Sunday, June 20, 2010

Ice Cold Cash: The Business of Hockey

With the 2010-11 schedule just two days away, and the NHL Draft practically on our doorstep, the teams have begun the round-robin of trading players faster than NYSE brokers - the main reason, of course, being the salary cap.

The Chicago Blackhawks are already receiving the most attention for this, of course, and that was long before their success in bringing home the Stanley Cup. Everybody knows that for 2010-11, the Hawks are going to have to shed salary, so 2010 was viewed as the "it" year for this team to win the Stanley Cup.

Of course, you never know what "can", "could" or "might" happen. Nobody expected the Flyers to make it to the Final round after the season they had, either, but there they were.

The winning of the Stanley Cup is both good and bad for Chicago. Good for all the obvious reasons: it lifts the value of any players they might trade, since they're all now wearing Stanley Cup rings; it proves that yes, indeed, players like Toews and Kane and Keith have been worth every penny; and it brought in a lot of money for the team - and the NHL.

On the bad side, the same reason that is a "good" is also a "bad": it raises the value of any players looking to continue with the club or re-sign to the club. Clearly, you win a Cup, you get a raise. Or heck, if you just did good and improved in general, you get a raise; that's how good businesses operate.

The question is: how big of a raise?

If there's one thing that hockey players have learned over the years, it's this: Hockey is a business. From the early-90s lockout to the season-that-never-was (2004-05) due to lockout, it's all been about the money. Loyalty and love of the city you're in are all very good and heartwarming, but at the end of the day, everybody wants more money.

Now, of course, thanks to the historical issues with salary, and the prior lockout, players' salaries are very transparent. They are also directly tied into the fortunes of the NHL as a whole, because the salary cap (and salary floor) are determined by an interesting combination of rules that include revenue sharing and other factors. During the negotiations that took place during the last lockout, owners wanted to establish "cost certainty", that is, to be able to know at any given point in the season just how much money they were able to spend. The league used to spend approximately 76% of its revenues on player salaries alone.

In short, today, what has evolved that the creation of a salary cap has made the NHL into part of a giant, constantly-evolving, league-wide jigsaw puzzle of costs that has the added effect of preventing any one team from turning into a salary-laden (read: talent-hoarding) juggernaut. The most financially successful teams have to pay into a pool that helps the struggling teams survive; and the salary cap prevents any single team from basically buying themselves a Stanley Cup through player acquisition.

In its own weird way, it's sort of fitting, because hockey is the ultimate team sport. But on the other hand, some days you wonder if players sort of got shot in the foot by the league's current salary restrictions.

Back in the day, the stinginess of some of the owners was infamous. Back in the days when player salaries were unpublished and even the guys who played together didn't even know how much their teammates made, owners were happy to parlay that ignorance into profit. In 1968, Bob Baun got traded to the Detroit Red Wings; he was also the new President of the NHLPA. Gordie Howe and Baun ended up having a discussion about salaries, and Howe was shocked to discover that he was being underpaid in comparison to much lesser players than himself. Baun encouraged Howe to ask for a long-overdue raise. The Wings' owner, Bruce Norris, agreed to the raise immediately, and when the stunned Howe asked why now, after 22 seasons, he was finally getting such a raise, Norris replied, "Gordie, you never asked for anything more. I'm a businessman."¹

Norris's reply spoke on behalf of every owner in the league. After all, if you're still selling out every game, whether or not you're a winning team, what incentive does the head office have to improve the quality of the players on the ice or their salaries, if they're willingly playing for a certain amount of money? If they're paying players cheaply, and getting maximum profit, without being challenged by the players, clearly there is no motivation for the owners to change the status quo. But likewise, the players have the right to be paid well for their efforts, and get a raise when they do well, just like any job.

And although you'd never guess it by watching certain sports stations, there is more talent in the league than just a few name-brand players. There's lots of talent and skill, and a whole bunch of it is underrated - and occasionally, underpaid. But there's only so much money to go around.

Let's go back a few years to the lockout. As a hockey fan, it certainly made for a very empty winter to have no hockey. Ok, that's not totally true - we still had the AHL, of course, and other non-NHL leagues to help us through the season. But as a sports fan, it can often be, shall we say, challenging to find sympathy for people who are fighting over what number goes in front of the six zeroes that follow the first. Baseball went through it after the strike in 1994-95; hockey felt it in 2004-05.

Your average sports fan is making less than a tenth of what the worst-paid guys on their favorite teams get. (Start talking about those guys making into the millions, and it becomes more like 1/100th.) And no matter how much we love our teams or our players, there probably isn't a single one among us who wouldn't gladly warm the bench for a fraction of the pay. Most athletes get paid more than the President of the U.S., and they play a game for a living - so if you were a hockey fan back during the Season That Wasn't, you surely had to be wondering why it took the NHLPA and the owners almost a year to bang some figures out.

As a direct result of there being no NHL hockey, all the smaller leagues - AHL, KHL, ECHL, etc - absorbed a lot of NHL players who wanted to stay in the game while things got worked out. A bunch of players went to Europe and played there. And the fans didn't totally give up on hockey; they went instead to see all those other leagues play.

A couple months ago, a friend and I took a Chicago Wolves game. We got tickets just a few rows off the glass for $35 each - the same price as the "worst" seats at the UC cost. If we'd wanted to sit right on the glass? Just $50. Worst seats are $11, about what it costs for a movie these days. Obviously, if your budget is tight or you've got a whole family to bring along, a lot of people are going to opt for these less-expensive games - less than $45 for a family of four, vs $145... not a tough choice for people during a recession.

The guys who play in the AHL and other leagues of course hope to make it to the NHL, which is where they can make some really big money. But the guys playing at this level aren't exactly going broke - unlike their counterparts in say, baseball's minor leagues, players in the AHL may be making $1M or more while they bide out their time to be judged "ready" to be called up to the NHL.

Which brings us back to the salary cap, a finely tuned money machine which dictates everything practically down to which direction a player should spit.

Because the salary cap is based on how well the league does as a whole, it does not remain constant from year to year - however, since the NHL seems to have finally re-found its footing five years after the lockout, one should only expect the salary cap to rise, as attendance and merchandising revenue streams go up.

The one other number you should keep in mind is that the most a team can pay a player is 20% of the salary cap (currently around $11.3M/yr). Unlike baseball and football, it is still relatively rare to see NHL salaries in the $7-$10M/year range. And since a contract of that size given to a singular player greatly constricts a team's roster flexibility, you will not see many teams attempting to fit more than one player of that salary range on their roster.

And even if a player was gracious enough to want to offer to re-negotiate their salary in order to make things happen for the team, they can't - not under current NHL guidelines, anyway. Once you're locked into a contract, it's stay, get traded, or sent to the AHL.

That figure leads to another question: since there's always a risk that the salary can drop in any given year, if you're going to commit 12-20% of your roster allowance to a single player - while still needing to fit another 21 men into the equation - you better be absolutely sure they're worth every dollar - for example, players of the caliber of Jonathan Toews or Sidney Crosby that are out there. For every player who is taking home $4M or more in salary, the team is balancing those guys out with a couple "bargain" players being paid $500K-$1.75M each. While the "average worth" of each player - at least on paper - is around $2.6M, the reality is that there is a wide variety on any given team.

One has to wonder, for example, how the Vancouver Canucks are feeling right about now. Roberto Luongo's salary will be $10M in 2010-2011 and $6.7M for the next seven years to follow, but due to how salary caps are calculated, his cap hit is $5.3M/year. With a salary like that, you have to be expecting the very best out of your player, and gnashing your teeth if they're not performing up to expectations.

Hockey players got the message loud and clear over the past 20 years: Hockey is a business. The owners want to make as much money as they can; and the players want to make what they can, too. And while you will hear many players speak about how they would like to or would prefer to play for a specific club for the rest of their career, they will always be at the mercy of their own salaries: either their team thinks they're worth it and will fight to keep them on the roster (or will have taken steps and given the player a no-trade clause), or a team decides they can make the sacrifice of that player's salary in order to make room for less expensive players, so that they can fit a whole team under the salary cap.

So as the season ends, the draft approaches, and teams jockey to make room and plan for the future, there may be some players who price themselves out of a job - whether it is with their current team, or their capacity to be taken on by another club. Some teams will regret the need to trade players or let their contracts expire. Others, who have the cap space, will readily take on a player or two who may be a little overpaid with the hopes of having a better shot at the Stanley Cup next June.

Players may express a desire to stay with a particular team for their career, but the business of hockey may determine otherwise.





¹ source: Hockey: A People's History, by Michael McKinley

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