Freakonomics Radio - 23. Millionaires vs. Billionaires

Episode Date: February 24, 2011

Five things you don’t know about the NFL labor standoff

Are you ready for some labor negotiations? Yes, the National Football League held a very nice Super Bowl a couple of weeks ago. The Green Bay Packers beat my beloved Pittsburgh Steelers, sadly. It was the most watched TV program in U.S. history. So, everyone in the NFL must be really happy, right? Well, not quite. The owners have opted out of their collective bargaining agreement with the players two years early, and they're threatening to lock out the players for the upcoming season. At issue? Money, of course.

The league produced about $9 billion in revenues last season. The owners think the players get too big a share. So, for now, they're taking their ball and going home. And the players? Well, the players will just have to wait. Honestly, like they keep saying, it's billionaires fighting against millionaires. And when it comes down to it, there needs to be some kind of agreement. I don't know what side is being stubborn, but I think both sides need to come to some type of agreement and give a little. That's Brandon Jackson, who played the last

four seasons with the Packers. Last year, he made a little over $500,000. Sounds like a lot of money, right? But the average NFL career is short, and most contracts aren't guaranteed. So you've got to make your money while you're able. Plus, Jackson's got two kids, with a third on the way next month. It's gonna be a battle in the NFL tonight. If the lockout happens, bye-bye paycheck,

bye-bye health insurance. Welcome to the real world. From WNYC and American Public Media, this is Freakonomics Radio. Today, millionaires versus billionaires, and five things you don't know about the NFL labor fight. Here's your host, Stephen Dubner. In this podcast, we've got a mission. Whether you're a football fan like me or don't know or care the first thing about the game, we want to tell you five interesting things you probably didn't know about this very unusual labor standoff.

This week, team owners and the players union are behind closed doors with a federal mediator, and none of them are talking to the press. Fortunately, we spoke to everyone last week. So you'll hear from a variety of NFL insiders, including the head of the Players Union, the president and CEO of the Super Bowl-winning Packers, the biggest labor leader in the country, and the quarterback who won the Super Bowl MVP last season. Let's get started. Number one, the players have a prosecutor on their side. The owners have asked me to put my name on a $7 billion check back to some of the richest people in the world. My guess is that if I had the choice of being vilified for not having football

or the choice of being vilified for writing a $7 billion check without any economic justification for it, I'm much more afraid of the latter than I am of the former. Demora Smith is executive director of the NFL Players Association. That's the union that all players belong to. I had asked him if he was worried about being seen as the man who helped shut down the upcoming NFL season if it came to that. That $7 billion check he's talking about? Well, up till now, here's how the owners and players have split revenues. The owners get $1 billion off the top every year. Of the remainder, roughly 60%

goes to player salaries and benefits. What the owners want in a new agreement is another billion dollars off the top every year over a seven-year term. Thus, seven billion reasons for DeMora Smith to fight back. Smith got the job running the Players Union in 2009. From day one, he knew this fight was coming because the owners had announced their intentions. But Smith doesn't mind a fight. He's a lawyer. He's done white shoe private practice, and he's been a government prosecutor. In fact, the smart money says that if Smith hadn't taken the NFL job, he'd currently be the U.S. attorney for Washington, D.C. That was the hope. And it was certainly fun to be under consideration at the time. And I made a choice as this process furthered that I would

pull myself out of that consideration and continue to talk to the players about the type of leadership that they wanted and really the type of leadership that I hoped they would be interested in as players. So let me just – I just have to ask. Prosecuting the biggest criminals in the District of Columbia versus sitting down with the NFL owners and trying to pry open the books, which is harder? Let's see. I've done both and I'm not at the end of the last process. So how about this? You and I will talk about that after this process is over. All right.

Now, you're a lawyer who did not play professional football, correct? Correct. You've never done, as far as I know, sports law or labor law specifically, correct? Correct. So how did you get this job? How did this job come to you? Talk to me just a little bit of the process of who you are and why you were a fit for what the union needed, what the union was looking for. You know, the easiest way to look at it is we spent a tremendous amount of time during the course of the process of looking for the executive director of pulling apart the business of football, every aspect of the business of football.

So whether it's a labor law aspect, an antitrust aspect, which I had a tremendous amount of experience in in private practice, the negotiation aspect, which again, I did both in the government and in private practice. Obviously, there is a significant public relations aspect. The issues of injuries, the long-term consequences of those injuries, how businesses deal with injuries that occur not only to their employees but also others is something that I had a lot of experience in, in private practice and in the government. When you pull the business of football apart, while the sport obviously is unique, the composition or the amalgamation of all of those parts are really not much different than the high-profile their homes on TV Sunday afternoon and then now Sunday night and Monday night. And there's a league out there and they know that the league is composed of teams and there are 32 of them and those owners have a lot to do with how the league is run. And then there are the players.

But mostly, it's a sausage we consume and don't really care so much about how it's made. Now – so I want you to tell me. Now that you're wrestling with this standoff from one side, when people think of the National Football League and they look for a noun to describe it, it's a league. What, however, is a word that you'd use to describe how the NFL operates? It's a monopoly and And it's a non-profit monopoly. The National Football League is a 501 C6 non-profit entity that has been able to enjoy substantial benefits. And every player would admit that it's a phenomenal business model. What does the public think about the players that, from your perspective now, you think is all wrong?

I think there's a misperception about the business of football. And that cuts across two or three general categories. One, our players only play for an average of 3.4 years. And most of our fans actually think our players play for a longer period of time. Second, virtually all of our fans believe that if you get hurt playing football, that you have post-career health care to take care of the injuries that you suffered as a direct foreseeable consequence of engaging in the business of football. Healthcare costs are a big concern for the players. Not so surprising, really, since it's a brutal sport that can exact a cost for years to come.

But here's where it gets tricky. The owners say they need to bring in more revenues, and one way to do that is to lengthen the season from 16 games to 18. But the players don't like this idea, in part because of the increased risk of injury from those two extra games. And this isn't just fingers and toes we're talking about here. There's increasing evidence that playing football can lead to brain damage, which some have linked to dementia and depression. Last week, a 50-year-old former NFL player named Dave Dewarson shot and killed himself. He put the bullet in his chest, not the head. Dewarson reportedly wanted to leave his brain whole so scientists could examine it for brain damage

in the hopes of helping other football players. Number two, listen, players. The NFL is not your daddy. Now, if you believe what we read in the papers and if I believe the people that we've been— Well, first of all, you can't believe everything you read in the papers. Point taken. I think we all know that, but especially when it deals with these issues. Mark Murphy is president and CEO of the Super Bowl champion Green Bay Packers,

which means that he's working to reduce the player's share of NFL revenues, which is interesting since he used to be a player himself, eight seasons with the Washington Redskins. And even more improbably, he later worked at the Players Union with then executive director Gene Upshaw. I asked Murphy about the contract the owners have opted out of. It really favors the players more than the owners.

It's a one-sided deal. Now, whose fault is that, though? Because here's the thing. The thing that always puzzled me is Gene Upshaw, who you worked with, was very well regarded, widely well regarded, and yet there was kind of the feeling among players, at least, and former players, that he was maybe too cozy in the negotiations. So even if that were not true, whose fault is it that the league signs a deal with a players' union that was considered by some to be a little too compliant that the league feels – in other words, did the league get out-negotiated by the player's union? And if not, then how could they have signed a deal that just a few years later they wake up and say, oh, you know what?

We didn't do very well. They did too well. We need to remake it. How did that happen? Obviously, it's the owner's fault. They signed the deal, but you're right. Within two years, everybody on our side realized that it was a one-sided deal. It favored the players too much.

Obviously, it's a tribute to Gene. He did a great job. I do think what you've seen is over time a couple things have changed that have impacted the current agreement. I think the biggest thing is stadium financing. It used to be that municipalities and cities and communities would pay for the building of stadiums. And, you know, you go way back and, you know, they were combination baseball, football stadiums that cities would build. You know, now they're football only stadiums and they're being built by the individual owners. And so that's a big expense that, you know, we didn't have in 1993 when the agreement was, our system was agreed to. The players' union's biggest complaint is that the owners are asking for a giveback even though they're all thought to be profitable and even though they won't open up their books

for inspection. Only one of the league's 32 teams issues a financial report each year. That team? It's the Green Bay Packers. You know, the Packers are a publicly held corporation. We're community-owned, and all of our records are open, and the union has access to them. And I think if you look at them, it really illustrates the problems that we have with the current agreement. You know, the current agreement started in 2006, and I don't want to get into too many of the details.

It will just bore everybody to death. But just from a broad perspective, our player costs have grown at 11% since 2006, while our total revenue has grown at an annual rate of about 5.5 percent. So just about twice the rate of growth in player cost relative to revenue. That's obviously not a healthy situation. It's not sustainable. And that's really why we're pushing to change the agreement and get it back to what we had previously. Last year, the Packers had nearly $10 million in operating profits,

down from $20 million a year earlier and $34 million four years earlier. That's a four-year drop of 71%. So you can understand why teams are concerned. In a typical business, when profits shrink, you cut costs, including labor costs. The NFL isn't a typical business. It can't fire players. But it can try to reduce their share of the pie.

As a former player, Mark Murphy hears what the players are saying, but he doesn't think that playing in the NFL for a few years should entitle you to a lifetime of benefits. And even if that were financially possible, he's not sure it'd be a good idea. You know, right now, our current players, if they're vested, And even if that were financially possible, he's not sure it'd be a good idea. You know, right now, our current players, if they're vested, and, you know, you vest if you play three or more seasons, you get health insurance coverage for five years, which is great. But, you know, I look at it, too, and the transition for players from playing in the NFL to finding another career and establishing themselves is very difficult.

And I really wonder sometimes if we do too much for the players. They've got severance pay and 401k plan. And, you know, I guess what I'm saying is sometimes I think it's not all bad. And going back, you know, and talking to some of the players who played for Lombardi in the 60s, you know, they worked in the off seasons and they made a very smooth transition to their second careers because they had to. And so I'm a little worried. If we do too much for players in terms of compensation after the career's end and health insurance, it's not all bad to have an incentive to get a job. And so those are just some of the things we're thinking through. All I want is union

coming up when is a union not a union and when when is a half-million-dollar salary just not enough? Union raised my wages. Union raised my wages. Oh, Lord. From WNYC and American Public Media, this is Freakonomics Radio. Number three. What do NFL players and the Guild of Italian-American actors have in common? Pro football players have been unionized since 1956. This year, they're really acting like it. The Players Union has closely aligned itself with the AFL-CIO, the National Trade Union Federation,

that represents the United Mine Workers of America and the Amalgamated Transit Union and the Guild of Italian-American Actors. Football players have taken to championing the cause of their fellow union workers, like stadium employees, who'd also be out of a job if there was no football. So, how much do football players have in common with their union brethren? Here's Richard Trumka, president of the AFL-CIO. I'm told you used to work in a steel mill, is that right? A coal mine. In a coal mine. All right. I'm told you used to work in a steel mill, is that right? A coal mine. In a coal mine. All right. So what'd you do exactly?

I did every job underground from labor to track man to a continuous miner operator. I ran every piece of equipment underground. I see. And did you ever dream when you were a coal miner working underground, all those jobs in the mine, that you would someday be helping this very small, privileged, relatively wealthy union, most of them kind of millionaires on a yearly basis, go up against a big, privileged group of billionaires? Did you ever foresee a labor standoff like this that you'd be involved in? You know, I believe that every group of people should have a union to speak for them. So I guess whenever I was growing up, they were just another group of workers that needed help.

I mean, they had the same type of health and safety issues that we did in the mine. We could look for to be disabled three to four times during a 20-year working career. These guys get disabled the same way, some of them every season. So it's not a surprise at all. But here's a surprise. The NFL union may break itself up on purpose. It's hard to imagine Richard Trumka's coal miners disbanding their union during labor negotiations, but that's exactly what NFL players have threatened to do. Here's Drew Brees, last year's Super Bowl MVP with the New Orleans Saints, and a member of the Players Union's executive committee. When you decertify the union, basically your union becomes, you know, no longer for a

period of time that you choose to decertify. But you have to decertify in order to sue the NFL under the antitrust laws. So that's something that we did back in 93 during the Freeman McNeil case, which basically was the case that we won that changed the league forever because it gave us free agency. So that's a trick the players have used before, and there's a good chance they could use it again. If the owners choose to lock the players out, look for the players to break up their union at least long enough to counterattack. Number four. Thank you for sharing. So the head of the NFL Players Union calls the NFL a monopoly.

But it's also a cartel with teams who compete against one another on the field acting together to make their business plan and, most important, deciding how to share the wealth. Eric Grubman is the NFL's executive vice president for business ventures and finance. I mean, at the end of this all, there is a business negotiation. There is a pie described by our total revenues. You can't spend a dollar twice. And this negotiation is vastly oriented around the business aspects of the size of that pie and how it's split up. There are a lot of other things that are incredibly important to the players, such as the rookie system, such as their health care. All of those things are crucial. And if I were on their side, I would have a tremendous focus on them. On the management side, those

cost money. So if you pay for a player in a rookie system. You can't pay a different player with those same dollars in the veteran side. If you pay health care dollars, those dollars can't be paid for salary cap. So this is a business negotiation with a lot of individual pieces. Most labor negotiations, one worker is not so distinguishable from another worker. But in this case, it's an unusual union in that you've got a superstar worker who's got an entirely different kind of compensation scheme and longevity scheme and maybe even insurance schemes than the entry-level labor. Is that part of the challenge here or is that not really come into play from your end? Well, it does not come into play from our end.

Sharing – look, at the end of the day, this is all about sharing and this probably is something your listeners deserve to know. On the sharing side of the equation, the National Football League – and again, I'm going to use very round numbers. But the National Football League has various revenues that come in from national sources and club sources. Eighty percent of the revenues are subject to sharing. National revenues are shared equally, and then ticket and associated revenues are shared one-third on an equal basis. So 80% are subject to sharing, and in round numbers we're talking about 67%, 68%, 69%, 66% or something of our revenues are equally shared.

That is an extraordinary level of sharing for a sports organization. There's another aspect of sharing, which is sharing with the players. And this is all about, back to my point of the dollars. To your point specifically, the sharing on the player side, again, that's for the players to decide. But to my knowledge, they do little or no sharing with one another. And so you do have players at the minimum salary level of order of magnitude $320,000 or $325,000. And some other players may be making $15 million or $20 million a year. And compared to other unions in America, that is highly unusual. I see.

Where would you say – what you said there just raises a question. Where would you say there's stronger unity, among the players or among the owners right now? I've been at the league seven years as an employee. And prior to that, I spent perhaps another eight or nine years doing various transactions and advising either club owners or the league on various matters going back to the mid-90s. I can't recall a time period where there was a greater level of unity amongst the owners. Number five, when a half-million-dollar salary just isn't enough. One of the reasons that football is such an expensive sport is that there are 53 players on a team. That's more than double the number on a baseball team, more than four times the number on a basketball team. Now, most of

those football players aren't superstars, and they aren't paid like it either. The median NFL salary is about $800,000 a year. Now, yes, that's a lot of money, but remember that the typical NFL career is only three and a half years, which means that if you've had the good fortune to make it all the way to the NFL, you want to bank as much money as you can. Being locked out of your job? That's a disaster. Here's Brandon Jackson of the Packers again. That would be big time to miss something like that.

I can't afford it. That's like that. I can't afford it. That's the thing, I can't afford it. You know, my plans and my goals that I set out for myself was to play football and to not make the earnings that I would make in a full season. It would hurt me in a way because of the goals I have set out. My goals are to financially support my family and my kids and make sure that my kids, when they get older, that they have a college education.

And that works by me working now. Even though Jackson made a little over half a million dollars last year, he says he's not rich. Well, that's one thing they don't understand. Everyone sees figures, but they don't see taxes. They don't see after taxes. And most of that is gone after taxes. And you figure in the type of lifestyle that you have,

and if you're living a good lifestyle, how can you keep that up? You know, not talking like I'm spoiled, but I love the lifestyle that I'm living. And doing what I'm doing, I want to enjoy the benefits. Jackson's third child is due in March, just after the lockout is set to happen. If it does happen, he'll have to pay for his own health care coverage. So he's following the NFL negotiations as carefully as he can. How?

Just like the rest of us. This is SportsCenter. People have to understand the players don't know anything. We only know what we see on ESPN right now. Freakonomics Radio is a co-production of WNYC, American Public Media, and Dubner Productions. This episode was produced by Chris Neary and mixed by David Herman.

Our staff includes Colin Campbell, Susie Lechtenberg, and Beret Lam. Subscribe to this podcast on iTunes, and you'll get the next episode in your sleep. You can find more audio at FreakonomicsRadio.com. And as always, if you want to read more about the hidden side of everything, go to Freakonomics.com.