Coming Back To Empty Seats Spells Disaster For Salary Caps

With virtually no sports competition in North America in this Covid-19 blighted spring the NFL Draft this week has taken on epic proportions. The fact that the teams and the players they select starting Thursday may not even play in 2020 is irrelevant. We finally have a sporting event on TV that you can’t play Spoiler Alert with in advance on Wikipedia.

The Draft distributes talent to teams who will, alternatively, use it to achieve greater win totals or squander it. The Draft also helps to distribute the billions in salary that the NFL pays to its players. Drafted athletes from the first through the seventh round will find their place on a defined salary grid. 

They’ll join the rest of their new teammates whose salaries are governed by the rigid  NFL salary cap which was set at $198.2 M per team in 2020— a 5.3 percent increase over the previous year. That figure is reached by taking a proscribed 48 percent portion of gross revenues earned by the league till 2021. 

Teams use the cap to determine which players they can retain and which they must release from year to year. They do project budgets for multi-year contracts based on the predictable rise in revenues sports has seen the last few decades as TV/ digital rights have skyrocketed. They also pro-rate signing bonuses over the course of those contracts.

It’s largely the same in all the leagues governed by a salary cap— which is to say almost all the leagues outside MLB which uses a luxury tax to discourage overspending on personnel. So their portion of gross revenues is vital in maintaining the enormous salaries players command these days.

But it’s becoming clear that leagues that actually do open for business again after the self-isolation phase will likely perform in front of empty stands for a while. In states and provinces hard hit by Covid that might be a very long while. Empty stands mean no beer sales, no concession sales, no souvenir sales, no parking revenue and, crucially, no ticket sales or luxury box rentals.

Consider, for example, that a high-end luxury suite at Rogers Centre for the Blue Jays and other events can bring in $ 50 K or more a year— and that Rogers Centre has 5,700 club seats and 161 luxury suites. Plus concessions and ticket revenue on top of that. You begin to see how much not having fans in the stands will hurt. And what a slice it will take out of salary cap percentages.

The NFL, whose TV/ digital rights sales form a large  portion of the league’s revenues (the split is estimated at over 50 percent), might be hurt less than leagues such as the NHL which still are more reliant on game-day revenues. But it is going to take a large hit from the loss of its stadium-generated revenues in cities where the Covid lockdowns linger. 

Which begs the question about what happens if NFL revenues drop by 25 percent. The clubs have legally binding contracts with players for established pay over the length of said contract. What can a GM do heading into next season if he’s already committed to paying 25 percent over the 2021 cap? How does he keep his team together?

Fortunately for the NFL owners (not the players) the contracts are not guaranteed. A GM can (reluctantly) dump players with buyouts to create cap room. Or he can re-negotiate the contracts he’s already signed with players to buy some flexibility. It will hurt, but it will be manageable under their CBA.

The NHL wishes it had that flexibility. Teams are currently allowed just one contract buyout per year, and all the money promised in those seven-, eight-, or even 11-year deals is guaranteed. When the ticket sales, beer concessions, parking and other revenues lost to Covid lockdowns are lost for this season and longer, what will the league do? Will the NHLPA give them a break on the CBA?

The NBA has already negotiated a deal governing the payment of its players during the lockdown, with some salaries being held in escrow. In a drastic scenario it could declare what’s known as force majeure to abandon the current CBA, using an epidemic as grounds for the move. But that necessitates a new CBA while also aggravating the players beyond belief.

Fortunately for the NHL and NBA, they have completed approximately 75 to 80 percent of their regular-season schedules-- and relevant revenues— for 2019-20. Still, they will take a hit on any playoff revenues should the postseason be played in front of empty stands. MLB, too, has a problem in that it has yet to capture any of its 2020 regular-season or playoff revenue streams. There is more flexibility under a luxury tax— teams have no obligation to spend to a floor— but long-term contract commitments are guaranteed.

So if teams come back to finish— or start— their season under the Covid plague, look longingly at your teams. They may not resemble anything you’ve cheered before once the losses are totted up. 

Bruce Dowbiggin @dowbboy is the editor of Not The Public Broadcaster (http://www.notthepublicbroadcaster.com). He’s also a regular contributor to Sirius XM Canada Talks Ch. 167. A two-time winner of the Gemini Award as Canada's top television sports broadcaster, he is also the best-selling author of Cap In Hand which is available on BruceDowbigginBooks.ca