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

NHL CBA – The economics of long-term contracts

July 18, 2012 by Leave a Comment

When I first heard about the owners initial CBA proposal to the NHLPA, my first reactions were surprise, disappointment and ‘not cool’.  This may have been the owners initial negotiating point from which they would move back towards numbers similar to the CBAs negotiated in other leagues, but without additional context it reflects poorly on the NHL.  Such an extreme proposal requires explanation to justify their position.

I had not planned to address the new CBA with Puckonomics, but now that the negotiations look to be challenging right from the start I think there are at least a couple of topics that directly match what Puckonomics is all about. There are several economic and financial attributes which directly relate to why the owners are asking for certain terms in the latest bargaining session.

One of the most important pieces of the CBA puzzle is what percentage of revenue sharing should the players receive? I will save that analysis for my next posting.  First, I would like to discuss the owners initial proposal to limit free agent contract lengths to 5 years.

Let’s start with basics contract value and term.  The theory behind any multi-year contract is that the player will deliver about equal value via their performance to the future cash flows received from their contract.   The challenge is that as the contract length goes longer and longer the predictability of the player performance and thus the value they deliver becomes less certain. There is significant risk inherent in these long term contracts to the teams.  Because NHL contracts are guaranteed all the risk is borne by the teams and not the player.  Taking injuries out of the equation (which can be partially addressed via insurance) this creates an asymmetric model where players do not have a financial incentive to perform. Of course there are many other incentives a professional hockey player has to perform, but this lack of alignment is a real concern.

A counter-argument is that if the owners want to give out these long term contracts at their own will, as they have in recent weeks, that is their choice if they want to take on that risk.  However, what we have seen is an arms-race type of situation based on the current CBA as teams compete for elite talent, and the only way to secure their services is to offer long term contracts. Reasonable length contracts are no longer an option.

At Puckonomics we want to see the NHL be an efficient market, where player compensation is as close to the value they create as possible. We don’t side with either the players or the owners. So when a situation like contract length arises we just want to provide an economic perspective on how to deal with specific situation.

That being said, long-term guaranteed contracts remove efficiency from the NHL market.  Other leagues like the NFL do not have many guaranteed contracts.  If the NHLPA does not want to accept non-guaranteed contracts or some hybrid thereof, from an economic view, limiting the length of contracts to a more reasonable, predictable time period to reflect the true value of a player may be in order.  We do not know if it should be 5 years or 7 years or whatever (a further analysis on performance by elite players over several years would be required), but limiting the length of contracts to some single digit number does not sound unreasonable from an ‘economics’ perspective.

Filed under 2012-13, Economics, NHL CBA, UFA Tagged with , ,

Shaone Morrisonn – Should be playing in the NHL

June 16, 2012 by Leave a Comment

Shaone Morrisonn was signed to a two-year contract with the Buffalo Sabres for the 2011-12 season after spending several years with the Washington Capitals.  Unfortunately, Morrisonn spent the 2011-12 season playing for the Buffalo Sabres AHL affiliate Rochester Americans.  At the end of training camp the Sabres put Morrisonn on waivers with the explanation that he was being sent down for salary cap reasons. The Sabres were right up against the salary cap and the team could use the space to bring in a lower cost stay-at-home defenseman.  However, when you look a little deeper at the Morrisonn’s True Value there seems to be a disconnect.

Shaone Morrisonn
GP G A Pts TOI Cap Hit ($M) True Value ($M)
2008 76 1 9 10 20.3 0.90 1.74
2009 72 3 10 13 18.0 1.98 1.95
2010 68 1 11 12 17.6 1.98 1.86
2011 62 1 4 5 16.2 2.08 1.33
2012 AHL 2.08

Shaone Morrisonn’s numbers are remarkably consistent (especially when adjusting for injuries). He is essentially about a $2M per year player, and that is without factoring in his playoff experience with the Capitals.  Given his predictable output and value, one wonders if there is more to the story than the salary cap excuse for sending Morrisonn to the minors. On July 1 Morrisonn is once again a UFA, hopefully another team will recognize his past contributions and give him another shot in the NHL as a reliable, tough, stay-at-home defenseman.

 

Filed under 2012-13, Defensemen, UFA Tagged with , ,

Zach Paries – How much will he get?

June 15, 2012 by Leave a Comment

Zach Parise is probably this year’s biggest UFA name. Even though he has said he wants to stay in New Jersey, there will be many teams lining up to make him an offer.  Former GM Lou Nanne has said the Minnesota Wild will make him the highest offer.  What makes his comments interesting are how they must factor into Parise’s value.  Zach Parise’s on-ice performance is pretty consistant, with his true value worth about $5M during the regular seasons for three of the past four years (he had a significant injury in 2010-11 which kept him out most of the season):

Zach Parise
GP G A Pts Cap Hit ($M) True Value ($M)
2008 81 32 33 65 3.13 3.49
2009 82 45 49 94 3.13 5.33
2010 81 38 44 82 3.13 5.03
2011 13 3 3 6 3.13 0.46
2012 82 31 38 69 6.00 4.96

Then when you look at his performance during the playoffs, his leadership and captaincy and the supply/demand of this elite level UFA he will surely get at least $6M per year.  But in a market like Minnesota where his father J.P. Parise played for many years, Zach’s value is even greater as his presence could be directly tied to increased revenue for the Wild (TV viewers, ticket sales, ticket prices) as people come to games specifically to watch him play. If only 150 people become season ticket holders because of Zach Parise, that could easily allow the Wild to pay him an additional $1.5M (150 x 44 games x $200 (2 tickets/gm)).

We shall see how this all plays out, but it would not be surprising if Zach Parise gets up to $7.5M per years if he goes to a market where he will be the center-piece player (compared to NJ where he shares the spotlight with Martin Brodeur and Ilya Kovalchuck).

Filed under Forwards, UFA Tagged with , , ,

Brad Stuart – What’s he worth?

June 13, 2012 by Leave a Comment

Brad Stuart was traded from Detroit Red Wings to the San Jose Sharks this past weekend. Given the Sharks need for help on the penalty kill and a reliable, mobile defensemen it seems like he would be a good fit for a second tour with the Sharks. Since Brad Stuart makes his offseason home near San Jose and his family remains in the area during the season, it is nice to see that this could be a good match for both parties (I have seen his kids skating at Sharks Ice with their Stuart Red Wings jerseys on several occasions).

The Sharks have until July 1st to negotiate exclusively with Stuart. So the big question is how much is the 32 year old worth?

Looking at his performance the last five years shows the consitency of his game year in and year out. While he puts up a reasonable number of points he isn’t known for his offensive ability, but he does log over 20 minutes per game.

As you can see from the table below, Brad Stuart consistently rates at about a $3M value each year (when you adjust for injuries) but has been paid at $3.75 per year in this last contract with the Red Wings.

Brad Stuart
GP G A Pts TOI Cap Hit True Value
2008 72 6 17 23 21.2  $            3.50  $            2.31
2009 67 2 13 15 20.2  $            3.75  $             2.11
2010 82 4 16 20 23.2  $            3.75  $             3.00
2011 67 3 17 20 21.5  $            3.75  $             2.53
2012 81 6 15 21 21.1  $            3.75  $             3.00

In our analysis UFAs clearly receive contracts above their true value due to supply and demand issues and restrictions on entry level contracts.  Given Brad Stuart’s pending UFA status, his consistency year in and year out and tremendous experience of being in the Red Wings organization it would not be surprising if he once again signs for somewhere between $3.5M and $4M, with the amount varying on the term of the contract.  The Sharks probably want to sign Stuart for 2 years, and he would probably be asking for 3 or 4 years.  We shall see where the two sides net out.

Next up:  Zach Parise

Filed under 2012-13, Defensemen, UFA Tagged with , ,