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The NFL Machine


In this era of bad-boy businessmen and the corporate perp walk, it's hard to imagine any CEO commanding a police escort--unless he's cuffed in the backseat of a patrol car. Still, that's what is waiting for Paul Tagliabue as his private jet touches down in Tampa in early December. Why the rock-star treatment? Simple. From September to February, this bookish 62-year-old with the button-down look of a corporate lawyer controls the passion of America--the 32 teams of the NFL. Besides, he can get Super Bowl tickets.

There are hours to go before the Tampa Bay Buccaneers face the Atlanta Falcons, but Tagliabue hops into a black Lincoln Town Car buffered by two police cruisers. As sirens blare and lights flash, the commissioner's car is guided through pregame traffic directly into the caverns beneath Raymond James Stadium. Fans treat him like a celebrity, too. "Hey commish, over here," shouts one Warren Sapp wannabe in a bright-red No. 99 jersey as he snaps a photo. The 6-foot, 5-inch Tagliabue signs autographs and chats with security guards before strolling out onto the lush field to watch warm-ups. He quickly notes that the socks of Falcons star quarterback Michael Vick are scrunched down around his ankles in violation of league rules. They are pulled up tightly by kickoff time.

Sometimes a quarterback finds himself in a sweet spot where everything works just right, week after week. Tagliabue in 2002, and now heading into the Super Bowl on Jan. 26 in San Diego, is in that kind of groove. Behind him is a thrilling, anyone-can-win season and a white-knuckle postseason. Ahead is a media empire in the making. The National Football League recently signed a $2 billion satellite-TV deal. There are three years left on an $18 billion network and cable contract. Twenty spanking-new football-only stadiums have been built or renovated in the past 10 years, thanks to the league's deft use of the bond market. Sponsors keep queuing up to get a piece of the NFL brand. Harmony reigns among players and owners. And heck, as John Madden might say, this is in the middle of an economic slump.

Maybe one reason for Tagliabue's championship season in the face of a stubborn downturn is that the NFL is not exactly a model of capitalism. The commissioner has made it his mission to distribute equally as much of the league's revenues as possible among the teams of the National Football Conference and the American Football Conference. "We're 32 fat-cat Republicans who vote socialist," Baltimore Ravens owner Art Modell quipped recently. It doesn't hurt that players have agreed to a hard cap on salaries and few guarantees. "I don't see this as us vs. the owners, but instead it's us vs. all the other entertainment choices out there: the movies, music, theater," says Gene Upshaw, the former Oakland Raider and Hall of Famer who represents 2,000 players as executive director of the NFL Players Assn.

To understand the success of the business that Tagliabue has built and runs with almost military precision, take a look at the season just past. It started in early September, when the commish and his marketing team were able to persuade New York City to shut down Times Square during rush hour on a workday for a kickoff concert featuring Jersey rockers Bon Jovi. Half a million people turned out.

By the final regular-season weekend at the end of December, 19 teams still had a shot at the playoffs and a record 24 games had been decided in overtime. Those photo finishes helped boost TV viewership by 5% over 2001, inching closer to the NFL's recent peak in 1999. An average of 15.8 million viewers this season tuned in to any one game on the networks, according to Nielsen Media Research. For a league that loves to boast about competitive balance, it couldn't have been a more satisfying finale. "They wanted parity. They sure got parity," says Richard A. Bilotti, a media analyst at Morgan Stanley.

Life looks like a cakewalk for the 83-year-old NFL these days, but it's not as if the league hasn't had its issues. Grumbling that the game had gone flat led to the birth in 2001 of the testosterone-infused XFL--a smash-mouth spectacle featuring cheerleaders dressed like showgirls. But this production of World Wrestling Entertainment and NBC proved too staged, too self-parodying, and maybe even too violent to turn the curious into fans.

Not that violence isn't a good part of the NFL's appeal on-field--and a problem for the league off-field. The controversial 1998 book Pros and Cons: The Criminals Who Play in the NFL cited research showing that one in five players during the 1996-97 season had been charged with a serious crime at one time. "These guys are the gladiators of modern culture," says sports media consultant Neal Pilson. "And with that come pluses and minuses associated with players who are larger than life." It doesn't help that a string of crummy calls by refs in recent games have fans, owners, coaches, and players riled up. But most of the focus has been where it should be: between the chalk lines.

Beyond the compelling action on the turf, the NFL, already widely considered the most successful and opportunistic of the pro leagues, has struck half a dozen or so blockbuster business deals in the past year. The moves, from the new $2 billion, exclusive satellite television deal with DirecTV (triple the value of the previous pact) to a $300 million sponsorship by Coors, underscore how pro football has been able to leverage its mass following to double revenues in five years, to $4.8 billion in 2002. By comparison, the valuable cable networks at media giant Viacom, such as MTV and Nickelodeon, had revenues totaling $4.3 billion in 2001.

The NFL estimates that revenues will grow by an additional $1 billion over the next three years. "When [Tagliabue's predecessor] Pete Rozelle ran the league, it was a football business and a good one," says Paul J. Much, a senior managing director of investment firm Houlihan Lokey Howard & Zukin. "Now it's truly an entertainment business." Says Tagliabue: "In 1989, I inherited a great structural underpinning, the equal sharing of TV money. We've added three more pillars to that: branching into new media, including satellite TV; creating a narrow band between player salary cap and floor; and using our growing TV revenues to ensure that new stadiums could be financed."

As evidence of the faster march into showbiz and the push into distribution, BusinessWeek has learned that the NFL will hire Steve Bornstein, 50, one of the architects of ESPN and a former top executive at Walt Disney Co., to be in charge of TV and media. Bornstein will also be CEO of a 24-hour, NFL-owned, digital cable channel devoted to football--though the only games shown will be classics. The channel, which will include news and commentary, will launch later this year.

Also in the works are plans to sell the league's rich archives through a video-on-demand service that will allow fans to watch old game footage for a fee. In addition, Tagliabue is expected soon to announce a deal with Time Inc. to put out an NFL magazine. And ESPN is nearing a deal with the NFL Films unit to help develop two original movies.

Unlike other leagues with big corporate owners such as AOL Time Warner, News Corp., and Walt Disney, no company has ever owned an NFL club. The league maintains that individuals care more about winning and corporations care more about their shareholders--not that there's anything wrong with that. NFL ownership groups are restricted to 25 people, with the principal owner holding at least a 30% stake. And an owner can borrow only $125 million against the value of the team. By contrast, the free-spending lords of baseball were allowed to tap an MLB-backed loan pool almost at will--jacking up the teams' collective debt to $3.5 billion today from $593 million in 1993.

In the NFL, strict oversight ensures that the 32 teams equally divide about 63% of total revenues. That helps level the playing field when it comes to buying top talent. In fact, the combined revenues of the top eight richest teams is just 28% more than the eight teams on the low end. The NFL closely guards revenue and earning numbers, but it is widely believed that almost every team turns an operating profit. In baseball, by contrast, revenue is largely dependent on how much teams derive from local broadcasting contracts, not national deals. In 2001, the local revenues generated by the richest team, the New York Yankees, were $218 million. The poorest team, the Montreal Expos, took in just $9.7 million.

Jerry Jones, 60, the hands-on owner of the Dallas Cowboys since 1989 and one of the most aggressive businessmen in the league, takes the view that sharing revenue is all well and good but that teams need to seize their own marketing opportunities. In fact, the NFL has sued Jones over his aggressive local sponsorship deals. Still, Jones doesn't seem bitter and likens owning a team to acquiring a piece of art. "You're not going to see an inordinate amount of annual return on your money," he says. "It's all in the potential appreciation."

On the other hand, revenue guarantees have been swiftly driving up the value of an NFL franchise. In 2000, advertising executive Daniel Snyder, 38, shelled out a record $800 million for the Washington Redskins and its stadium. Previous owner Jack Kent Cooke paid $300,000 for a 25% stake in the 'Skins in the early 1960s. The newest owner is Arthur M. Blank, 60, the retired co-founder of Home Depot. Last year, he spent $545 million for the Atlanta Falcons, which had the league's second-lowest attendance record--an average of 52,000 a game. Previous owner Rankin M. Smith Sr. paid $8.5 million in 1965.

H. Wayne Huizenga, 65, owner of the Miami Dolphins and ProPlayer Stadium, used to own MLB's Florida Marlins and the NHL's Florida Panthers. After losing more than $100 million collectively, he sold both. "[The NFL] is the only thing that makes sense in sports today," he says. Huizenga, who is chairman of several real estate companies and serves on the board of AutoNation Inc., says the disparity of local revenues in baseball and hockey makes it impossible to compete if you're not in the TV-rich market of New York City. "I keep hearing about the Yankees dynasty. It makes me sick. Put me in that local TV market, and I would have had a dynasty, too," says Huizenga. He won't disclose the Dolphins' financials but says: "We do make some money."

One of the most important changes in the economics of the league has been new stadiums. "It's been the biggest transformation in the balance sheet of the NFL since I've been commissioner," says Tagliabue. With criticism of public funding for stadiums growing louder, the owners in 1999 authorized the league to go to Wall Street to sell bonds, the proceeds from which would be used to lend money for construction at low interest rates. So far, $650 million in such loans has helped build or renovate eight stadiums, including Gillette Stadium in Foxboro, Mass., and Lincoln Financial Field in Philadelphia, which opens next season. Gone is the emptiness of yesteryear's cold concrete shells. The new stadiums--adult theme parks, really--create fresh revenue streams from sources such as luxury suites, club seats, high-tech signage, restaurants, and shops.

Still, the league faces sizable risks. More than 50% of revenues comes from the money television pays for the rights to show NFL games. The league is in year five of an eight-year, $18 billion package with ABC/ESPN, CBS, and Fox. But all three are part of media companies that have just endured one of the worst ad recessions in decades. When renegotiation time rolls around, it remains to be seen whether they will pony up as much as they have in the past. For example, News Corp., owner of Fox, in February announced a nearly $1 billion write-off from losses associated with its sports contracts.

Morgan Stanley last year estimated that media companies would lose a combined $2 billion on the NFL over the term of their deals. Still, as part of the current pact, the league has until Feb. 15 to renegotiate terms or extend the contract. Or it can just wait for it to expire in three years. "The networks are between a rock and a hard place because they are bleeding money, but they want to have the NFL as a platform to promote the rest of their schedules to that enormous audience," says Morgan Stanley analyst Bilotti. ESPN will be the only one to make money on the current deal--an estimated $50 million profit, according to Morgan Stanley--in large part because it can get revenues from both advertising and hefty fee increases it charges cable and satellite operators.

NBC, a unit of General Electric Co., walked away from football in 1998, refusing to cough up for new rights after 34 years of broadcasting AFC (and earlier, AFL) games. CBS, which in 1994 lost the NFC to Fox, won the AFC contract by shelling out $4.1 billion over eight years. Executives at NBC, who also passed on an NBA contract last year, say privately that they have no regrets. They estimate that the net would have lost upwards of $1 billion if it had kept the NFL. "Look," says one network executive, "NBC was the No. 1 network in terms of ratings when they walked away, and they still are. In other words, if you don't have it, it doesn't kill you."

The fear in NFL offices is that other nets, pressured by parent companies, will take the NBC line in three years. "Will the next negotiation be a difficult one? Sure," says Howard Katz, president of ABC Sports, home of Monday Night Football, which has struggled with declining ratings, though viewership was up 4% this season over last.

So Tagliabue is already talking to the nets about flexible scheduling that would allow last-minute switches to more competitive games on Monday night. An additional prime-time game on Sunday is also under consideration. Such ideas aren't going over too well with Fox and CBS, which don't want to give up a daytime game to rival ABC/ESPN. The only certainty next time around, network execs say, is that there must be plans in place for a Los Angeles team.

More viewers, yes. But not all football, all the time. Talk about expanding the NFL's presence on TV fuels worries about consumers reaching a saturation point. "We're always concerned about commoditizing the NFL," says Chief Operating Officer Roger Goodell, 43, son of the late New York Senator Charles Goodell and thought to be the leading candidate to succeed Tagliabue. "But we still see extraordinary demand for what we offer. It's the best reality TV going."

At the same time that the TV contract expires, so does the league's labor agreement. The NFL is widely seen as having the most favorable player deal in pro sports, with average salaries at $1.2 million. True, the average NBA salary is $4.5 million. But don't cry too hard for the footballers, many of whom get fat signing bonuses not figured into that average salary. Philadelphia Eagles quarterback Donovan McNabb, the league's highest-paid player, for one, will make $21.7 million this year, almost all of it from his signing bonus. While the salary cap has been instrumental in bringing parity to the league, there is a downside: Teams sometimes must cut veteran players, alienating fans.

Overall, though, the league has a highly dedicated following. Despite some erosion of support in the face of so many other entertainment options, NFL fans remain the most loyal of any sport, followed by those of the NBA, then baseball and hockey, according to a newly released index from consultant Brand Keys Inc. One big reason so many are so hot for football is gambling. An estimated $560 million is wagered on NFL games each year in Nevada alone, the only state where sports betting is legal. Estimates of illegal betting, of course, go into the billions.

To understand the roots of the NFL's powerful and enduring brand, you have to go back to 1960 when new Commissioner Rozelle, then 33, persuaded Washington to pass the Sports Broadcasting Act. That allowed leagues to sell broadcast rights as a package and gave them much more clout in negotiating favorable contracts. The first NFL deal was reached a short time later with CBS, which agreed to pay $4.6 million, split among the teams.

Rozelle is credited with transforming modern sports by marrying games with TV, and needless to say, when he retired in 1989, his were big shoes to fill. The differences between Rozelle and Tagliabue, who was hired to replace him, could not have been more striking. Rozelle, a tanned Southern Californian and former PR man, had the gift of schmooze. Jersey City-born Tagliabue, who played basketball at Georgetown and had been the NFL's outside lawyer at the Washington firm of Covington & Burling, was seen as stiff and reticent.

But Tagliabue's methodical, lawyerly approach has served the league well, say those who have worked with him. He sweats every detail. His office in the NFL's Park Avenue headquarters in Manhattan is littered with yellow legal pads on which he often diagrams his strategies. And his interests extend well beyond the gridiron. In fact, the commish will actually read the front section of The New York Times, where his brother John is a highly regarded foreign correspondent, before digging into the sports pages. A former Pentagon policy analyst during the Johnson years, Tagliabue is just as conversant with America's Mideast policy as he is with the NFL's ban on the supplement ephedrine.

While Rozelle may have delivered the NFL to the media altar, it is Tagliabue who has made the union a lasting success. He studies the media, lunches regularly with Rupert Murdoch, and is a frequent guest of investment banker Herb Allen at his annual gathering of moguls. And with an annual salary and bonus totaling $8.5 million, Tagliabue is indeed a member of the media elite.

Robert Kraft, who made his fortunes in paper and packaging and has owned the New England Patriots for nine years, is one of the beneficiaries of Tagliabue's innovative reign. Kraft's new Gillette Stadium, which cost $345 million and was partially financed by the league's novel bond scheme, features two large clubhouses--sponsored by Fidelity Investments--that boast working fireplaces, chef stations, and several bars. There is a McDonald's above each end zone. The stadium has a capacity of 68,000, with 6,000 club seats in midfield that go for as much as $6,000 apiece for 10 years. More than 50,000 fans have put down a deposit to be on a waiting list for season tickets.

On the last weekend of the regular season, as the Super Bowl defending champion Patriots host the Dolphins in a game with crucial playoff implications, Kraft seems practically giddy. The sellout crowd is supercharged with adrenaline after fighter jets perform a scorching fly-by timed to the last note of The Star Spangled Banner. Following the kickoff, the 61-year-old Kraft, who had open-heart surgery last summer, runs from the field to take his place up in the owner's suite. He gazes out across what he calls "my new home," a far cry from the expanse of rickety aluminum bench seats at the old Foxboro stadium. As the Patriots contain the Dolphins on the first set of downs and the crowd roars, Kraft rises from his seat--a Caesar before his legions--waving his arms to signal: "Louder, louder." The stadium erupts, and a smiling Kraft turns to a guest and like a schoolkid at his first game, shouts: "Is this cool, or what?"

The Patriots come from behind to beat the Dolphins in overtime. But a win later that Sunday by the New York Jets ends the postseason hopes of Kraft and New England. Emperor one minute, off the throne the next. That's the way it is in the frenzied, fast-money empire called the NFL. By Tom Lowry


Steve Ballmer, Power Forward
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