NHL Revenue and how it’s confusing the issue – Part II

In Part 1 of this series, we looked at the fact that the NHLPAs recent CBA proposals are tied to NHL revenue growth, as well as the possibility that this growth is unsustainable. Let’s take a further look at that possibility here.

Let’s be clear – the NHL never expected its revenue to grow as quickly as it has since the last lockout. If they had, they would never have setup a system in which the salary floor could ever have risen as high as $54 million. Why did the numbers grow so quickly? Well, there’s been some organic growth, and some of the poorer markets have acquitted themselves well since the last lockout. But the majority can be attributed to two reasons which might have been unthinkable during the last lockout: a Canadian dollar that rose to par with the US dollar, and skyrocketing ticket prices in a few major markets.

Let’s first take a look at the organic growth. According to ESPN.com, nine NHL cities have seen attendance increases of more than 10% since the 2003-04 season. Remarkably, Pittsburgh’s attendance has risen 56.3% while Chicago’s rose 62.50%, increases which can be attributed to much-improved teams in those markets (and a new building in Pittsburgh). Even strong markets like Calgary and Boston rose over 16%. Meanwhile, just 4 teams have seen attendance decreases of over 10% during that period – Dallas, Colorado, Columbus and Phoenix. In all cases, it would be fair to attribute those decreases to declining team success, as well as ownership issues in the case of Dallas and Phoenix.

The overall attendance numbers for the NHL are up 5% since the last lockout – not overwhelming numbers, but healthy growth. Considering that a number of markets are selling out every night, you could argue that the numbers might be artificially constrained by building sizes. Assuming that ticket prices stayed the same or rose slightly over the past 7 seasons, this should have translated into modest revenue increases for the NHL.

But there’s where it gets a little sketchy. Remember that talk about NHL teams lowering ticket prices after the last lockout? Not so much. According to agent Allan Walsh, “The average NHL ticket price has increased 39% since 2004”. ESPN reports that the average ticket price last season was $57.10. Now, no-one should have put much stock in the idea that ticket prices would go down after the last lockout. NHL tickets are a commodity, whose prices are governed by supply and demand. The NHL product itself has arguably become more entertaining due to tighter enforcement of obstruction rules, and as such fans have returned in droves. But are going to see another 40% increase in ticket prices over the course of this next CBA? This guy doesn’t think so, and points to a recent poll by Leger Marketing to prove it. He says that “70% of Canadians making less than $40,000 a year say they haven’t attended a single NHL game in the past five years,” and that the NHL has priced itself out of reach of the average Canadian. Certainly in many Canadian cities, the NHL has become a big ticket, where the best tickets are owned by corporations who want to impress their clients. You don’t see a lot of dads taking young kids anymore – it’s just too expensive. The average ticket price in Toronto is now $123. Meanwhile, in cities where there are lots of seats available, teams are still having to make tickets a bargain in order to draw a crowd. It’s just not realistic to think that even the biggest markets can continue to absorb huge price increases, nor is it realistic to pretend that sun-belt markets will ever be paying big-dollar prices for tickets. Do you think Winnipeg, whose tickets average $99 already, is going to go for $140 tickets in 5 years? Or that Nashville fans will pay what Rangers fans pay now? Unlikely.

The biggest concern, however, is the effect of currency on revenues. In the past decade, the Canadian dollar has risen from around 63 cents US to just over par, a climb of approximately 60%. Remember the Canadian Relief Program, the supplement for northern teams to compensate for the fact that they were paying US salaries with Canadian dollars? These days the seven Canadian teams are accounting for around 40% of the NHL’s revenue. This has been a tremendous boon for the NHL, and one which they could not have fully predicted. Unfortunately, it’s not sustainable. There is very little likelihood that the Canadian dollar will rise another 60%; in fact it might be reasonable to think that it could drop somewhat as the US economy recovers.

If you combine the 60% rise in the Canadian dollar with 40% increases in ticket prices, it’s likely that gate revenue from Canadian teams has increased 120% since 2004. Undoubtedly there is still room for growth in revenue, but growth at this rate is absolutely unsustainable. Given that the Canadian teams account for around 40% of NHL gate revenue, it has to be a concern for the NHL when the NHLPA’s proposals make assumptions of 5% year-over-year growth. It’s not inconceivable that revenues could decrease slightly during one or two of the years covered by the next CBA. Thus, don’t be surprised as the NHL rejects player proposals which guarantee player-revenue increases.

In Part 3 of this series, we’ll take a look at the myth and reality of profit and loss for NHL teams.


NHL Revenue and how it’s confusing the issue – Part 1

The more one reads about the current NHL lockout, the easier it is to become confused about the revenue issues.  In part, this is because the issues are complex. It’s also because both the league and the NHLPA muddy the waters with their terminology and statistics.

At the risk of seeming a bit pretentious after 4 whole blog posts, I’m starting a three-part series examining some of what’s been said and written about NHL revenue (and a little on profit).

In this opening salvo, let’s take a look at the recent rhetoric from the NHLPA regarding revenue splits. On October 18, the NHLPA made three mini-proposals to the NHL, attempting to bridge the gap on revenue sharing. James Mirtle of the Globe and Mail summarized them succinctly. In the first proposal, “Players would receive a set revenue figure for a small raise in Years 1, 2 and 3 but would have their salary frozen at the Year 3 number until their share hit 50 per cent. If league revenues increased at 5 per cent a season, the players would receive a share of 55.4 per cent in Year 1 and 50 per cent in Year 5.”  The NHLPA trumpeted this as a big concession in which they agreed to a 50/50 split of revenue. To be fair, it’s a big step from the guaranteed 57% they received in the previous CBA. But this proposal only gets to 50/50 if NHL revenues continue to increase as quickly as they have the past few years. Let’s say, just for the sake of argument, that the lockout really affects the fan base, and the NHL revenues begin a slow decline over the next several years. With fixed revenue amounts, actually increasing over the first 3 years, that would have the effect of actually increasing the players’ share above that previous 57% number. You could say that decreasing revenue is the fault of the owners, especially having tested the fanbase with this lockout, but you definitely can’t say that the players have agreed to a 50/50 split. They’ve agreed to a plan that could conceivably end up in a 50/50 split one day, but that’s a far cry from what the owners are asking for. (And I’m not even confusing the issue further by talking about the so-called “make-whole” proposal, which would return some money to the players over the first few years in order to soften the blow of an immediate move to a 50/50 split.)

We’ve heard the the league complaining that the NHLPA has refused to negotiate off the league’s proposals. Ever wonder why that’s a big deal? Why can’t the league work off the players’ proposals? Because the players, until this week, have never proposed any deal which tied the cap to league revenue on a percentage basis. And while they did finally do so this week, they also included a “ratchet” clause, which essentially means that as revenues change over time, the dollar amount of the players’ share can increase but never decrease. (Think the league’s going to agree to that one?) Every proposal by the players thus far has had guaranteed minimum dollar figures, regardless of what happens to league revenues. The NHL prefers to share the risk and reward of revenue movement, which is why they’ve appeared appalled at the players’ proposals so far.

So why haven’t the players wanted to go to a percentage split? At least in part, it’s because they wanted to try to hold the league’s feet to the fire on the revenue split in year one. The NHLPA has argued that revenue losses due to the league-imposed lockout should be the responsibility of the owners. Let’s back up and think about it. They’ve proposed to have their share go up slowly – for the sake of argument, let’s say $1.8B in year one, $1.85B in year two, etc., and as league revenues grow at 5% per year, maybe from $3.3B in year 1 to $3.45B in year 2 and $3.6B in year three, pretty soon you’re down to 54% instead of 57%.  Keep going and you eventually hit 50%. But what happens in year 1 when the season is only 64 games, or even 48 games as we had in 1994? League revenue goes way down in that year – given that the league is largely gate driven, every game lost might mean $30-$40M. In a 64-game season, you might reasonably assume that a $1.8B player share would be around 70% of league revenues. In a 48-game season, it might be more like 90%. With that as a starting point, eventually agreeing to a pro-rated number for this first shortened season might seem like a huge concession. Remember the league’s first proposal, which was completely unreasonable? Well, so is the idea of a non-prorated amount for year one, aka. making the owners responsible for the losses incurred by the lockout.

After this week’s proposal, NHLPA head Donald Fehr sent a memo to the players, informing them that the owners had declined their offer. In it, he said “Under our proposal, it is now undisputed that the gap is only $182M over 5 years.” Since then, many respected journalists have parroted that statement, yet NHL Commissioner Gary Bettman has said that the two sides are still far apart. You can see why they’d disagree, given the numbers above.

All of this leads me to wonder why the NHLPA has been so set on fixed numbers rather than percentages. I suppose it could just the year 1 issue, but I don’t think so.  I think that the players think the current rate of growth of league revenue is unsustainable, thus they’re better off locking in some numbers rather than allowing their share to float up and down along with league revenues. So, in part 2 (coming soon), let’s take a look at revenue growth, the myth and the reality.

Pass or Fail – Bure to the rafters in Vancouver

On Monday, the Hockey Hall of Fame finally did what they should have years earlier, in admitting Pavel Bure.  Bure was one of the most exciting players in league history, but had his career cut short by injury, which, presumably, is why they made him wait six years.  He finished his career with 0.623 goals per game, third among the 100 highest goal-scorers of all time, behind only Mario Lemieux and Mike Bossy.  Suffice it to say, he loved scoring goals, and he did so better than almost anyone else, during an era in which other players were allowed to waterski behind him to slow him down.

Monday’s induction kicked off a fresh round of debate as to whether Bure’s number should be retired in Vancouver.  For a time, Bure was one of the most-loved Canucks ever.  From his first shift against the Jets, he lifted fans out of their seats.  For the first time ever, the Canucks had a star, and Vancouver fans could hardly believe their eyes.  In his second and third seasons, Bure scored 60 goals, proving him an elite talent, and it appeared that the best was yet to come.

Then came the 1994 playoffs, and with a 2nd-overtime series winner against the Flames in the 1st round, Bure became a legend.  His 2nd-round flying elbow on Shane Churla made it clear he wouldn’t take any crap from anyone, and had the Canucks won game 7 in the Stanley Cup Finals, Bure could have run for mayor.

What happened instead was a series of rumours that Bure, whose agent had been renegotiating his contract, had threatened to pull himself out of the lineup during the playoffs (something GM Pat Quinn publicly and vehemently denied).  Ultimately Bure signed a new 5-year deal, but he later admitted he had already asked to be traded.  It’s never been clear why Bure wanted out of Vancouver, though it’s commonly thought that he felt mistreated by Canucks management.  It might have been reasonable for him to feel that way – GM Pat Quinn, while generally an honourable sort, has been accused of a number of less-than-friendly tactics, and there’s enough smoke that there must be some fire.

Then came the 1994 NHL lockout, after which Bure held out for 4 days and eventually sued the team, over a claim that his contract was guaranteed to be paid even during a lockout.  It can’t be a good situation to be playing for a team that you’re also suing, and the shortened season wasn’t among the best for either the team or for Bure.

Before the 1995-96 season, Bure changed his jersey number from 10 to 96, then tore his ACL.  The following season he played through a neck injury and his point totals suffered.  In 1997, he switched back to #10, and his point totals rebounded – he finished the year in 3rd place among the NHL’s scoring leaders.  But another report of a trade request proved accurate, and Bure chose not to play again for the Canucks, finally forcing a trade to Florida for Ed Jovanovski and some spare parts.

I tell that whole story to illustrate that it’s fair to say that Bure’s time in Vancouver was a mixed bag.  Ask some Canucks fans for adjectives describing Bure, and you’ll get “selfish” just as often as you’ll get “incredible”.  The way he left Vancouver has soured some on Bure, and that group of people would vote against retiring Bure’s number.  Some have even said that Bure wouldn’t want to attend a retirement ceremony out of fear that there would be as many boos as cheers.

So, should Bure’s sweater be retired?  The arguments for retiring Bure’s are somewhat obvious – he’s still 7th in Canucks team scorring, 5th in goals, 3rd in hat tricks, 4th in game-winning goals, 2nd in power-play goals, 1st (by a long shot) in short-handed goals, 3rd in playoff scoring, 2nd in playoff goals; he also had the most goals in a season (60, twice), and most goals and points in a playoff season, not to mention his leading role in the team’s magical playoff run in 1994.  He was the most exciting player in team history, and he was the person who turned many non-Vancouverites into Canucks fans.  In the 90s, if you saw a Canucks jersey outside of Vancouver, it was likely Bure’s.  Quite simply, Vancouver has never had a player like him before or since.

However, the arguments against retiring his jersey are also out there.  The way he left Vancouver is the one quoted most often – when a guy can’t wait to get out of Vancouver, it’s not hard to argue that he doesn’t belong amongst the team’s most revered players in history.  This argument is also the most petty.  It says nothing about the way he played or how beloved he was for most of the time he was here.

People outside Vancouver point to his career stats and the fact that he’s been inducted into the Hockey Hall of Fame, and say if he’s good enough to be honoured among the league greats, how could he not be good enough to be one of the top Canucks ever?  This argument has merit, but only to a point.  Bure spent only 7 of his 13 seasons in Vancouver, and had two of his best four years offensively while in Florida.  428 of his 702 games were in Vancouver, along with 254 of his 437 goals, but that also means that much of his career success came in Florida, and to a lesser extent in New York.  Compare that to Markus Naslund, who spent 884 of 1117 games in Vancouver, and scored 346 of 395 goals there.

There’s also an argument that can be made for the Canucks having some specific criteria for their retirees.  Each of the 3 who were previously honored were longtime captains and each was very involved in the community, to go along with team-leading career statistics.  Bure, on the other hand, was rarely seen in the community outside of Vancouver’s night-life scene – he preferred to make his statements on the ice, and as a young kid only learning to speak English, he was never comfortable as a spokesman for the team.

Personally, I have a different argument that gives me pause.  The Canucks, as a 41-year-old franchise, have 3 sweaters in the rafters of Rogers Arena already.  Few in Vancouver could argue with those choices.  And let’s be honest, if Daniel and Henrik Sedin finish their careers in Vancouver, theirs will go up as well, for many of the same reasons we see Linden’s and Naslund’s up there, bringing the total to five, or six if you include Bure.  Now, let’s just dip into fantasy for a moment – let’s say the Canucks win a cup or two in the next 5 years.  I have to think that would ultimately result in a couple more retirements – Kesler, maybe Bieksa, possibly Schneider depending on how the rest of his career goes and how long he stays in Vancouver.  Now you’re up to somewhere between 7 and 9.  Let’s compare that to the Detroit Red Wings, an original-six team with 11 cup wins.  They have six jerseys retired, soon to be 7 once they put Lidstrom’s up.  Does it seem right that Vancouver, with no cups and a 40-some year history, should have so many numbers retired?  At some point you have to hold the bar high in order to keep the totals from getting ridiculous.  Should Bure be above the bar? Arguably, yes, but you can definitely debate it.  Some would say that if it’s debatable at all, then there should be no debate.

Regardless of how you see it, it’s fair to say that it’s not a slam-dunk either way.  Most-loved or most-hated, or both?  It’s clear that he should be honoured in some way by the team, but is retiring his jersey the best way?  It’s been reported that Bure was offered a spot in the Canucks’ “Ring of Honour” but declined.  If that were true, then it would be jersey retirement or bust.  Tough call.

What say you?  Bure’s #10 to the rafters – Pass or Fail?

NHL Lockout – what are the goals of the league?

In my last post, I discussed the difference between positional and interest-based negotiation.  I also mentioned that I believed the NHL has been mostly using positional tactics, while the NHLPA has dipped somewhat into the interest-based mode.

I’m curious, what would happen if the two parties engaged a mediator who employed an interest-based mode, where the first step would be to explore the underlying needs and wants of each party before proposing solutions or terms.  What would be the underlying concerns for the owners?

I’m not in the heads of either the owners or the commissioner, but here are what I think are their primary motivating factors:

  • League Parity:  The league, in the person of commissioner Gary Bettman, has worked hard not to go back to the days where Detroit and New York had $70M payrolls while the Oilers and Predators tried to get by on $20M or so.  Fans in Edmonton can lament endlessly about star players lost for financial reasons, including Doug Weight and Jason Arnott (not to mention Wayne Gretzky and many of his 80’s era peers).  No-one I know wants to return to those days, thus the league needs a system where team payrolls are in relative sync with one another.  This is why they’ve stuck with a system which has the gap between the Salary Cap and Salary Floor at a fixed number ($16M under the previous CBA) rather than a percentage-based calculation.  From a certain viewpoint this appears ridiculous – in the first year after the last lockout, the cap and floor were $39M and $24M, but in 2011 they were $65M and $51M.  This resulted in some teams (Hello Florida!) overpaying for washed-up veterans just to reach the floor; for that reason I would also argue that this has resulted in salary inflation.  But, to be fair, this policy has also resulted in a different Stanley Cup winner each year of its existence, and no real excuses for teams to perform poorly – if your team is terrible, it’s because it’s terribly managed, not because of finances.  However, it has also resulted in teams being forced to spend significantly beyond their means.
  • Ability to make a profit in a variety of situations:  Most of the league’s owners are, at their core, businessmen.  To be fair, some of them seem to see their teams as rich men’s toys, but most of them are in it to make money.  This doesn’t seem unreasonable to me – they commit hundreds of millions to players and other operating costs, and they should be afforded at least some possibility of seeing a return on that commitment.  Some would argue that the profit comes when the team is sold for double its original price, but that’s only valid for someone who wants to flip a team – many of the NHL’s owners are longtime contributors to the league and have no interest in selling.  Others would say that the profit comes from parking, concessions, and other events in the building, but not every team owner also owns their team’s arena or has a beneficial arrangement to share non-hockey revenue.  With all of these different ownership circumstances, what sort of system would allow each team a reasonable opportunity to make a profit?  One “easy” solution that the league has proposed is to simply reduce across the board the percentage of their revenue paid to players, but the players have reasonably seen this as merely a way for the richest teams to get richer.
  • Ability to realize the benefits of growing their markets:  Imagine you’re a mid-market team that has done a great job to build your fan base and manage the on-ice product, and you’ve started becoming significantly profitable after losing money for a number of years.  Would you then want to give some percentage of those profits away to teams which have built perennial losers, or teams who overpay for washed-up players?  This is one of the major arguments against meaningful revenue sharing.  If you’ve done a good job managing your business, you’d like to think that you’d be able to realize the benefits.  Revenue sharing is an easier sell in the NFL, where their massive TV contracts and lucrative product licensing generate billions in centralized revenue which can be distributed evenly among the teams.  But the NHL is primarily a gate-driven league, where the most successful teams have spent years in some cases to build their markets.  The NHLPA would like to see more meaningful revenue sharing, and it’s likely that the NHL will agree to increase the pot somewhat, but it would be surprising to see significantly higher-levels of revenue sharing.
  • Ability to keep winning teams together:  In addition to an increased share of the revenue, the owners are also demanding changes to arbitration rights, a 5-year cap on contracts, and a delayed progression to unrestricted free agency, as they believe these terms will help control escalating salaries.  The players have asked “If we’ve agreed to a 50/50 split of revenue, why do you care how it’s spent? Why are you so hung up on contracting terms?”  The answer to that question is best illustrated by looking at the Anaheim Ducks during the summer after their cup win.  The Ducks won the cup in 2007 with a team loaded with some strong defensive veterans and a youth-filled forward core.  Their line of Ryan Getzlaf, Dustin Penner and Corey Perry were all playing on their first contracts, and thus cost their team little in actual salary or cap hit.  Over the next year or two, GM Brian Burke would need to sign these three budding stars to their second contracts at a reasonable price in order to continue to challenge for future cups.  Then, out of nowhere, Oilers GM Kevin Lowe signed Dustin Penner to a 5-year, $21.25M offer sheet.  Burke was livid, and accused Lowe of destroying the notion of the “second contract”, ie. a few more relatively affordable years before the player cashed in with a contract that took him into his UFA years.  Since that time, Burke has been proven correct, though Lowe can’t shoulder the blame alone.  League GMs, in order to hold onto their top talent, have since given lucrative second contracts to many players which tie them up for years, sometimes at incredible cost.  To a certain extent, this has been exacerbated by the contract terms ceded to the players in the last CBA negotiations (negotiations which the owners supposedly “won”).  In order to sell a hard salary cap to the players, the owners agreed to loosen rules related to unrestricted free agency.  Prior to the last lockout, players could become eligible for Unrestricted Free Agency at age 31, but the last CBA allowed players to become UFAs at age 27 or after 7 years of NHL service (keep in mind that some elite players start in the league at age 18).  Now, in order to keep an elite player, owners would have to open up their wallets.  But what happens once you’ve committed huge portions of your salary cap to a few elite players?  The rest of your team becomes disposable and interchangeable.  You know who your top line and top 2 or 3 defensive will be, but beyond that you have to look for bargains every summer.  Fans who used to identify with the 2nd-line supporting cast and 3rd-line grinders now see them move on to another team after a year or two.  The owners would prefer to see a more organized distribution of money, where elite players can still be paid what their worth, but perhaps a bit later in their careers (and paid for performance rather than potential), allowing supporting players to stick around a bit longer.
  • Fewer loopholes:  NHL Commissioner Gary Bettman appears to hate loopholes, and wants them closed or at least significantly tightened.  Truthfully, this is not an underlying reason, but to be honest I haven’t determined precisely why Bettman has pursued this so doggedly.  Most of the loopholes involve finding creative ways to circumvent the salary cap.  One such loophole has seen Wade Redden playing in the AHL for the past 2 years.  Redden was good enough to play in the Rangers’ top 6 defencemen, but with his $6.5M cap hit they’d rather use the money somewhere else – thus, they assigned him to the AHL, essentially burying his cap hit in the minor leagues.  Another loophole comes in the form of so-called “back-diving contracts”, contracts with big dollars in the early years, and smaller salaries in the last few years, keeping the salary cap somewhere in between those high and low numbers.  The trick here is that some of these contracts seem to go well beyond the point where the players might reasonably be expected to retire, thus forfeiting the lower-dollar years – this effectively allows a team to pay a player more than his cap hit would otherwise indicate.  In fact, Bettman has generally said that he wants to eliminate all long-term contracts, even those without the back-diving provisions, as changing circumstances might make those contracts eventually seem much less reasonable than they seemed when they were signed.  I would put most of these contract situations in the category of “saving the owners from themselves”, ie. reducing the ability for teams to get themselves into financial trouble, and in fact that might well be the underlying reason for the league’s desire to close these loopholes.

I’m sure that there are more factors which are important to the league and its owners, but I believe that these 5 main interests account for the majority of the league’s behaviour to date in these negotiations.

What good is it to know these underlying reasons?  Perhaps not much.  However, it might help one to understand why the league has made some of the demands they have.  And, if a mediator were to step in at some point, perhaps some brainstorming would result in some new ideas for solving the league’s problems.  Wishful thinking?  Probably, but I’d sure like to see what would happen.

Wherein I begin my blogging career

I’m not really a blogger, or even a writer. I’m not an NHL insider. I have no connection to any particular player. There’s no compelling reason for you to read my blog. Let’s get that out of the way.

So why am I starting my own blog? I read a lot of NHL-related news and commentary online. Like, a LOT. And increasingly I find myself want to connect with the authors of the material I’m reading, to share with them an alternate point of view. So many times I either disagree with the premise, or I find it very one-sided. I end up adding a lot of comments to their posts, and hope to hear back from the author. Sometimes the author comes back with some well-reasoned arguments, which I appreciate. Sometimes they don’t respond at all. But most of the time they have their point of view and that’s the way it’s going to stay.

Why do I disagree with them so often? I’m sure that in many cases they merely wish to stir the pot. In other cases they are firmly in the camp of one party or another, and that colours their views. Often, though, in my opinion, they just don’t seem to have any interest in exploring both sides of a story.

I really enjoy and respect some blogs and writers. Some of my favourites are Puck Daddy writer Greg Wyshynski, CBC staffer Elliotte Friedman, and Vancouver Province writer Jason Botchford, among others. I read them whenever possible, and they inform my own opinions.

But here’s my chance to put some of my own thoughts out into the ether. I hope they inform your own opinions. If not, perhaps I’ll hear about it in your comments. 🙂