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Breaking it down: Why NHL owners oppose revenue sharing

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If you were the owner of the wealthy, successful New York Rangers, how eager would you be to give more of your money to a fund that could help struggling teams like your local rival Islanders? (Mike Stobe/NHLI via Getty Images)

By Stu Hackel

The players and owners were supposed to meet on Wednesday afternoon in Toronto to discuss the CBA’s core economic issues now that contrasting offers have been proposed by each side. After Commissioner Gary Bettman and his deputy, Bill Daly, met with NHLPA Executive Director Don Fehr and his brother Steven, a PA legal advisor, in a scheduled morning session to talk procedure and a few key points, they decided to postpone the larger afternoon talks and reconvene on Thursday.

“I think more than anything else it was to review where we are in the process, where we’ve come from, where we are with the various proposals and to determine how to move the process forward in the best way possible — hoping and understanding that both sides are committed to using the time left to making a deal as quickly as possible,” Daly told reporters afterward.

Fehr also met the media (video) and made little of the postponement, characterizing it as a normal part of what goes on in bargaining. Perhaps that’s so. Fehr said the postponement was not a bad sign — and it seems that since they will go at it again Thursday, this is not cause for concern. Had talks broken off, then we’d worry.

That doesn’t mean all is well, as you know. Fehr admitted there was some frustration on both sides, in part, I’m sure, due to growing concern that the owners’ threatened lockout on Sept. 15 could become reality. The two proposals on the table make finding agreement on things difficult, especially because, as Kevin Allen writes in USA Today, “Neither side seems willing to negotiate off the other side’s offer.”

What each side proposed before this week is pretty different, and not just because they are at odds over how high player salaries should be. If it was simply a matter of pay, they could start banging out an agreement now. No, the two proposals seek to structure the game’s economics in divergent ways, so it’s almost as if they are speaking different languages. And — hoping I’m not stretching this metaphor too badly — while they each understand the other’s language, it seems they may be unwilling to speak it, or at least conduct business using it. This could be the recipe for a standstill unless — stretching the metaphor even further — they can find a third language, or at least construct a polyglot tongue by taking elements of both.

That’s something that experienced negotiators understand. Asked on Tuesday after an NHLPA gathering in Kelowna, B.C. how the NHLPA could reach consensus with the NHL on the thorny issue of what constitutes Hockey Related Revenue — the pool of overall funds from which players’ salaries are drawn — Fehr said…

…”If you can find a way to come to a conceptual agreement that we all think this counts and this doesn’t and so forth, that’s great. If you can’t find a way to do that, then you have to find a way to come to an agreement which allows you to, in some fashion, accommodate those disagreements and resolve them, if necessary, on a case-by-case basis going forward.” Then he quickly added, “I don’t think — and I could well be wrong — but I don’t think that those kinds of issues in the end are likely to get in the way. The gulf that separates us is triggered essentially by the owners’ position that the players have to make enormous concessions, far more than they did last time.”

So these different “languages” are not just on the specifics of what is being proposed, but what each side thinks is important. The owners fundamentally want to pay the players less. That won’t fly with the NHLPA. The players fundamentally want the owners to share more revenue (and are willing to temporarily take less in salaries), but while revenue sharing is part of the league’s overall package, it’s not central to the owners’ scheme as it is for the players.

Under the current CBA, the NHL shares about $150 million in revenue. The league has proposed raising that total to something around $190 million, but the savings it would achieve by cutting players’ salaries has the PA saying that the NHL’s idea of revenue sharing would, in truth, be funded by those reductions, not by the well-off teams actually writing checks to poorer clubs.

The NHLPA, alternately, suggests that teams share about $250 million. One of the least publicized aspects of Fehr’s remarks last Friday during a conference call was his disclosure that the players’ proposal included what is called an “Industry Growth Fund” which he said “would put $100 million a year to go directly to the assistance of the teams that need it. And there would be some discretion as to which teams and what amounts and how that would be done. A large part of that discretion under our proposal would be vested in the commissioner’s office. The idea was to come up with specific team-by-team plans to have us stabilize this industry and put the difficulties such as (we have now) behind us.”

That looks pretty good, and since the league would administer the fund, you’d think it would make the NHL happy. It puts a name to the notion the NHLPA floated about the players’ partnering with the top NHL franchises to assist the less-successful ones. Some of the players spoke about this to the media coming out of their Kelowna meeting on Tuesday, as this news report shows.

However, as Fehr says of the owners in the above video, “They certainly have not indicated any substantial willingness to increase the revenue sharing, but I wouldn’t say those discussions are foreclosed in that regard and hopefully that will be an area that we’ll be able to find more common ground than we have yet.”

Fehr may be hopeful, but it’s going to take a major change on the part of ownership’s perspective to agree. Why? The easy and flippant answer is that they are greedy; the wealthy teams don’t want to give away any more than they have to, even to their less well-off partners. The more meaningful answer has to do with what is most important to all owners, not just in the NHL but all sports: franchise values.

Team owners may make a few million every year, or they may lose money. But the real payday for an owner is when his team is sold. That’s when the serious profits roll in. For example — and it’s the most glaring one — the Ontario Teachers Pension Plan sold their 75 percent share of the Maple Leafs for $1.32 billion; they paid $102 million for it in 1994. George Gillett sold the Canadiens back to the Molson family in 2009 for $575 million; he paid $181 for them in 2001.

Those are two of the top three highest valued teams in the NHL, but take the example of the Minnesota Wild. Robert Naegele, Jr. bought them as an expansion team in 1997 for $80 million. He sold them in 2008 to Craig Leopold for $225 million. Leopold had bought the Nashville Predators at the same expansion sale and when he sold them to buy the Wild, he got $174 for them, more than doubling his money.

In some cases, even losing money doesn’t reverse a club’s value. The San Jose Sharks, for example, claim to have lost $15 million last year. (David Pollak’s San Jose Mercury News story on that from earlier this week is worth reading) Their owners say they lose money every year. But, according to Forbes Magazine’s most recent valuation of NHL franchises, the Sharks are worth $211 million, substantially more than the $147 million the current ownership group paid 10 years ago.

In fact, as Michael Ozanian wrote in his Forbes article accompanying the valuations, NHL franchises are at an all-time high. “The average NHL team is worth 47 percent more than it was before the lockout that cancelled the 2004-05 season,” he writes. In his interview at the Kelowna meeting in the video above, Canadiens defenseman Josh Gorges wonders why, if the owners say the current system is broken, they don’t want to change things. That 47 percent leap under the current CBA is all any owner would have to tell him. Ownership wants to fix what doesn’t work — franchises whose expenses outstrip their revenue — but they don’t want to tinker with the fundamentals of the set-up that has been otherwise very good for them.

If the explosive growth of the biggest revenue producing teams (the Original Six franchises, the Flyers, and the Canucks) has been driving the NHL’s great leap forward economically — that extra $1 billion a year in revenues since the lockout — and fueling the rise in franchise values league-wide, what will taking money out of those teams’ operations through revenue sharing do to them and, in turn, what would it do to the financial picture of the entire NHL? No one in ownership wants to find out.

There’s been some buzz lately that the smaller-revenue teams in trouble, the recipients of the NHLPA’s Industry Growth Fund, might be less solid behind Bettman and the big revenue club owners in opposing the players’ proposal. Aaron Portzline of The Columbus Dispatch quoted an unnamed player agent who said, “I think as many as eight NHL owners would accept the NHLPA’s initial proposal. And there’s probably four to six others who would find the proposal acceptable enough that they could tweak a couple of things and live with it.” Perhaps that’s true, although it’s very hard to know. As Portzline added, “Don’t expect any owner to acknowledge that publicly. The NHL has threatened a fine of at least $1 million to any club that speaks out during the lockout. Any disagreement would have to be confined to private talks among owners.”

The NHL’s wealthy franchises, undoubtedly the force behind the owners’ militancy, seem to be firmly guiding the commissioner’s efforts at the moment. One NHL exec told Portzline that Bettman has the “full support of every owner in the room right now.” It’s easy for high revenue clubs to remind their lower revenue colleagues that if you own a smaller home in a good neighborhood that includes big, pricey houses, supporting efforts that keep the values of those big houses strong helps the value of your smaller home, too.

Then again, when Dave Checketts sold the St. Louis Blues last spring for $130 million, it represented a $20 million loss over what he and Towerbrook Capital paid for the club in 2006. So small revenue clubs like the Blues may not entirely buy into the notion that what’s good for the rich and powerful NHL franchises is good for everyone. The Blues are an example of a competitive, well-run, locally supported team that has market limitations. They have a modern arena and roots in the community. They shouldn’t be a troubled NHL franchise, but they can’t make money no matter what they do and they are not alone.

So the centrality of revenue sharing — or lack of it — in these two proposals becomes another reason why we could be left with a stalemate when Sept. 15 rolls around. And then it becomes a battle of wills between the ranks of the players and the ranks of the owners. (Mike Heika of The Dallas Morning News wrote a very interesting piece about that earlier this week that’s worth reading.)

Needless to say, forging a deal in this situation is going to test all the skill and experience of both Gary Bettman and Don Fehr. That’s assuming both really want to get a deal done. There is concern from the players’ side that the owners would prefer to lock them out, a point they continually raise when they say lockouts have become a tactic of owners in capped sports and that they’re willing to play without a contract and continue to negotiate while the owners say the game won’t proceed with an expired deal. Conversely, there is concern from the owners’ side that the PA is taking its sweet time about negotiating, allowing the clock to run down so Bettman will be forced to lock out the players instead of reaching a deal.

But while fans and media urge the sides to accelerate their efforts, the core economics of the NHL are truly complex as I noted earlier this week when writing about the oversimplified concept of a 50-50 revenue split and agreement isn’t on the horizon. So time is indeed an element here. It is in short supply and if it runs out, the finger-pointing could engender bad will — which hasn’t really been part of these negotiations yet. Once that ugliness starts, no good can come from it.

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  • Published On Aug 22, 2012
  • 5 comments
    DeeCa
    DeeCa

    Why should the Detroit Red Wings who play in a 32 year old arena pay another team that plays in an Arena only a few months old?

    Jim9
    Jim9

    It is truly a complex situation. The bottom line really comes down to just that, the bottom line. Why should a team like say the Flyers, one of the most successful of the expansion teams be forced to subsidize the less successful team that are either in a bad market, run badly or a combination of both? The revenue that should be shared are the resources that come as a result of a league wide TV contract or other league contracts and  advertisers. That should included league branded items. A great deal of the revenue that the successful teams generate come from concessions and local tv contracts and sponsors. This is the difference between the haves and have nots. Small  market teams don't get the same revenue sources and there fore do not have the ability to generate the same profits. Why should the successful teams subsidize the smaller market teams with finances which then in turn allows them to be more successful in fielding a more competitive team. So they will have smaller profits, and competitors that are fighting them for free agents use capital that came from the larger market teams. I understand the reluctance. of these teams. They have managed their teams correctly for years and are now being asked to share that success with their rivals. While they are all partners within the league, they all have their own bottom line and investors to answer to.

     

    PopsTwitTar
    PopsTwitTar

    Great article, Stu.  Dead on about what these owners are all about - resale value.  The more they keep for themselves, the more the value of the teams inflate.  Its really simple. 

     

    Its also why you cannot believe any published reports from teams on their finances.  They will tell you til the cows come home that they are losing money...and in the end they almost always sell for a profit anyway?  Unless someone provides audited financial statements, with the footnote detail to back it up, and those statements show no accounting/bookeeping shenanigans, there are too many ways for money to be shifted around within an integrated system.  Like loans from the person to the entity which pays interest back to the owner...or intra-company transfers between the "team" and affiliated companies existing solely to support that team so that it appears the team itself loses $, but all the affiliates make the profit. Teams are a great way to build up huge financial losses from an accounting perspective, but still grab millions of ancillary revenue that isnt directly attributed to the team’s financial statements. Real estate deals…TV and radio broadcasting deals…sponsorship…arena management and concessions… Thats why, in a few years, a team can go from "losing millions” to suddenly selling for a 30% profit.