Understanding This Mess

Bruce Bennett - Getty Images

The underlying numbers behind the NHL and NHLPA's proposals might surprise you. Here's a look at what's really going on and how each side's arguments may affect the league financially.

Before I get into my analysis, here's a few here's a few questions I'd like you to answer :

1. In 2010-11 (2011-12 numbers haven't been released yet), how many teams do you think turned a profit?

2. Of those teams, how many would you guess made a significant profit of over $10 mil?

3. If you take out those teams with significant profits, what was the profit/loss for the other teams in the NHL?

**All numbers taken from Forbes NHL Team Values unless otherwise specified. The 2011-12 data won't be released until November, so the most recent statistics are from the 2010-11 season.

Answers:

1. 12 teams turned a profit in '10-'11 (Bruins, Flames, Blackhawks, Avalanche, Red Wings, Oilers, Canadiens, Rangers, Senators, Flyers, Maple Leafs, and Canucks). This means that 18 teams, over half the league, actually lost money that season.

2. Only 6 teams made profits of over $10 mil: Wings ($16.3), Oilers ($17.3 - no, I'm not joking), Canucks ($23.5), Rangers ($41.4), Habs ($47.7), and Leafs ($81.8)

3. The money lost by the other 24 teams in the league totaled $101.5 million in just that season alone.

The Mess:

The current system is seriously flawed. NHL Numbers ran an outstanding series taking a look at how the last CBA has affected teams. It's split into three parts, here, here, and here. But, in essence:

* The teams that were making money pre-lockout started making a much larger share of the money post-lockout. The increase in league revenues we've been hearing about has mostly gone straight into these owners' pockets.

* The teams that were breaking even (+ or - $10 mil) have mostly stayed about even, so the last CBA didn't give them the increased profit they were expecting. Some teams (around 10 of them) have actually fared worse post-lockout.

* The teams that were losing money have lost less money per year than they were before, but are still bleeding dollars at a staggering rate because their incomes can't keep up with skyrocketing player costs due to the rising salary cap floor.

Here's an awesome graph that explains this concept.

Overall, costs have been rising at a rate that is fairly constant with increased revenues. On average in 2004, running a franchise cost $77.8 million ($49.2 mil for players and $28.6 mil for operations). In 2011, that cost was $98.8 million ($58.6 mil for players and $40.2 mil for operations). This means that the average club is shelling out $21 million more dollars each year than they were in 2004. During that time, average revenues have also increased from $74.6 to $103 mil, a jump of $28.4 mil. This should seem like enough to cover the rising costs and generate some profit, BUT if you take out the teams that are making a bunch of money (the Wings, Oilers, Canucks, Rangers, Habs, and Leafs) and run the same calculations, the expenses have gone up at exactly the same rate: $21.1 mil for both expenses and revenue.

Basically, outside of six teams, no one is making any money. Yes, six teams, including the Avs, are managing to turn a meager profit, but most teams - 18 of them in 2010-11 - are losing money each year.

To put this in perspective, in 2011, the Avs paid $44 mil to players, $32.9 mil in operating costs, and brought in $83 mil from hockey and non-hockey related revenue. This equaled a profit of $6.1 million dollars. Paul Stastny, with his salary of $6.6 million, made more money from the Avalanche than the Kroenkes did that year. Oh, and did I mention that the $6.1 million profit was the 8th highest in the league?

With the new CBA, everyone wants to correct this profit loss, including the players. Profitable teams are stable teams. They have a lower likelihood of being sold or relocated, which is something that works in the players' favor. Unfortunately, the NHL and NHLPA's ideas on how to accomplish this are very different.

The Owners' Solution:

The owners want to cut costs by decreasing the players' percent of the "Hockey Related Revenue". Hockey Related Revenue (HRR) isn't much different from the regular revenue that we've been talking about above, but HRR doesn't include stuff like interest on loans, league expansion/relocation fees, profits from AHL teams, or the sale or leasing of real estate. There's more on HRR here. Currently, the owners only get 43% of the HRR, but the exceptions mean that they are actually getting a bit of the pie that the players can't touch. Once you start looking at real dollars and not just HRR, the split of money is actually pretty close to 50-50 right now. However, the owners still feel that the best way to solve the problem of teams losing money is to drop the players' costs via the HRR.

Using the dollar amounts for each team, the estimated salary for all active NHL players is around $59.7 million per club (actual $$, not cap hit). By averaging each team's 2006 to 2011 growth, under the old system each team could have expected around $43.3 mil in operating costs and $112 in revenue in 2013, which means that the owners should have made a 9.2 mil per team profit. Unfortunately, 16 teams would have still been in the red, and if you take out those six profitable teams mentioned above, the average profit drops to negative $2.1 mil a year.

Right now, the players are making 57% of the HRR. The owners' original proposal was for them to take 43% instead. I wasn't able to find club-by-club HRR numbers, but by using reported revenues in order to ballpark the figures, 4 teams (Sabres, Coyotes, Lightning, and Winnipeg (keep in mind WPG's averages are taken mostly from Thrasher years)) could still be losing money even with 57% of the HRR headed the owner's way. Everyone believes that the end number will be a 50-50% split. If this is the case, 10 teams, a third of the league, could still be losing money each year even though the average profits per team are at $16.5 mil.

These estimates oversimplify a large number of variables, but they do show that even with serious concessions from the players, a number of teams still have a good chance of not being financially successful. Simply tweaking HRR is a bandaid solution that makes the rich teams richer and the poor teams poorer at slightly a slower rate. In my opinion, if the players accept just a pay cut, there will be another lockout at the end of this CBA because we will be dealing with the same type of financial problems that we are right now.

The Players' Solution:

The players seem to understand that they'll need to make some concessions on salary to help stabilize the league. Their current proposal isn't quite there yet, but chances are good that they'll eventually give in to the 50-50% HRR split. A 7% paycut over the next 5+ years is far from ideal, but players are only in the game for so long. After they start missing paychecks, many of the players, especially the 3rd and 4th liners who only have a couple years in the NHL to make some dough, will probably start being more willing to negotiate. Some of the stars may start crossing over too - Mike Madano regrets he didn't during the last lockout. While the players understandably want to fix the CBA to where we don't have to do this lockout dance every 5-7 years and the owners quit plowing them over every time we do, financially, it's going to get to a point where holding out just doesn't make any sense anymore. Their window for making money is so short (5-6 seasons on average) that most can't afford to burn a full year, whereas the majority of owners are actually saving money by riding it out. This means that of the two, the players have far less bargaining power.

However, one of the major points that the players are pretty dead-set on is the idea of more revenue sharing. Yes, the league has made record profits, but those profits are not spread across all of the clubs (as demonstrated above). This was a problem that was supposed to be addressed in the old CBA. Under that agreement, some money from the 10 most profitable teams and revenue from the playoffs went into a pot. The bottom 15 teams were eligible to draw from it, but their percentage was based on attendance, revenue growth vs. league average, and the number of television households. In '10-'11 max they could draw was $10 mil, but most teams didn't qualify for that amount. The Islanders, one of the most hurting teams in the league, didn't qualify at all because their TV market was greater than 2.5 million. It's a messed-up, complicated system that's derived at the very end of the year so no one has any idea how much they'll end up putting in or getting out. Also, it only equates to around 12% of the owner's share of the profits, a figure that is MUCH lower than the other major professional sports leagues (the NFL shares as much as 80%).

The current players' proposal wants to push the total revenue sharing available to $250 million by creating a $100 million "Industry Growth Fund" that would be run by Bettman. Fehr also wants to remove many of the restrictions that prohibit struggling teams from collecting money. It's a fairly logical solution that would benefit and stabilize the league by slightly denting the profits of only the teams the NHL Commissioner deemed could afford it. Win-win, right?

Unfortunately, there's a few reasons why the owners aren't too keen on revenue sharing. For one, all the teams in the NHL are competing against each other for marketable players. That's why in the months leading up to this lockout, they took the opportunity to lock up many of their best players to 6+ year contracts while arguing for a max term of 5, sign the two biggest FAs to $98 mil deals after crying poverty only months before, and doll out $199 million in contracts in the last 48 hours before the lockout. Over the course of this past CBA, the owners have proven that they're more than willing to pony up more and more money for free-agents, so why on earth would any of the teams want to give other teams more power to woo profitable players away from their clubs?

Also, since most of the sinking teams are in non-traditional but densely populated markets that have potential to create large fanbases, a number of the profitable owners don't feel that is should be their job to support these often mis-managed teams that just can't find a way to bring in fans and make money. They seem to have made an exception for Phoenix because the potential for fans is just so high (and because moving it would make Bettman look bad), but the owners seem loath to expand their charity to other clubs (despite the fact that the expansion/relocation fees originally paid by these struggling clubs went directly into their pockets). Furthermore, increased revenue sharing could have a direct affect on the size of certain clubs' fanbases. Do you honestly think that the money-making Rangers' ownership is totally psyched to help make the other two teams within their market more stable, talented, and attractive to profit-generating fans?

The last reason ties back into the idea of franchise value. The majority of the money made off a sports club is not produced in the annual operation of it: it's made from buying low and selling high. As it stands, the franchise value of an average team (even the ones losing money) has gone up 47% since 2005 because the big clubs are bringing in record revenue, sponsors, and TV deals, thereby increasing the overall perceived value of the league. By increasing revenue sharing, there is a concern that it could weaken the perceived value of those big money teams and pop the bubble, which would end up hurting all of the smaller teams too. It's a risk a number of owners are extremely wary to take.

However, if you're the owner of a team bleeding money, that risk becomes a whole lot easier to stomach. According to an anonymous players' agent, around 8 of the small market teams were willing to take the NHLPA's initial deal, and 4 to 6 others would have been on board after a few minor tweaks. Dividing the owner's ranks would seem like a wise tactic, but unfortunately, it only takes 8 owners to veto the NHLPA's proposals. Besides, based on the quick turnover of the small markets' owners (probably due to their financial instability), Bettman knows it's in his best interest to please the owners that will be around in 10 years, specifically those of BOS, PHI, DET, and NYR - all of which are teams that would be hurt by revenue sharing.

The league has agreed to increase the revenue sharing to $190 million, but the $40 million boost comes more from the cutting of player's salaries than any meaningful re-distribution of the revenues. Bettman may argue that they're only haggling over percentages at this point, but the dissagreement goes much deeper than that.

The Stalemate

If you believe that this fight is all about the NHL vs. the NHLPA, you're missing the bigger picture. The true fight is between the big market owners and the small market ones, the All-Stars and the 4th liners. As long as the NHL and NHLPA stand united against each other, negotiations aren't going to matter much. Major progress will only come when the financial gaps within each organization reach a critical point and internal disagreements force them to actually start looking for a solution.

Unfortunately, each organization's hatred of the other could keep them united for a very long time. This lockout is about more than money: it's about pride. There are a lot of nasty feelings and ugly precedence left over from the last labor dispute, so this go-round has become a major power struggle. The owners want to show the "cattle" who's boss again, but the players are willing to lose a lot of money just to prove they won't be pushed around anymore. Neither side trusts or respects the other, and neither side really wants to talk - they're more interested in screwing the other over than in playing hockey or bringing home paychecks right now. It's an extremely volitile environment that's unlikely to change until one side completely implodes. When the dust settles, there will be a clear winner and a clear loser, but it could be a very long time before we get there due to the intense unifying hatred they have for each other.

Yet the NHLPA's clock is already ticking because of the NHL's trump card: the lockout. Since most of the owners have other large sources of income and that $200 mil NBC deal still on the books, they can easily afford to wait out the players. The guys talented enough to find a spot in Europe or have millions in their bank accounts can withstand this siege for quite some time, but once the escrow checks stop, there are going to be a lot of bottom-tiered players that are hurting for money and willing to agree to whatever just to get their jobs back.

All the PA can do right now is minimize the damage and try to get some concessions in while they can. They don't have much bargaining power, but there is one small card still up their sleeve - the massive revenue machine known as the Winter Classic. The event itself is expected to bring in around $30 mil this year, and that's even before the benefits of HBO's 24/7 and it's ability to "grow the game". The two teams that have the most to lose from it being canceled also conveniently happen to be two of the most powerful clubs in the league. Don't think Bettman hasn't realized this - he's reportedly already told the owners that if a deal hasn't been reached in November, he's canceling the event in order to remove the players' leverage.

If that happens, the PA still has the option of waiting it out and fighting the owners by possibly critically damaging the league's brand and sponsorships, but A) that really doesn't benefit anyone in the long run and B) the NHLPA probably isn't going to stay united long enough for that to happen. Some of the players (such as Dan Cleary) do think they can stick this out for over a year, but the players being interviewed right now aren't the ones that are going to suffer the most during this lockout. The PA could also start looking at widening their concessions to attempt to sway certain teams (like offering an amnesty clause that could allow Boston to take care of their Tim Thomas problem), but that would involve seriously throwing some of their own members under the bus and still probably wouldn't be able to coax over 75% of the owners to their side.

If the Winter Classic goes away, the players are completely at the mercy of the owners, and I don't think there will be any empty promises of "partnership" this time. The length of the lockout will then depend entirely on how long the PA chooses to hold out, but if their hatred of Bettman and the owners causes them to prolong the conflict, the damage that will be done to the league could take a very, very long time to repair.

Summary (aka the TL;DR version)

The six most profitable teams in the league are doing really well right now, but the majority of the teams are actually in the red each year. The owners want to fix this by adjusting the hockey related revenue of the players, but this method is only a stop-gap that will lead to another lockout. The players want to increase revenue sharing, but this means going after the most powerful teams in the league and spreading the wealth around in ways many of the owners don't like. Both sides have a lot of hate for each other, and since no agreement will be reached until one side completely breaks down, we could be waiting a while. The NHLPA is almost certainly going to break first since the lower-tiered members of its ranks can't afford to hold out, so the players' only hope is to use the Winter Classic as leverage to get some concessions. However, if that game is canceled, the players are hosed and can either accept their defeat or end up critically hurting the league.

X
Log In Sign Up

forgot?
Log In Sign Up

Forgot password?

We'll email you a reset link.

If you signed up using a 3rd party account like Facebook or Twitter, please login with it instead.

Forgot password?

Try another email?

Almost done,

By becoming a registered user, you are also agreeing to our Terms and confirming that you have read our Privacy Policy.

Join Mile High Hockey

You must be a member of Mile High Hockey to participate.

We have our own Community Guidelines at Mile High Hockey. You should read them.

Join Mile High Hockey

You must be a member of Mile High Hockey to participate.

We have our own Community Guidelines at Mile High Hockey. You should read them.

Spinner.vc97ec6e

Authenticating

Great!

Choose an available username to complete sign up.

In order to provide our users with a better overall experience, we ask for more information from Facebook when using it to login so that we can learn more about our audience and provide you with the best possible experience. We do not store specific user data and the sharing of it is not required to login with Facebook.

tracking_pixel_9355_tracker