Free Agency Shows Why The NHL Is In Trouble, Headed For Lockout

NHL Fans, prepare yourself for a long labour stoppage after the 2011-12 season.  And you can place the blame squarely on the owners of the “Have” teams for the unrest.  Going into the last lockout in 2004-05, Gary Bettman was steadfast in demanding  “cost certainty” and when the NHLPA finally agreed to the Salary Cap, the NHL claimed “victory” and wanted the NHLPA to be a “partner” in the league going forward.

The A salary cap is a good thing for the NHL.  Having a set value to the amount a team can spend and guaranteeing the players a certain percentage of revenues is a good business model, in theory.  However, the problems with the current cap system are massive and will likely take a lengthy labour stoppage to solve.  The two major problems as I see it boil down to:

  1. Lack of significant revenue sharing among the NHL clubs
  2. Assigning average cap values instead of actual salaries paid when determining cap hits

 

ONE FOR ALL AND ALL FOR ONE ME….

It is very tough for the NHLPA to be partners with an organization that can’t partner up within its own group.  The NHL owners are clearly divided into two groups – the Haves and the Have-nots.  The Haves are the teams like Toronto, New York, Philadelphia and Detroit, for example, who love the Salary Cap because they lacked self control, and spent willy-nilly to buy players, and then spent even more to try to cover up mistakes.  They NEEDED the cap in place to control how much they spent because they couldn’t help themselves.  The Have-nots didn’t NEED the cap, because for the most part they could control their own spending.  The quality of the Have-not teams was often inferior because they couldn’t compete with the Haves for the top players, but then were still expected to sell out their arenas to fans watching mediocre players.

The NHL is run by the Haves, they are in control of the money and they have the Commissioner’s ear and his attention.  After all, the top revenue clubs bring in more money, so why wouldn’t they have more say, right?  The revenue sharing plan in the CBA is a joke, as is the “partnership” among owners.  If revenue was shared more equally among all teams, then each team would have a relatively equal starting base.  Then, and only then, will the Have-not markets be able to begin to focus on both getting a product on the ice that can compete AND making the public, most of whom are not born and raised hockey fans, aware that hockey is the best game on earth, played by the best athletes on the planet.  The expansion teams in the southern states paid millions upon millions of dollars to bail the league out in sad financial times by paying exorbitant expansion fees to join an exclusive group of people who are only in it for themselves.  They were then hung out to dry by the very teams they bailed out.

The current restrictions in order to qualify for revenue sharing in the NHL are setting teams up for failure.  Those who need it, essentially have to de-value their product in order to qualify, since they need to sell a certain percentage of seats to qualify.  This means they have to greatly discount their seats (or purchase seats themselves) to come close to the 80% capacity they need in order to get a slice of the pie.  Discounting the seats serves the short term, but reduces revenue and in effect cheapens the product because of the “you get what you pay for” mentality.  If you pay $10 for a lower bowl seat, then the product must not be very good, right?

Now factor in that when the Cap was put in place, the most a team could spend was $39 million per season (2005-06), which was supposed to even the playing field for the Have-nots.  Now, for the 2011-12 season, the salary cap is $64 M, with a FLOOR of $48 M.  In 7 seasons, the teams have gone from not being allowed to spend more than $39 M to being forced to spend at least $48 M.  What has driven the revenues up has been the big market teams and the Canadian teams, who by virtue of currency exchange rates alone have increased their revenues substantially.  The total revenue goes up, so does the cap.  But the increased revenues are not split equally so the Haves get to line their pockets, while the Have-nots struggle even more than they did before the cap.

For example, take the Nashville Predators.  According to Forbes Magazine in their annual snapshot of NHL markets, the Preds’ operating income for the four years prior to the lockout was $22 M total, or an average of $5.5 M per year.  In the 5 years since the lockout (up to 2010), their operating income was $-22 M, or an average loss of $4.4 M.  So the salary cap in fact hurt the Predators. Pre-lockout they paid about $29 M in salaries (2004)  and last season they paid $46 M in player costs (just over the $43.4 M floor).

On the flip-side, the Detroit Red Wings.  According to the same Forbes Magazine report, the Wings spent $80 M in player costs in 2004, the year before the lockout.  Their operating income for the 4 years leading up to the lockout was $-39 M.  Once the reins were put on the Wings in terms of forcing them to adhere to “responsible” salary expenses, they had an operating income of $75 M for the next 5 years, or an average of $15 M per season.

So who was the demand for a salary cap designed to help?  It has hurt the Have-not teams, and served to fill the wallets of the Haves much to the detriment of  their Have-not “partners”.  The extra revenue doesn’t go where it is needed.

The final team I will look at in some detail is the Atlanta Thrashers Winnipeg Jets.  The population of the Metro-Atlanta area disqualified the Thrashers from participation in the revenue sharing program.  In the 4 years pre-lockout, (again from Forbes Magazine) the Thrashers had a operating income of $10 M, or $2.5 M per year. After the lockout, when they were forced to meet the ever-increasing salary cap floor, the financial losses piled up to the tune of  $-27 M or almost $-5.5 M per year.  So the lack of local ownership candidates stepping up can not be surprising, and resulted in the move to Winnipeg.  They went from a franchise who were managing to stay afloat to one that could no longer tread water, due to the fact that they were being forced to spend more money, and not getting any additional help in return.

(The entire Forbes Magazine report can be seen HERE.  You can then click on each team for more detailed information. It is a very informative look at the past few years from an independent perspective.)

THE NHL CHAIN IS ONLY AS STRONG AS ITS WEAKEST LINK

The NHL may be in a position where it has the most revenue it has ever had, but until a more equal revenue sharing agreement exists among the 30 “partners”, there will always be problems in some markets.  Can you really expect the owners of the Predators or Blue Jackets (for example), a team that spends more in salaries, player expenses, travel etc. than it brings in, to spend additional sums of money on marketing, creating even greater losses?  All this while watching his “partners” in Detroit and Toronto make more profits than they know what to do with.  They are all partners in the same league, and in order to thrive rather than survive, all markets must be strong.

Yes, the NHL signed a brand new $200 M TV deal with NBC and Vs. in the US.  All teams will share in that revenue, but how often will Columbus, Phoenix or Florida be shown on National TV?  The national games will undoubtedly always feature Pittsburgh, Philadephia, Detroit, Washington or the NY Rangers as they have in the past.  The focus will be on the HAVES.  The Have-nots will continue to toil in relative obscurity without any effort to promote them on the part of the Haves.

LOOPHOLES MAKE THE WHOLE NHL SWEATER UNRAVEL

In the legal system, the criminals always seem to be two steps ahead of the law.  The same theory applies to the NHL CBA.  Those looking to find loopholes find them quicker than they can be closed.  Starting with Lou Lamariello stashing salaries in the minors, and culminating with the front-loaded, multi-year contracts (Ehrhoff, Richards) that have additional years tacked on to bring down the cap hit, people on both sides are always looking for ways to get around the cap.  By hook or by crook, they find a way.  Once it is done the first time, the horse is out of the barn and others follow the example, creating a downward spiral.  If both sides would have adhered to the spirit of the CBA rather than finding ways around it to benefit themselves, it might have worked.  But the current system is broken beyond repair and will have to be demolished and rebuilt next summer, and probably beyond.  All because the owners STILL can’t help themselves, and cut off their collective noses to spite their face.

AVERAGES DON’T WORK

Perhaps it is time to move away from calculating the cap hit using average salary for the length of a contract, and go to a harder, actual number.  This will avoid the front-loaded deals and the tack-on years to bring the cap hits down.  That way, teams that have the money can’t buy players by writing $20 M in cheques in one calender year for a player and only be forced to carry a $6.66 M cap hit for the same player.  Doesn’t really make sense, does it?  If a player makes $10 M in a season, his cap hit should be $10 M for that season.  No more $1M seasons at the tail end of a $100 M contract.  That would make teams accountable for their spending and there could be no trickle down effect.

In the current system, teams can exceed the cap value in actual payroll, then offload the cap hits when the actual salary goes down, and the player can no longer perform to his cap hit.  They can send those players to those Have-not teams who need big cap hits to reach the floor, but don’t have the money to pay the same level of salary. Then the Have teams can bulk up again, giving front-loaded contracts.  This is a vicious cycle that will see phantom payroll values and put the league right back into the spot it was before the lockout, even if on paper it looks ok.

CONCLUSION

When a team like Florida is forced to spend money it doesn’t have, on players that don’t deserve the full value, in order to reach an arbitrary salary target, you know there is something drastically wrong with the system.  Gary Bettman wants the NHLPA to be a partner in the league, but as long as there are such diametrically opposed value systems in the NHL boardroom itself, it  will be impossible for the NHLPA to truly partner with them going forward.  The NHL needs to get its act together and become one unit before the players can truly have a stake in whether the owners succeed or fail.   Until this happens, teams will struggle and move around and the NHL will never truly gain a foothold in the US markets that is covets so dearly.

 

The NHL labour stoppage will:

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I truly hope I am wrong, but my best guess is that the stoppage will kill the 2012-13 season and possibly more, much to the detriment of the momentum the NHL has built up in the past few years.  Imagine how much better it would have been with a system that worked?  A real solution to the problem is convincing the Haves that they need to sacrifice some profit in the short term to create a better product throughout all 30 markets in order to benefit all franchises in the long term.  Their hoarding of the revenues is holding the newer, weaker markets back and not allowing the league to reach its full potential.

This isn’t intended to allow the NHLPA off the hook, but until the 30 owners can get their ducks in a row, and on the same page, the players will be constantly pulled in two different directions and can’t possibly satisfy both factions.  Once the owners are truly united for the sake of the game, then and only then can the NHLPA become a true partner for the development of the future of the sport.

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Tags: Free Agency 2011 Gary Bettman Labour Stoppage Lockout NHL Revenue Sharing Salaries Salary Cap Strike

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