Where to go from here…

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Oct 192012

There seems to be a lot of pessimism after the NHL walked out on negotiations with the NHLPA yesterday but the reality is that the NHL and NHLPA have come a long way.  The initial NHL offer to the NHLPA was that the players would get a 43% share of revenue.  The initial offer from the NHLPA to the NHL was that the players would subsidize a larger revenue sharing pool for 3 seasons through a reduction in their share of revenue but then bounce back to a 57% share in year 4.  As of yesterday, both the owners and players now agree that in the long term they should split revenues 50/50.  The disagreement is that the owners want the 50/50 share immediately while the players want to phase it in part in order to ensure existing contracts are honored in full (which is a bit of a bargaining/propaganda ploy because contract values were never guaranteed and always tied to revenue and the CBA).

James Mirtle of The Globe and Mail has a good run down on the difference between the first two player proposals relative to the owners proposal.  In essence, the players proposals nets the players an additional $500M (approximately) over the next several years before the 50/50 level is reached.  This is not insignificant but it only accounts for approximately 2.2% of the projected $22.5B in projected revenue over the term of the CBA assuming 5% projected revenue growth per year.

The owners had a “make whole” agreement in their proposal which was designed to appease the players by honoring existing contracts but it was a bit of a marketing/propaganda ploy as well because essentially what it did was taking salary from players a couple years from now to make up the short fall in the first two years of the CBA.  The owners proposal called this a “Deferred Compensation benefit” but in reality it was a “deferred claw back penalty.”

The solution to this mess, I believe  is for the owners to step up and volunteer to pay the make whole amount which they estimated as being up to $149M in 2012-13 and up to $62M in year 2013-14 for a total of up to $211M (nicely somewhat close to half of the extra money they players want).  As stated above, projected revenue over the 6 year term of the contract is $22.5B.  I propose the owners take responsibility for the make whole portion of their proposal and they can pay the deferred salary in the amount of 1% of overall revenue until the up to $211M is paid in full.  This will essentially peg the players share at 51% and the owners share at 49% until the $211M in deferred salary is paid in full at which time it drops to a 50/50 split.  This seems like a perfectly reasonable compromise to me.  Now lets get it done and get back to playing 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.