Parity, Profit and Competing Incentives

Kent Wilson
October 02 2012 08:47AM

 

 

A few things became clearer in the wake of Graphic Comments' three part series on the effects of the prior NHL CBA: that the NHL grew rapidly, but unevenly; that different owners actually have vastly disparate incentives, and that the current labour negotiations don't seem to be focusing on the leagues truly meaningful issues.

Deadspin recently published a useful NHL lock-out primer that succinctly gets to the heart of the matter:

So the league has to shut down because it's making too much money?

More or less! The league as a whole grew at approximately seven percent per year since the last lockout. But the new wealth didn't enrich everyone. Most franchises—especially the usual dogs, the Phoenix Coyotes, Columbus Blue Jackets, Nashville Predators, Tampa Bay Lightning, and the like—entered the past CBA while poor and emerged from it even poorer. The money went to the richest teams, the ones located in places where people have money and like hockey. So they got even richer and drove the cap upward, squeezing the poor teams even harder.

Huh. So it seems like this is really a feud between owners, rather than between owners and players.

Exactly. The big-market guys have entirely different priorities than the small-market guys, and we can't tell which group will dictate management's stance, because the league has a gag order on everyone who isn't in the commissioner's office.

This was ably demonstrated by Graphic Comments in this graph:

The Clash Between on-ice and Financial Parity

The profitable and middle tier teams' ability to generate revenue and pay players far outstripped that of the weaker franchises over the course of the last CBA. The result was a rapidly raising cap ceiling and floor, with both the latter and former eventually ballooning past what the poorer markets could reasonably bear.

The previous CBA skirmish wasn't merely about cost certainty. A salary cap was also sold to the public as a means of enforcing league-wide parity - a limit both to the degree to which the heavy hitters could hoover up talent and to how cheap the poorer clubs could be. The guiding assumption is that greater parity would improve overall competition, enliven fan interest in lackluster markets and, therefore, grow and deepen the league's fanbase.

It was a fair assumption. It's intuitive to figure parity = fan growth = profits, particularly for clubs who were struggling beneath the oppressive shadow cast by Glen Sather and his $90 million payroll (and enduring willingness to pay the free agent du jour exorbitant amounts of money). Prior to the 2004 lock-out, organizations like the Rangers, Red Wings and Avalanche were busy leveraging their relatively large fan constituencies, well heeled owners and a $0.65 Canadian dollar to outpace the rest of the field in the NHL arms race. It seemed like the NHL had become a league of entrenched class warfare, where the richer teams exploited the second and third tiers, pilfering talent at will and draining the unfortunates of any true chance of on-ice success.

As is so often the case with well-meaning, apparently intuitive, top-down solutions for complex issues, the NHL's solution turned out to be 180 degrees incorrect, at least when it came to dollars and cents.

The cap did indeed improve competitive parity, with the rich guys spending less and frugal guys spending more, but the result was actually a widening gap between the two groups financially speaking; even as the differences on the ice shrunk. Parity meant more profit for the already rich, because the cap reigned in their expenses and (some) of their more extravagant spending habits. Unfortunately, parity meant more losses for the bottom third of the league because they were compelled to spend well beyond their means.

Ironically, the enforced parity of the salary cap grew the middle class on the ice by augmenting the off-ice differences between the various teams and ownership groups, in turn widening the gap between the haves and have nots. It would be like a central authority deciding the poor, working class family down the street keep up with the neighboring bluebloods by purchasing fancy leather furniture and 55-inch plasma TV's on credit: their house might get a lot nicer, but their debt will explode.

The problem is there is such gross, fundamental differences between the Rangers and the Coyotes of the world that enforcing equality on the ice without a completely equitable sharing of all revenues across all the teams in the league (or, say, a random re-drafting of all players every year, with a universal base pay of $X amount) is likely to be futile. The Coyotes can't possibly keep up with the Rangers in any real sense of the term given their wildly different fanbases, support levels and revenue streams: to do so on the ice means to accelerate Phoenix's losses and increase their debt. To do so in terms of profits and losses means to either tap the richer teams via significant revenue sharing or to allow the Coyotes to pay players at levels commensurate with their income.

This is because, essentially, a win (and the perception of competitiveness, ie; higher potential for more future wins) is worth more to franchises with already healthy fanbases/support. So, for example, if a each marginal win is worth $3 million+ in revenue to clubs like Montreal or Toronto, it's likely worth drastically less to clubs like Phoenix or Nashville ($500k for example). With the cap/ceiling tied to the accelerating revenue that parity may engender in teams from the middle (Calgary, Edmonton) and upper class (NYR et al.), it rapidly outpaces the relatively menial gains for the lesser lights. As a result, marginal wins become more expensive to buy than they are worth for the bottom third.

Revenue sharing exists (or existed in the now expired CBA), but it was merely perfunctory when compared to the wealth and revenue gaps between rich and poor. Furthermore, successful businesses and rich men aren't typically in favor of handing over large chunks of their profit.

The dream of parity becoming a catalyst for the rapid growth of fans and dollars in the poorer markets has turned out to be fleeting and foolish, crushed beneath the iron heel of reality. Which isn't to say that there was zero effect on the markets of the various sun belt teams - just that the few steps taken weren't enough to bridge the many miles separating them from the densely populated megamarkets (New York, Toronto, Montreal) and places where hockey is a cultural institution and a gorilla in the room when it comes to pro sports entertainment (Calgary, Edmonton).

Winning, or at least an improved chance of winning, was supposed to energize crowds for the woebegone cities, spark growth in their fanbase, improve gate receipts and maybe ensure that all important national TV deal. Unfortunately, selling sports is more complicated - the correlation between winning and profit is no doubt positive but not quite so direct and overarching. The Oilers and Leafs have been terrible for years, but remain vastly more profitable than many of their objectively more successful (on-ice) peers in the league.

Some teams can stink and still print money. Others will win but struggle to break even. In between those two extremes are the moderates whose fortunes will rise and fall with the ebb and flow of various variables, including a winning record. The connection between winning/parity and profit is therefore somewhat tenuous and subject to a host of other factors.

Solutions

On-ice Parity is probably something that shouldn't be altogether abandoned. No one besides Sather wants to return to the days of a $9 million/year Bobby Holik. Nor, however, should parity be considered sacrosanct, particularly in it's current form. The cap and floor bloated the middle class on the ice, but distanced the upper and lower team's bank accounts. If parity via the ceiling and floor means greater losses for the lower rung clubs, then it's promises of growth are hollow and will ultimately lead them to ruin.

Which is why it is somewhat disingenuous for the league to cry poor at this juncture in their discussions with the players. The financial failure in the NHL is structural and won't be solved with an additional rollback of the players percentage of revenues - it may result in temporary relief for the bottom-third depending on what kind of roll-back occurs, but that would be little more than a dead cat bounce should the current cap system remain more or less in place. Chances are the rich will continue to get richer, the poor poorer, and the uncomfortable dance of trying to find a sucker owner for perpetually cash negative clubs will continue apace.

There are a few potential solutions:

1.) Contract or relocate a number of the perennial losers. Moving Atlanta back to Winnipeg was a big win for the league in terms of dollars. Find better places to park teams or simply get rid of those who are perpetually in the red.

2.) Encode revenue sharing into the rules of the game. It's clear financial prudence and the will to win are often at odds in pro sports. Under the current system, avid spenders are somewhat constrained (AHL demotion and front loaded contracts notwithstanding) while previously, the imprudent were free to prove they had more money than brains.

The existence of the cap and the differential between the various teams ability to spend to it means it's possible to commodify cap space. Teams weren't really allowed to trade cap space previously (aside from pushing around bad contracts disguised as hockey deals, which is easier said than done). However, if buying extra cap room from other teams was possible, you would mostly likely see dollars flow from the rich to the poor due to the former's on-ice self-interest and the latter's excess supply of something they can't use anyway. This could be especially effective if coupled with a sever reduction or elimination of the cap floor and the closing of some other cap dodging loopholes (such as burying bad deals in the minors).

This new mechanism would resemble MLB's luxury tax system in that it would impare competitive parity somewhat, but it would also mean more revenue ending up in the pockets of the poor (and frugal) managers, while the big spenders would be free to continue trying to buy championships. Of course, it wouldn't entirely mimic the MLB in that the hard cap would continue to ensure cost certainty - only that cap spending would a bit more transient and likely upwardly mobile.

In the end, though, there may be no obvious solution to what ails the NHL. Shaving a few points from the players isn't going to solve any real problems in the current system: most of those dollars will just end up in the pockets of the top hat and monocle crowd, as they did under the most recent, now defunct CBA. It may simply be that they aren't 30 viable NHL markets in North America and the league is destined to continue this thrust and parry with the players until either hockey spontaneously becomes as popular as football south of Illinois or the weaker clubs simply implode.

More by Kent Wilson:

 

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Former Nations Overlord. Current Fn contributor and curmudgeon For questions, complaints, criticisms, etc contact Kent @ kent.wilson@gmail. Follow him on Twitter here.
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#1 MathMan
October 02 2012, 09:51AM
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Personally, I always felt the notion of "parity" being a goal of the cap was marketing. The only real goal was cost certaintly. Parity really was more of a side effect -- one that made for a good soundbite to give to the fans but it was never a real consideration.

Besides, it always was very imperfect anyway as players were always willing to take discount or gravitated to more attractive destinations anyway, so some teams never really had a shot at drawing high-quality free agents despite having money available, while the Rangers, say, kept grabbing them year after year.

Cost certainty was the *only* thing the owners were really after, and now that they have it, they are not going to give it up. IMO any model that doesn't maintain the hard cap is really a non-starter with them.

Likewise, given the salary disparities, I think it will be a hard sell convincing New York, Montreal and Toronto to finance half the league. A bit of an exaggeration but given the revenue curves, not far from the truth; most of the teams are making very little money, and revenue sharing would therefore have to come with those handful of teams that are very profitable. Given that these wealthy clubs by definition have a lot of money, they likely have a lot of clout.

The CBA would practically have to "cap" revenue to remove some of the more profitable teams from the revenue equation to keep the cap (and, most importantly, the floor!) under control. Say team revenue above what the fifth-most-profitable team makes doesn't factor into the salary cap. That represents a setback for the players, certainly, but it's about the only way the cap can apply to a league that has about five super-profitable clubs without raising the floor so high that the lesser lights will be strangled.

And yes, moving teams to more profitable markets would be an obvious and needed solution, but if the resistance to the Thrashers' move is any guide, I don't think it's one the league brass is even interested in contemplating.

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#3 Graphic Comments
October 02 2012, 05:11PM
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Good sum up!

I'm so much more in favour of contraction than relocation. I would love to see a league where the scrubs making up most of the 4th lines around the league couldn't crack a line-up. The on-ice product would be immeasurably better, IMO.

In terms of reaching a solution, one aspect that I had completely forgotten was the immense power Bettman actually has by way of the voting system the owners have agreed to. As Eliotte Friedman pointed out earlier, if he doesn't like the deal, it takes 75% of the owners to overrule him. Assuming he controls the Phoenix vote, that means he only needs 7 teams to agree with him to reject any deal.

The crazy thing is this could happen at either end of the spectrum! He could team up with the profitable teams to block any deal requires revenue sharing, and he could team up with the money-losing teams to block any attempts to end the lockout-out on the part of large market, corporate owners like Bell/Rogers that will feel the impact on quarterly earnings reports.

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#5 speeds
October 02 2012, 08:06PM
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Has anyone looked into how much changing the spending and reduced UFA age changed parity, vs. the introduction of the shootout on its own?

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#7 speeds
October 02 2012, 08:30PM
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I guess my point is that it may be that the introduction of the shootout has more to do with parity than any systemic changes.

Yes, the difference in spending between the top and bottom teams has been reduced, but the rationalization of spending that's occurred* through the RFA system, reduced UFA age may mean that while you can spend marginally less than before, that extra money can be spent more efficiently, creating a bit of a wash. In the pre 2004 CBA, the Rangers could spend as much as they wanted, but the players available were 31 year old Holik at 9 mil. In the post 2005 CBA, the Rangers could sign a 27 year old Gaborik at 7.5 mil.

*at least, that one could argue has occurred

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#9 speeds
October 02 2012, 08:38PM
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I wouldn't go as far as to say I think the shootout is entirely (or even mostly) responsible for increased parity (if there is increased parity), I'm more musing than anything - like you, I'd want more info before doing more than throwing out an idea.

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#10 David Johnson
October 02 2012, 09:17PM
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@Graphic Comments

"As Eliotte Friedman pointed out earlier, if he doesn't like the deal, it takes 75% of the owners to overrule him. Assuming he controls the Phoenix vote, that means he only needs 7 teams to agree with him to reject any deal."

Yes, but it only takes 16 owners to fire Bettman (maybe only 15 if NHL owned Coyotes don't get a vote, not sure how that works) so if a majority group of owners really wanted to make a deal but Bettman was blocking it, they could still do the deal by firing Bettman and replacing him with a supporter of the deal. Because of this, I have a difficult time believing that Bettman would be willing to block a majority vote of the owners unless he is really looking forward to a career change or early retirement.

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