Our recommendations for the top CBA issues

October 14, 2012 by Leave a Comment

Everyone has their opinion about what the final agreement should look. Here are our two cents based on finding some type of balance for both sides and addressing the major issues from both an economic and sustainability perspective.

Revenue Share:

Our recommendation is to have the revenue share start at 53% for the players in 2012/13 and be reduced by 1% each year until it reaches 50/50 in 2015/16. At the same time, all currently signed contracts should be paid without an across-the-board reduction. However, we also suggest for salary cap purposes, all current contracts be prorated for the salary (e.g. only count at 93% against the cap in Year 1 – 53% divided by 57%) based on the current year rev share percentage divided by 57%.  As a result, all current contracts would still be paid at the full amount, but allow teams to manage the salary cap in a more reasonable manner. Thus teams with large long-term contracts will be ‘punished’ by having to pay the full cash amount but not be harmed from a salary cap perspective.

Contract Lengths:

As mentioned previously, 10 years is too long and does not make economic sense for a contract length given the lack of visibility into any contract 10 years out. We recommend a maximum of 7 years for UFAs and 5 years for players who are RFAs.

HRR :

This is a very complicated issue as Elliotte Friedman has pointed out. It seems like the current CBA has flaws, in particular because the agreement tried to simplify things across all 30 teams by setting rules to simplify the effort required to calculate true HRR. If the NHL & NHLPA agree not make any changes to HRR that is fine – but in reality all revenue related to hockey players performing on the ice should be included with the owners calculations with direct costs being subtracted to determine the net shareable revenue.

Clearly there were many challenges in the recently expired CBA, at the team level that created unintended consequences and need to be addressed. I would suggest spending a little more money and time to get an impartial cost-accounting expert/firm to develop an activity based costing approach for each of the 30 teams that can be updated every year based that adjusts to the dynamics of each team/arena.  This would address head-on all the nuances of owning/operating versus not owning the arena handle both revenue and costs in a more accurate manner to reflect actual hockey-related activity.

Cost Sharing:

We recommend the NHL adopts cost sharing,  not revenue sharing, for the top 5 revenue generating teams to offset the player and travel costs for the bottom 5 revenue generating teams for games in which the low-revenue team visits the high-revenue team.

Filed under Economics, NHL CBA, RFA, Salary Cap, UFA

How parity, a hard salary cap and team profitability are the essence of the CBA discussions

September 7, 2012 by Leave a Comment

Team owners are just as competitive as the players on the ice. They want their teams to win and will try everything they can within the rules to win the Stanley Cup.  At the same time they are business people who must balance the owners’ conundrum. So ironically, league parity is something that each team wants for all the other teams but themselves.

While not the only factor, parity in the NHL has certainly contributed to the tremendous growth of the league in the last few years.  With so many teams fighting for a playoff spot going into the final weeks and days of the season this certainly helps each contending team’s ticket sales and viewership. As a result, overall revenues have continued to grow every year.

The league is an ecosystem unto itself, where teams depend on each other’s success to drive interest and revenue.  The salary cap created a more even playing field for teams to compete for talent and stay within a reasonable band of each other.  As a result we have seen that the salary cap has worked reasonably well the last seven years to create parity.

However, the salary cap is not perfect and several teams have found creative methods to try and circumvent it. Examples include burying contracts in the AHL or Europe, buyouts and trading outsized contracts to budget teams to help them reach the cap floor.  There will always be ways to game the salary cap in which richer teams try to take advantage to gain a competitive edge. The NHL wants to close most of these elements which soften the salary cap.  Many of the NHLPA proposals such as a luxury tax, retaining traded-player salaries and trading draft picks for cash are all ways to softly loosen the salary cap and reduce parity in the league. Clearly this is in the interest of players because it is then easy to argue that lower revenue teams can now become profitable without dramatically lowering overall salaries. But once again this creates a loose salary cap and is likely to reduce overall competitiveness.

Connecting the dots…

The NHL wants the best of both worlds; overall parity and individual franchise profitability. On the other side of the coin, it is in the players’ interest to have as soft a salary cap as possible since this allows high revenue teams to find ways to spend more on players and try to gain a competitive advantage while staying within the cap rules.  The result should see more profitable teams and less of a need to reduce the share of revenue for the players at the expense of the current parity.

Once the owners and players agree upon where to draw the parity vs. team profitability line then determining the revenue share percent for players will become a much easier discussion and move both sides a lot closer to a new CBA.

Filed under 2012-13, Economics, NHL CBA, Salary Cap Tagged with ,