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.