Common Issues with Revenue Generated from Broadcasting Right
February 12, 2025
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In the previous couple of articles, we have tried to understand what salary caps are. We also know the different types of salary caps, where they are followed across the world, their objectives as well as their advantages.
It needs to be understood that the salary cap system is not free from its flaws. In fact, it has many flaws. This is the reason that even though salary caps are implemented by sports leagues across the world, they are also a hotly debated topic.
Many critics claim to have presented empirical evidence which proves that salary caps do not have the desired effect when achieving their stated objectives.
Over the years, many problems have been raised against the salary cap system. These problems have led to heated debates in the media as well. Some of the common disadvantages of the salary cap system have been explained below in this article.
It is a known fact that a sports franchise only makes money when its players are popular. Hence, in the absence of these salary caps, the free market would ensure that a bulk of these profits end up in the hands of the players. However, it is claimed that wealthy franchise owners ensure that artificial salary caps are put in place so that they can avoid paying players their fair share and keep the bulk of the profits for themselves.
For instance, if the league finished first in the previous year, they might get some relaxation in terms of salary cap rules. Similarly, there are extremely complex rules which create a system riddled with loopholes. The end result is that a lot of teams spend money on legal teams to get help so that they can use these loopholes to their advantage. The entire point of having salary caps can be defeated if the rules governing such caps are too complex.
The revenue recognition policies of franchises can vary significantly. Also, even if there is a single policy prescribed for all franchises, there is still the possibility of creative accounting taking place.
It is possible for sports franchises to accelerate or defer the amount of revenue that is being recognized. This will allow them to increase or decrease their salary cap as per their requirements in any given year. Once again, the result of salary caps is that the focus begins to shift from sporting prowess to creativity in accounting!
The year 2011 was an uncapped year for the league. This meant that officially the league was not prohibiting or restricting the amount of salary which could be paid to the players. However, the players union alleged that the league as well as the owners of all the franchises had secretly colluded and agreed to an unofficial salary cap of $123 million dollars. It is said that the players found out about this at a later stage.
Finally, the players union filed a lawsuit in a Minnesota court against the league and sought over a billion dollars in compensation for the unfair trade practices used by the league. The NFL has been at the center of many such scandals.
Even in 2022, players filed a lawsuit against the league claiming that the franchises had been colluding in order to ensure that certain quarterbacks are denied the opportunity to sign a fully guaranteed contract. The problem with these claims of collusion is that they are very difficult to prove in court. However, the existence of such recurring claims does create doubt in the mind of the fans which ends up negatively impacting the overall league.
Hence, it can be said that the salary cap system creates a zero-sum situation unless the franchise is underutilizing its budget, to begin with. The zero-sum situation means that a player can only gain financially if another player loses an equal amount. The end result is that players can become demotivated to perform better.
However, salary caps put an artificial upper limit on the amount of money that can be paid to these players. The sports franchise will not be in a position to increase the remuneration of these players unless they had underutilized their budget previously or are reducing the salaries of other players.
Many times, sports franchises lose out on young talent because the league rules do not allow them to pay more money even if they want to.
Salary caps are generally calculated either based on a single year’s financial performance or they are calculated based on the financial performance of multiple past years. In either case, the amount available to pay salary can vary from year to year.
It is possible for a team having $100 million in salary budgets right now to have $90 million in the next year. Hence, the team will be compelled to reduce the salaries of its players on release some players and buying new ones.
Also, the salary cap rule does not take into account the performance of the current season. Hence, it does not allow sports franchises to have a performance-linked compensation structure.
The sports franchises cannot have a big variable component in their salaries which will be paid out based on performances. Hence, it prevents the sports franchise from using salaries as a tool to incentivize their players to perform better.
However, when it comes to European football, the salary cap has not been found to be as effective. This is because there are many football leagues that are played in Europe.
If a single league tries to apply rules related to salary caps, then there is a likelihood that the players will start seeing an economic advantage in transferring out of that league. As a result, the salary cap will keep wages artificially lower and will end up pushing players toward other leagues.
For instance, if the sporting franchise is owned by a wealthy real estate baron, they could sell a property to the player for a fraction of the cost. Hence, they would be indirectly paying the player and such a payment will not show up on the books. Hence, it is possible and even common for sporting franchises to circumvent these rules.
However, there is no restriction in terms of how the excess profits are used. The franchise owners are under no obligation to spend these funds for the benefit of the franchise. They are allowed to pocket the difference.
The fact of the matter is that the salary cap system has been under fire due to several reasons. The system has been criticized by several critics for its perceived shortcomings. Some of the most discussed shortcomings have been explained in this article. There are a few more which will be discussed in the next one.
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