Colts and NFL and Sports Business

NFL plan puts hit on Colts

April 9, 2007

A new National Football League policy could cost the Indianapolis Colts $56 million in league revenue sharing in the decade following the opening of Lucas Oil Stadium.

The policy--designed to put small- and large-market teams on a level playing field--actually puts more pressure on the Colts to compete with revenue-generating giants such as the Washington Redskins and Dallas Cowboys.

Approved by league owners March 26, the new policy means the Colts will miss out on as much as $16 million in revenue sharing during the 2008 and 2009 seasons. That total could significantly increase if the policy is extended as expected.

League officials emphasized the new policy is not designed to discriminate against any teams, especially its small-market brethren.

"We recognize more revenue sharing is needed," said NFL spokesman Brian McCarthy. "This is all about further aiding the smaller-revenue-generating teams to compete on the field."

While league Commissioner Roger Goodell pushed for the policy, none of the owners appears terribly pleased despite the 30-2 vote. Owners of the Cincinnati Bengals and Jacksonville Jaguars voted against it, saying it didn't do enough to help small-market teams--and even penalized some, such as the Colts, for trying to improve their chances of being self-sustaining.

"Nobody is happy," Houston Texans owner Bob McNair told the Los Angeles Times following the meeting. "Some [teams] think they are giving too much. Some think they are receiving too little. So, I guess, maybe it's a good deal that way."

But the Colts--maybe more so than most teams, according to sports business experts--are caught in a Catch 22 with their Super Bowl run and impending new stadium.

The policy, which Colts owner Jim Irsay approved, stipulates that teams with new stadiums can't draw from a new, $110 million pool of money designed to shrink the revenue gap between large- and small-market teams.

The money in that pool is separate from the overall revenue-sharing formula. Regardless of their status, teams will continue to share revenue from national TV contracts, general admission and merchandise sales.

The new money comes from in-stadium advertising and concession sales that traditionally haven't been shared. The policy states the top 15 revenue-generating teams will dole out money to the bottom 15, with top teams paying in more and the poorest teams drawing out the most--unless they don't qualify to participate.

The maximum a team can receive from the pool in a given year is $8 million, but teams with new stadiums or renovation projects valued at more than $150 million are not eligible for the funds for five years after the stadium opens. And they only are eligible for reduced funds for the next five years. The current deal expires in 2009, but it could be extended, meaning it could cost the Colts heavily through 2016.

The Colts are set to move into the $625 million Lucas Oil Stadium for the 2008 season.

"The one thing I've learned from the fathers that built this league is that you can't look at it from your club's perspective only," Irsay said. "But in the earliest origins of revenue sharing in this league, there were never qualifiers. That was not the spirit of revenue sharing. Revenue sharing was designed to make all teams competitive and the league stronger."

Irsay pointed out that while his high-profile team drives television ratings, merchandise sales and attendance wherever it plays, the Colts still trail the Redskins in revenue by $100 million annually. That gap is due primarily to the larger-market teams' ability to earn unshared revenue--such as luxury suite sales and local radio deals--far in excess of small-market teams.

"The Colts pay 70 percent of its revenue for player expenses, and teams like the Redskins pay 37 percent of their revenue for player expenses," Irsay said. "So, naturally, there's a concern."

Also of concern is a stipulation that to take full advantage of the new revenue pool, teams eligible for assistance must generate at least 90 percent of the league average of gate receipts. Irsay said that's not an immediate issue for the Colts.

"We're completely sold out on everything now and for the first year at Lucas Oil Stadium," Irsay said.

But Andrew Zimbalist, a noted sports economist and professor at Smith College in Northampton, Mass., said the ticket-revenue stipulation is a sign the NFL could require tighter management of franchises going forward.

"The [National Basketball Association] is already moving in this direction," Zimbalist said. "It pressures teams to manage smarter and market more aggressively. The theory is, you don't want to reward a franchise for poor management."

The Colts' Super Bowl run last year and the prospect of generating more revenue at Lucas Oil Stadium have some sports-business experts wondering if the franchise actually could creep into the league's top half in revenue generation. If so, the Colts would have to pay into the pool rather than dip into it.

"Pittsburgh has been able to crack that upper half even though they're in a small market," said David Carter, principal of Los Angeles-based Sports Business Group and director of the University of Southern California's Sports Business Institute. "But they're in an unusual position with no NBA franchise to compete against and unusually high fan avidity for the Steelers."

Sports-business experts said teams falling behind the top revenue-generating teams but just ahead of the bottom half will find themselves at a disadvantage. They'll lose the funds they have to pay out while not benefiting from the welfare system that helps teams below them.

The Colts likely won't crack the NFL's top 15 in revenue, Irsay said. In 2005, the Colts were tied for 29th in revenue generation with $167 million, according to Forbes magazine.

"We're projecting the new stadium will take us to 19th in the league in terms of revenue," Irsay said. "We're going to be as aggressive and creative as we can, but we think that's the potential for this market."

The Colts could more than make up for the lost subsidy, though, with revenue increases gained through the new stadium.

"Studies have shown that NFL teams with new stadiums take in $30 million to $70 million more per year than through their old venue, if it's properly managed," Zimbalist said.

But while the Colts are likely to get a $30 million revenue bump, the Cowboys and New York Giants are likely to get more than twice as much when their new stadiums open just a year or two later.

And since the 32 teams' average revenue determines the player salary cap, the pressure increases more sharply for the poorest teams.

"Teams like the Giants and Cowboys don't have to worry about getting subsidies yanked from them, because they bring in so much money--they wouldn't be getting any, anyway," Zimbalist said. "That's where the pressure comes in for the Colts. The potential exists for them to actually fall further behind ... while they appear to be getting ahead."

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