• Anyone else think that the NHL is starting to have the economic structure of a third world country?

    by  • February 10, 2008 • Uncategorized • 10 Comments

    There was a story this week suggesting that the NHL salary cap is going to go up another $3MM for next season. As I understand the salary cap, it’s all based on a mid-point between the ceiling and floor; if every team spent the midpoint and revenues were as expected, the players would get the appropriate amount. Accordingly, if the cap is going up $3MM, it means that the NHL projects an increase of about $163MM in revenue; the players cut of that is $90MM.

    What interests me about this is how much of this money has already been spent. I did a very unscientific flip through nhlscap.com and was able to identify about $80MM in increases that have been handed out. I was just looking for players who will see their salaries go up by about $1MM or so next year.

    There are a hell of a lot RFA’s who have yet to be signed. My first point is that there’s $10MM left over for all of the increases for all of the other players in the NHL. Anything over that and, assuming that the league has the revenues pegged right, everyone is going to be losing money to the league in escrow. I would suspect, without having yet done a really thorough analysis yet, that next year’s escrow rates will be set higher. I’m also starting to suspect, more and more, that the next labour fight might be the worst one yet, as you’re going to have a PA with deep divisions between the guys who are getting paid movie star money and the guys who are making great white collar job money as well as with a lot more information about the NHL’s finances that they’ve ever had.

    There’s a more intriguing aspect to this though. There’s been a lot of talk lately about how teams like the Oilers and Maple Leafs have so much money tied up in mid-level talent; I think that I’ve heard that they both have more than 14 guys making $2MM or something like that. While that’s been a loser strategy historically, I’m not so sure, moving forward, that that’s going to be such a loser strategy. It will basically involve making a concession that the other side is going to have better top end forwards and defence but after that, there should be a substantial edge in favour of your own team. I would think that the market for talent has to be realigning and the problem for teams like the Oilers and the Leafs will be the legacy contracts, signed before the market started throwing large wads of cash at the absolute top end and shorting everyone else. I haven’t shown that to be true yet – this chart is a start – but it’s a pretty strong hint that that has to happen, I think. There’s no other way to address all of the money being paid to the young top end guys in a situation where there’s only so much money that can be paid.

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    10 Responses to Anyone else think that the NHL is starting to have the economic structure of a third world country?

    1. mclea
      February 10, 2008 at

      There are a hell of a lot RFA’s who have yet to be signed. My first point is that there’s $10MM left over for all of the increases for all of the other players in the NHL. Anything over that and, assuming that the league has the revenues pegged right, everyone is going to be losing money to the league in escrow.

      I imagine that there will more than a hand full of players who will end up making less money next year as well.

    2. February 10, 2008 at

      Nice to see other people are starting to see this too. I have too many series of posts going on myself to get to it in a timely manner but from where I sit the best strategy this off-season would be to keep your powder dry.

      I did one examination of Philadelphia and found that, barring a trade of Carter, one of Smith or Hatcher and one of Kukkonen or Vandermeer can’t be with that team next year.

      That means good talent WILL be shaking loose because Philly ain’t the only team in that situation (like, say, the Oilers).

      Keeping the powder dry will mean a team will make some great depth pick-ups over the next few years and in therein will be the outperformers that will allow the team to compete.

    3. lowetide
      February 10, 2008 at

      I know zero about the NBA, but did teams have this kind of problem in the first few years of their cap?

    4. mc79hockey
      February 10, 2008 at

      I imagine that there will more than a hand full of players who will end up making less money next year as well.

      That’s kind of the point that I’m driving at here mclea. The financial structure of the league seems to be changing to one without a middle class.

      I know zero about the NBA, but did teams have this kind of problem in the first few years of their cap?

      Both the NBA and NFL salary caps are a lot more complicated than the NHL salary cap. I am only vaguely aware of them but I believe that the NFL has a veteran minimum that’s higher than the rookie minimum…but that might be the NBA. In any event, my guess is that the salary cap is only going to get more complicated.

    5. February 10, 2008 at

      Likely we’ll also see another trend continue – guys who made big money for years unable to get any interest from teams unless they sign for the minimum or thereabouts, refusing to do so and then fading away.

      Plenty of guys who were pretty good players for years have disappeared in the last two years without much fanfare. Amonte, O’Neill, Allison being three who come to mind. No tag sales for guys like these of course.

      Our own Geoff Sanderson and maybe Marty Reasoner may head down that path this summer as well, although I would guess Marty would find work somewhere.

    6. February 10, 2008 at

      I posted about this a couple of times back in 2005 (I should do a follow-up), but yeah: a salary cap hollows out the middle class of the salary structure. It happened in the NBA, it happened in the NFL. The superstars still get paid a ton, and the journeymen still get paid the minimum, and the middle class gets squeezed out (down).

      I don’t think there’s any doubt that there’s value there to be exploited, but how far can you take it? If Gagner is a much better player in 18 months, but isn’t yet a superstar-level difference maker, what do you do? Ignore 20-40 comparable contracts, and offer him a take-it-or-leave-it deal for whatever you think he’s worth? (Then repeat this process every year or two with an up and coming youngster?)

    7. Dennis
      February 10, 2008 at

      Good stuff, Ty.

      Minds-that-don’t-have-a-good-team-to-obsess-over must think alike because I said a lot of the same things to a few friends of mine yesterday.

      My ball hockey crowd had their Surplus Party and the host is a Flames fan. He asked me what I thought of the Dion signing and I broke out the same line I did to Matt at BOA about how it’s great for the Flames just as long as the league passes legislation and says you’re only allowed to play eight forwards a night:)

      And that’s also a cool point about the pay desrephency between the top and bottom earners. That exists in any union but certainly not to extent that it currently does in the NHL and seemingly will continue for the near future.

      Mike Johnson was the ’08 poster child for a useful vet that had to beg for a job and I wonder if Micheal Ryder won’t be the next guy to feel that pinch.

      Some other things:

      YK: You’re saying that some teams are gonna be able to take on useful players in big contracts if they have the space come next summer. That’s how Lowe got his jollies in ’06: ie Pronger and Peca. We’d been cheap fucks heading into the lockout and then we had the space to add without a whole lot of subtraction production wise. Wanna take a stab at the next team that will enjoy that advantage? Should be easy to see, no?

      Ty: These legacy contracts you speak of; I gues for us it’s Pisani, Moreau, Torres and Staios?

    8. mc79hockey
      February 10, 2008 at

      I’d delete Torres and add Roli, Dennis. The thing of it is though, you need a GM who knows how to read the market and figure out what a player’s other options are likely to be.

      With the data available to the Oilers, they should be able to tell you, on June 15, how much each team is likely to have in revenues in the coming year and how much they’re likely to spend on salary. They should know who the likely competitors for each FA are going to be. They should be able to figure out where there are efficiencies to be had in the market, because they know where the soft spots are – ie. a glut of players at a given position and not enough jobs/money to go around. A few years back, it was goaltenders; I think that this summer, there might actually be a decent shot at moving Roli because the goalie market looks to have more openings than starters available. Kevin Lowe and the Oilers should know this. If we’re right about the market changing, a smart team should be able to grab useful playres cheap.

    9. PunjabiOil
      February 10, 2008 at

      Fantastic work. I think you should send your resume over to the Oilers. I don’t think I’m even kidding.

    10. February 11, 2008 at

      I like Colorado, New Jersey and even Detroit Dennis. All three teams have excellent management and nice Cap friendly contracts.

      Colorado has some serious Cap space opening up next year and as long as they can get Sakic back on a decent deal (I actually see him taking a 250-500k paycut) thay have lines that can do damage and there is no way Smyth hurts that bad two years running.

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