What the Jay Gruden Hire Means for the Value of the Redskins Franchise

The Redskins are struggling on the field, leading to a deterioration of the value of the franchise. Can Dan Snyder's most recent hire turn around that trend?

Jan 13, 2014 at 4:38PM

It's hard to imagine that the fate of a 49-year-old billionaire rests in the hands of a 46-year-old who was formerly known as Chuckie's little brother. You know, the other Gruden. Jon is the one we know – the blond-haired, part-down-the-middle, scowling guy who fires off intense, insightful comments and analysis as we watch Monday Night Football.

And Jon is, most notably, the youngest coach to ever win a Super Bowl. He was 39 and that was seven years before his brother, Jay, landed a heading coaching gig in the league.

Although Jay was alongside Jon as an assistant when the Tampa Bay Buccaneers got their rings, he took a circuitous route to his first head coaching job in the NFL. In 2010, he made a brief pit stop in the UFL and served as GM and head coach for the Florida Tuskers. Don't know what a Tusker is? Turns out it's a wild boar or elephant with big tusks.

But now, this other Gruden has been handed the reins to one of the NFL's most valuable financial properties, but one of the biggest disappointments on the field over the last 10 plus years.

Understanding the basic economics

If you look more closely, you find that Redskins owner Dan Snyder has failed to understand the basics of NFL economics. The master practitioner of this discipline is Bill Belichick and the New England Patriots.

Kevin Hassett, director of economic policy studies at the American Enterprise Institute, outlined the basic economics in the organization's online magazine. In a nutshell, a handful of veteran free agents use the free market to get high-dollar contracts, while a greater percentage of draftees earn much lower compensation dictated by the collective bargaining agreement. Hassett concludes that economics straightforwardly predict that to perform at the highest level, a team should "load up on draft picks, especially from the inexpensive late rounds."

Teams that "receive higher value relative to salary from [their] players than [their] opponents receive from theirs" beat the teams that don't.  In short, it's better to pay a hungry, talented rookie a fraction of what a comparable, high-dollar veteran would earn.

Making bad decisions

Snyder is notorious for trading away draft picks and taking on big veteran contracts. He gave away a second- and a fourth-round pick for Donovan McNabb, and has signed free agents Albert Haynesworth, Adam Archuleta, Brandon Lloyd, Antwaan Randle El, Andre Carter, and others to overpriced contracts.

Not to mention the dollars wasted on the rotating-door of coaches. The last debacle? Paying $8.5 million for the Shanahans -- father and son -- to go away.

The Redskins will pay Gruden an undisclosed amount for the next five years to do what the Shanahans and every other coach of the Redskins have failed to do under Snyder: win consistently.

At some point, bad management decisions catch up with you. If the Redskins eventually have to eat a few years on Gruden's deal because the trend of impatience continues, the value of the Redskins will continue eroding.

Signs of decline

There are signs that it's already happening. As Fool contributor Jake Mann outlined in a December article, much of the growth in the $1.7 billion value of the franchise during Snyder's tenure has come at the expense of the fans. Snyder has raised ticket, parking, and concession prices as attendance continues to decline -- from an average of 88,000 in 2007 to 76,000 in 2013, according to ESPN numbers cited by Mann. Mann's conclusion: a 3% drop in attendance over time has devalued the organization by $200 million.

It is realistic to assume if Gruden does not find quick success, the downtrend will continue, further depleting fan support and attendance, and continuing to erode the value of the team. This could leave the franchise and owner – the 426th richest American in 2013 -- with off-the-field struggles, as well as on-the-field ones.

Judgment day

So far the billionaire with the third most valuable NFL franchise, according to Forbes, has done well in some other ventures. His private equity firm, Red Zone Capital Management, sold Dick Clark Productions in 2012 for $370 million, reportedly twice what Snyder's group paid for it. 

Ultimately, the fans in the D.C. area and the football gods won't judge Snyder by his business acumen off the field. He'll be judged by what the Redskins do on it. Unless Gruden can create a consistent winner and bring D.C. the NFL's biggest prize, or at least a few playoff wins, Snyder's lack of grasping the simple economics of pro football could cost him more than his reputation.

Praying for revival

The ongoing success of the Washington Redskins could boil down to one factor: Did Snyder pick the right guy to manage his most valuable HR investment? In 2012, this one looked like a sure thing, but took a sharp downturn in 2013. Now Gruden, an unproven commodity, has to turn this troubled franchise into a contender.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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