FanPost

How to share the Fans' money

Share and share alike. Seems to make some sense doesn't it ? The owners have proposed that they get a larger portion of the pie when it comes to the NHL revenue, starting with their offer of 43%, now at 46% of revenue to the players. Since the players are currently at 57%, there is some symmetry to splitting the whole thing right down the middle at 50/50. So lets be optimistic and say we get there. While we are at it though, why don't the owners show the way by sharing the precious HRR (Hockey Related Revenue) 50/50 with one another. Let's explore how that would look.


A Complex Arrangement

First, lets acknowledge that this whole thing is not like a regular labour negotiation. Normally a business or public service is for the most part a single entity with one revenue stream and one paymaster. They negotiate with a union for the services of labour ( who get different salaries relative to their positions). There is one employer, not 30, and there is no individual negotiation between labour and management. In the NHL scenario, the League and the Players Asssociation ( Union ) are negotiating a deal, but then they have all 700 members in turn negotiate with 30 semi independent management groups on a case by case basis. It's kind of like a provincial government trying to strike a deal with a teachers or nurses union, then allowing each board or region to offer whatever they can afford to attract talent. In a case where some regions have 3 times the money that others do, ( as is the case in the NHL) this means the rich regions would get the talent and the poor ones would get screwed, or go bankrupt just to keep their schools or hospitals open.

Really ? We have a problem ?

I have to admit, I was pretty complacent until a few weeks ago about the potential for a lockout. I mean

the 57% share that the players are currently getting is a number that the League pretty much mandated last time, sacrificing a whole year to get cost certainty. Revenues have grown since, and one potential sore spot ( Atlanta) has been upgraded to Winnipeg, so I thought things were going to be OK. My line of thinking, as I am sure it was for many fans was how does a party in a negotiation get exactly what they want, that is 43% of revenue on $2 billion coming out of the last lockout, and now a mere 7 years later, after 50% growth in revenue, can't make it on 43% of $ 3 billion ? As it has become clearer that the owners are going to pretty militant I have gotten kind of angry, surely to goodness the fixed and administrative costs haven't gone up that much. Even if they have gone up 50%, shouldn't the bottom line be the same ?

As James Mirtle pointed out in the Globe a few weeks back this isn't about the overall numbers, but the fact that some teams still make no money at all, and the few rich guys hiding behind the weak sisters so that they can make even more. Under a $70 m cap the Islanders and the Coyotes are never going to make any money, in fact they won't make any at the $54 m floor either. The Forbes report says the Islanders had $63m in revenue and Phoenix $70. Mirtle's article suggested that the owners were telling the players that there are $35 m in expenses per team not related to players ( Again this seems alot to me since the owners were happy to accept less than $29m per team to cover both operations and profit coming out of the last lockout) . Even if you cut the players by 20%, and have a $56 m cap and $45 m floor, you would have at least 10 teams who would not make a profit at the salary floor !

At the other end there are 5 teams who according to Forbes have revenues of $150 or more so $70m in player costs is really nothing to them. The Leafs have $193 in revenue, so with $35 of operations and $70 of player costs, the Leafs stand to make $88 million under the current system. That's some serious profit over sales, and a tremendous return on investment.

The title of the Forbes article written last November ironically was: "Team Values Hit an All Time High". There are 7 teams whose marked value exceeds $300 million. It doesn't seem that long ago and the NHL was selling franchises for $45m ( Ottawa and Tampa ), and now every team in the league - even if they are not making money are valued at least $150 million. So even if teams aren't making alot of money they are appreciating in value. Nashville paid $80 million to get in 12 years ago and now the team is worth $160m. Doubling value in that period of time is a 6% annual growth rate, so even if you haven't made any money your asset is appreciating at a pretty decent rate.

My favourite example of how owners have made a ton. Peter Pocklington paid $7.5 m to get the Oilers in to the NHL and paid what, a million for Gretzky ? He sold Wayne for $15 m 10 years later, and when the court ordered the Oilers put up to cover Peter Puck's other debts and the team was sold off for a sum approaching $100 million. Talk about a return on investment ! From less than 10 to over a 100 in 20 years, never mind the money that he made along the way.

Shoot yourself in the foot

The problem, as I see it, is the willingness of some owners to circumvent their own system with guaranteed bonuses and bogus contract lengths in order to get an advantage. What is aggravating is that after they cheat their own system then they have the gall to come back to the players for an across the board cut. The contracts deemed legal by the League, of Parise and Suter amount to almost $40 million in cap circumvention by one team in the next 10 years. Both of those guys signed 13 year $98 m deals, with $95 of it in the first 10 years. You know that they are really only 10 year contracts, those guys aren't playing for a million a year at ages 38-40 after making nearly $10m per year. So they should have cap hits of $9.5 m, instead they are at $7.53, and therefore they are cheating by nearly $2m each every year. So when the owners are asking for 12 or 14 million in rollbacks per team, perhaps Suter and Parise's 21 team mates should be asking why they as a group should agree to that and essentially subsidize the superstars with their pay cut.

The underlying problem is the revenue disparity. Gary Bettman called revenue sharing a distraction, but it is in fact the solution. The 12 teams with revenues under $90 million can not make money under the current system even if they only spent to the floor. Cut the players by 20 % and these teams might feel like they are competitive for a while, but they still wouldn't make money if they tried to spend to the new cap. As the big teams make more money and league revenue goes up, pressure goes back on the weak teams as the cap will increase again.

How to solve it

To me a league of anything means that you are aligned with a group of people with similar interests. The teams need to start acting like they are really working together and they could do that with meaningful revenue sharing. You are never going to change the fact that Nashville could match Toronto and New York with revenue, but you could close the gap considerably with all teams contributing and withdrawing from a revenue sharing pool. Instead of a complex system that pays only the weak teams from the strong ones how about a 50/50 split of all revenues ? The principle of this is pretty simple, every night there are 2 teams playing and they should essentially split the gate. This would transform and stabilize the game.

Under this system, using the Forbes numbers the top revenue Leafs would contribute $96.5 million to the pool and withdraw $52.5. At the other end the Islanders would contribute $31.5 and get the same $52.5 out of the pool. Team revenues, instead of ranging from $63 to $193, would be now $84 to $149. Every team in the league could make money at a $45 m salary floor and over half would make money spending to the cap.

The secondary problem is not the current cap but the floor. If you dropped the floor from the projected $54.5 to $45 and froze the cap at last years $65 I think you could proceed without a player salary cut at all.

You could freeze the cap for an additional year, until player costs get down to the 50%. Essentially on revenues or $3.3 B, which is the number I heard yesterday. 50% is $55 m per team. If you had 6 or 8 at the new floor, you'd almost be there right away.

Team Revenue Kept Shared From Pool Total Operating cost Floor $45 Cap $65 Team Value ROE Floor ROE Cap
NYI 63 31.5 31.5 52.5 84 35 4 -16 149 2.68% -10.74%
Phoenix 70 35 35 52.5 87.50 35 7.5 -12.5 134 5.60% -9.33%
Winnipeg 71 35.5 35.5 52.5 88.00 35 8 -12 164 4.88% -7.32%
St Louis 78 39 39 52.5 91.50 35 11.5 -8.5 157 7.32% -5.41%
Columbus 80 40 40 52.5 92.50 35 12.5 -7.5 152 8.22% -4.93%
Florida 81 40.5 40.5 52.5 93.00 35 13 -7 162 8.02% -4.32%
Carolina 81 40.5 40.5 52.5 93.00 35 13 -7 169 7.69% -4.14%
Nashville 82 41 41 52.5 93.50 35 13.5 -6.5 163 8.28% -3.99%
Colorado 83 41.5 41.5 52.5 94.00 35 14 -6 198 7.07% -3.03%
Anaheim 84 42 42 52.5 94.50 35 14.5 -5.5 184 7.88% -2.99%
Tampa 87 43.5 43.5 52.5 96.00 35 16 -4 174 9.20% -2.30%
Buffalo 87 43.5 43.5 52.5 96.00 35 16 -4 173 9.25% -2.31%
Dallas 90 45 45 52.5 97.50 35 17.5 -2.5 230 7.61% -1.09%
Washington 94 47 47 52.5 99.50 35 19.5 -0.5 225 8.67% -0.22%
Edmonton 96 48 48 52.5 100.50 35 20.5 0.5 212 9.67% 0.24%
San Jose 96 48 48 52.5 100.50 35 20.5 0.5 211 9.72% 0.24%
Minnesota 97 48.5 48.5 52.5 101.00 35 21 1 213 9.86% 0.47%
Ottawa 100 50 50 52.5 102.50 35 22.5 2.5 201 11.19% 1.24%
New Jersey 100 50 50 52.5 102.50 35 22.5 2.5 181 12.43% 1.38%
Los Angeles 101 50.5 50.5 52.5 103.00 35 23 3 232 9.91% 1.29%
Calgary 105 52.5 52.5 52.5 105.00 35 25 5 220 11.36% 2.27%
Pittsburgh 110 55 55 52.5 107.50 35 27.5 7.5 264 10.42% 2.84%
Chicago 118 59 59 52.5 111.50 35 31.5 11.5 306 10.29% 3.76%
Boston 125 62.5 62.5 52.5 115.00 35 35 15 325 10.77% 4.62%
Detroit 127 63.5 63.5 52.5 116.00 35 36 16 336 10.71% 4.76%
Vancouver 146 73 73 52.5 125.50 35 45.5 25.5 300 15.17% 8.50%
Montreal 165 82.5 82.5 52.5 135.00 35 55 35 445 12.36% 7.87%
NYR 169 84.5 84.5 52.5 137.00 35 57 37 507 11.24% 7.30%
Philadelphia 170 85 85 52.5 137.50 35 57.5 37.5 290 19.83% 12.93%
Toronto 193 96.5 96.5 52.5 149.00 35 69 49 521 13.24% 9.40%

You will note that 20 of 30 teams increase their revenues as a result of this system

As revenues grow, in whatever market they are in, all teams benefit. This would motivate the League to get out of dead markets as soon as possible.

If Snider, Jacobs and the like can't stomach giving 50% in to the revenue sharing pool, how about a third ? Here is what the numbers look like for that.

Team Revenue Kept Shared From Pool Total Operating cost Floor $45 Cap $65 Value ROE Floor ROE Cap
NYI 63 42 21 35 77 35 -3.0 -23.0 149 -2.0% -15.4%
Phoenix 70 46.67 23.33 35 81.67 35 1.7 -18.3 134 1.2% -13.7%
Winnipeg 71 47.33 23.67 35 82.33 35 2.3 -17.7 164 1.4% -10.8%
St Louis 78 52.00 26.00 35 87.00 35 7.0 -13.0 157 4.5% -8.3%
Columbus 80 53.33 26.67 35 88.33 35 8.3 -11.7 152 5.5% -7.7%
Florida 81 54.00 27.00 35 89.00 35 9.0 -11.0 162 5.6% -6.8%
Carolina 81 54.00 27.00 35 89.00 35 9.0 -11.0 169 5.3% -6.5%
Nashville 82 54.67 27.33 35 89.67 35 9.7 -10.3 163 5.9% -6.3%
Colorado 83 55.33 27.67 35 90.33 35 10.3 -9.7 198 5.2% -4.9%
Anaheim 84 56.00 28.00 35 91.00 35 11.0 -9.0 184 6.0% -4.9%
Tampa 87 58.00 29.00 35 93.00 35 13.0 -7.0 174 7.5% -4.0%
Buffalo 87 58.00 29.00 35 93.00 35 13.0 -7.0 173 7.5% -4.0%
Dallas 90 60.00 30.00 35 95.00 35 15.0 -5.0 230 6.5% -2.2%
Washington 94 62.67 31.33 35 97.67 35 17.7 -2.3 225 7.9% -1.0%
Edmonton 96 64.00 32.00 35 99.00 35 19.0 -1.0 212 9.0% -0.5%
San Jose 96 64.00 32.00 35 99.00 35 19.0 -1.0 211 9.0% -0.5%
Minnesota 97 64.67 32.33 35 99.67 35 19.7 -0.3 213 9.2% -0.2%
Ottawa 100 66.67 33.33 35 101.67 35 21.7 1.7 201 10.8% 0.8%
New Jersey 100 66.67 33.33 35 101.67 35 21.7 1.7 181 12.0% 0.9%
Los Angeles 101 67.33 33.67 35 102.33 35 22.3 2.3 232 9.6% 1.0%
Calgary 105 70.00 35.00 35 105.00 35 25.0 5.0 220 11.4% 2.3%
Pittsburgh 110 73.33 36.67 35 108.33 35 28.3 8.3 264 10.7% 3.2%
Chicago 118 78.67 39.33 35 113.67 35 33.7 13.7 306 11.0% 4.5%
Boston 125 83.33 41.67 35 118.33 35 38.3 18.3 325 11.8% 5.6%
Detroit 127 84.67 42.33 35 119.67 35 39.7 19.7 336 11.8% 5.9%
Vancouver 146 97.33 48.67 35 132.33 35 52.3 32.3 300 17.4% 10.8%
Montreal 165 110.00 55.00 35 145.00 35 65.0 45.0 445 14.6% 10.1%
NYR 169 112.67 56.33 35 147.67 35 67.7 47.7 507 13.3% 9.4%
Philadelphia 170 113.33 56.67 35 148.33 35 68.3 48.3 290 23.6% 16.7%
Toronto 193 128.67 64.33 35 163.67 35 83.7 63.7 521 16.1% 12.2%

So even pooling 1/3 of HRR allows everyone except the Islanders to make money at a $45m floor. 13 teams could make money spending to the cap. This is based on $3.15 B total revenue from the November report, so it would be better at $3.3. Many teams would have revenues very close to what they would now get, only the bottom 6 end up with more than $8 million more.

Other Alternatives

Contraction

Why not contract the League by 2 teams instead ? The League already owns Phoenix anyway, and the Islanders aren't getting a new arena. Pay Mr Wang $150 m for the Islanders and fold up the Coyotes and suddenly $70 million in annual losses disappears. Do a dispersal draft and have some amnesty buyouts. Recoup the $150 later in expansion fees, but make sure the applicant has a solid buisness plan !

Premier League

Or, why don't we scrap the whole thing and make a Premier League and a secondary league. No salary cap or floor, teams can sell their players off like assets as happens in European football. One draft so the weak teams in the second division could draft and develop the top guys, and then sell them off to richer teams. Start with 20 teams in the Premier League, and the 4 who fail to make the playoffs get relegated to Division 2. Expand Div 2 to at least 12 teams, maybe 16, with the final 4 getting pushed up every year.

Under a system such as this there is no telling how much the Leafs or Flyers would spend on payroll, or how much they would be willing to subsidize the weaker teams by buying the contracts of star players. Two teams would become champions every year one in each division, and the teams with weaker revenues could be competetitve in the secondary division and the occasional foray in to the Premier league.

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