At the end of this round of the NHL’s labour negotiations one phrase should become as familiar to hockey fans as the term salary cap did during the 2004-05 lockout – revenue sharing.
This is where the league owners and the NHL Players’ Association have their sharpest difference over a solution to the league’s lingering economic problems.
Seven years after the owners successfully won a hard salary cap based on revenue with a little revenue sharing, there are fewer of the NHL’s 30 teams in serious economic trouble – six in the estimate of one former governor – but the owners are still looking to find the solution in the pockets of the players.
In their first offer to the players earlier this month, the owners demanded the players reduce their share of hockey-related revenue (HRR) from 57 per cent to 46, but also demanded a change in how HRR is defined that would further reduce that share to 43 per cent.
The owners also want to increase the eligibility for unrestricted free agency from seven years to 10, a five-year limit on contracts and to abolish salary arbitration. There were no proposals on revenue sharing.
There is a chance the players will make their first counterproposal this week when they hold two days of talks with the owners in New York on Tuesday and Wednesday.
It is clear from union sources that whenever it is made, the players’ proposal will suggest far more revenue sharing between the league’s richest and poorest teams.
“It’s a key component of the system we have now and will be a key component of any system we have in place,” said former player Mathieu Schneider, special assistant to NHLPA executive director Donald Fehr. “If the overall goal is the health of the entire league, then there needs to be some meaningful revenue sharing.”
When he was head of the Major League Baseball Players Association, Fehr was the architect of the revenue sharing that was introduced in 1996. Now, 48 per cent of the revenue of MLB teams is subject to revenue sharing, which includes 31 per cent of the richest teams` local revenue.
In 2009, for example, that figure translated to about $433-million (all currency U.S.) that was paid to MLB`s lower revenue teams from the total revenue of $6.6-billion. According to a memo from NHL commissioner Gary Bettman to the league`s governors that was obtained by The Globe and Mail, the league`s HRR for the 2008-09 season was about $2.6-billion. Bettman said in the memo that the revenue-sharing obligation was about $146.1-million.
According to research done by Justin Hunt, a sports attorney in Columbus, Ohio, whose research paper on revenue sharing in the NHL, NBA and NFL will soon be published in the Texas Review of Entertainment & Sports Law, a publication of the University of Texas School of Law, the actual revenue redistributed to the NHL`s poorer teams was $174.39-million. His number is higher because his calculations on the difference in the U.S. and Canadian dollar were slightly different than the NHL`s and he included money from the league`s central fund, an account that contains revenue subject to sharing like broadcasting and merchandising.
The NHL lags behind the other three major North American professional sports leagues when it comes to revenue sharing. The richest league is the NFL and it is also the leader, sharing 60 per cent of its annual revenue of more than $9-billion among its 32 teams.
With the adoption of its new collective agreement earlier this year, the NBA sharply increased its revenue sharing. It went from a plan mainly based on a luxury tax on payrolls to one closer to baseball, in which the richest teams contribute a larger share of their local revenue. By the time the plan is fully in place in the 2013-14 season, the bottom 15 of the NBA`s 30 teams will draw as much as $16-million each, which is up sharply from last season`s maximum of $5.8-million.
The Los Angeles Lakers, with their lucrative local broadcasting contract, are estimated to have paid $50-million this season into the revenue-sharing pool. In the 2011-12 season, the maximum any of the top 10 revenue teams in the NHL paid in revenue sharing was about $14-million.
As the accompanying chart shows, while the two or three poorest NHL teams did well compared to the NBA in money from revenue sharing in 2008-09 (the Phoenix Coyotes received $18.59-million), most were in the $6-million to $14-million range.
In addition to paying out the least in revenue sharing, the NHL`s system is easily the most complicated of the four major sports. It is explained in the collective agreement but only those with accounting degrees can understand it.
“It`s really complex so accurate information is hard to compile,” Hunt said.
The NHL starts by setting what it calls Targeted Team Player Compensation each season. This is a number that is between the midpoint of the salary cap and the floor. It is a result of a complicated equation involving each team’s regular season and preseason revenue.
Next, the league calculates what each team should have available to pay player salaries. The available amount is subtracted from the target amount and qualifying teams are paid the difference.
But there are also exclusions and clawbacks. Any team in a market of more than 2.5-million households, such as the New York Islanders, cannot receive revenue-sharing funds. Teams who miss attendance and sales targets can see their shares clipped by up to 50 per cent.
When the players make their counterproposal, it is expected to follow the baseball model. This calls for a greater share of the rich teams` local revenue to go into the pot. This is not expected to thrill the owners.
Both a current NHL governor and a former NHL governor admitted the league`s richest teams are not keen even about the limited sharing the exists now. The former governor said the owners would only accept sharp increase like the NBA owners did if Fehr and the union can convince them every team will become profitable.
“You really have to get whole league profitable for that kind of revenue sharing to work,” said the former governor, who added the league is saddled by several teams in markets that will never work financially. “Otherwise, it`s just moving chairs around the Titanic.”
But a prominent sports agent, who asked to remain anonymous because he is not authorized to speak for the players as a group, said revenue sharing is the only answer to the NHL's problems. He said the NHL’s cap system is doomed to fail because the revenue from the richest teams inflates the salary cap beyond the reach of the poorest teams.
“If the NHL owners were smart, they’d say to Fehr, ‘Help us design a system that works for us and you guys can live with,’ and he would come up with a system,” the agent said. “All the owners do now is grab more money from the players. That works for a year, revenue goes up and the small markets start choking.
“Then they limp to the next collective agreement and Bettman promises more cap money for small markets. This is all just like a Ponzi scheme. Unless you meaningfully share revenue, the small markets will die.”