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How the NFL makes the most money of any pro sport

The NFL scores big bucks every Sunday.

According to IEG, the National Football League and its 32 teams raked in a record-setting $1.07 billion in sponsorship revenue for the 2013 season, an increase of 5.7 percent over the 2012 season. A good portion of the revenue increase can be attributed to a new partnership between Microsoft and the NFL. The two agreed on a $400 million deal that secures the exclusive right for Surface tablets and other Microsoft technologies on the sidelines for all 32 teams.

Mark Cunningham | Detroit Lions | Getty Images

Another major money maker for the NFL is its four-year $4 billion partnership ($1 billion per season) with DirecTV—a service that allows viewers to watch every football broadcast on several channels. It attracts roughly 10 percent of DirecTV's 20 million subscribers to the satellite TV service, and is scheduled to end this year. With the acquisition of DirecTV by AT&T, the Sunday Ticket is likely to be renewed by DirecTV (AT&T has reserved the right to call off the deal in the event DirecTV loses the NFL); however, negotiations between the two have been ongoing, and at one point, DirecTV CFO Patrick Doyle said the NFL asking price was too high, and DirecTV would not pay significantly more than the current $1 billion per season.

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Either way, that's just a fraction of the money that's available to mint on any (and all) given NFL Sundays. In 2010, NFL commissioner Roger Goodell went on the record to say that he expects the NFL to achieve $25 billion in annual revenue by 2027.

Leading with the Pack

The NFL does not release its annual financial data, but one NFL team is a public entity: the Green Bay Packers. The Packers are the best barometer for team-by-team revenue because their financial reports must be made public. In 2013 the Packers earned $187.7 million in national revenue, which consists of its portion of NFL national television contracts, sponsorships and a portion of jersey and ticket sales—split between all the NFL teams. (The Packers had total revenue of $324 million in 2013, including local revenue sources, like increased seating and ticket sales at Lambeau Field.) If you multiply the Packers' national revenue by 32 (the total number of teams in the NFL), it comes out to a little more than $6 billion.

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All those billions flow through an organization that is complicated in structure—a structure that has attracted controversy.

The money generated by sponsorships, television deals and ticket sales—the same revenue source that is disclosed by the Green Bay Packers—is taxed through a for-profit organization owned by the 32 teams, called NFL Ventures, not the actual NFL League Office. This revenue is split between the 32 teams and players under the rules of the most recent 2011 collective bargaining agreement (CBA).

However, the National Football League is organized for tax purposes as a 501(c)(6) organization under the Internal Revenue code.

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A 501(c)(6) organization exempts taxes from "business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues (whether or not administering a pension fund for football players), which are not organized for profit."

The NFL League Office located in Manhattan receives dues from the 32 league members, or NFL teams. These funds received from the teams are used to pay for non-revenue ventures, such as office rent and the salary of the NFL commissioner, which was $44.2 million for Commissioner Goodell in 2012 and 2013. The funds received are not federally taxed, but they also cannot be declared expenses as a deduction due to the 501(c)(6) status. These funds are taxed as income once they are passed through to staff as salary, including to the commissioner, league office employees and game officials.

The collective bargaining agreement

According to the CBA, the players and clubs divide up three main revenue sources. So, for example, the Green Bay Packers $187.7 million in 2013 revenue compares to an NFL salary cap of $123 million in 2013. The "player cost amount" for each team includes the NFL salary cap as well as the amount of money that is allocated for player benefits. A player "benefit" includes pension funding, group insurance programs, worker's compensation, as well as certain per diems and medical costs.

The players receive:

  1. 55 percent of league media, which includes all broadcasting revenue—television, satellite, radio and Internet.
  2. 45 percent of NFL Ventures and the NFL postseason revenues—including all revenue from the operation of postseason NFL games, as well as revenues arising from the operation of NFL-affiliated entities, such as NFL Mobile, NFL.com, NFL Productions and the television channel NFL Network.
  3. 40 percent of local revenue—which consists of "all revenue received or to be received by the clubs or club affiliates and not included in League Media or NFL Ventures and Postseason revenue."

The amount of money each team allocates to its players is calculated by subtracting the total player benefits (guaranteed money the NFL pays to the players that are not part of a player's salary) from the player cost amount. Once this figure is calculated, one must divide it by 32the number of teams in the NFL. This will give you the salary cap.

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The CBA mandates that all teams must operate under a salary cap, and also, according to the CBA, each team is required to spend 95 percent of its salary cap on player contracts from now until the 2020 season. The salary cap increases as the NFL becomes more lucrative through new deals, such as the Microsoft deal and a likely new deal with DirecTV.

According to Forbes, which recently released its annual ranking of the most valuable franchises in the National Football League—the most lucrative sport league in the world—the average value of an NFL team is now $1.43 billion, an increase of 23 percent over the previous season. The league's top earner, the Dallas Cowboys, is worth a massive $3.2 billion—that's the second most valuable team in the world behind the $3.4-billion-dollar soccer powerhouse, Real Madrid.

Even though the NFL is the highest-grossing sport league in the world, the NFL continually makes moves in order to reach Commissioner Goodell's ambitious goal of $25 billion in revenue by 2027. Talks about expanded playoffs, larger television deals and even an NFL franchise in London are among the levers for continued fiscal growth.

By Ike Ejiochi, special to CNBC.com
Follow him on twitter @IkeEjiochi

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