Buffaloed said:
It shouldn't be the case that they have to do everything perfect to not lose money.
I don't think they do have to be perfect. I do think a team can be managed well and lose money, but that is not the normal state of affairs. Sometimes it is just bad luck. For example, injuries have a big affect on the cost side and the revenue side if team performance suffers.
Let's stop and think about the nature of this business. It is truly a competition for profits among the 30 teams. Let us begin with the premise that total NHL profits should be about $300 million. That's a 10% return on franchises worth on average $100 million. For the Oilers a good year sees them make a profit of $7.5 million, for the Rangers, it might be $20 million. But overall, a 10% return. (Don't take the actual numbers here too seriously. I'm trying to illustrate a point.)
A second premise is that this is a business where profits fluctuate wildly. Almost all revenues are local. Teams that are successful on the ice pile up revenues, teams that are not successful, struggle. This is true in the regular season and is particularly true for the playoffs. If the overall league profits should be $300 million, $150 million of them will go to the 16 playoff teams. Everybody can't win.
Thus in our theoretical model, the 16 playoff teams make $400 million in profits and the 14 teams that miss the playoffs lose $100 million. We still have a good return for the league. Setting aside the time value of money complication, the typical team does not have to make $10 million in profits every year to be a good investment. They have to turn $150 million in profits over fifteen years.
Again, if they are typical, they make the playoffs 8 times. They get one trip to the SCF, two trips to the conference finals and in four years they win one round of the playoffs. In the one year, they go to the SCF, they probably make 25% of the profit for the 15 years. In the other two years they are elite, they make another 25%. And so on.
When teams miss the playoffs, but are otherwise well managed, they might break even. In the two or three years they are a bottom feeder, they might lose money despite their best efforts. Over the 15 years, they turn their 10% profit. That's the way it should work. That's the way it has always worked. Well managed winning teams are extremely profitable. Poorly managed losing teams are extremely unprofitable. Everyone else falls in between the extremes. Over the long term, everyone gets their just desserts.
I don't think it is too hard to see why the NHL is less profitable today than it was ten years ago. The league added nine losers and zero winners. The same number of teams make the playoffs today as in 1980. The owners always see expansion as a free lunch. They took the $500 million in expansion fees and forgot that every new team made it harder to win, made it harder to get to the promised land of extreme profitability. The result has to be to reduce the overall profitability of the league because there is still only one Stanley Cup to be won.
So what's the answer? If we accept the idea that the league expanded so much that the economic model that has worked forever no longer works:
1) Do nothing. Profitability has been reduced and franchise values fall as a result. This seems fair since the expansion fees did end up in the owner's pockets.
2) Do nothing and let half a dozen teams fold. This, too, is fair given a zero sum game. There are only so many profits to be divided and competition drives out the unsuccessful.
3) Do substantial revenue sharing. This will not improve the profitability of the league but it is also fair. Right now the extremely profitable teams are not paying any price for their expansion fees. The extremely unprofitable ones have given back the benefits. This could be solved by making the final two rounds of the playoffs league revenues to be evenly divided among the 30 teams. Reduce profits of winners and reduce the losses of the losers. The result might be - across the league - an 8% return instead of a 10% return.
Result? All teams survive but hockey returns a smaller return on investment.
4) Get cost certainty. Artificially reduce the cost of labour to below what the profitable teams are willing to pay. This will return overall league profitability to where it was before expansion.
If there is revenue sharing included as part of the package, the profits will be spread around and all teams survive. If there is no significant revenue sharing, winning teams will become much more profitable and losers stay in the same place. It doesn't really matter to the owners as long as they all assume they will eventually win.
A $45 million salary cap (let's be realistic) would not affect half the teams because they already spend less than that. It would, however, dramatically improve the profits of the top teams.
The best solution for most owners is cost certainty without revenue sharing. The best of both worlds would be both 1) cost certainty, and 2) contraction. Profits for the remaining, say, 24 teams would be substantially higher.
The best solution for the players is number 1 or number 3. That preserves jobs and provides the appropriate return to the owners who effectively took their profits in expansion fees. They were supposed to be foregoing future profits when they expanded and they are foregoing them.
The second best solution for the players is number two. Do nothing and let half a dozen teams fold. The job loss would be substantial but the remaining players - the majority - get more. The players are willing to give something back to save jobs, but for them the choice will end up being an arithmetical calculation.
If the owners get what they want right now, the player's salaries drop by about $500 million. If the six weakest franchises fall by the wayside, they collectively lose about $180 million. That's a no brainer for the players. The players are collectively better off if 12 teams fold than with a $31 million cap.
Tom
