiority of the NFL relative to the other major American team-sport leagues. Yet after further review, the two primary reasons just given for the league’s success at maintaining a relatively even distribution of talent across clubs do not hold water. This post will discuss the sharing of broadcast revenue, with the salary cap’s effect to be evaluated in a future post.

Much credit for the level of competitive balance, and the assumed corresponding financial success, in the NFL is given to the decision to sell collectively and share equally all television broadcast revenue. The financial advantage is certainly the case as the league controlled sales generate considerable market power and price is manipulated by regulating output; monopoly profits result. Commissioner Bert Bell realized the economic advantages of monopoly limits on the availability of televised games through league controlled rights the 1950s. However, he was thwarted by federal antitrust law. League sale of broadcast rights was ruled a violation of the Sherman Antitrust Act prior to the enactment of the Sports Broadcasting Act of 1961. Nonetheless the upstart challenger American Football League, formed in 1960, boldly sold their broadcast rights collectively, and without a successful legal challenge. Facing a competitive disadvantage the NFL, through recently appointed Commissioner Pete Rozelle, aggressively lobbied Congress to enact the SBA as a statutory exemption to federal antitrust laws. Under the Act antitrust laws do not apply to any agreement allotting broadcasting rights made by a professional league comprising only the sports of football, baseball, basketball, and hockey. Though not required by the law the NFL and the other three major American sports leagues have chosen to split league collected revenues equally among clubs. Only the NFL has assumed full ownership of television broadcast rights at the league level.

With NFL broadcast revenues equalized across teams beginning in 1962, the first year of league sales and equal revenue sharing, conventional wisdom suggests that the distribution of talent would also have leveled as the advantages of media market size were significantly curbed. However, the examination of two key dimensions of competitive balance does not support this position. The frequent claim is made is that the league’s broadcast revenue distribution allows the smallest markets to compete on an even playing field with the largest.  However from inception in 1922 to 1961, the Green Bay (WI) Packers, representing the NFL’s smallest media market through all except the very early part of this history, accumulated more league championships, at seven, than any other club. (The Packers were league champions in 1962 as well.) Green Bay and other smaller market clubs have accumulated titles since, but small market success hardly parallels the sharing of broadcast revenues. Championships in the before SBA period, as they have been since, were quite well distributed. From the largest markets the Chicago Bears earned six titles and the New York Giants four championships. Among the rest, the Detroit Lions won four championships, while the Philadelphia Eagles and the Cleveland Browns claimed three titles each. For those clubs with significant membership tenures in the league during this period, only the Pittsburgh Steelers and San Francisco 49ers were denied titles.

Economists prefer a more scientific approach for evaluating the distribution of talent, with the standard deviation of win percent each season commonly employed. (Standard deviation is adjusted to account for the number of scheduled games per season by creating an actual to ideal ratio of dispersion, the RSD. The closer to one the ratio, the better the competitive balance.) Again using the more specific metric, the claim that the SBA and collective rights sales improved balance is specious. Comparing the adjusted standard deviations averages of the before and after SBA periods in their entirety does reveal modestly better balance in the latter period. The RSD averages 1.74 for forty years before and improves to 1.57 for the fifty years after the Act’s passage. However a closer look, comparing the shorter periods directly before and after passage, reveals a different story. For the eleven preceding years, 1950 to 1961—the period beginning with the merger of the NFL and AAFC—RSD for the NFL was 1.53. RSD for the eleven years, 1962-1973 following the Act’s passage measures 1.74.  Competitive balance actually became worse in the immediate aftermath of the SBA!

Of course there are several factors that potentially influence the distribution of talent across teams in a sports league. Moreover, much besides the enactment of the SBA will likely differ between any arbitrarily compared eras. Included are shifting demographics, collective bargaining provisions, league expansions and mergers, changes in post season opportunities, etc. Notwithstanding, there is no evidence that the equal sharing of the proceeds from national television broadcast rights sales improved competitive balance in the NFL.

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