October 01 2012 07:26AM
Negotiations can be tricky, but nuclear war isn't in anyone's interests
Photo by Sharon Farmer
As the lockout rumbles on and negotiations show few signs of progress, we are all left to wonder how likely it is to cost us the 2012-2013 season. Most seem to believe that the season will start late and be shortened, as was the case for the 2011-2012 NBA season. Is that reasonable? To find out let's look at whether it's in the league's interest to lock the players out for the entire season if it means getting a better deal in negotiations.
A key component to all of this is revenue growth. Going by figures from Forbes and this article by James Mirtle these were the league revenues every season of the last CBA:
|Season||Revenue (Billion US$)||Growth Rate (%)|
Starting with the first season after the lockout, this gives us a compound annual growth rate of 6.35%. This is a slightly lower number than the 7.1% cited by James Mirtle. I think his number goes back to the season before the previous lockout and the difference could come down to using slightly different figures overall. Part of the difficulty here is that we don't have any official numbers to work with. This won't affect any of this analysis because I'll be looking at the different proposals and possibly sitting out a year with various possible growth rates.
Annual NHL revenue growth, which varied from over 12% in the 2007-2008 season to 2.6% in 2008-2009, was pretty similar to that of the other leagues over the same period:
Let's turn to how the growth rate affects the proposals and the league's incentives to lock out the players for the full season.
The Players' Proposal
James Mirtle covered the players' proposal quite well in an article worth linking twice. It's more complicated than the last CBA and the owners' offer, but here is a summary:
|2015-2016||$2.103B plus 54% of difference between 2015-2016 and 2014-2015 revenue|
|2016-2017||2015-2016 amount, plus 54% of difference between 2015-2016 and 2014-2015 revenue|
Comparing this deal to the owners, including the potential for canceling this season, isn't completely intuitive. Money the owners make now is more valuable than money they make a year or two down the road. Similarly, money earned a year from now is more valuable than money brought in three years from now. The main financial tool used to take this into account is net present value, NPV.
Going by the proposal above, I calculated the net present value of the owner's share of league revenues for various potential growth rates. These numbers represent the of their cut after player salaries are taken out. I also calculated the net present value of their share of league revenues with the same split as the previous CBA. Here are those numbers:
|Growth Rate||NHLPA Offer (Billion US $ NPV)||Previous CBA|
From this table we can see that unless league revenues grow at a very low rate the players' proposal is better for the owners than the status quo, substantially so for higher growth rates.
The league's proposal is a lot more straightforward:
|Year||Players' Share of Revenue|
The league's offer is for six years, so let's drop a year off of it to get a fair comparison to the NHLPA offer and the previous CBA. Again, these numbers are league revenues net of total player salaries.
|Growth Rate (%)||League Proposal||NHLPA||Old CBA|
You can see what James Mirtle pointed out - the gap is large, but goes down the larger we assume revenue growth to be.
Worth Sitting Out a Year?
Let's now get to the question of how much the owners must gain in negotiations to make losing a season worthwhile. As a starting point, we'd like to compare the owners' share of revenues if they take the players' deal with what it would be sitting out a year and then getting their deal. Unfortunately, the offers have complicated this because the NHLPA offer is already one year shorter than the league's proposal; the hypothetical year off would make the players' offer two years longer. I deal with this in two ways: by adding two years to the NHLPA deal that look like the last two and by adding two years where the owners and players each split revenues 50/50, which would be more favorable to the owners. Here is a comparison of how the owners do, in net present value, sitting out a year and getting their offer and immediately taking the NHLPA offer with those tweaks:
|Growth Rate (%)||Skip Season Then Owner Offer||NHLPA extended||NHLPA 50% last 2 years||Previous CBA|
The takeway is that no matter what revenue growth is, the owners are financially better off taking the players' offer, or even the old CBA , than canceling the 2012-2013 season and getting everything they want out of negotiations.
It's worth noting that the above chart is optimistic for the owners in every scenario. Locking the players out for a full season will almost certainly not get them everything they are asking for now - if that were the case they'd probably be closer to a deal. If they don't lock the players out, this season will almost certainly be shortened which will cut into the 2012-2013 figures. Perhaps more important are sources of non-hockey-related revenue such as real estate and other investments based around the hockey venues. The return from these assets will plummet if they miss a season and they can't get any of those back from the players down the road. I suspect that if they cancel the season it would be even worse for the owners than the above table indicates.
It is not in the league's financial interest to cancel the 2012-2013 season.