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Why the Owners are (Mostly) Right


Since the latest NHL lockout began, many fans and journalists alike have sided with #theplayers, appalled by the notion that the owners – “greedy, stupid billionaires” all – would demand their employees take an immediate pay cut.  After all, the NHL made $3.3 BILLION last season.  Also, the players have contracts – written agreements, signed by the owners, promising to pay x amount over the life of the deal.  Now the owners don’t want to pay the agreed-upon amount?  How dare they!  To the NHLPA and their supporters I say:  get over yourselves.  Set aside your histrionics and your talking points and take a cold, hard look at reality.  Here’s why the owners are (mostly) right, and you are (mostly) wrong:

The Nature of the Beast

The NHL is a unique industry, in that 30 separate businesses simultaneously work in conjunction to produce a single product (an NHL season) and compete fiercely against one another (to win the Stanley Cup).  The battle between teams isn’t confined to the ice, either:  GMs compete with each other for scarce resources (NHL-caliber players).  The level of competition is such that, were 30 Sidney Crosby clones available, each team would attempt to acquire as many Sidney Crosbys as possible.

To continue that analogy, as a fan, you would be upset if your team made no attempt to acquire at least one Crosby (or at least one more Crosby than your biggest rival).  Fans pay good money for tickets, concessions, parking and souvenirs, and as such, they (rightfully) expect, even demand, management/ownership do whatever it takes to ice the best possible team.  Fan expectations, which translate directly to revenue, are a significant driver of off-ice competition.

This “Battle of the GMs” is not just driven by fan expectations – it’s also required by law.  If they didn’t compete – if the 30 GMs got together and said, “Okay, guys…from now on, nobody offers UFAs more than $2mil/year.  Agreed?  Agreed!” – that would be collusion, and the NHLPA would sue…and win.  Thus, player salaries continue to grow (from an average of $1.4mil in 2005 to $2.4mil today), held in check only by the salary cap and the self-imposed spending limits of individual owners.

Why the Players are Locked Out

Over the life of the now-expired CBA, the players received 57% of Hockey-Related Revenues (HRR).  Despite the fact that HRR has grown to record levels, at least half of all NHL franchises lost money last season.  Why?  Because 43% of HRR is not enough for many franchises to cover their operating expenses.

In truth, the NHL erred back in 2005, when they agreed to give the players 57%.  It was intended as “a spoonful of sugar” to make the medicine – a salary cap – go down, but the financial struggles of at least half the league’s franchises have proven the short-sightedness of that deal.  Now, for the stability and financial health of the NHL as a whole, a correction must be made.

Why We Wait

If you’re reading this, you know the NHL’s latest offer called for an immediate 50/50 revenue split, with a “make whole” provision for existing player contracts.  In short, players would have some of the money due them this season and next deferred to Year 3 or to the end of their current contract, whichever comes first.  The NHLPA objects to those “make whole” payments coming out of the players share of HRR, saying it would mean “players paying players”, which they find highly offensive.

At the same time, the NHLPA has called repeatedly for increased revenue sharing to help the struggling franchises.  By this, of course, they mean moving money from profitable franchises to unprofitable ones…in other words, they’re all for “owners paying owners”.  Though revenue sharing among franchises is a necessity, the NHLPA stance reeks of hypocrisy.

The players made three counter-proposals to the NHL last week, none of which would bring the HRR split down to 50/50 before Year 5.  In other words, the NHLPA proposals call for roughly half of all franchises to continue to bleed cash for at least four more years.  What will the players sacrifice in return?  Well, they’ll get smaller raises each year…but make no mistake, they will get raises.

Truthfully, there’s no guarantee a 50/50 HRR split will put all 30 NHL franchises in the black; in fact, some franchises will still lose money, at least in the short-term.  Lowering the players share of HRR will reduce the number of teams in need of revenue sharing $$$, which will increase the stability of the league as a whole…and thinking long-term, at the end of the next CBA, if only three or four clubs are still losing money, it will be exceedingly difficult for the NHL to make a case for a greater share of HRR.

In Conclusion

It’s obvious, even to the NHLPA, that the HRR split must come down to 50/50.  Now, the players must set aside their personal animosity toward Gary Bettman, their ridiculous indignation at the NHL’s original offer (43% of HRR) and their unrealistic expectation of uninterrupted (though reduced) raises year-over-year, and work with the league to tweak the NHL’s last offer and get a deal done.  In the current economic climate, many people in the “real” world are either unemployed or have taken significant pay cuts in order to keep their jobs.  A 20% pay cut when you’re making $50k hurts much more than 20% of $525k, believe me.  If the rest of us can do it, the NHLPA can, too.

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About Matt Pryor

Freelance writer of hockey, history and travel. Born and raised in Texas. Saw first hockey game 22 FEB 1980 (USA 4, USSR 3), was instantly hooked. Attended first NHL game 26 DEC 1981 (Colorado Rockies 6, Calgary Flames 3). Semi-retired beer league player. Shoots left.

Discussion

7 thoughts on “Why the Owners are (Mostly) Right

  1. One issue you are missing is the dual nature of an investment in an NHL franchise. Owners unlike players don’t necessarily need to make a profit every year because NHL franchises are a commodity. Whenever one comes on the market it sells for 30+% more than it is valued at (Forbes’ numbers). This is because unlike an aeroplane or a house or a Ferrari NHL teams are a true commodity. It isn’t something you can just buy whenever you want no matter your wealth. The only true parallel is a work of priceless art. Like a Van Gogh. When people talk about artists who weren’t very prolific and are very famous they always take into account this payment premium in their purchasing. Because of this for all the owners are whining about sometimes losing money if they wanted to get out of the game they could and they could stand to make a lot doing it. Certainly a grand profit over what they payed. The players don’t have such an option and that is partly why revenue sharing just makes sense for the owners. As the league gets more valuable so does there team.

    Posted by Noah Aaron Benjamin-Pollak | October 25, 2012, 13:45
    • Noah,

      You make a good argument, but I see a flaw in your logic: Say I purchase an NHL franchise for $180m and proceed to lose $10m/year for five years, then decide I’ve had my fun (and spent enough money) and it’s time to sell. For me to break even, I’ve got to sell the team for $230m – a 27.8% increase over my purchase price. Is a team which loses $10m/year really going to appreciate in value at least 5.5% each year? Though it’s certainly possible, I’d say it’s probably not going to happen. Another consideration is that NHL owners can absorb small losses year-over-year only as long as their other businesses are profitable. The Dallas Stars went into bankruptcy because Tom Hicks’ other businesses failed. Devils’ owner Jeff Vanderbeek is struggling to pay the bills. The U.S. economy is a bloody mess, and it’s squeezing NHL owners.

      I agree revenue sharing is necessary for the health of the NHL. It isn’t a cure-all, though. Player salaries are at unsustainable levels for at least half the league and must come down. 57% was too much in 2005, and it’s still too much today.

      Posted by OGAsBigTex | October 26, 2012, 00:10
  2. You miss the entire point of professional sports ownership.

    It goes like this. First, you get rich in a DIFFERENT industry, then you buy a NHL team because YOU LOVE HOCKEY and want to give back to your community.

    If an investment firm buys a professional sports team looking for a profit, they are idiots. They, like you, dont understand the reasons for ownership.

    Its not like a house with an increasing value, its like a boat with a decreasing value. You buy it because you want it, not to make you rich. You are already rich thats how you bought it.

    Mark Cuban is on record saying he looked into buying an NHL team but didnt, because he wants the businesses he invests in to return a profit. Smart man.
    Maybe some of the current owners who cry about losing a million dollars on their team while gaining billions in oil annually can look to his example and get the hell out of our sport.

    Maybe more people like Pegula will buy the teams. Look up what hes done for Buffalo minor hockey since getting there. You think he did that for a profit? No, he owns the team for the right reasons.

    Posted by Pedro Smith | October 25, 2012, 17:20
    • Pedro,

      Let me make sure I understand you: The NHL is a $3.3b charity, designed solely to entertain fans and enrich players, and owners have no right to expect to break even, much less turn a profit? Owners should suck it up and continue to pay the bills purely out of devotion to The Great Game? Seriously?

      If you asked all 30 NHL owners why they chose to purchase their teams, I’m sure many would say it’s a status symbol and they love hockey. I don’t believe any of them would say, “I did it for the tax deduction for charitable contributions”. I firmly believe Mr. Pegula is a serious hockey fan, and I applaud both his purchase of the Sabres and his financing of a Division I program at Penn State. I also firmly believe he never would’ve purchased the Sabres if he didn’t think he could turn that club around, compete for The Cup, AND make a little money in the process.

      The fact is, professional sports teams can be VERY profitable (see Cowboys, Dallas). Unfortunately, only 12-15 teams are profitable under the current NHL business model. This must change, for the long-term stability of the league. Look at it this way: We’re told, over and over again, that paying teachers and First Responders more will improve the quality of education and public safety, as higher salaries will attract higher quality applicants. By the same token, giving NHL franchises an easier road to profitability will attract better (potential) owners…like Mark Cuban.

      Posted by OGAsBigTex | October 25, 2012, 23:23
  3. Im glad you clarified, because you do not understand me.

    I never said it was a charity. Thats a poor metaphor. I said it was like a boat, which is an excellent simile.

    Boats are designed to entertain their owners at a cost. Plus it costs money to upkeep them. Sometimes you can sell them for a profit, especially if they are well taken care of. I dont care why the owners say they bought the teams. Just as I dont care why some guy buys a boat. The bottom line is always the same: they bought it because they could afford it.

    Its just the stupidity of thinking that your expensive purchase should be crapping out money that makes me shake my head.
    If THATS why you bought it, for constant profit, that you think you somehow deserve just because youre in a little club called the NHL, then youre stupid.

    If you want your business to succeed, work harder. Look at marketing. Attract fans by any means necessary. Start young so that one of them has to bring a paying parent. Do something creative. Make loud noises in a public place.

    Businesses fail. They lose money. Happens everyday. Dont want it to happen to you? Get out there and kick some ass and acquire some more customers.
    Kinda hard to do when youve shut yourself down in an attempt to spite your employees.
    Kinda hard to do when youre spending all day hiding behind your spokesperson like a coward.

    I understand your position that business people like to make money. I hope you understand mine that money isnt handed to you and if you want it you should do something to earn it besides locking out your employees and refusing to release your actual finances while crying poor. (PS. You actually have NO IDEA which teams are profitable because they dont release their finances. Not even Forbes can figure it out.)

    And if you want to improve the quality of eduction, you look at issues such as class size and basic needs, you know, making sure the children are well rested and fed. Giving teachers money does nothing for education. Giving teachers money only does stuff for teachers. Same thing with responders, more salary only helps them, it is more equipment helps public safety.
    It sounds like whoever is telling you that doesnt understand the difference between a person’s salary and their budget at work.

    Posted by Pedro Smith | October 26, 2012, 04:06
    • While there’s always room for improvement where marketing is concerned, “working harder” will only take NHL owners so far. Why? Because the players have been getting 57 cents of every dollar teams make. Out of the 43 cents remaining, owners pay the marketing & sales staff, coaches, scouts, the Zamboni driver, mortgage/rent, property taxes, corporate taxes, utility bills, and so on. Though the proper ratio of payroll to revenue varies from one industry to another, the general rule is that any payroll greater than 30% of gross revenue falls in the “danger zone”. You don’t need to see the detailed finances of all 30 teams to see that 57% won’t work for most of them.

      Your boat simile doesn’t work, either – unless that boat is a ferry or cruise ship with paying passengers. Even if owners consider their teams to be status symbols, they also understand the NHL is a big business. If the deck is stacked against them, if they must excel on and off the ice just to post a small loss, teams will continue to change ownership (and sometimes cities) with regularity. Franchise instability is a killer in pro sports – just ask the USFL, NASL and WHA. If the Atlanta Thrashers were profitable, wouldn’t they still be in Atlanta? Would a profitable Coyotes franchise be mired in their neverending mess? Would Jeff Vanderbeek be struggling to keep the lights on in New Jersey?

      Bottom line, this isn’t about owner greed; it’s about owner need. NHL owners need to know that if they make smart choices – at all levels – they can at least break even. With the players getting 57 cents of every dollar earned, that’s just not realistic for far too many franchises. The NHL business model has to be corrected.

      Posted by OGAsBigTex | October 26, 2012, 13:32

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