Thursday, May 31, 2007

United Football League – how to lose tens, hundreds of millions of dollars

Wednesday, The New York Times reported Wall Streeter Bill Hambrecht and Google executive Tim Armstrong are launching a professional football league to compete with the N.F.L., and have lined up billionaire Mark Cuban as their first team owner.

In an exclusive New York Times column, Joe Nocera writes that the new United Football League aims to line up seven more owners “with Cuban’s deep pockets and contrarian mindset” so that it can debut with eight teams. Right now, the league is scheduled to play its first pre-season games in August, 2008.

Cuban owns the N.B.A.’s Dallas Mavericks. Undaunted by the monopolistic N.F.L., which has squashed four competitors, he tells Nocera, “There are quite a few good-sized non-N.F.L. cities that can support a pro team.” So far, the league has picked Los Angeles, Las Vegas and Mexico City. San Antonio and Orlando are among other top markets without N.F.L. teams.

According to U.F.L. executives, Nocera reports, the new league will emulate the old American Football League – one of whose major characteristics was revenue sharing. Each owner will put up $30 million, worth a half-interest in a team; the league will own the other half. Eventually, the plan envisions that fans will become stakeholders – because each team will sell shares to the public to raise an average of $60 million per franchise. Public ownership will reduce the pricing pressure on the teams, resulting in cheaper tickets all around.

Officials are convinced they can land decent players from the get-go, and better players later on. “The U.F.L. will be able to offer most rookies, who aren’t top draft choices, far more money than the N.F.L. would give them,” Nocera writes.

This promises to be the latest in a series of failed professional football leagues. Once again a group of entrepreneurs with more money then common sense are attempting to compete with the Behemoth that has consumed professional sports in the last 25-years better known as the National Football League. This isn’t even the first ‘professional’ football league hoping to flourish as the United Football League.

The United Football League operated between 1961 and 1964. It was primarily a Mid-Western league, drawing many quality players from the Big Ten conference. Though it provided the NFL with many talented players, it was an entertaining option during a time when (with lower player salaries) it could compete with other leagues. The league would fold, but many of its backers and players would find new franchises in the Continental Football League.

The Continental Football League was an American football league played in North America from 1965 through 1969. It was established as a minor league. It had hoped to be the "major force" in professional football outside of the National Football League and American Football League. It owed its name, at least in part, to the Continental League, a proposed third Major League Baseball organization that influenced MLB significantly.

Bill Walsh, Ken Stabler and Sam Wyche were among a few players and coaches who would later gain fame in the NFL.

The most recent failed professional football league on paper had a great deal going for itself before it played their only season in 2001. The XFL was founded by Vince McMahon, better known as the owner of World Wrestling Federation (now known as World Wrestling Entertainment). The XFL was intended to be a major professional sports league complement to the off-season of the NFL, but failed to find an audience and folded after its first season. Along with the creative and marketing power of McMahon, 50 percent (McMahon owned the other 50 percent) was owned by NBC.

Created as a joint venture between NBC and the World Wrestling Federation under the company name "XFL, LLC", the XFL was created as a "single-entity league", meaning that the teams were not individually owned and operated franchises (as in the NFL), but that the league was operated as a single business unit.

The concept of the league was first announced on February 3, 2000. The XFL was originally conceived to build on the success of the NFL and professional wrestling. It was hyped as "real" football without penalties for roughness and with fewer rules in general. The loud games featured players and coaches with microphones and cameras in the huddle and in the locker rooms. Stadiums featured trash-talking public address announcers and very scantily-clad cheerleaders. Instead of a pre-game coin toss, XFL officials put the ball on the ground and let a player from each team scramble for it to determine who received the kickoff option, which, unsurprisingly, led to the first XFL injury. This type of "coin-toss" has since been referred to as the "injury zone."

The XFL had impressive television coverage for an upstart league, with three games televised each week on NBC, UPN, and TNN. The XFL paid standardized player salaries. Quarterbacks earned U.S. $5,000 per week, kick-punt specialists earned $3,500, and all other uniformed players earned $4,000 per week. Players on a winning team received a bonus for the week.

On April 21, 2001, the season concluded as the Los Angeles Xtreme defeated the San Francisco Demons 38-6 in the XFL Championship Game (which was originally given the Zen-like moniker "The Big Game at the End of the Season", but was later dubbed the Million Dollar Game, after the amount of money awarded to the winning team).

Though paid attendance at games remained respectable, if unimpressive (overall attendance were only 10% below what the league's goal had been at the start of the season), the XFL ceased operations after just one season due to astonishingly low TV ratings. The NBC telecast of the Chicago/NY-NJ game on March 31 received a 1.5 rating, at that time the lowest ever for any major network primetime television broadcast in the United States. (On July 19, 2006, an episode of the reality game show The One: Making a Music Star broke the that record with only a 1.3 on ABC.)

NBC itself attempted to win back the audience that it had lost when it lost the rights to air NFL games two years previously, which seems to have been the reason behind both its investment in and broadcasting of a new professional football league. But despite initially agreeing to broadcast XFL games for two years and owning half of the league, NBC announced it would not broadcast a second XFL season, thus admitting failure in their attempt at airing replacement pro football. WWF President Vince McMahon initially announced that the XFL would continue, as it still had UPN and TNN as broadcast outlets. However, in order to continue broadcasting XFL games, UPN demanded that WWF SmackDown! broadcasts be cut from two hours to one and a half hours. McMahon found these terms unacceptable and he announced the XFL's closure on May 10, 2001.

One reason for the failure of the league to catch on, despite its financial solvency and massive visibility (perhaps infamy), and perhaps epiphenomenal of its TV ratings, was the lack of respect for the league in the sports media. XFL games were never treated as sports events, but were regarded more as WWF-like sensationalism. Lacking any noteworthy exposition of talent, save Tommy Maddox, the league's MVP, or thoughtful analysis or even consideration by sports columnists, the XFL never gained the necessary recognition to be regarded as a viable league. Most news teams refused to air clips or scores of XFL games. Most newspapers did not report the scores either. This led to many football fans treating the XFL as a joke, rather than competition.

McMahon and the WWF's failed venture is another example of entrepreneurs with mass success in one industry, attempting to replicate that success in a seemingly similar, but often times, entirely diverse business. Clearly, the XFL marked the most recent confirmation that building a successful major sports league is a daunting and often doomed proposition.

Both the WWF and NBC estimated that they lost approximately $70 million from the operation of the XFL.

The United States Football League was a professional American football league that played three seasons between 1983 and 1985. In the process, the National Football League had its greatest competitor since the 1960s version of the American Football League. The USFL was infamous for franchise instability, the signing of Heisman Trophy winner Hershal Walker, Donald Trump as an owner (call Cuban the Trump of the UFL) and what remains one of the more comical lawsuit settlements in sports business history.

In another effort to keep themselves afloat while at the same time attacking the more established National Football League, the USFL filed an antitrust lawsuit against the older league, claiming it had established a monopoly with respect to television broadcasting rights, and in some cases, to access of stadium venues.

The USFL claimed that the NFL had bullied ABC, CBS and NBC into not televising USFL games in the fall. It also claimed that the NFL had a specific plan to eliminate the USFL, the "Porter Presentation." In particular, the USFL claimed the NFL conspired to ruin the Invaders and Generals. The USFL sought damages of $567 million, which would have been tripled to $1.7 billion under antitrust law.

Each NFL franchise was named as a co-defendant, with the exception of the then-Los Angeles Raiders; Raiders owner Al Davis was a major witness for the USFL. Howard Cosell was also a key witness for the USFL.

The case went to trial in the spring of 1986 and lasted 42 days. On July 29, a six-person jury handed down a verdict that devastated the league. While the jury declared the NFL a "duly adjudicated illegal monopoly", and found that the NFL had willfully acquired and maintained monopoly status through predatory tactics, it rejected the USFL's other claims.

The jury found that the USFL had changed its strategy to a more risky goal of merger with the NFL. Furthermore, the switch to a fall schedule caused the loss of several major markets. Most importantly, the jury found that the NFL did not attempt to force the USFL off television. In essence, the jury felt that while the USFL was harmed by the NFL's de facto monopolization of pro football in the United States, most of its problems were due to its own mismanagement. It awarded the USFL only one dollar in damages, which was tripled under antitrust law to three dollars. It later emerged that the jury incorrectly assumed that the judge could increase the award.

The verdict was a classic Pyrrhic victory. The USFL had essentially staked its future on the outcome of the suit, and considered the television-related claims to be the heart of its case. Almost immediately upon announcement of the verdict, it announced it was suspending operations for the 1986 season, with the intent of returning in 1987. Players signed to contracts were free to sign with NFL (or other professional teams) immediately. Indeed, the NFL had held a draft in 1984 for teams to acquire the rights to USFL players, in the event of the league (or teams in the league) folding. However, many USFL players had already signed contracts with NFL teams, and the league was some $160 million in debt. This made it unlikely the USFL would have been able to put together a viable product in any case. With nearly all of its players under contract to the NFL and Canadian Football League, Usher announced the league would stay shuttered in 1987 as well.

Despite the post-trial statements of several jurors indicating that they wished to award much greater sums to the USFL (one juror alone stated a $100 million award, tripled to $300 million, was what he thought appropriate), the USFL's appeal was rejected by the U.S. Court of Appeals for the 2nd Circuit in 1988. This decision was the end of the USFL, which formally dissolved shortly afterward. However, due to a provision of antitrust law which allows an "injured" party in an antitrust action to recover its attorney fees and costs of litigation, the USFL was awarded over $5.5 million in attorney fees and $62,220.92 in court costs. That award was appealed by the NFL; it was affirmed on appeal and ultimately allowed to stand by the U.S. Supreme Court in 1990, long after the USFL had ceased operations.

The USFL finally received a check for $3.76 in damages in 1990, including interest. Notably, the check has never been cashed.

Which brings the failed series of professional football leagues to the New York Times report regarding the United Football League. According to The New York Times report, the fledging league has hired a CEO and COO Bill Daugherty, the C.E.O.; Jon Brod, the C.O.O.; and Andrew Goldberg, a senior analyst are the leagues first three employees.

Both Bill Hambrecht and Tim Armstrong, a senior executive at Google, have pledged $2 million each. Cuban is on board as an owner. Boone Pickens donated $165 million to Oklahoma State’s football program to help rebuild the school’s football stadium. Hambrecht and Armstrong may have somehow convinced Cuban to lend his name to their efforts to start a football league, but Pickens showed the two men the door.

Hambrecht told the New York Times a combination of factors led him to believe he could create a league to compete against the NFL.

“I really started thinking hard about this after the Los Angeles Rams left to go to St. Louis and the Houston Oilers went to Nashville,” he told me over drinks recently. “Why do you leave two of the top 10 TV markets in the country for these two smaller markets?”

Houston has a NFL franchise, but Los Angeles the second largest American market remains without an NFL team and little if any real prospects the NFL will return to Lotus Land anytime in the near future. What Hambrecht refuses to acknowledge is why the NFL doesn’t have a team in Los Angeles. The Lords of the Pigskin don’t believe the Los Angeles Coliseum or the Rose Bowl are up to NFL stadium standards. The two stadiums are home to the USC Trojans and UCLA Bruins respectfully another factor Hambrecht didn’t mention in the New York Times report.

The New York Times report noted 21 of the country’s top 50 markets — including such enormous metropolitan areas as San Antonio, Las Vegas, Orlando and (of course) Los Angeles are without NFL teams. San Antonio desperately wants to become members of the NFL (former Minnesota Vikings owner Red McCombs is a San Antonio native), the biggest stadium in Las Vegas seats just under 40,000 and Las Vegas isn’t interested in a substandard football league (the Canadian Football League failed in that market as did the XFL), and Orlando’s Citrus Bowl is outdated – not ready for big time professional football. It’s easy to point to cities that don’t have NFL teams but it’s far more important to understand why NFL teams aren’t in those markets.

According to the Times report Cuban is interested in the Las Vegas franchise (a classic money-pit) and the UFL seems determined to put a team in Los Angeles and Mexico City. Mexico City – best of luck with that. The NFL did play a game in Mexico City a few years ago, a one-time event that worked. The NFL has worked tirelessly at reaching the Hispanic market and the NFL is knows all too well its going to be a long process. Consider the security issues facing a franchise being located in Latin America? Maybe the players signed by the Mexico City team would enjoy seeing Denzel Washington’s “Man on Fire”?

Roger Noll, a sports economist at Stanford University told The New York Times: The crucial barrier to entry is finding stadiums in the biggest cities,” he replied — something U.F.L. executives insist is not a problem in the places they are considering. “If you can do that, it would be easy to have a league.”

League officials believe the on-field product won’t be short of talent. As Daugherty (the CEO) told The Times, “If you don’t put a good product on the field, nothing else matters.”

Daugherty believes (what else would you expect the CEO to admit) they’ll be able to sign players drafted in the second through seventh rounds of the NFL draft and of course undrafted free agents.

“The average career of an N.F.L. player is less than four years,” Daugherty says. “They have a huge incentive to maximize their income.”

Yes but that doesn’t suggest they’ll sign with an inferior league playing in markets that are questionable at best. And then factor in the history of professional football leagues who have attempted to slay the dragon known as the NFL and Daugherty and his colleagues face a daunting task.

"It's a pretty simple concept," Cuban said in an e-mail to The Associated Press. "We think there is more demand for pro football than supply."

"The NFL wants and needs competition," Cuban wrote. "They have grown so big and powerful that every move they make is scrutinized by local or federal officials. A competitor allows them to point to us and explain that their moves are for competitive reasons rather than the move of a monopoly."

"That's not to say it will be easy. It won't," Cuban wrote. "We still have to cover quite a bit of ground and have a lot of milestones to hit. That said, if we can get the right owners I obviously think we can make this work."

Those are all valid points raised by Mark Cuban but along with seven other owners, the UFL needs eight great cities and stadiums to play in (and Las Vegas isn’t one of those cities) and even more important has to have a national television contract.

The NFL’s $3.75 billion annual television contract is the economic engine that has made the NFL a business that generates more than $6 billion annually. The NFL has long-term agreements with NBC, CBS, Fox and ESPN. ESPN and ABC are owned by Disney. Given that Monday Night Football is the cornerstone of ESPN’s programming and ESPN is the most successful Disney owned media property where exactly does the UFL hope to find a television partner. And no Comcast and their sports cable network Versus with a reach of only 71 million homes won’t work.

Some ideas make no sense; this is a colossal example of a concept that is destined to be an unmitigated financial disaster of biblical proportions.

For Sports Business News this is Howard Bloom. Sources cited and used in this Insider Report: Wikipedia and The New York Times.

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