Why NHL teams cry poor despite the league’s record growth

The Globe and Mail

National Hockey League commissioner Gary Bettman speaks in Toronto in 2010. (Darren Calabrese/The Canadian Press)

Time for another by the numbers look at the money fight that is the NHL and NHLPA’s current collective bargaining negotiations.

First of all, you’ll note there’s a decidedly different tone this time around than there was in 2004-05.

Back then, there were cost overruns, endless losses and the Levitt Report.

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Now, commissioner Gary Bettman can’t stop trumpeting just how wildly successful the league has been over the last seven seasons.

Revenues have risen from roughly $2.2-billion to $3.3-billion – or an average of about $160-million a season – over the length of the current CBA, pushing the average revenue-per-team figure to $110-million.

Overall, the league is profitable, too.

Take that imaginary average team making $110-million a season. Their player costs would be 57 per cent of that figure, or $62.7-million, and their other, non-player related expenses are likely to be in the neighbourhood of $35- to $40-million, depending on their lease arrangement and various other complicating factors.

What’s left is the profit – which according to these rough estimates here would be between $7- and $12-million per team.

Sounds good, right?

For as many as a dozen teams, it is. On the high end in the NHL, the Toronto Maple Leafs, New York Rangers and Montreal Canadiens are all pulling in more than enough revenue to be very profitable and they don’t lose all that much of it to revenue sharing.

What’s not exactly news is that many teams on the low end struggle, and it’s that vast revenue disparity which is to blame for a lot of the problems the owners are once again making noise about correcting.

That’s why we can have a team like the Philadelphia Flyers sign a free agent defenceman like Shea Weber to an enormous, $110-million deal even as owner Ed Snider is part of talks to eliminate those long-term contracts.

These deals make sense for some teams and not others – just as the system is “working” for some and not others.

Below are two graphs I’ve put together that highlight how vastly different revenues are for the high and low teams in the NHL. Note that these figures are all estimates from the 2010-11 season and that they rely on the data provided by Forbes as part of their annual Business of Hockey series.

Their revenue estimates are not perfect, but they are a usable approximation and illustrate why we’re in another labour war, seven years after the last one:

Estimated NHL team revenues (2010-11)

Before revenue sharing, the NHL's top 10 revenue generating teams are believed to averaged close to $150-million in revenue the 2010-11 season. The bottom 10 teams are likely closer to $70-million each.

SOURCE: Forbes (with alterations made for estimated revenue sharing figures)

Now, the way the NHL’s current CBA works, it’s not that difficult to come up with a general estimate of the profit levels of the 30 teams as a group.

In 2010-11, for example, the league made roughly $3.1-billion and, as per the CBA, 57 per cent – or $1.76-billion – of that went to the players.

That then leaves 43 per cent for the owners or about $1.33-billion ($44-million per team).

Expenses beyond what teams pay players then take a big bite out of that figure, with those costs going to things like executive and staff salaries, minor league operations, arena operations, travel and marketing, etc.

According to the Levitt Report in 2002-03, these operating costs were roughly $26-million per team nearly a decade ago. Accounting for inflation and rising costs in several areas, we can probably safely assume they have since risen into the $35-million range.

Multiplied by 30 teams, that would have eaten up roughly $1-billion of that owners’ share mentioned above.

So in terms of our roughed out numbers here that leaves about $280-million as our “profit” estimate.

The NHL as a whole, in other words, now makes money – and if revenues were 100 per cent shared among owners, they’d all be profitable.

(That’s looking at only hockey-related revenues, by the way. Getting into non-HRR sources such as increases in franchise values and the like is a whole new topic.)

The major issue, however, is that the $280-million profit margin (or whatever the precise figure is) is going almost entirely to the league’s top teams.

The Leafs, for one, likely make up $100-million or more a season of that figure, even after giving up the league’s largest revenue sharing donation to the less fortunate teams.

Add in the Rangers, Habs, Canucks, Red Wings, Bruins, Blackhawks and Flyers – all healthy franchises – and there’s another $240-million or so.

So there’s eight franchises and we’re already well over the $280-million profit figure we’ve estimated for 2010-11.

The NHL model: Profitable for some

Using Forbes' figures for team revenues, here are some estimated revenue and expense figures for the three wealthiest and three of the poorest teams in the 2010-11 season. "Difference minus expenses" uses an estimate of $35-million for non-player costs such as staff

Where the league is suffering and why we may have yet another lockout (the third under Bettman) is (a) the bottom 10 teams have revenues so low they can’t cover their expenses and (b) those at the top have little intention of helping them do so more than they already are.

It’s an owner versus owner problem more than it is an owner versus player one, with Thursday’s massive offer sheet the perfect example of how a high spending team can go after one receiving revenue sharing and just hanging on.

The fact the players are again being asked to save the stragglers rubs many on the PA side the wrong way.

“Under the current CBA, NHL teams have received over $3-billion in revenue that would have previously gone towards player salaries,” one such source said this week. “The issue is not whether the players should now give up more revenue, it’s what did the owners do with this $3-billion?

“We know what they didn’t do. NHL clubs did not meaningfully revenue share between the big and small markets. After accepting a salary cap, a 24 per cent rollback and making other significant concessions last time, with revenues up over 50 per cent since 2005, why look to the players again?”

The answer is easy: Bettman and Co. believe they will have far more luck prying $200- or $300-million out of the players than the big moneyed teams, the owners of which feel they’ve given up enough of their advantage by agreeing to a cap, some limited revenue sharing and greater parity.

But even under the league’s recent proposal, which would cut the players’ share to 46 per cent, many teams on the low end would continue to lose money.

You simply can’t turn a profit while bringing in $80-million or less unless we’re talking about a cap of $45-million or less, which at current revenue levels would require giving players only a 37 per cent share.

To make a team like Phoenix profitable, they’d have to take closer to 25 per cent.

Neither of those will come to pass.

In a lot of ways, this CBA negotiation is still tied directly to the NHL’s path down the overexpansion road in the 1990s, one it hasn’t fully recovered from. Yes, revenues are way, way up, but they are up in large part due to its biggest hockey markets (including Canadian teams).

Those that have struggled in the past for the most part continue to do so.

The frustration on the players’ side is that in many instances this is more a revenue problem than a player salary problem – and they have little say in how to correct the vast revenue imbalance in the league.

Relocation is one option – going from Atlanta to Winnipeg alone had to have boosted league revenues $30-million or more – but there really aren’t many places to go beyond perhaps franchises in Toronto, Quebec City and Seattle.

Another is to drop the salary floor and allow teams to simply spend what they can afford, giving up on forced parity when it means forced losses for those on the low end.

More robust revenue sharing could also certainly help – and I expect that’s what union leader Donald Fehr eventually pushes for – but how willing are the Leafs, Habs, Rangers et al to bail out the league’s perennial problem children?

“Not very” has always been the word, and that’s why they currently share only a tiny fraction (rumoured to be roughly 7 per cent) of their share of revenues.

But pushing the players to fix this can only take them so far here. For the rest of the solution, this is a league that needs to look in the mirror at what’s really happening and why some of its teams are losing this much money.

Or give up the ruse that that’s what they’re fighting to correct in the first place.

“I know other leagues have meaningful revenue sharing,” one agent said this week of the NHL’s revenue gap dilemma. “The NHL hopes that the media and fans ignore that fact. Owners would rather try to pound on players than pound on each other.”

Follow on Twitter: @mirtle