US sports unions are so, so screwed

TL;DR It’s always a good time to be a billionaire, but when you get to exploit people with super-short prime earning periods, it’s even better.

I’ve been seeing chatter about potential upcoming labor unrest in the NFL, the NHL and NBA both had a stoppage this decade, and baseball players haven’t been very happy about the lack of progress on the Harper and Machado fronts.  Furthermore, this is an era where norms have been giving way to the raw exercise of power, so I thought it would be interesting to look at upcoming negotiations under the assumption that the owners were going to try to make more money and that the players were willing to be extremely antagonistic.

Sports labor negotiations are positive sum- if the games are played, owners and players alike are much better off, over a wide range of revenue splits, than if the games weren’t played.  Under an absolute take-it-or-leave-it-forever ultimatum, the players would be willing to play for far less, and the owners would be willing to pay the players more.  The former is true because the four leagues mentioned are destination leagues- there’s nowhere else to play baseball, football, basketball, or hockey for nearly as much money.  The owners would be willing to pay more because less profit is still better than no profit.  If there were alternative markets (MLS is nowhere close to a destination league for soccer, for example), the following analysis wouldn’t be relevant.

None of the owners are going to suggest a revenue split anywhere near the minimum players might accept in a pure ultimatum (KHL might pay 20% of NHL at the top end, NPB, KBO, and EuroLeague are much worse).  That would be reducing player revenue share from ~50% to ~5-10%.  Nobody’s stupid enough to even float a proposal like that.  How much higher the owners would be willing to go is a much more interesting question.

There are reports of team revenue and operating income (profit), but if you’re skeptical of those numbers, there’s a fairly safe way to estimate an upper bound on profit.  Whatever a franchise valuation is, would the owners still be happy to own it if they also had to dump X% of the valuation into a black hole every year? If X is 0.01%, sure- that’s a 400k/year extra cost to own the Yankees (4 billion franchise value), and that’s not going to move the needle at all.  They make far, far more than that.  If X is 20%, hell no- 800MM/year down the toilet to own the Yankees would be completely insane.  Even 5% (200MM) seems like a bad idea in normal times, but let’s run with that and see where it gets us.

League averages (millions)
Franchise Valuation
Revenue
Profit
5% valuation
Profit % of Revenue
Payroll %
Previous CBA %
MLB 1645 315 29 82.25 9 54 N/A
NFL 2500 412.5 101 125 24 ~48 53
NBA 1650 246.7 52 82.5 21 ~50 50/57
NHL 630 157 25 31.5 16 50 57

(Source: Forbes articles)

MLB is structured differently, so maybe the profit % actually is lower because teams bid against each other with no hard cap, or maybe it’s fudged lower because it’s not a number that has to be signed off on by the players, but players could attempt to capture 60% of revenue as payroll, and outside of MLB (and maybe even in MLB), the owners would say yes on an ultimatum- it’s not that far above previous CBA levels.  Let’s create a hypothetical league that’s an amalgam of the non-MLB leagues to work with and assume that the owners come with some proposal around 45% of revenue to payroll in the next CBA and the players counter with 60%

League averages (millions) Franchise Valuation Revenue Profit Profit % of Revenue Payroll % Non-payroll expenses
Amalgam (current) 1800 300 60 20 50 30% / 90M
Owner offer 1800 300 75 25 45 30% / 90M
Player offer 1800 300 30 10 60 30% / 90M

If the owners cancel a season and win- the players come back the next year at 45%- then in 4 years total time, they’ll make -90M*4 (expenses) -45%*300M*3 (payroll) + 300*3 (revenue) = 135MM in profit, and the players threw away 45%*300M= 135MM by holding out and then folding (and cost the owners 165MM). If the owners had just accepted the player offer from the start, 4*30 = +120MM in profit.  So they make up for this really fast if they win.

On the player side, if they hold out and win- the owners agree to 60%- then in 4 years total time, they earn 3*60%*300 = 540MM, and if they’d just accepted the owner offer initially, they would have earned 4*45%*300 = 540MM, and the owners threw away 120MM by holding out and then folding.  The players also make up for this really fast if they win. (ignoring “harm to the game” effects which hurt both sides)

This looks like it might be a difficult kind of battle to handicap, but it’s not, for two main reasons.  The first is that the owner timescale is clearly longer than 4 years.  They can make decisions to maximize profit or future franchise value that far down the road, easily.  The sports unions however are not in the business of maximizing the amount of money that goes to players- they’re in the business of maximizing the amount of money that goes to *current voting members*, or more precisely, a bloc of current voting members large enough to certify a new agreement.

The last column in the top table shows the change from the previous CBA.  The NBA had a stoppage in 2011 when the owners tried to drop revenue from 57% to 47% with a harder salary cap, and after the stoppage, the players settled for 50% and a worse-but-not-as-bad-as-originally-offered cap change.  The NHL lockout in 2012 was close to what’s being discussed- the league was trying to drop salary from 57% to 43% (the reverse of a 32% increase) with a bunch of player-unfriendly contract terms as well, and settled for 50% without the contract issues.  The NFL lockout in 2011 (no games missed) was an attempt to drop from 53% to 42% and lengthen the season.  They settled for 48%.

Given that the average career length ranges from 3.5 years (NFL) to 5.6 (MLB) and medians are lower, it’s actually impressive leadership- or, more likely, complete player delusion about their expected future career length and anger about something they had being taken away- to get many takers on a threatened holdout that only pays off if you’re still playing 4+ years later. The owners won- huge- in all three lockouts. NHL and NBA owners got an extra 7% of revenue over 10 years at the cost of a few percent of revenue in the first year.  NFL owners got 5% extra for 10 years for nothing.

Perhaps, if NBA and NHL had aimed a little more conservatively (say, proposing 57% to 50% with the intent of settling at 52% with no games missed), they could have come out even better, but it’s not clear that they would have.  As it was, the NHLPA offered settlements at 54% instead of even trying to fully defend its territory, as did the NBPA at 53%, and they might have stuck harder to those numbers in the face of a more reasonable proposal.

It’s hard to find any example of the players outright winning a labor dispute or CBA negotiation since 1990.  Even following 1994 MLB, the players conceded ground- they averted disaster, in that they avoided the salary cap and hard-line revenue sharing, but they agreed to luxury tax numbers, and that’s just one of a number of anti-spending measures MLB has adopted since.  They can’t directly negotiate salary percentages down, so instead they reduce the club-level financial rewards of winning to limit salary growth.  Every form of revenue sharing, luxury tax, lost free agent compensation, etc. decreases the marginal revenue from spending and thereby works to suppress payroll.

Players might be able to fight back and get a consensus somewhere around a 50% jump (40% of revenue to 60%) if it were guaranteed to succeed, but of course, it’s not.  The owners would say yes to a pure ultimatum, but how do the players make it an ultimatum? It’s well-known that the best strategy in a game of chicken between non-suicidal players is to be the first one to throw your steering wheel out the window where the other person can see it.  By visibly taking away your options, you’ve left the other player in a swerve or die scenario, and you win.  Unfortunately for the players, they have no way to do that, and they’ve been demonstrably weak in every sport even when they’ve taken it to a holdout.  Against that backdrop, the owners haven’t quite thrown their steering wheel away, but the players should have absolutely no expectation that the owners will be in any kind of a hurry to use it.

The closest to strong the players have been is 1994 MLB, and that was the league trying to unilaterally impose a salary cap and revenue sharing and preceded by the owners blatantly colluding to suppress free-agent contracts.  Not “collusion” in quotes, but literally the commissioner publicly telling teams that long contracts were bad and the owners paying out multiple settlements for hundreds of millions of 1990s dollars.  And in the face of all of that, the players only stayed where they were and then conceded ground shortly after.  “Winning”, for a modern sports union, is now defined as “not losing ground horribly”.

The takeaway from that is that even if player share of revenue continues to drop to the 40% range where the players appear to have a reasonably credible ultimatum-level threat, they still don’t because they’ll just fold to a lesser offer.  If players were trying to go from 40% to 60%, and the ownership (miraculously) countered with 55%, the players would trip over themselves to ratify that agreement.  And they’d do the same thing at 50% and 45%.  Assuming they have the self-awareness to understand that in advance (the owners certainly do), they know they don’t have a credible threat at 40% (sitting out a season to go from 40% to 45% is moronic even with guaranteed success).  And in the same vein, sitting out a season to avoid going from 50% to 45% feels worse, because they’re benchmarked at 50%, but it’s equally moronic.

It’s also moronic for the owners to actually follow through with it, but because the players have folded so many times in a row, the players are acting far more strongly against their individual self-interests dollar-wise because of their shorter timescale, and the players’ marginal utility of money is much higher than that of the zillionaire owners/conglomerates, they’re likely only going to stay irrational for so long, and it’s a well-calculated risk at this point that they’re just going to fold again before too much damage is done.  The true floor of what the players will play for is still nowhere in sight IMO.

The upcoming NFL renegotiation in 2021 has all the makings of a total bloodbath for the players.  The NFL is in the worst position to defend itself, with the lowest career length, and yet the union is already-saber-rattling, two years in advance, with talk of reclaiming what they lost in the last CBA, and players like Richard Sherman are saying players have to be willing to strike.  That’s true, but… being willing to strike doesn’t mean you’re actually going to get your money back, and if players really are willing to strike without realizing that there’s a good chance that it’s just going to completely blow up in their faces, and a very high chance that most individuals come out worse even if they somehow fully win the dispute after only missing half a season… well, good luck with that.  The players are going to come in thinking they’re going to make gains, and if the owners channel their inner Nate Diaz and give the players the double birds while they wait for the inevitable tapout at something under 45% of revenue.. well, I guess I can pat myself on the back.  !remindme 2 years.

Their best hope, and it’s a slim one at that, is that the NFL owners simply aren’t in a mood for a fight.  The NBPA skated through a negotiation period in 2017 with minimal changes (and the ones approved look to me to be more like “good governance of league operations” agreements than one side trying to get over on the other), most likely because leaguewide revenues were absolutely exploding along with attendance, TV ratings, merchandise sales, etc. and neither side wanted to battle when they were both making more money than they’d even dreamed of a couple of years prior.  Maybe the NFLPA knows it has no chance in a lockout and is just trying to bluff the owners into not fighting or into aiming for fewer concessions- after all, the head of the union isn’t getting elected over and over by telling the membership that they’re all going to bend over and take it every time the owners come looking for more, even if he knows that’s true.

On the other hand, MLB players who’ve spoken out appear to be confused on a different level.  They think owners have started colluding again, and while I can’t rule that out, especially given their history, the situation appears to me to be explainable by a confluence of three factors.  First, teams are much smarter analytically and realize that big free-agent contracts to older players have been piss-poor investments (and may actually be getting worse post-steroid-era).  Second, teams are spending with more of an eye to marginal revenue than ever before.  Third, the anti-spending measures MLB has been winning concessions on for at least the last 25 years have really started coming home to roost.  Teams have been explicitly not spending money because of the luxury tax, and it should have been obvious that this sort of thing would happen more.  The owners wouldn’t have been harping on anti-spending measures for longer than most of the players have been alive if they hadn’t expected it to yield dividends.

That being said, MLB players are *still* in a better position than the other three leagues, although it’s likely to keep decaying, and trying to get much more money is like blood from a stone at this point, especially if the operating revenue estimates above are close to accurate.  MLB is harder to understand than “bargain for X% of revenue, then talk about how it gets divided” leagues, but the players- or at least enough of them that an informed union can negotiate on reality-based terms- need to understand that they’re 100% “getting screwed” currently by the concessions they’ve repeatedly made to the owners since the 1994 stoppage and most likely not getting screwed harder by a sudden recurrence of prohibited behavior.

 


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