Friday, August 1, 2008

Is the Salary Cap Working?

This is a very exciting announcement for us here at HockeyBums. We have recruited a very special blogger who is from the UK and is a very well spoken and big hockey fan indeed. He will be writing special in-depth articles for the HB team all year long. Ladies and gentlemen, Rich-Steve Williams!

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It seems with all the excitement surrounding the trade merry-go round and the day by day shocks and surprises that sprung up around the free agency period, that this offseason has almost been as exciting as the on ice season that preceded it. Perhaps one of the most interested stories to emanate from the dizzying array of rumors and dollars fluttering around the hockey world in the recent months was how the Pittsburgh Penguins were going to cope with the salary cap. Built up from seasons of solid and often spectacular drafting, much of the young talent that drove the once stale Pens’ all the way to the finals were entering varying degrees of free agency including some at the end of their entry level contracts. This left many to ponder how the Pens’ would handle their roster with high end wage demands sure to follow their cup run and youth hype.

As it happens the Pens’ had little to be concerned about merely dropping out a couple of grinders in the form of Laraque and Ruutu, one young star in the shape of Ryan Malone and big money journeyman in Marian Hossa whilst finding reasonably priced replacements for all in the shape of Matt Cooke, Miroslav Satan and Ruslan Fedotenko. Sure these replacements may not be like for like, but the Penguins roster has hardly taken the bashing many thought it would considering the other big loss was Gary Roberts at 41 years old.

No, the Penguins have been the benefactors of a spiraling wage cap and league wide financial ethic that is showing worrying similarities to the seasons running up to the infamous labour disputes that brought about the season long lockout. In fact heading into just the fourth season of post-lockout hockey, the NHL salary cap roof has reached $56.7 million with the floor now pitched at $40.7 million. Put into perspective, the cap floor is now higher than the cap ceiling of 2005-‘06. The result is simple, bigger market franchises still posses the clout to buy into success with such an astronomic cap whilst small market teams struggle to stay in the black with such a high minimum floor. Subsequently fans can expect to see increasing ticket costs whilst small market teams have to juggle their prospects and stars with financial security.

What we now have is increased levels of disparity running its effects throughout the entire league structure with niche market teams feeling the pinch in much the same way as the slew of near bankrupt teams did in 2004. This of course can be traced back to the inception of the CBA, the child that spawned the euphemistic “New NHL.” With negotiations stalling on the concept of salary cap, the NHLPA wanted no such thing whilst the NHL wanted a hard salary cap unbound to league wide revenue, the natural convergence was on a salary cap tied to league revenues. The idea was that franchises not turning over profit would be supported by the high earners, the likes of Detroit, New York Rangers and Toronto. However with the strengthening of the Canadian dollar and the increase in ticket costs and league revenues as a whole, the NHL was able to announce profits in excess of $2.6 billion for 2007-’08. Subsequently players were entitled to 56.3%, up from 55.5% owing to the $2.5 billion excess bracket. Adding on the NHLPA sweetening 5% inflation bump and we reach a salary cap limit that will see average player wages reach $2 million for 2008-‘09, $200K more than before the league breaking lockout.

This would not be a problem if there was not such vast differences in the kinds of numbers the thirty organizations were pulling in, but to look at it from a microcosmic standpoint, the bottom fifteen teams featured in a leaked NHL league table regarding ticket revenues constituted just 35% of the leagues ticket returns, whilst the six Canadian franchises who make up 20% of the league, total 31% of all ticket receipts. Taking in the unchartered variables that surround NHL organizations such as local media deals, arena management and parking costs and the success of the traditional hockey franchises has seen hockey related revenues exceed 11% growth. In a nutshell, the success of the bigger teams has pushed the salary floor above the means of many small market franchises, allowing bigger money deals for the big clubs and the likelihood of continued HRR increases in the upcoming seasons. The revenue linked salary cap merely makes compensation to reach the salary floor and only in seasons where the player’s escrows, an overflow related to payroll midpoint, is available; in short, financial support is scant for small town franchises.

This naturally affects the NHL for the fan, aside from the mere inconvenience of overpriced tickets. With increased disparity, the league will slip into the cycles of predictable big franchise success we saw throughout the decade leading to lockout and in turn this will affect the marketability of the game in the US, where its more popular big “3” are less influenced competitively by fiscal mismanagement. This will mean a sport with comparatively minor support, coverage and sponsorship will be looking at a wage bracket over that of the NFL, the very same situation that brought the games biggest league to its knees less than half a decade ago.

So where do we go from here? With Hockey Related Revenues expected to continue rising for the foreseeable future and the NHLPA having the option to re-open contractual negotiations at the end of the upcoming season, the CBA could come under question very soon. For the majority of owners, 2008-‘09 will see them break even on the losses incurred by the lockout with all subsequent revenue becoming net gain. Although it’s unlikely that the NHLPA will exercise the right to re-negotiate, the latest the current CBA can be re-assessed is 2011-12 by which point, assuming HRR remains at a steady 11%, the cap floor will be $58 million, $1.3 million more than the upcoming seasons cap roof. However just three seasons down the road, most of the small town hockey franchises could be facing bankruptcy whilst the high rollers are free to sign in the highest cost talent. The league will be more lopsided than it ever has been.

This will make for some interesting discussions whenever the CBA is next reviewed. The squabbles surrounding the lockout in 2004 was that player’s wages were taking such a significant cut from the organizations turnover that the financial structure had to be rearranged. At the time players were earning around 75%, according to the leagues dicey Levitt Report, or more likely 66% as apportioned by Forbes magazines own investigation of total league revenues. In the aftermath of the new CBA, players saw their portion reduced to 56% in years when profit exceeded the $2.5 billion bumper. However with the continuous rise of hockey related revenues, the players 56% cut is all-but-equal to the financial sum of 66% in pre-lockout money. In the meantime the 34% of the owners share has increased to 44% which sees them making a clear $260 million profit over the terms they found themselves in prior to the new CBA.

With so much of the disproportionate wealth being manufactured by the games elite franchises, there is the very real possibility that when the leagues various bodies come to reassess the CBA within the next three years, the discussions that had been so widely seen as player versus owner in 2004 will become owner versus owner. In the likelihood of many of the NHL’s less profitable organizations facing such desperate financial uncertainty, the bottom end of the microcosmic NHL ticket revenues league table may start squeezing the high turnover franchises for greater financial support. Subsequently the next battle may well be linked to the terms of the revenue sharing policy rather than player wage entitlement.

In the meantime the current CBA is beginning to feel like the dinosaur of the previous iteration. It’s obvious that well maintained franchises such as the Detroit Red Wings will remain successful no matter the financial state of the league, but for the majority it’s becoming the same old game we saw a decade ago, slowly slipping into absurd deals made by careless owners looking to push the big buck whilst smaller franchises fail to create bottom dollar turnover. Is the salary cap working? All signs point to no.


3 comments:

Alex Chiappini said...

Great read...its clear that the main cause seems to be the florishing profits of the big franchises.So this gives the NHL a false sense of security.Really you nailed it...bravo once again.

Anonymous said...

I can't really tell if you provided any insight regarding the salary cap, but you have no clue regarding who the Penguins are. They are one of the most chaotic organizations in hockey.

#1 "Solid and Spectacular drafting" Who are you kidding. Their dismal play over many years gave them the #1 overall choice twice in the last ten years and several other top ten picks. The Maple Leafs could draft well with these picks. Just a refresher on drafting. The WORST team picks first.

#2 "Managing the Cap"
The Penguins have ridiculous dollars committed to long term contracts. I think they have already committed $30,000,000 to their payroll in 2012-13. NO OTHER TEAM has committed one half of that number to 2012-13. Why? Because that doesn't work. Teams who commit huge dollars to players long term end up being owned by players.

The Penguins made a mistake signing Andre-Fleury long term for too much money. He was one of the top twenty goalies in the league this year and he looks like he could be a top ten goalie. But, he is not there yet, and goalie is the most difficult position to predict how one will continue developing. Unfortunately, goalies should not be paid in contracts longer than three years. Just look at Manny Fernandez and Khabibulin.

I bet the Penguins struggle to make the playoffs more than twice these next five years.

Richard-Steven Williams said...

I think you've spent a little too much time focusing on three paragraphs that worked as an intro to the issue of salary cap. And cheers on the heads up how the draft works I haven't got reems of draft coverage on other sites. Bottomline the Penguins did draft well with what they were given owing to their abysmal hockey or as I worded it in that particular article "Once stale."
My point was that the Pens have the cap space, owing to the continually spiralling cap limit, to commit 30 mill in their 2012-13 cap why? Because at the current rate of league revenue increases, the cap will be above 70 mill, plenty of space to flesh out the rest of the roster, and in the context of my argument it's the very same situation that the league found itself in just a few years ago prior to lockout. But hell, that would of required reading to the end.

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