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 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.