The American Money Machine

By Bill Saporito/Foxboro

Not many businesses survive, never mind thrive, with a customer-satisfaction rate of 50%. Somehow that ratio doesn't do justice to the 68,756 patrons packing spiffy Gillette Stadium and the 5.5 million homes watching ESPN as quarterback Tom Brady leads the New England Patriots past the Buffalo Bills. Armed with a game plan designed by the league's best coach, Bill Belichick, Brady dismantles the Bills. No doubt Bills customers at home in western New York are disappointed. Two weeks earlier, it was the Pats turn to disappoint, courtesy of a whipping from the surging Pittsburgh Steelers. The real winner, as it is every Sunday, is the National Football League. "We compete against each other for three hours a week," says Robert Kraft, owner of the defending-champion Patriots, speaking of his gridiron adversaries. "Otherwise we have aligned interests."

Exquisitely aligned, in fact. Call it the m formation, as in money. In a world of $100 million players, $1 billion franchises and $10 billion television contracts, the scale of the sports industry has grown dramatically in just the past decade. More than any other league, the NFL has been able to capture that rising value while profitably using technology like the Web to reach fans in new ways. "The risks and rewards of success and failure in the football business are greater than ever," notes NFL commissioner and de facto CEO Paul Tagliabue. "So is the degree of sophistication and expertise required to manage the business." This year the NFL will bring in some $5 billion in revenues. The league won't discuss profits, but the community-owned Green Bay Packers earned $29.1 million on revenue of $179.2 million. That's a lofty 16% margin, although the NFL says the Pack is one of the better financial performers.

The days when quarterbacks like Fran Tarkenton drew plays in the dirt are long gone. There's now far too much money at stake to leave anything to chance, particularly when a team like Green Bay has $100 million invested in its quarterback, Brett Farve. The modern NFL player is fast, ferocious and laptop equipped, and he reports to a coaching staff so well organized that it puts most corporate setups to shame. That's because if the decision making isn't right on Sunday, you lose. And so do your customers.

The NFL's management playbook, from the fields to the owners' boxes to the NFL office in New York City, has lots to offer more conventional businesses. Just look at the scorecard: the NFL has increased the value of its product, expanded seamlessly into other distribution channels, like satellite, started its own television network and raised billions for lucrative new stadiums. And the game has never been more popular.

Just as the game has evolved--there's far more passing, for instance--so too has the NFL's management under commissioner Tagliabue. The league office has transformed itself into an organization that functions more like a holding company than a rules-and-procedures operation. It's a strategy that has propelled the NFL into what Tagliabue calls the league's third stage. The first was the community-based, pre-TV era, when guys played without face masks for peanuts. The second, the TV era, was created by Tagliabue's famous predecessor Pete Rozelle, who got Congress to pass the law that allowed the NFL to sell a national television contract. Now, as the league advances in the digital mega-money age, it has a structure to suit. By centralizing some management and service roles at headquarters, the NFL has been better able to manage its trademarks and expand its businesses.

Licensing is a perfect case in point. At one time the various teams had as many as 425 licensing agreements, and the league lacked control over its trademarks and the products being produced. "We pulled all that back [here]," says NFL chief operating officer Roger Goodell. "We've done that in every one of our businesses." The number of licensees was cut down to 110. Last year the league created an entity called the Master Agreement to manage its trademarks and merchandising deals. More important, the NFL got owners to cede control (with the notable exception of Dallas Cowboys owner Jerry Jones, who retained some local marketing rights, and risks).

The Master Agreement in turn is part of NFL Business Ventures (NFLBV), which handles everything from sponsorships to merchandising, with Goodell as president and the commissioner as chairman. "It's not so much that we changed anything. There really wasn't a structure," says Tagliabue. NFLBV has cut lucrative deals with on-field vendors such as Reebok (for uniforms) and Motorola (communications). That still leaves stadium advertising in the hands of each team.

The key to the NFL's profitmaking prowess has long been its revenue sharing. About 80% of the NFL's revenues are shared, a distribution that allows each team to have the resources to be competitive. Team owners joke that they are socialist millionaires, a collective farm that distributes the harvest. But it's more like a cooperative monopoly--call it a co-opoly. "We're in the 20th biggest market," says Denver Broncos owner Pat Bowlen. "We do wellwe have a stadium filled with 76,000 people. But it would be very difficult to be competitive on a model that didn't involve revenue sharing."

It's easy for people to ascribe the league's success to the money the networks splash out to televise NFL games. "Football is the best reality television going," allows the NFL's Goodell. And the networks pay dearly for the eyeballs they get. Last month the NFL renewed two network TV dealswith CBS, a division of Viacom, and with Fox, a division of News Corp.that will guarantee $8 billion for broadcast rights from 2006 to 2011. Another News Corp sibling, DirecTV, is paying $3.5 billion for satellite rights through 2010. There are still cable and Monday Night Football deals to be concluded. Finalizing them will mean that 52% of the league's revenues are in the bag. And that's just the television money. The league sells about 94% of its available seats, and many teams have waiting lists for season tickets. There are long-term naming rights to stadiums and signage and luxury-box deals. Merchandise? About $3 billion at retail annually.

With such fat TV contracts--and a labor agreement that includes an escape-proof salary cap--isn't the NFL virtually guaranteed to make piles of money? Not really: Europeans love their football (soccer) just as much, yet their leagues and team owners lose gobs of money. For instance, Italy's top league, the Serie A, is a mess. Several teams have gone bust, and one famous team, Lazio (the New York Jets of Rome), was forced to sell off top players to stay afloatthis despite big television contracts. "I've negotiated deals with all the major leagues, and I can tell you that this has nothing to do with luck. It has everything to do with planning for the future," says Dean Bonham, head of the Bonham Group, a sports-marketing agency in Denver. "The NFL is as good as you can get in the world of sports. These guys are clearly the model that everyone aspires to."

The league's fastest growing revenue stream comes from new stadiums, which are also a product of the recent centralization. Under a program called G3, the league grabs $1 million in television revenues from each team and uses the money as collateral to float bonds for stadium construction. The NFL has loaned $725 million to help build or renovate 20 stadiums in the past 10 years. Total investment: $3 billion, $2.4 billion of which has been put up by owners. To keep those projects going--new stadiums are abuilding in Dallas and Phoenix, Ariz.--the league maintains in-house finance and stadium-design arms that the owners can tap when needed.

These new football palaces have made the games a much more pleasant customer experience. And they gush money. The Patriots' Gillette Stadium opened in 2002 at a cost of $350 million. None of it was publicly financed, and about half was initially financed by the NFL. The new stadium has 87 luxury suites, which sell for $100,000 to $300,000 annually; its 6,000 clubhouse seats go for $5,000 each. Throw in the stadium signage and naming rights, and the Patriots go from 28th in the league in stadium revenues to near the top. The Green Bay Packers increased revenues 36% in two years with the help of a stadium renovation too.

The league has pulled this off despite a decision-making structure that seems perfectly rigged for trouble. There are 32 owners, many of whom are entrepreneurs who tend to follow the golden rule of management: he who has the gold makes the rules. Those owners are assigned to committees charged with handling everything from labor, competition and broadcasting to finding a team for Los Angeles. It's a group that includes NFL rebel Al Davis of the Oakland Raiders, financial ciphers like Malcolm Glazer of the Tampa Bay Buccaneers, nouveau riche types like Daniel Snyder (Redskins) and old-school owners such as the Rooney (Steelers) and Mara (Giants) families.

The trickiest part? No decision or deal can be approved without a 75% majority of the owners. "Nine guys can prevent you from taking a bathroom break," says Denver's Bowlen. For the NFL's front office, the 75% rule practically demands that any new idea or proposal be absolutely compelling, since it must be embraced by a group of powerful individuals who don't necessarily share the same agenda. "It's not that we all like each other and want to have dinner with each other all the time," says Bowlen. "It does force a clarity of thinking," says Harold Henderson, the NFL's labor chief. "You can't present something to them unless you've thought it through thoroughly." Or as Bowlen puts it, if there are 11 or 12 owners who agree to disagree on a proposal, "something must be wrong with it."

Although the Patriots are now one of the NFL's most successful teams, the counterintuitive management lesson that owner Kraft had to learn is that losing is the defining feature of football. "Even in a good year, when you go 10-6, you are going to lose about 40% of your games," he says. So Kraft went long in his management approach. A paper-industry magnate, he says football has a lot in common with the rough-and-tumble paper trade, in which shifting commodity prices can quickly turn gains into losses. But having the right system in place brings profits in the long term.

That's particularly important on the field. "It truly is a marathon, and there are lots of ups and downs. You have to support the people you believe in, especially when things aren't going well," he says. In 2000 Kraft hired Belichick, the coach he had wanted to sign a year earlier. It cost him a first-round draft pick to pry Belichick loose from the Jets. Belichick promptly lost 13 of his first 18 games, but he eventually delivered two Super Bowl titles over the past three years.

Belichick defines the 21st century NFL coach: tech savvy, detail oriented and passionate about personnel--a mini-CEO in his realm. New England spends inordinate amounts of time evaluating playersand not just assessing athletic talent. It looks for personalities that fit into New England's system, which is not star driven. A head coach today, Tagliabue explains, is "someone who is effectively an executive investing half a billion dollars in the next five years." That's the amount of money each coach will have to spend on players over that period, and the salary cap prevents any team from buying its way out of bad choices. Just ask the Washington Redskins, whose owner, Snyder, has been driven to distraction by his team's lack of success on the field, even though his franchise is now worth an estimated $1 billion.

If the NFL were a stock, it would command a high P/E. It has a predictable cash flow, great cost control, good management and an insane demand for its product. But as Bowlen points out, none of that is of any interest to Broncos fans. "They couldn't care less if I make a dollar or $10 million. All they care about is winning the Super Bowl." Maybe the NFL should print a warning label on its tickets: Customer satisfaction not guaranteed.

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