From Street and Smith's Sports Business Journal
League considers new structure after posting $24 million in losses
By JOHN LOMBARDO
Staff writer
Published February 25, 2008

The Arena Football League is considering a move toward a single-entity ownership structure, which league officials believe would help lower costs and attract investors.

The discussion about a new structure comes after the AFL posted a $24 million operating loss last year, according to the league. That figure includes losses calculated from the league office, all AFL teams and
the AF2 league.

AFL executives refused to discuss how the financials compare with previous seasons, but said they are confident that the league can turn a profit within three years.
“I think it’s very achievable,” said AFL Commissioner David Baker. “More teams are making money and a number of others are close and there are a lot of things we can do. We are creatively examining every aspect of our [business] model.”

The push for league profitability comes as the AFL last summer hired Boston-based Game Plan to study a variety of options, ranging from selling a small minority stake to selling off the entire league.

At a recent AFL meeting held in Phoenix just after the Super Bowl, team owners voted to continue studying a plan to convert the 22-year-old league into a single-entity structure with additional equity partners. A decision is expected sometime this summer.

The AFL is now structured as a limited liability corporation, in which each team is counted as a member of the corporation and operates independently.

The league hasn’t finalized its proposed structural changes, but they could range from a simple consolidation of services to having league investors buying franchises from owners and forming a centralized operation. Services that could be consolidated include sponsorship and marketing efforts.

“We are throwing the idea into a jar and shaking it up,” said Bill Niro, president of Gridiron Enterprises, which owns a 10 percent stake in the league. “But it could allow for equity investment without owning
teams and bring us greater efficiencies.”

The league eventually could choose to back off from a full-scale, single-entity conversion and adopt a scaled-down plan to centralize services, but it is apparent that the AFL will undergo some significant
structural changes.

“Clearly, we have grown,” Baker said. “Franchise values have grown and we are reaching a point to where we are looking to centralize some services, work on profitability and grow in a way that is going to
bring a different economic model. We have turned the corner from looking at each team as its own economic unit to looking at the league as an entire economic unit.”

Should the AFL adopt a single-entity structure, the move no doubt would raise eyebrows within the industry given the checkered history of single-entity leagues. Major League Soccer has succeeded with a single-entity structure that calls for teams to sign an operating agreement with the league, requiring them to turn over a portion of local revenue to MLS.

League and local revenue, including sponsorships, is shared among all teams, and player contracts are negotiated by the league. Should the AFL opt to take over player contracts, it likely would have to be approved by the AFL Player’s Association, which is represented by the NFLPA. Other leagues like the WNBA and the NBA Development League, which began as single-entity owned properties, are shifting toward private team investment to offset losses and encourage local team growth.

The WUSA women’s professional soccer league folded in 2003 after losing nearly $100 million as a single-entity league. The newly launched Women’s Professional Soccer league will return in 2009 with a traditional league structure with local owners.

“We considered single-entity, but decided it would be better to have some local entrepreneurship on the part of clubs,” said Women’s Professional Soccer League Commissioner Tonya Antonucci. “You don’t want people to think ownership is just moving the pieces around. Now maybe someday if the national business dictates, we’d move to single entity, but for us starting out, the franchise model made the most sense.”
An industry expert said the one key to a successful single-entity league structure is to give team owners independence.

“As long as the team owners can run the franchise as they want and they get a share of the league, it can work,” said Sal Galatioto, who runs Galatioto Sports Partners, a sports investment adviser. “It is more of a way to keep operating costs down.”

One of the AFL’s biggest challenges was to create a consensus among the league’s 17 owners to pursue structural changes. The league did not disclose the vote count made among owners in Phoenix in early February to approve the single-entity conversion study, but Baker said that the ownership group is now changing how it views the league’s operations.

“Our brand has begun to get some respect and our owners are becoming more interested not just in their own operations, but also in what the other guys are doing,” Baker said. “They are interested not only in the competition and profitability of their own teams, but they now understand that the [league’s] brand is everyone’s responsibility.”

Signs of respect include an increase in franchise values, which are now expected to top $20 million. The Tampa Bay Storm last year sold for $19 million and expansion franchises are expected to fetch up to $25
million when the AFL adds between one and three teams for next season.
“The recent transaction reflects the growth,” said AFL Deputy Commissioner Ed Policy. “We will have expansion teams selling for more than $20 million, including attendance guarantees that we tack on to
the deals.”

While franchise values have escalated, the AFL is waging a long running battle to push team owners to operate more efficiently and maximize revenue. The push for efficiency drove the league to relocate its Las Vegas franchise to Cleveland with the same owner, while moving the AFL’s Austin, Texas, team into the AF2 league. One other franchise change was
the shuttering of the Nashville Kats. The Kats were owned by Bud Adams who decided to shut down the franchise and focus on running his NFL Tennessee Titans.

“We are turning the corner in terms of focusing our teams on being the best businesses they can,” Baker said.

One possible option for the league would be to consolidate sponsorship sales. But the AFL knows it has also to attract more viewers on television. The AFL expects to do just that during the upcoming second season
on ESPN and is banking on its first leaguewide marketing campaign with
ESPN to stir interest.

“The strategy is based on talking to core football fans, either the hard-core NFL fan and college football fans,” said David Haney, senior vice president marketing for the AFL. “It is something we have never done before and the message muscle ESPN can put behind it is tremendous. We’ll promote it across all ESPN platforms and in our markets. It won’t just be on
broadcast, but also through league messaging and through teams.”

The AFL also is looking to push its value by playing overseas. AFL executives insist that international expansion is a very real possibility within the next few years, especially as new arenas come on line in
Europe.

To emphasize the reality of international growth, the AFL created a futuristic ESPN “SportsCenter” broadcast set in 2013 that showed imaginary highlights of an ArenaBowl held in London between the
Dallas Desperados and a team in Berlin. The video was shown to AFL owners during the recent league meeting in Phoenix.

“We’ve spent a lot of time developing a business plan that shows that the AFL can continue to grow into a strong proposition,” Baker said. “We’ve moved from a league where long-range planning meant meeting the payroll on a Friday to a league that knows what is going to be happening five years from now.”