NHL Economics Part I
By Editorial Staff
NHL ECONOMICS PART I
Today begins a three part series on the NHL and its economic model, today’s article is an exploration of how the NHL economic system has developed into what it is today and it will examine the long term viability of it. Part two will examine the salary cap itself and its strengths and flaws and part three will examine how the NHLs economic model compares to the other big three North American Sports Leagues.
In today’s world of Professional Sports the notion of wild contracts, monster payrolls, and teams spending to the cap has become the norm. In order to retain the world’s premiere talent you must pay up or shut up. Of course this is does not come without its consequences and once every few years a team screams uncle and calls in the moving vans to leave for what it hopes will be greener pastures. Currently three of the four major North American leagues have some form of salary cap in place. The idea of a salary cap was born out of the rapid escalation in player contracts. It became apparent that to create parity and ensure small market teams could remain economically viable some sort of cost certainty was needed. The idea of capping player costs in order to achieve more parity on and off the playing surface was born.
In the National Hockey League the idea of controlling escalating costs can be traced back to the 1970s and being forced to compete with the upstart WHA. Bobby Hull signed at the time a record deal to go play for the Winnipeg Jets of the then WHA. Over 1 million dollars for 10 years and there are many people who point to that contract as the one that started a dramatic rise in professional sports contracts. The NHL became concerned with retention of its best players. After all if Bobby Hull could be loured a way any one could. By the 1980s the NHL no longer had to worry about the WHA as it had folded in 1979. In fact because of that fold the NHL now had the Edmonton Oilers; a team that would go on to dominate the 1980s and become one of the greatest dynasties in NHL history. By the end of the 1980’s player costs once again became a concern for pro hockey. A small market Canadian team with the likes of The Great One, Messier, Fuhr, Lowe and so many more had to find a way to pay up. So how could they? The answer came on August 9th 1988; one of the biggest blockbuster deals to ever be pulled off in NHL history. Wayne Gretzky was dealt to the LA Kings, Los Angeles a big market American city. From that point on it seemed that money and talent would forever be in twinned with the NHL.
Over the course of the 1990s four NHL teams would be forced to deal with economic hell and eventually were relocated. Two of those teams the Winnipeg Jets and Quebec Nordiques were Canadian teams shipped off to the United States. Player salaries continued to rise and it became a possibility that Calgary, Edmonton, and Ottawa could soon meet the same fate as the Jets and Nordiques. Ridiculous deals were being handed out like candy. Alexi Yashin was signed by the New York Islanders on draft day 2001 to a 10 year 87.5 million dollar contract. The Rangers, Leafs, and Wings frequently made major singings and had payrolls 20 million north of today’s cap.
The climax to this saga would start September 16th 2004 when Gary Bettman announced that the owners had locked out the players. Small market teams said there was no longer anyway they could compete without a salary cap. 300+ days later a new CBA was ratified and the NHL was ready to begin anew. There was cost certainty in the form of a salary cap, parity across the board and the belief that any market in the current 30 team league could now be economically viable. The original post lockout cap had a ceiling of 39 million dollars. This would ensure all 30 teams the ability to sign top players and compete both on the ice and at the bank. Skip ahead to 2011; the salary cap is now at 64.4 million dollars and more the floor is 48 million. The cap is tied to revenues so the year over year increase suggests that it is working, but the reality is around half of the leagues teams lose money. Some of them lose millions of dollars per year.
So the question must be asked does the NHL operate on an effective economic model that allows for growth of the league and maximum profits.
Well the facts suggest that the first question is really a two point answer. The NHL wanted a way to make every team economically viable and that hasn`t happened. In fact there are currently no less than three teams that appear to be in dire straits and one just relocated. The other function of the salary cap was to control escalating player salaries and give every team a chance at singing the premier players. It certainly appears that the NHL salary cap has been more effective at slowing the rising cost of players. If you look and see the NFL, MLB, and NBA all three have multiple players making more than 12 million per season. And in the case of the MLB there are multiple players making 20 million per season or more. Those leagues also have huge discrepancies between the top spending and bottom spending teams. So it does appear that the NHLs CBA has been at least somewhat effective.
With that said there are two sides to every coin, because a salary cap floor was written into the last collective bargaining agreement teams are now forced to spend a minimum amount of money. For many teams in the Sun Belt spending to the league floor guarantees a season of losing money because they simply don’t generate the revenue that they need to be at the floor and make money.
Now the NHL says there is no problem because the cap rises on if revenues rise. Thus if the cap is up revenues are up as well. This is true to an extent, last year there were six Canadian teams and they generated somewhere around two thirds off league revenue. Meanwhile in Florida, Phoenix, Tampa, Nashville, and Atlanta the teams all lost money, lots of money because the cap floor is tied to league revenue it went up meaning those teams will have to spend even more on players this year. We know for certain the only reason the Phoenix Coyotes are still in Arizona is due to the fact the municipality of Glendale writes the NHL 25 million dollar checks but that was due to the belief there was an owner willing to keep them in Arizona. Now it appears that is dead and come June there will probably be the NHLs second relocation in as many years.
The goal of any business is to make money and the NHL does make money. The twist is the amount of teams that are profitable in the NHL is limited to somewhere around half the league, depending on the year and the types of revenue you are looking at. That is not very effective for making money. The problem seems to be that the NHL has expanded into extremely competitive markets with a relatively unknown product. The hope was that big Southern markets had untapped potential for growing the game and the NHL would compete with the other sports in those markets. Time has shown that the NHL succeeds in Canada, original six markets, Northern US markets and places where it has relatively little to compete with. For example San Jose and Carolina, both teams are Sun Belt teams and both have had at least some success economically. There are two reasons for this one is that they are competitive on the ice and the other is they are in regions where they are the only pro sports teams that compete in the winter months. San Jose’s closest competition is the San Francisco Bay area and the Hurricanes are in Raleigh North Carolina which has no other major winter sports teams. Places like Detroit, Pittsburgh, New York, and Minnesota all are places where hockey is played at a wide spread grass roots level, and the seven Canadian teams have the advantage of extreme popularity and a strong Canadian Dollar.
The NHL teams that are failing right now are in markets with extreme competition and are mostly in large Southern markets. I.e. The Florida Panthers and Phoenix Coyotes, two teams that are in oversaturated sports markets and losing money. Both are in markets with NBA, MLB, and NFL teams in close proximity as well as NASCAR and NCAA. They are also in markets that aren’t native to hockey and have many things to do other than go to sports events.
The NHL took a risk expanding into big American markets with the hope the sport would catch on and grow. It has worked in some places but many of the teams that lose money are in big Southern American markets. There aren’t that many businesses that have such a large gap between the top and bottom for revenue generation. It is ironic because the very system that was supposed to prevent this from happening has caused it. The roles have just reversed Canadian teams make money but much of that is due to the rise in the Canadian dollar and the growth of the Canadian economy over the last ten years. It appears that the Sunbelt experiment has failed in most places. There is a small group of diehard fans in these regions but not enough to ascertain hope of profits in the future. The NHL has been reluctant to admit this but it appears that they might not have much choice now. The NHL economic model changes over time. It is a revenue positive league overall but there are so many teams that lose money. The NHL economy is interesting and confusing and it appears it will continue to be ever changing. It makes one wonder what will does the future hold for the NHL?