Good afternoon, everyone! Thank you for coming to Tampa for the conclusion of the 2004 Stanley Cup finals. I'd like to start by congratulating the Calgary Flames and Tampa Bay Lightning on their spectacular Game 7. Under the circumstances, with the NHL ready to shut down because of a dispute over its economic system, one can safely say there was no loser here. Yes, one team took the Stanley Cup home, but two small-market teams came this far, after years of losing, despite having payrolls a fraction of big-market teams left behind, some far behind.
These two unlikely finalists came this far, and 12 different teams have reached the Stanley Cup final four in the past three seasons, and 21 teams made the final four, 12 of them advancing to the finals, in the past decade playing under the current CBA, and 20 teams have vied for the Cup in the finals since 1990 -- including six of the nine teams that have joined the NHL during that span of time! That should say something about the ability of teams to compete on the ice regardless of market size or payroll level.
But you'll never catch NHL commissioner Gary Bettman saying anything like that. No, what you'll hear Bettman say over and over again is only what serves him best. In a 973 word introduction to his May 25th pre-finals Q&A, 386 words (40%) were about the CBA, mentioned five separate times, despite his protests right up front that "the Stanley Cup and the game itself should be the focus". In the overall press conference, 66% of all discussion was in re: the CBA, mentioned 20 separate times, despite Bettman's reiterations that the finals should be the subject of conversation.
Such protestations aside, Bettman said twice more that NHL revenues as publicly reported are "gross" even though the Levitt report clearly describes them as "net". Perhaps Bettman, who never used the word "revenue" alongside "gross", meant "gross profit" rather than "gross revenue", which is far closer to the truth. Regardless, both writers and readers of media reports continue to act as if he is referring to gross revenue -- which made it appropriate for Bettman to admonish reporters to read the Levitt report before asking stupid questions, though for the wrong reason considering his own repeated misquotes of the findings.
So let me take this opportunity to admonish all of you in advance for all of your stupid questions: Get a degree in economics, finance, and accounting before trying to figure all this out. In the absence of such, ask away, and I'll do my best to answer based on my own business experience:
Q. Why is the NHL so hell-bent on getting the players to agree to a salary cap? Why don't they all just get together and say, "This is how much we all agree to spend on our teams"? After all, they're in charge of their budgets, aren't they?
A. I know most of you know this already, but there are a handful of people who need to be reminded that the NHL cannot simply impose a salary cap on the players -- not even tacitly by getting together on the side and saying, "Let's not pay our players more than $x." It would be illegal price fixing without the players' consent in the form of a collective bargaining agreement.
On the other hand, there's nothing to stop owners and their general managers from saying, "From now on, we vow to manage our business sensibly," and based on that statement decide team by team and player by player what to spend. In fact, the players' association would welcome such a stance far sooner than the price fixing scheme the owners want to force upon them. That's exactly what happened this past season, causing a bit of a decline in salary levels, and the players readily agree that a decline is inevitable due to stagnant revenue streams -- they just don't want to be locked into artificially capped salaries when revenues and franchise values rebound down the road.
Q. What about some sort of revenue sharing or luxury tax system?
Revenue sharing between teams will never happen. There is no way the billionaires who own the big market teams will agree to subsidize the billionaires who own the small market teams (most of the paying public may not know just how wealthy their team owners are, but you can bet your booty their fellow owners do).
A luxury tax will never pass muster with ownership either. No way will the billionaires who are willing to spend money to try to reap the lucrative rewards of winning (some like Detroit with some success, some counterproductively like the Rangers) agree to share any of those profits with the billionaires (like those in Boston and Chicago) who prefer to bleed their fans dry and pocket all the earnings without ever pretending to ice a team capable of competing for the Cup.
Ultimately, franchise value pre-empts any potential for revenue sharing -- the fellows in large markets who own multiple teams playing in lucrative arenas on hyper-valuable real estate for rich broadcast deals on networks some of them own are not about to allow any part of their equity to transfer to teams that lack some or all of those key attributes, not when they paid premiums for them in building or buying their franchises.
Q. Is that what they mean then when they say the economic system is broken?
No, that's not what the NHL means, even though that summarizes the entire economic system, or rather the entire spectrum of business models, of the NHL -- and the inequities betweem them. The average fan, to whom any phrase that includes the word "economics" is roughly equivalent to Dracula saying "I vant to suck your blood", is able to boil it all down pretty quickly to the single essential element behind the dispute: money.
To put it bluntly, the NHL wants to take back about half a billion dollars of profits it has transferred to players in the past decade or so. The players, realizing that revenues have flattened and that they therefore have to give some back, unilaterally offered to cut their share of last year's pie by 5% across the board -- 15% of the disputed half billion -- while they negotiated the terms of the new CBA (they asked for a share of franchise value in exchange, and were of course immediately turned down, which sums up the whole ball of wax right there). More recently, the NHLPA was rumored to have offered a 10% salary reduction (30% of the half billion) in exchange for a luxury tax system, which we know owners will never agree to among themselves let alone with the players, and a reduced age of free agency.
Q. So what exactly is the economic system that they claim is broken?
Actually, the economic system of the NHL, the one operational across the board as opposed to individual team business models, was on full display this year in the Stanley Cup playoffs: in the NHL, success on the ice translates into financial success. Pittsburgh, Montreal, and Edmonton were not having any difficulty when they were winning Cups. Neither are Calgary or Tampa this year, nor was Minnesota or Anaheim last year, nor Vancouver or Ottawa the past few years despite disappointing playoff runs. Revenue, profits, and franchise value have soared in Detroit, Dallas, and Colorado in the past decade. The Devils are the only anomaly because of their unenviable geographic position in the armpit between two highly popular franchises in New York and Philadelphia.
The Devils have won three of the last ten Cups under the management of the notoriously frugal Lou Lamoriello -- Bettman completely mischaracterized them as a top-ten payroll team (they may be now, after winning three Cups, but otherwise have been the model for economical team building). Two other Cups were won by Colorado, a team that has let far more free agents leave than they have signed and have staked their place in the NHL pantheon mainly by developing or trading their own home-grown assets. And now, with Tampa's win, fewer Cups have been "bought" during the current CBA than have been wisely built.
The incentive is to win, which seems to me to be a good thing -- what the NHL wants to impose is a system that makes losing profitable too, that rewards (or at least makes up for) bad management as well as good management, and that, if Larry Brooks is right about a lower age of free agency as in the NFL, will make it even harder for teams to retain their home-grown stars in the long run. Fans should think long and hard about whether they want their money to subsidize losers or reward winners before deciding whether they support skewing profits toward the players they pay to see play or to team owners.
Q. OK, we all know it's about money, and the NHL claims teams are losing money under the current system. Are they wrong to say that?
I've gone to great lengths to show that we really don't know -- and despite all protestations over what the Levitt report purports to say, I've shown specifically some of the ways that report intends to deceive us, some of the many holes remain in our knowledge even with the report, and how even Gary Bettman doesn't seem to know exactly what it says. I can say one thing with certainty -- recent bankruptcies in the NHL have zero to do with player salaries and everything to do with owners' extra-curricular activities (some of them criminal) or a lack of adequate arena facilities.
As if to demonstrate just how uncertain we will ever be about team finances, take newly reported information about the Rangers and their parent company, Cablevision. Cablevision has lobbied hard against a proposed new West Side stadium for the New York Jets that would compete with Madison Square Garden for arena events. We have learned during this dispute that the Garden receives an annual real estate tax abatement -- a 100% abatement -- from the city worth tens of millions of dollars annually. Is that credited as revenue? Is any portion of it credited to the Rangers? How many other teams have publicly funded benefits of this type? Teams in Canada that are taxed to death make no secret of its detrimental effect -- why does no one publicize beneficial tax programs like this one? What other types of revenue streams or cost abatements do teams benefit from that never make it to the operational ledger?
I have no doubt that some teams lose money and that some teams make money. Every piece of real data I have been able to get my hands on demonstrates 100% that this is a result of team management performance as it translates into business decisions and winning hockey. Seems to me the only solution to this problem, as it is for just about every business entity in the world, is to improve management. Why is the NHL avoiding that issue and trying to force millionaire players to subsidize billionaire and near-billionaire owners who refuse to subsidize each other?
Q. Good question: Why doesn't the NHL focus on getting its own house in order before resorting to a work stoppage?
Because they know it will mean contraction, and after collecting all those expansion fees and having already spent the money or having cashed in on inflated franchise value over the past decade, letting teams fold or relocate is something they want to avoid. Meanwhile, contraction may very well be the correct answer to the problem -- the true economic problem in the NHL is the simplest economic one, supply and demand.
Overexpansion has diluted the talent pool to the point where there are too few stars to go around. Fewer stars, more teams bidding on those stars -- that's called high demand forcing up the price of a limited supply item. Classic.
The NHL can try to impose any type of artificial system it wants on the NHLPA, the laws of supply and demand will subvert them in the end, just as they did in the last CBA. Funny that the owners are now hell-bent on undoing a CBA that was a huge victory for them a decade ago. Just as the limited supply of players caused teams to break the rookie salary cap they won in that CBA, just as the limited supply of stars caused teams to overpay for restricted free agents over whom they possessed all bargaining levereage under that CBA, just as the too-high age of unrestricted free agency caused teams to overpay for players past their prime, so too will the backbone of capitalism, the law of supply and demand, undo any future attempt to impose artificial trade restraints.
Tragically, the NHL's misreading of the supply and demand equation has also caused the nature of play on the ice to devolve. They can talk rule changes all they want, the truth is there are too many muckers and grinders and not enough skaters and scorers. Some coaches were smart enough to realize this and have built good low-budget teams strictly on the strength of one or two scoring stars surrounded by well-coached legions of trappers and checkers. To some extent, I believe the NHL might have even encouraged this style in order to devalue the power of stars heading into this CBA negotiation -- it may sound crazy for the NHL to undermine its top drawing cards, but listen to how they consistently downplay their financial performance in a world where most businesses do the opposite, and you can come to believe that anything is possible.
The draft has been likewise diluted by overexpansion. Glen Sather will never be able to luck into a team like the Oilers again -- he'll never have enough draft picks to get all those players in a single draft, because he will have to wait 30 or more turns between draft picks (this year he has all those first- and second-round draft picks he amassed in his Ranger fire sale last March, but that's a one-shot deal and it took several drafts to build the Oilers). To underscore just how much the draft has been devalued, check out its impact on Tampa and Calgary -- Tampa had only five of its own draftees on their Cup-winning roster, only one a first rounder, four of the five emerging from one draft class; Calgary likewise had only five (a sixth missed the playoffs due to injury).
Q. So that's it? It's as simple as supply and demand to not only right the ship financially but also get the on-ice game back to the level of excitement that spurred the growth of the NHL in the first place?
Well, that's the way I see it. But I'm no hockey professional. On the other hand, I do know a thing or two about economics and business -- a sight more than your average GM. If sports in the latter 20th century into this decade has become less of a game and more of a business, the players have gotten a step ahead of the owners by choosing to employ the right type of professionals (lawyers, agents, and such) to represent them and negotiate on their behalf against team management culled mostly from the ranks of hockey professionals (former players, coaches, scouts, etc.).
I for one am not surprised that two of the more successful GMs in recent years, Colorado's Pierre Lacroix and Brian Burke for Vancouver until last month, are former player agents. Meanwhile, everyone pretty much agrees that the game has passed the once fabulously successful Glen Sather by (except, unfortunately, his boss, self-proclaimed hockey ignoramus Jimmy Dolan). Perhaps the time has come for teams to strike the right kind of balance between business issues and hockey issues in selecting their management teams. A real company would structure itself so that a CEO would make appropriate decisions based on input from a CFO on relevant financial issues and peers representing the appropriate creative, technical, and/or operational issues -- so too should a hockey team set itself up so that the ultimate decision maker gets the chance to balance his decisions based on input from different kinds of experts.
Q. So how do we get ourselves out of this whole mess? There doesn't seem to be an answer, at least not one that anyone's willing to accept.
A. There's nothing we can do as fans anyway, except squawk about it, and in the extreme case choose not to spend our money on the NHL. The best we can do, like baseball fans did last time around, is to let all parties know loud and clear that they are just a bunch of greedy schmucks who had better figure out a reasonable way to split their lucrative pie without taking our hockey away from us, or else the pie is going to go seriously stale.
The point is, it really doesn't matter what system they put into place, since market forces will ultimately prevail, so why shut the NHL down over it? The time will come, sooner or later, where one team will put its own self-interest ahead of the collective interest of the league and undermine whatever restrictions may come into place. We will learn a lot about teams' resolve between now and September 15th -- the current CBA still holds for qualifying offers, free agency, and arbitration. A complete lack of activity by teams probably opens them up to accusations of collusion. But rogue activity by one team will probably trigger a cascade of activity among all teams.
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