Oct 032012
 

At this time eight years ago the NHL had locked out the players and the NHL was on the verge of cancelling regular season NHL games, and eventually went on to cancel the whole 2004-05 NHL season.  Back then the issue was related to controlling player salaries so more teams can compete on the ice and more importantly be able to compete, and survive, financially.  Eventually the NHL and NHLPA came to a resolution, after the NHLPA all but imploded, which saw the players salaries rolled back 24%, a salary cap system would be instituted, and the players salaries as a whole would be capped at 57% of all hockey related revenue.  Essentially the players folded and the owners got pretty much what they wanted and Gary Bettman touted the deal as the start of a new era for the league where all teams would be financially stable and we would see greater parity on the ice.

Unfortunately, it didn’t work out that way with respect to the financially stable part.  The Atlanta Thrashers failed to survive in Atlanta and eventually relocated to Winnipeg and we all know about the Phoenix Coyotes fiasco.  Additionally there are a number of other franchises that are in weak, if not perilous, financial situations. The 2005 CBA did not fix the financial problems of the NHL.

Back in October 2004 I wrote about the most important financial problem with the NHL on a now non-existent previous incarnation of this website:

Yesterday Gary Bettman was in Raleigh, North Carolina with Carolina Hurricanes owner Peter Karmanos Jr. telling the world and most importantly reassuring Carolina Hurricane fans that contraction is not an option and he is committed to keeping all 30 teams in the league. But honestly, shouldn’t contraction be an option with Carolina at the top of the list?

According to Karmanos the Hurricanes lost $22 million last year on a $38 million payroll. So, for them to break even they would have had to have a payroll of $16 million. Is that a formula for a successful franchise? This is a team that made it to the Stanley Cup finals a couple years ago and couldn’t capitalize on that success by expanding it’s fan base. Even if a $30-35 million salary cap was put in place like the owners want the Hurricanes will still lose money. How can the Caroline Hurricanes compete with the likes of the Maple Leafs, Red Wings, and others when Carolina would break even with a $16 million payroll and the Leafs and Red Wings make oodles of money with $62 and $78 million payrolls respectively. They can’t and that is the problem with the NHL. The disparity between the rich teams and the poor teams is so huge that only a rediculously low (for the rich teams) salary cap can help many teams survive.

A salary cap does not address the key problem in the NHL. A salary cap will not fix revenue disparity between the rich and poor teams. Only a massive revenue sharing program or contraction of the 4-6 poorest teams will address that problem. But the NHL isn’t talking about revenue sharing to any great extent or it being a key component of a multi-pronged solution.

In February 2005, as we were approaching the drop dead date for saving the 2004-05 season I wrote the following:

According to the NHL’s latest ‘take it or leave it’ offer, the proposed deal will have a $42.5 million salary cap with a $0.50 on the dollar tax starting at $34 million. Under this agreement a team like the Maple Leafs with a $42.5 million payroll would be spending $46.75 million in payroll after taxes. Last year their payroll was closer to $70 million. The players are not going to accept any deal that will see the Maple Leafs, and other big revenue clubs who are already making money, making upwards of $20 million more in profit while they are taking a 24% paycut. The reason the players are accepting a paycut in the first place is to help the small market teams survive, not to line the pockets of the big market owners.

So, the key to any new deal is going to be revenue sharing. If the NHL wants a $42.5 million salary cap the NHL will probably have to be willing to accept significant revenue sharing, possibly seeing the Maple Leafs and other big market teams sharing upwards of $10 million, possibly more, each with the smaller market teams. Should the league be unwilling to accept revenue sharing don’t expect the players to negotiate down their salary cap significantly, if at all.

What the NHLPA is really saying is, we aren’t going to bail out the small market teams if the big market teams aren’t willing to help out as well. The fix to the economical mess has to be a multi-party solution, not a players only bailout and if you ask me, that makes a lot of sense.

In the end, the NHL got it’s salary cap, but the players forced the NHL to commit to a significant revenue sharing program. Problem was, the revenue sharing program was not significant enough simply because the revenue disparity across the NHL is so great, and got even greater over the past 7 years of the CBA.  Once again revenue sharing is an issue for the players and they aren’t willing to take a pay cut without increased revenue sharing.  Here is a quote by Don Fehr after the NHLPA submitted their initial CBA proposal to the NHL.

“In essence, when you boil it all down, what were suggesting is that the players partner with the financially stronger owners to stabilize the industry and assist the less financially strong ownership groups” -Don Fehr

From all reports, there is a gap in the revenue sharing that the owners have proposed ($180-190M) and the revenue sharing that the players have proposed ( approximately $240-250M) and this is the core of the problem.  The owners want to solve the weaker teams financial problems largely on the backs of the players, while the players want the big market owners to share in the small market assistance plan.  This was the core of the problem in 2005 and is the core of the problem now.

There are solutions to the problem of the financial security of all 30 NHL franchises but the unfortunate problem is the NHL owners can’t agree on the real solution. They can only agree on finding a solution on the backs of the players. The big market owners aren’t reluctant to give up their large profits to assist their fellow owners (who are both partners and competitors) and the small market owners aren’t willing to accept a CBA without seeing their financial situation improved significantly, either through large player salary reductions or significantly increased revenue sharing.

The truth is, the NHL can’t resolve the financial woes of its small market franchises through cuts to players salaries alone. Even if the NHL successfully cuts the salary cap/floor by $10M, that only reduces the small market franchises expenses by $10M. All indications are that the Phoenix Coyotes have been losing upwards of $25-30M per season, even after existing revenue sharing programs.  Reducing player expenses by $10M does not make them a profitable or financially stable franchise, it only cuts their losses to $15-20M. Only when the NHL gets serious about revenue sharing will financial stability exist within the NHL.  So despite what the NHL wants you to believe, this lock out, like the last one, is more about generating more profits for the league as a whole, not about improving the financial situation of the small market teams.  Until they start proposing massive increases to revenue sharing all indications are that this lockout is just an attempt to milk the players for everything they can, and are willing to sacrifice the game we love to do so.

If the owners view the players as nothing more than cattle, they view the fans as nothing more than cattle feed.  Fans are here so they can feed the cattle so they can then milk the cattle for everything they can. What the fans think or what is best for the game of hockey is pretty much irrelevant. It is all about profits.

For more insight on the revenue disparity in the NHL have a read of Kent Wilson’s excellent piece on the topic.

 

Sep 272012
 

It looks like the NHL and the NHLPA are in a stale mate in terms of the CBA negotiations.  As of right now the NHL is holding firm on its stand of limiting players to 47% of revenue and the players are holding firm on its stand of not wanting to see any roll back of salaries either through a negotiated roll back or through escrow though the players are willing to scale back the growth of player salaries.

When the CBA negotiations started outside observers believed a final resolution to the CBA would see the owners and the players split revenues more or less along the 50% line, not unlike the NBA.  The question is when and how long it will take for both sides to capitulate to those numbers.  While driving around in my car yesterday I thought up a more innovative solution that might appease both the owners and the players and it has aspects within the system that both the owners and the players could view as a “win”.

Under the old CBA players got a fixed 57% of revenue.  It really didn’t matter what was written on their contracts because their salaries fluctuated depending on revenues.  A portion of the players salaries as written on their contracts were withheld every year (the dreaded “escrow”) by the NHL and once final revenue numbers were calculated the NHL would distribute from escrow whatever money the players still deserved to collect according to the 57% revenue rule.  Players hated this, even if there was potential to earn more than what was written on their contracts in the event of significant revenue growth.

Under the old CBA the salary cap and floor was calculated as being $8M above and $8M below the “midpoint” which was calculated as 57% of the average team revenues.  So, if the league had a projected revenue of $3B for 30 teams (I am using $3B to make calculations easy, actual projected revenue for next year was closer to $3.3B), it would be an average of $100M per team and the players share, or midpoint, would be 57% of that or $57M.  This would make the salary cap $65M and the salary floor $49M.

The system I am proposing is quite simple and revolves around adjusting how the salary cap and floor are calculated.  Instead of having the midpoint at 57% of average team revenue we set the salary cap at 57% and the salary floor at 43% (as an example I’ll use the owners initial offer).  This would make the salary cap $57M and the salary floor $43M.  Teams sign players according to those constraints and the numbers written on the players contracts are their actual cap hits.  If every team spends to the cap, which they won’t, the players could theoretically earn a 57% share of the revenue.  If teams individually choose to spend less, they can.  The more teams that choose to spend below the cap, or even right down to the floor, the players share of revenue will drop accordingly.  If every team chose to spend only to the floor, the players would earn just a 43% share of revenue.   In reality the players share will probably end up somewhere in the middle, in the 50% range, sometimes more, which the players might see as a “win” and sometimes less, which the owners might see as a “win”.

Under this system, escrow is not needed as players salaries aren’t explicitly tied to revenues, only the salary cap and floor are.  A player with a contract that will pay him $6M will have a salary cap hit of $6M and will get paid $6M, no more, no less.  Eliminating escrow is a win for the players.  Linking the players actual salary, and not their cap hit manipulated front loaded contracts, to their salary cap hit improves competitive balance which is a win for the owners, and the fans.

Under this system there will be no more long term front loaded contracts because the players actual salary in a given year is what is used as the cap hit, not the average salary over the term of the contract.  There would be no benefit to tacking on several years of $1M salaries as it won’t reduce the players cap hit in the early years.  This is a win for the owners, particularly the small market owners who couldn’t play that game.

I’ll also propose that every player earning an NHL salary (i.e. playing in the NHL or are on NHL one-way contracts) will count against the salary cap.  This includes players that have been demoted to the AHL like Wade Redden.  This also eliminates some of the big market advantage which improves competitive balance.

I’ll also propose significantly more revenue sharing, more along the lines of the players proposal.  If the owners are serious about competitive balance and 30 financially viable franchises significantly increased revenue sharing is the only solution to that.

There are a number of transition issues that will need to be resolved like how to transition from a $70.7M cap system to a 62.7M cap system and what to do with existing players on heavily front loaded contracts who will now see their salary cap hits rise dramatically as their front loaded salaries will now become their salary cap hits.  These can be negotiated and can probably be achieved through a 2-year transition period where escrow still exists but there is enhanced flexibility with regards to the salary cap.  Some of the teams that have significant numbers of front loaded contracts (i.e. the Flyers) may still have long term cap issues (that they will be forced to resolve) but too bad for them.  It’s their own fault for manipulating the system like they did.

When all is said and done, I think this system is a good one for both the players and the owners and the fans.  The players still definitely see a hit to their share of the revenues (they certainly won’t be earning 57% any more) but they get rid of escrow and there is still some upside potential to earn more than a 50% share if the league is able to develop 30 financially viable franchises.  The owners see the players share of revenue fall (if they so choose) possibly even down to the levels they have asked from the players.  With greater revenue sharing and eliminating the benefits front loaded long term contracts the small market owners will be the big winners which improves competitive balance which is something the league has identified as being good for the game.  The fans win because of the greater competitive balance, but also because I think the system is something that could work long term for the league and the players and hopefully eliminate the need for any future work stoppages.

It sounds like a win-win-win to me.  Now lets get it done and lets get back to hockey.

 

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.

 

Oct 292010
 

Attendance across much of the NHL appears to be trending downward this season which may create new trouble spots for the NHL and with the Canadian dollar unlikely to rise as significantly this year as the previous couple years, we could, for the first time, see the salary cap fall.

Last year there were 19 games with fewer than 10,000 fans, 13 of them in Phoenix and one of them being a snow storm related issue in New Jersey. So outside of Phoenix there were only 5 games where fewer than 10,000 fans showed up. This included one game in Atlanta, one game in Carolina, and three New York Islander home games. Not including the San Jose-Columbus game played overseas there have already been six NHL games with fewer than 10,000 fans, two in Columbus, two in Atlanta and two in Phoenix.

The table below shows each teams average attendance in their games following their home openers (since most teams sell out their home openers, games played in Europe not included) along with their 2009-10 Attendance.

Continue reading »

Oct 152010
 

Yesterday David Shoalts of the Globe and Mail wrote a story that the potential sale of the Phoenix Coyotes to Matthew Hulsizer has stalled in part because the reportedly Hulsizer wanted a discount to the $165M the NHL is asking for to cover all their costs in purchasing and operating the team out of bankruptcy court.  Later last night Darren Dreger of tsn reported that although nothing had been signed indications of a deal to purchase the team was close and that for the most part an agreement in principle had been agreed to.  Obviously this conflicts somewhat with what David Shoalts wrote.

Today NHL deputy commissioner Bill Daly said

“We’re moving toward an agreement, which we’re hopeful can be concluded relatively quickly.  The next step will be proceeding to the NHL ownership approval process.  We are hopeful this represents the beginning of the end of this long process, which if successfully completed, will ensure the long-term future of the Coyotes in Glendale.”

So the question is, who are we to believe?  I know for a fact that I have to question anything that comes out from the NHL.  Remember, it was the NHL that stated that they were about to present former owner Jerry Moyes with a purchase agreement from Jerry Reinsdorf way back in May 2009 when Moyes first took the team into bankruptcy but we now know that at best that offer would be full of conditions relating to concessions Reinsdorf must get from the City of Glendale with respect to the lease agreement.  Bill Daly also stated last December that he was confident that an Ice Edge purchase of the Coyotes would occur though clearly that didn’t happen either so forgive me if I don’t put too much stock in what he is saying.

The reality is, the Coyotes will only remain in Phoenix if one of the following things occur:

1.  A deep pocketed owner steps up who really wants to keep the team in Phoenix and is willing to lose $15-25 million per year.

2.  The City of Glendale steps up and is willing to significantly renegotiate the Coyotes lease agreement or provide significant concessions so that a new owner won’t be in a position to lose $15-25 million per year.

3.  Or some combination of #1 and #2.

The reason for this is that the Coyotes cannot survive under the current lease agreement.  That’s a fact.  There just has not been enough of a fan base and corporate support to sustain the team.  So, if the Coyotes are to stay in Phoenix, someone has to be willing to eat those losses.  As of yet no deep pocketed owner has stepped up to the plate willing to take on those substantial losses and while the City of Glendale has discussed a variety of options to help out a new owner, none of the concessions they have discussed in the past year and a half have resulted in a new owner stepping up.

Could the Coyotes remain in Phoenix?  Sure, but until someone (the city or a potential new owner) steps up and states that they are willing to fund the teams significant losses for the forseeable future I won’t be betting on that to occur.