Following the Board of Governors meeting, Commissioner Gary Bettman of the National Hockey League addresses the media at the Westin Times Square on December 5, 2012 in New York City.
You may not have noticed that the NHL hasn’t started its season yet, which is arguably Problem #1 for the wannabe major league: Ice hockey is fourth in a three-horse race of pro team sports vying for the affection of casual U.S. fans. Problem #1A is the lockout of players that’s been in force since Sept. 15, which has resulted in the cancellation of nearly 550 regular-season games to date. But in the event you are following the inaction rinkside, don’t be fooled when league officials or anyone else claims that the main issue is greedy players. The real problem in hockey is not in the locker room, but in the owners’ suites and commissioner’s office.
The NHL would like you to believe that owners give too much money to players. That was management’s position almost a decade ago—the last time the league locked out its talent—when players were getting three-quarters of total revenues. After an entire season was voided, the NHL Players Association caved, agreeing to lower its members’ share of revenue to 57%. Peace and harmony have ensued since, but now the owners want an even bigger piece of the pie, claiming financial hardship.
Don’t believe them, not for a minute. First, as I’ve written about before, sports team accounting is misleading at best, given that club owners can claim to be losing money when a) the losses are on paper only; b) there are tax benefits from whatever losses happen to be real; and c) the value of their teams continue to rise.
(MORE: America’s Gun Economy, By the Numbers)
All this is true for NHL owners as a group. The average NHL team, according to Forbes, is worth $282 million, an 18% increase from one year ago. It’s true, certainly, that sky-high values for a handful of mega-successful teams (Toronto Maple Leafs, $1 billion; New York Rangers, $750 million; Montreal Canadiens, $575 million; Chicago Blackhawks, $350 million; Boston Bruins, $348 million) raise the overall average, while some struggling teams (Carolina Hurricanes, $162 million; New York Islanders, $155 million; Columbus Blue Jackets, $145 million; Phoenix Coyotes, $134 million; St. Louis Blues, $130 million) are worth much less. But it’s also true that $282 million is higher than the price tag Forbes placed on the most valuable team in the league just a decade ago (Rangers, $277 million). And the average value for the bottom five teams today ($145 million) is nonetheless higher than the price tag for fully half the league’s team in 2002. Few teams have struggled financially in the past decade as much as the Coyotes, for example, and yet their valuation over the past decade has increased 69% ($79 million to $134 million).
Businesses don’t increase in value if the underlying model isn’t sound.
None of which is meant to say that the NHL doesn’t need tweaking. It does, in two ways. First, there’s a strong argument to be made that there are too many NHL teams, or at least too many in places where ice hockey is not exactly a native sport. i.e., the American South. This is the fault of NHL commissioner Gary Bettman, long a champion of NHL expansion. But hockey in the U.S. is not a national sport; it’s a collection of regional enthusiasms, and not enough fans in the American Southwest and Southeast are as enthusiastic about hockey as they are about football, baseball, and basketball. Is it any wonder that the Atlanta Thrashers’ fortunes improved after they relocated to Winnipeg last year (changing their name to the Jets)? With a rabid regional fan base, management could raise ticket prices and secure a more lucrative local TV deal. Forbes has the franchise’s value increasing by a fifth in just a year (to $200 million). Alas, there aren’t that many large markets without an NHL franchise left north of the border, or in the northern U.S. Likewise, contraction isn’t a likely prospect. Major (or even minor major) sports leagues reduce their ranks of teams about as often as owners speak honestly about their finances.
(MORE: Are Twinkies a Good Investment?)
More to the point, contraction might not be necessary if NHL owners would only grow up. The problem in hockey, as ESPN The Magazine‘s Peter Keating recently explained, is that NHL owners don’t share enough of their own money with each other. And share they must, because the nature of the NHL’s “popularity” in the U.S.—intense interest among small pockets of local fans, consistent disinterest otherwise—translates into paltry national TV contracts. As a result, Keating writes, NHL teams “share a far tinier proportion of their revenues than teams in other sports do, because NHL clubs rely much more on local media deals for money than on national TV contracts.” So big-market teams, with lots of local TV money, spend more on player salaries, forcing small-market owners to choose between paying their players more than they can afford or putting a subpar product on the ice. Either choice has unpleasant financial consequences.
This has long been a problem, of course, for all major sport leagues. But we’ve known for a while that the way mature owners and strong commissioners have to deal with this imbalance is to share revenues between teams. Practically, this allows all teams to be competitive, ensuring a consistent and popular product. Philosophically, this recognizes the we’re-all-in-this-together aspect of professional sports leagues, one of the more curious economic constructs in history. It’s not a coincidence that the most successful North American sports league also has the most rational approach to revenue sharing. Some 60% of the NFL’s $11 billion revenue pie is shared, which is why tiny Green Bay, Wisconsin can compete with big bad New York or Chicago. The other two Big Three leagues aren’t quite as egalitarian but have improved their models in recent years: MLB teams share nearly a third of local TV revenue, while NBA teams reportedly approach a 50% total revenue share (give or take a few complex calculations).
The NHL, meanwhile, has been sharing 4.5% of its $3.3 billion revenue (with not much more on the table in current talks.)
So greed is the issue, alright: owners’ greed, specifically owners in larger markets who refuse to recognize that sports leagues are in many ways socialist enterprises, in which the needs of the many fat cats should outweigh the few obese cats. At least if the obese cats want to keep purring.
(MORE: 3 Approaches to Curbing Gun Violence Using Economics)
Again: NHL owners with struggling teams, to the extent that they are actually struggling, are largely in the shape they’re in because of their fellow owners, not because of NHL players.
And all NHL owners would be wise to recognize their own culpability ASAP, rather than engaging in more legal maneuvering. (At the moment, the league is busy filing lawsuits and complaints, while the NHLPA is trying to decertify itself, so players can sue owners for anti-trust violations.) The urgency is not because NHL fans will give up on the sport; hockey fans are absolute gluttons for abuse and incredibly desperate to watch pro hockey. (Seriously, check this out.) No, NHL owners should get their act together because their league faces something none of the other major sports do: Russia’s KHL, an aggressive and surly rival league that has long resented how many European players in general and Russians in particular choose to play in North America rather than staying on their home continent. The KHL’s finances, like most things Russian, are a little murky, so it’s hard to know if the league could seriously compete with the NHL for top talent in the long run. But a surprisingly large number of iced NHLers are now playing in the KHL while they wait out the lockout, including a lot of North Americans.
You have to worry that at some point many will simply decide to stay for the long haul.