Sep 042012
 

Last week the NHL CBA negotations too a turn for the worse as both sides basically agreed to disagree and have temporarily walked away from negotiations.  Despite that I am still reasonable optimistic that there will not be a lock out or work stoppage anywhere close to as long as the 2004-05 lost season and I believe that any lockout will be measured in weeks and not months.  The reason is, the NHL is not losing money this time around as they were in 2004-05 and if there was a lost NHL season there would most certainly be significant lost profits at the hands of the owners.

If you recall back in 2004 the NHL hired Arthur Levitt to take an independent look at the financial state of the NHL.  You can read the report here but basically Levitt concluded that the NHL lost $273M on $1.996B in revenues during the 2002-03 season.  He also concluded that the players salaries worked out to 75% of total revenues during the 2002-03 season, or $1.494B.  With that knowledge, let’s crunch some numbers.

If total revenues were $1.996B and player salaries were $1.494B and total losses were $273M that would mean that non-player salary expenses totaled $775M.

The projection for the 2012-13 season was that revenue would be about $3.2B and under the old CBA agreement players were to be owed 57% of that, or about $1.824B.  The 43% that the owners get to keep would amount to $1.326B.

So, at this point we have the NHL owners share of league revenues totaling $1.326B and in 2002-03 non-player salary expenses totaled $775M.  Assuming no inflation in those non-player salary expenses and we have the NHL posting a league-wide profit of about $551M.  That is over a half a billion dollars in profit.  Of course, in the 10 years since 2002-03 non-player salary expenses have probably inflated as well.  I don’t know what the average inflation rate has been over the past 10 years but I suspect it is in the 2-2.5% per year range.  Now, for argument sake, lets assume non-player salary expenses inflated 1.035% per year.  This would equate to approximately a 41% increase in non-player salary expenses over the 10 year period which would estimate non-player salary expenses to be $1.093B for 2012-13.  Subtracting that from the $1.326B which is the owners share of the $3.2B in revenue and we could estimate owners profits next season to be a combined $283M, or close to $10M per team per year.  Now, not all owners will be posting a $10M profit next year, but as a whole the league will do quite well.  This is why I don’t believe the NHL owners will have the same resolve to sustain a lengthy lockout.

In the owners latest proposal they proposed the players get a 46% share of revenues while the owners themselves get to keep 54% of the revenue.  Plugging these numbers into the equations and we could forecast the NHL owners combined profit to be closer to $635M, or about $21M per team per year.  Think about that when the owners decide to lock out the players on September 15th.  They aren’t locking out the players to minimize league losses, they are locking out the players because they would rather pad their own pocket books to the tune of $20M/year instead of a mere $10M/yr.

 

  10 Responses to “Can the NHL owners really be losing money?”

  1.  

    I enjoyed most of this piece, right until your closing statement. Where you go from the totally founded in logic:
    “Now, not all owners will be posting a $10M profit next year, but as a whole the league will do quite well”

    to:

    “They aren’t locking out the players to minimize league losses, they are locking out the players because they would rather pad their own pocket books to the tune of $20M/year instead of a mere $10M/yr.”

    Except the revenue is not split even close to that evenly. Sure the Leafs, Habs, Rangers, Flyers & Bruins are all making great money, probably (and reportedly) in excess of 25M each, however do the math with your $283M profit (accepting a very conservative inflation rate) and you have $158M for the remaining 25 teams, or $6.32M if you were to incorrectly assume that was shared evenly.

    Now, what I’ve said above could lead to a suggestion of changing how the NHL owners share revenue/expenses/profit. However I would not believe in that as a successful model at all – similar to paying all the players the same wage – I fundamentally disagree with it, and believe it would lead to the leagues demise.

    Players who under-perform still make their money, superstars are making a similar amount to many of their team-owners, with no where near the risk.

    a 50/50 split is where talks need to begin. Hell if players are disgruntled that teams can use their names, then they should covering some of the marketing tab – it’s currently a great deal for the players, and that’s why they are fighting for it. Game is growing, great product, and yet there are owners operating with gigantic over-head (and huge risk) – somewhere in there is a business model error, and IMO the HHR split is at the core of it.

    Both sides claim to want a season, but I know one side that actually does: the fans.

    •  

      Yes, revenues are not split evenly. This is the #1 problem in the NHL. It isn’t player salaries, it is revenue disparity. There are two ways to resolve this problem that we have seen result in very successful leagues.

      1. Significant revenue sharing. This is the model of the NFL. The most significant chunk of revenue for the NFL comes from its national television contracts and this is split evenly among all teams. The result is all teams can be competitive, even teams in the smallest of markets. The NFL is an extremely successful league.

      2. Implement modest revenue sharing but allow teams to spend whatever they want on players so small revenue teams can spend a very small amount on players and still make a profit while large market teams can spend a ton on players and still make a profit. This will lead to a competitive inbalance but all teams can be successful financially. MLB has gone this route and is seeing record revenues and without any significant labor disputes for a long time.

      What Gary Bettman and the owners are attempting to do (or at least what their first two offers proposed) is achieve competitive balance of the NFL but with a more modest revenue sharing (relative to revenue disparity) like MLB. The only way that works is if they do it on the back of the players driving down salaries so low that even the lowest revenue teams can survive financially and be competitive on the ice with modest revenue sharing. This model could work in theory, but only by breaking the backs of the players and constant labor disputes (and you would probably see the union dissolve because the union would no longer be of benefit to the players).

      There is a fair and reasonable solution and that is some reduction in players salaries and an increased revenue sharing program. Every percentage point in reduction of the players share results in about $32M so cutting from 57% to 53% would net the league an additional $128M per year in cost savings based on projected 2012-13 revenues. Apply that 100% to revenue sharing and you can probably resolve all the major financial problems of all the owners in the league. So, I’d propose that at 53% the NHL could resolve all their financial problems and maintain a competitive balance among NHL teams and maintain the big market teams current profitability levels. The question is, how much more profit will the owners demand. The leagues initial offer was about 43% and the second offer was about 46% so that works out to an extra $320M and $224M in league-wide profits respectively. If the league locks out the players for that, there is zero chance I’ll support them.

      •  

        You admit your numbers are estimations but are still reaching concrete conclusions – I’d hesitate to express as much confidence in the number’s we’re throwing around.

        I wouldn’t mind revisiting the NHL/NHLPA split, you say their latest offer is 46%, but I’ve read in several locations the breakdown is a 6 year proposal with 3 final years at 50/50. Now I understand there was an edit in there to what revenue encompassed, however if it’s an aspect of growing the game (say marketing costs), I believe that would actually be benefiting both parties -> directly.

        I do not believe MLB is a model to follow, it’s not a competitive league it’s a development league and a pennant race pushed into once league – it’s a farce compared to the other competitive sports IMO.

        The NFL split (53owners/47players) is, as you commented on, largely possible due to their national broadcast contract – not their individual club sales/merchandise or other more local forms of their product. Getting a BIG USA National broadcast which all the teams could share a profit of would be fantastic, and probably solve some (or most) of the economic battle the NHL is currently fighting.

        In regards to how I think the Owners, and players should look at these negations. @ 57% of the 2011-2012 revenue the players salaries were the highest they’ve ever been, and not every team spent to the cap. This leaves a sizeable chunk to be divvied out to all the players based on their active average contract. There’s some negotiating room from my perspective, that’s money being paid out side of the individual contracts their all so virtuously opposed to having “rolled back” – although please tell me you see the internal conflict bordering on hypocrisy of individual contracts on a CBA-union worksite…what this locked in % going to the players does, is prevent the short-term ‘fix’ in removing the cap floor -unless the system of sharing changed.

        Honestly I feel like you’re villain-izing the owners as if this is a 3rd work labour abuse situation ” if they do it on the back of the players driving down salaries so low ” – regarding an industry which averages in excess of 2M per year per employee. You’re comfortable with the guys who ‘play’ the game (that they supposedly love) making more money then the franchises which are doing the normal definition of a job (compensation of work – which obviously you wouldn’t normally be doing if not for the comp). This breakdown doesn’t just effect the rich owners and the rich players – it’s all the people in-between as well, and at some points the fans. Still neglecting the actual risk the owners endure to have the privilege of trying to run a business. I think you’re mistaken in the light you cast on the owners of NHL teams, although I admit it’s easy to do – up in their owners suites with nice suits on and their visually modified women – seems like a different world. Ahem, sorry off topic – my point is that it’s not that one-sided, we’re talking about 2 parties both of which are doing good-enough by almost anyone else’s standards. Polarizing the sides (or the public’s view of the sides) is not good negotiating nor is it good for future relationships.

        •  

          Honestly I feel like you’re villain-izing the owners as if this is a 3rd work labour abuse situation ” if they do it on the back of the players driving down salaries so low ” – regarding an industry which averages in excess of 2M per year per employee.

          Of course it is all relative. The players won’t go broke if the owners only paid them 46%. I don’t even have a beef with the owners asking the players to accept 46%. I believe in freedom and if the owners want to cry poor and make demands of the players they are perfectly within their right to do so. The thing is, if they are going to do that they are opening themselves up to criticism and people calling them on their bluff/misrepresentation of the truth/lie/whatever you want to call it.

          The owners got almost everything they wanted in the last CBA (linkage of salaries to revenue in particular which is extremely rare, if not non-existant in any other industry), the fans returned in record numbers, and revenue has risen more than 50% since the last lock out. Using their numbers from the Levitt report and reasonable (if not high) rates of non-player salary expense inflation the owners, as a whole, should be making significant amounts of money (and if non-player expenses have risen more than my estimates they need better business managers running the business side of their organizations). The owners (as a whole) are not poor. The league (as a whole) is not losing money. Any representation otherwise is just owner propaganda. Yes, some teams are losing money but you don’t need to drive the players share down to 46% to resolve those issues, as the owners want you to believe.

          Polarizing the sides (or the public’s view of the sides) is not good negotiating nor is it good for future relationships.

          The owners are doing enough on their own to polarize the sides. If you want to polarize the players against you make your initial offer a 24% pay cut to each and every player plus far greater restrictions on the terms of the contracts you can sign. The owners initial offer was for greater concessions from the players than they got last time when they essentially broke the union.

  2.  

    I don’t believe the owners got everything they wanted in the previous CBA – in fact(amongst other things) I’d wager they wanted a value amount set for the cap, and not a percentage of revenue (especially not one above half) – however I would agree they broke the union, and their main goal (a cap) was achieved. I should also add that as a whole i thought your response was very good – perhaps better then the initial piece, and that I appreciate your replies. I’m going to sit here with my fingers crossed that you’re right , or that i am, but both yield a result with one side conceding to the other, and a deal being reached before november. That’s what counts IMO.

    Not that you’ve swung my view regarding who is further from ‘fair/accurate/my ideal’ business model – but I do appreciate how you’ve interpreted the information that is available. Hell if we were negotiating the CBA I’m confident we’d find a suitable contract and avoid a work stoppage. I look forward to your future articles and hope we can continue our friendly banter.

    Time for a plug: If you ever want to visit the most in-depth and committed fantasy Keeper league you should join us at the BBKL – sometimes rude, often opinionated, but always devoted hockey fans that run a 30 team, NHL-modeled, 16-category, complete with one-week-elmination playoffs, league. We also debate hockeyanlysis findings quite regularly.

    •  

      in fact(amongst other things) I’d wager they wanted a value amount set for the cap, and not a percentage of revenue

      While there was a time just before the NHL cancelled the 2004-05 season when the owners were making proposals without linkage of players salaries to revenues when negotiations started up again they were demanding linkage. If I recall correctly there was a time when the players offered a hard cap of something like $44-45M but the owners said no, sorry, we need linkage between revenue and salaries and in the end settled for 54% rising over time to 57% as revenues increased. They could have been playing the last 7 years with a $44M salary cap but they chose not to. Think about how much money that cost them and how much angst it is causing them this negotiation. Think about it. If the salary cap last year was $44M they could have agreed this time to up it to $55M and they players would have seen it as a 25% raise and the owners would have gotten something close to what their initial offer was (43% of revenue).

  3.  

    I’ve stated this over and over and that is as a fan I am against NHL revenue sharing unless the league implements ceilings and floors on ticket prices across the league.

    You said it yourself that revenue sharing in other leagues is primarily a function of TV revenue. In the NHL this will be funded by fans in some cities paying twice as much on average for tickets as fans in other cities where this money is being ciphened to. Phoenix and Nashville virtually give tickets away so they can get people in the building and you want fans in other markets who can barely afford to go to games to subsidize this.

    I wouldn’t have an issue with revenue sharing if the issues were really about economics like currency conversion. But the bottom line is that these teams that are in trouble are in areas where the fan base does not support the team. So I guess in your world it is perfectly fine to charge a fan in Toronto $250 a ticket so a guy in Scottsdale can use his free ticket that he got when he bought a bottle of Vodka watch the Coyotes.

    These teams are independent businesses. The NHL does not need 30 teams and in fact it would function better as a 24 team league as then you could have each team play each other in the same year and that is not even mentioning the higher quality of play you would see with a less watered down talent pool. In real life when a business is failing employees are laid of and jobs are lost or there is a wage roll-back. Why should the NHL be any different?

    •  

      I have written before that the NHL can deal with revenue disparity in 2 ways. One is the way of MLB and allow teams to have significant payroll disparities too but this typically leads to on the field disparity as well. The NHL, as a collective, has chosen not to go that route and instead would prefer to promote on the ice parity. The problem is, as I pointed out, they can’t successfully achieve this without significant revenue sharing. The NFL and to a lesser extent the NBA get revenue sharing through their national TV contracts but until the NHL gets one of those big national TV contracts (they may never if they keep turning away casual fans with lengthy lockouts every 6-8 years) they will have to achieve revenue sharing in a more explicit way. The NHL is seemingly attempting to achieve the on-field parity of the NFL but with the financial disparity of MLB. It can’t be done.

      As a fan, I am with you. I don’t care if some teams fail and we end up with a 24 team league. I don’t necessarily even care if the NHL strives for financial or on-ice parity. But as a fan I can only work with what he have got and right now we have got a group of owners who seemingly (at least publicly through Bettman) have set a goal of having on-ice parity as well as 30 stable franchises (in existing markets) but has also seemingly not been able to devise a method of achieving that without doing so largely on the backs of the players and this has resulted in a lost 2004-05 season and potentially a loss of some or all of the 2012-13 season. As a fan, that is not acceptable to me.

      “In real life when a business is failing employees are laid of and jobs are lost or there is a wage roll-back. Why should the NHL be any different?”

      First, in real life, businesses don’t tie employee salaries to revenue streams, don’t have salary caps, don’t draft employees out of university, can’t trade employees, etc. The NHL is not a typical real life business so any argument starting with “in real life” is largely a false argument. Second, the NHL as a whole is not failing. It is actually probably quite profitable.

      •  

        “First, in real life, businesses don’t tie employee salaries to revenue streams”

        My current compensation is directly tied through bonuses to both revenue and profit within my company.

        “don’t have salary caps”

        My company uses hard pay ranges based on job classification as does pretty much any other company out there.

        “don’t draft employees out of university”

        I was personally recruited while still in school

        “can’t trade employees, etc.”

        My company closed it’s offices in the city I was living and my only choice was to resign or relocate. As I work in high tech staying and going to another company was not an option as there were no other high tech companies in the city.

        I actually think the NHL is not that different than other industries. You look even at the life of people in the military and they have even less choice about things such as where they live.

        •  

          “My current compensation is directly tied through bonuses to both revenue and profit within my company.”

          Some people may have this, many/most don’t. Some have bonuses tied to merit, but that is different.

          “My company uses hard pay ranges based on job classification as does pretty much any other company out there.”

          Sure. There may be NHL teams that refuse to pay 3rd liners more than $2M too. But are companies limited (and mandated) to spending a certain percentage of their revenues on salaries? No.

          “I was personally recruited while still in school”

          Recruited, not drafted. You had the choice to sign on with your company or any other one. Additionally all the companies in your field haven’t bandied together to put limits on what you can earn in your first 3 years of employment.

          “My company closed it’s offices in the city I was living and my only choice was to resign or relocate.”

          See, there is the difference. You had a choice. You could have moved or found another job. When the Thrashers moved from Atlanta to Winnipeg the players had no choice but to move. When a player gets traded from one team to another, they have to move. They get no choice to quit and find another job playing hockey.

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