Wednesday, July 6, 2011

Why The NHL Won't Lockout in 2012

by Graydon Ebert

This weekend NHL General Managers spent like they were auditioning for Lifestyles of the Rich and Famous, despite the fact that there was only one premier talent in the free agent market. This has led many to suggest that the NHL business model is in trouble, if not broken, which in turn might mean fans will see another lockout when the NHL CBA expires at the end of next season.

We at Offside think that the prospect of an NHL lockout as a result of high free agent spending is unlikely.

The first thing to remember is that the players are guaranteed 57% of hockey related revenue. The players get this amount whether the teams sign these contracts or not. Now the concern might be that all these above-market contracts might, in the end, result in the players getting more than their 57%. However, the escrow system ensures that anything the players are paid over their 57% is returned to the NHL. So if the NHL pays the players too much because its projected revenues were too high, it just pulls the difference out of escrow.

What the commentators in the media and the public rightly noticed is that many of the free agent signings were driven by lower market teams who had to spend significant amounts of money that they don’t have to get to the salary floor of $48 million, which is significantly more than the salary cap was when the NHL came out of the lockout. You only need to look at the Florida Panthers who added Brian Campbell, Kris Versteeg and a bunch of mid-level players at above-market contracts despite losing millions of dollars a year to understand what is happening.

However, these signings are not evidence that the financial relationship between the players and the league is broken.

Yes, perhaps the NHL would like to see the players get a smaller share of revenue, but the league as a whole is thriving. The strong Canadian dollar, the NHL’s new TV contract, solid TV ratings and strong attendance in traditional markets have produced continually rising revenues league-wide.

The problem is that this success is not evenly distributed among all the teams. Some teams are doing well and can afford to spend well past the floor. Other teams are really struggling and the CBA requires these struggling teams spend an amount of money on player salaries that is unrealistic given their challenges in generating revenue.

If this seems like a big problem, it's because it is. However, it can and should be addressed without a lockout.

Ultimately, all the players care about is getting their percentage of revenue. How this is proportioned among the teams is not a real concern for them. This gives the NHL the ability to be creative with how it chooses to divide these player costs among the different teams.

One possibility might be to adjust how the salary cap and floor are calculated. In the NHL, the cap and floor are calculated by figuring out the midpoint of player salaries (based on the player’s percentage of league revenues) and then adding $8 million to get the cap number and subtracting $8 million to get the floor. The league could expand this range making the cap significantly higher than the floor, i.e. adding and subtracting 10-15 million. This may have some effect on competitive balance as you’ll have a group of teams spending significantly more than other teams. However, the history of sports is full of teams that spend a lot and finish poorly, and teams with low payrolls that have had significant success through innovative and intelligent approaches to team building. The NHL could also consider lowering the floor significantly but providing revenue sharing and other incentives to poorer teams to spend more on player salaries.

These solutions will have to be collectively bargained so the players will have to agree them. However, if their percentage of revenue is protected and they aren’t making less money, the players should agree to the terms and not force a lockout.

So, while the events of this past weekend should cause some concern for the NHL and cause it to reevaluate the current structure, the idea that a lockout is now imminent is an overreaction.

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