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 212012
 

There is an article in the Globe and Mail today discussing the possibility of the NHL expanding to 32 teams, and more specifically Seattle being one expansion possibility.  To many expansion seems counter intuitive considering there are a lot of teams that are already in financial distress that can hardly keep their heads above water as it is.  Some people are actually suggesting contraction is the much better option and on the surface that makes sense.  At least to us the fan.  Drop off the weak teams that can’t support a strong fan base and in the process improve the average talent level among the remaining teams and presumably make the product more enjoyable to watch.  The thing is, from the owners perspective that is the completely wrong way to solve the problem of weak teams.  The solution is rather, bring in more weak teams and collect a hefty fee while doing so.

Let’s put aside the fact that the owners will probably collect $300-400M, possibly more, from expansion fees to say Seattle and Quebec City and lets take a look at the impact such an expansion will have on the financial viability of the other weak teams in the league.

The 2012-13 league wide revenue is/was projected to be $3.3B, or about $110M per team.  But, a sizable portion of that revenue (National TV contracts, league licencing, etc.) is not team generated but league generated.  Let’s suggest that that amount is a mere $300M to make some numbers easy (it is probably significantly higher).  This would make team generated revenue $3B or an average of $100M per team.  Some teams most certainly bring in closer to $150M in revenue and maybe more, the weak teams probably bring in closer to $50M, maybe less.  Lets, for argument sake, suggest the NHL expands by 2 teams that are in markets that will generate slightly below average revenue.  Say $75M/yr.  Now, let’s crunch some salary cap numbers using the old CBA where the players get 57%.

At $3.3B in league revenue, the revenue per team average is $110M and the players allocation is 57%, or 62.7M which makes the salary cap $70.7M and the salary floor 54.7M.

Now, if we add in to $75M revenue generating teams the league-wide revenue rises to $3.45M but the team average revenue falls to 107.8M.  57% of that comes to $61.45M making the salary cap 69.45M and the salary floor 53.45M.

Expanding to 2 smaller markets just caused the salary cap and salary floor to drop $1.25M which essentially cuts the expenses of weaker teams such Coyotes by $1.25M per year.  That is not insignificant to a team losing money.  If you were a salary floor team you can cut your player expenses from $54.7M to 53.45M, about 2.3%, all while collecting $10-15M (per existing team) in expansion fees.  On top of that, you can do it without making the NHLPA mad because the NHLPA will be all for expansion because it means more jobs for them.  The only complaint the NHLPA may have is, why not expand to a big market like a second team in Toronto.

Now, the only loser in all of this is us, the fans.  We get a more diluted product and potentially more diluted rivalries (likely fewer games and less chance of playoff meetings against true rivals) but since when did the NHL ever care about the fans more than the dollars.