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Will an NFL Lockout Be the Biggest Disaster Ever For the TV Industry?

The NFL begins its playoffs this weekend, but the most intriguing action may be occurring behind closed doors. After the football season ends, the collective bargaining agreement between the players and owners is set to expire, and without any new contract, it's expected that the NFL will lock out its players and there won't be any games to broadcast.

As much as the prospect of no football may hurt both owners and players, it's TV networks that might be the real victims in the dispute.

That's because ESPN, NBC, CBS, Fox and DirecTV have agreed to fork over an estimated $4 billion regardless of whether football is played or not.

How do we know this?

Yesterday the players union pressed a grievance that the league made an underhanded deal with these TV networks. In return for accepting less from networks for rights to games, the NFLPA charges that the league got a guarantee it would be paid in 2011 no matter the lockout situation. The NFLPA characterizes the deal as "lockout protection" and compares it to "insurance," alleging that the NFL breached its fiduciary duties under the prior collective bargaining agreement.

The hearing was held before University of Pennsylvania Law Professor Stephen Burbank

The NFLPA wants Burbank to order that the TV money be put in escrow in order to prevent the NFL from using any of that money during any work stoppage. If that happens, the players will get some leverage as the owners won't have TV money to pay its bills over the next year to stadiums, coaches, etc.

If the NFLPA's allegations are true, it's hard to figure out why television networks agreed to such a short-sighted arrangement. They may have saved some money in the short-term and got a more generous rights package that allows them to sell access to broadband and mobile phone transmission of games. But the deals amounted to a big-stakes gamble there wouldn't be any labor strife. By making the supposed arrangement, the TV networks may be making it easier for owners to lock out players, which means no football, which ends up being a disaster if they're paying billions of dollars for no product at all.

But the TV networks may be able to get back some of that money.

NFL general counsel Jeff Pash explained the arrangement to NBCSports.com in an interview last February.

"The networks aren’t going to hand over large amounts of money to us, and if they don’t get a product [in return] tell us to go ahead and keep that money," said Pash. "We will have to give it back to them and take reductions about what we get from them for future years. I am quite certain that the networks will make sure that they are made whole and then some if we are not able to televise games. It is not a payment, it is a financing mechanism. It is no different than borrowing on a home equity line. You still have to pay it back.”

So the networks are about to give the NFL a $4 billion loan while facing the prospect of losing $3 billion in network ad revenue? How much guarantee do they really have to be made whole again?