Talking Red

Lockout Update: Moving the Puck Forward

Posted in on by EJ Fagan

Over the past week, there’s been quite a bit of development on the CBA front. On October 16th, the NHL presented an offer to the NHLPA that was a significant step toward an eventual resolution. We don’t need to get into finite details (This is a business deal being negotiated between millionaires and billionaires, and most of the details are important only to the two counterparties, and won’t effect the games we watch as fans), so here are the bullet points:

- 50/50 split of revenue, using the expanded definition of hockey-related revenue.
– A six year CBA with options for a few more years.
– Free agency one year earlier for players.
– Maximum of five-year deals for free agents
– $200 million in extra revenue sharing.
– No immediate reduction in existing player contracts.
– Most importantly: An 82-game season starting in early November.

When I saw reports about this offer, I recognized it for what it was: the owners making a moderate concession off their previous negotiating position in a giant game of chicken. At the time, I wrote the following Tweet:

Donald Fehr immediately labeled the proposal as encouraging, and then the NHLPA went back to read it, discuss it with the players, and come up with a counter-offer. They came back with three different offers, and told the NHL that they would work off of either one. All three were basically ways of using different escrow rules to transition to a certain revenue split without the players taking a pay cut – basically playing with different rates of revenue growth assumptions. The end result from all three would have been something like a 53-47 revenue split.

Had you explained these facts to me before telling me what happened next, I would have been just as confident as before that we would get an 82-game NHL season. But then:

The NHL let the NHLPA make the offers, then walked out after 10 minutes. And since then, we’ve been treated to a non-stop war of words, blames, and general bluster in the media.

Two observations:

First, Its telling that the NHLPA came across with a set of proposals that only addressed what share of revenue to aim for and how to get there. They aren’t even worrying about contract lengths, free agency, etc. And let’s be honest, all that stuff is really unimportant compared to revenue share. The outline in the NHL’s offer is a pretty good indicator of where we’ll probably end up for the other stuff.

Second, we’re still not necessarily in that bad of shape, even if I’m not as confident as I was earlier this week. There’s a reason that the the first reasonable offer that both sides could start to live with came pretty close to the point of no return for an 82-game season: even under the current deal, everyone’s making money. The players obviously like their paychecks, and as a whole the NHL is a profitable enterprise. These negotiations are a result of the NHL seeing an opportunity to increase their operating margins by reducing labor costs, and having the ability to do so since they control a near-monopoly on professional hockey jobs. As long as everyone is making money, the overwhelming economic incentive is to take what gains you can, make a deal, and play the season.

For example, if the season were to start in time for a 62-game season, both sides combined would lose something like 20% of total revenue for the year. This money would be totally and completely lost if those games were to be cancelled.

The difference between the two sides right now is about 4% of revenue per year. Assuming 5% revenue growth, capturing all of that difference is worth roughly the same amount as capturing all of the revenue from 27% of the 2012-2013 NHL season. More realistically, if the two sides met in the middle and ended up with a 52/48 revenue split, those 20 2012-2013 games are worth only a tiny little bit more over 6 years

Now, these numbers are just my back-of-the-envelope math, but I actually think they are pretty conservative. I’m treating all revenue as present value (when start factoring in expected future value, the that 27% gets smaller depending on what interest rate you assume), and not factoring in intangible things like damage to the game’s popularity.

(Of course, we’re talking about revenue, not profits, so things like the operating costs of running a hockey team factor in on the NHL’s side. But that’s making things really complicated.)

The takeaway? The two sides are actually quite close, and you have to be thinking super long time (the next CBA negotiation) for it to make economic sense to hold out for much longer just to grab an extra 1-2% of HRR.

This is a negotiation, and the NHL’s decision to leave after 10 minutes was probably just a pre-planned negotiation tactic, not a true expression of emotion. It puts the onus on the NHLPA to come back with another offer, which they probably hope uses the framework that the NHL set out on October 16th. If they were to come back with, say, the NHL’s offer plus a 52% share for the NHLPA and some other minor concessions, we’d be very close to a deal, and in reality it would be a better deal for the NHLPA than if they waited a few months and got the exact deals they proposed this week. The puck has moved considerably forward.

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  • Chris Dyer

    That was a really great post!

    If Bettman wants training camps to start on the 25th, what date do you think is the deadline for negotiations? How much organisation time do they need, 1 day, 2 days…?

    • http://twitter.com/ejfagan EJ Fagan

      Thanks – I’ve got no idea on the timeline, except that I don’t see any reason to take the NHL at their word that they could start a season ~2 weeks after agreeing to a CBA.

      Realistically, that doesn’t leave a lot of time for preseason games. My guess that you’ll get a week of camps, a week with each team playing 2-3 games, and then the season will start.