• The Narrowing Financial Gap Between the NHL and NHLPA

    by  • October 21, 2012 • Uncategorized • 12 Comments

    As I mentioned the other day, James Mirtle has done yeoman work on the various offers that have been exchanged during the course of the lockout. The thing is, some of the offers that have been exchanged have been premised on different growth rates, which kind of makes doing an apples to apples comparison more difficult. As well, James’ fine work is kind of scattered through a series of posts at the Globe and Mail’s website, which makes it hard to track.

    I’ve finally kind of gotten into this this week (hear that NHL? I am caring a lot less about your lockout now that I have my soccer mistress. I miss watching your games far less too,) There was a discussion on Twitter today in which Cam Charron, writer at most internet sites relating to hockey, casually commented that the PA’s offers hadn’t shown any positive movement. As far as I can tell, this simply isn’t true but if Cam’s confused, other people are confused, so I thought I’d make a sort of progress/apples to apples spreadsheet that sets out the progress of the negotiations more clearly and shows how the two sides have moved closer together, with financial concessions having been made by both sides.

    The table I’m about to post deals with the http://www.theglobeandmail.com/sports/hockey/give-and-take-between-nhl-and-nhlpa-not-nearly-enough/article4539204/, the NHL counter-offer that was made on the same day, the NHL offer of October 17 and two of the three PA responses of October 18.

    I’ve left out the PA’s 50/50 offer with existing contracts protected – I’ll talk about it a little more below – as well as the NHL’s initial offer. A word on that offer though: I’ve negotiated a bit and I’m a big believer in the anchoring bias. Wikipedia has a useful summary of the concept as it applies to negotiations here. In brief, the idea is that the first offer, no matter how outlandish, has an impact on where things eventually end up. Even sophisticated parties, aware of this bias, will struggle to overcome it.

    In this case, the people in the NHLPA office are highly sophisticated. The players, who openly loathe Bettman and who have to vote on any deal, aren’t. Taking such an outrageous position permits Bettman to say at some point – maybe next week or the week after, after another offer nudges things up slightly – that the NHL has come an extraordinarily long distance to satisfy the players. Going slightly above 50/50 – which all the media who have sources in the NHL seem to be saying is the NHL’s bottom line – would, in conjunction with the anchoring bias, certainly make at least some players feel like they’d won a negotiation. If the league is motivated to play a full season, or something very close to one, that might be one way to bring things to a head quickly.

    Back to the offers. I’ve called the NHLPA’s September offer PA1, as it was basically just a variant on their August offer. I’ve called the NHL’s September offer NHL2, as they had the anchoring offer in July. The October 17 offer is NHL3. The two PA counteroffers are PA2 and PA3. What I’ve done is run the numbers on them under three different scenarios: with 7.1% growth, 6% growth and 5% growth. 7.1% is the post-2005 CBA growth rate, the growth rate when you strip out Canadian dollar appreciate is about 6% and 5% is a number that’s been bandied around by the NHL for future growth. In addition, the NHLPA’s offers have not been for six years. I’ve just assumed that they’d tack an extra year on at the same terms as the last year.

    I’ve then totalled up how much money the PA would receive over a five year CBA and a six year CBA, for the various proposals and various growth rates. I’m going to post this table – it’s kind of a wall of numbers but don’t be overwhelmed.

    Notice the numbers that I’ve highlighted in yellow. Those numbers are how much money the PA would receive under the various scenarios. So, in PA1, assuming a 7.1% growth rate and a five year deal, the players’ share would total $10747.9MM or, as normal people say, $10.748B. My math isn’t perfect – there are a few tweaks in each offer that I haven’t incorporated because they aren’t out there or aren’t well explained, but it’s close enough, within a few tenths of a percentage point. For the purposes of our discussion, it’s fine.

    That’s not really sufficient though. What we really want to do is explore how the gap has narrowed and whether Bettman’s assertion that the PA response was a step backwards. What I’m going to do is look at the gap between the offers that were on the table at the various points of time in the last month and a half. That means PA1-NHL2, PA1-NHL3, PA2-NHL3 and PA3-NHL3. PA1-NHL2 is the difference between the parties as of the date of the lockout. PA1-NHL3 is the difference between the parties as of October 17, after the NHL tabled another offer. PA2-NHL3 and PA3-NHL3 are the current differences between the parties. I’ve prepared graphs showing the differences between them over a five year term and a six year term.

    The principles are the same either way, so we only need to talk about one of these graphs. We’ll use the six year one, because the league seems to desire a six year deal and that does seem to be the precedent. You can see that the NHL’s third offer narrowed the gap considerably – it basically offered the players an extra $600MM over the course of the agreement. At the same time, by my math – which is open to correction if I’ve done this wrong – the players’ offers also sliced an awfully considerable amount of the difference away.

    We’re doing some rough math here but it’s hard for me to see how Bettman’s characterization can be legitimate, unless, I suppose, the players anticipate some bigger revenue growth later in the CBA. I’m not using NPV or anything either but the gap does seem to be falling. It’s hard to suggest that the media should have called on Bettman on this, given that they were kind of on the spot, without a few hours to crunch numbers but if I were a real journalist, I might email these graphs to both sides and say “Look, is this basically right? If not, how is it wrong?”

    A note on the three offers. There was much debate as to why the players went ahead and did this. I have a suspicion that it relates to the fact that the growth rate has become an issue of contention. If you look back at the last graph, you’ll notice that PA2-NHL3 produces a broader range of outcomes for the three growth rates under consideration than does PA3-NHL3. PA4, the offer of 50/50 with existing contracts guaranteed, would produce an even wider range of outcomes, I suspect. In effect, it seems to me that the PA is attempting to address the issue of a fight about the expected growth rate by saying “Look, we can do some sort of an agreement is less affected by the growth rate (ie. the NHL takes more risk but gets more reward) or we can one that’s more affected by it (the PA takes more risk but gets more reward.) This seems like an awfully sensible way of going about this to me.

    When you get right down to it, the difference between the parties sure seems to be getting awfully small: even at 5% growth, the worst possible, the PA has presented an offer that appears to be about $487.4MM away from what the NHL wants financially over a six year period. That’s $81.23MM per year (and it shrinks if growth is higher!) $2.71MM per team. Do the Oilers NEED to have Kevin Lowe AND Steve Tambellini AND Craig MacTavish? They used to get by with one GM. Now they’re probably paying three guys GM money. The Maple Leafs have engaged in a little front office bloat since the lockout too, another example: Brian Burke is making huge money, they have Dave Nonis working for them, Rick Dudley was wandering around for a while, Dave Poulin, Cliff Fletcher as a special advisor, Steve Staios just got hired as a player development advisor…there seem to be awful lot of dudes in the Leafs’ front office and I haven’t even mentioned the guy who reads all the stat papers that get sent to Brian Burke and assures him that they’re useless.

    There was a line that surfaced at some point in the negotiations about the extent to which team’s other expenses have exploded since the lockout. While I don’t know for certain that this is true, it wouldn’t surprise me in the least if it was and, in the case of the two teams most on my radar, it seems likely to be true. Part of this is a sort of consequence of an economy that prevents you from spending your dollars in the areas that will bring you the most return – teams start throwing dollars at other things that they perceive might help them. The same factors that drove teams to spend big money in the old NHL still exist, they’re just prevented from spending that money on players, so it gets spent on something that teams still perceive as a positive, just one with less bang for the buck. One wonders, if the NHL gets something akin to what it wants, if we’ll go through another round of front office expansion.

    In any event, we’re talking about an awfully small difference on the team level. Both sides appear to have moved considerably with the offers that have been exchanged. As I said yesterday, albeit without laying out the numbers explicitly, it’s hard to make much sense of Bettman’s dour mien after Thursday. Unless, just maybe, it might have been a bit of theatre, intended for the benefit of the NHLPA membership from whom he’d like to squeeze more concessions.

    * * *

    One other point. Deadspin had a fun story this week about how the NHL has hired Frank Luntz to try and put a little lipstick on the ol’ lockout pig; gussy her up a bit. I’m puzzled that the NHL hasn’t started characterizing this as a dispute over how much more the players are going to make over the next six years than they made in the past six years. If you read any of the 80% of the hockey media that’s abysmal, you’ll notice that they kind of imply that the players did really well in the last CBA negotiation because the cap went up so much, kind of ignoring that it means that money was rolling in. These people are absolutely susceptible to this sort of stuff. As I thought about it, I could hear Bob Stauffer’s voice in my head. He sounded convincing.

    I should explain. On my math, the most recent NHL offer would see the players make $11.816B over the next six years, assuming a 5% growth rate. While I’m not sure of the precise amount paid to the players from 2006 to present (the six years leading up the expiration of this CBA), some back of the envelope math produces something like $10.1B.

    Seems to me that characterizing what’s happened as “We have offered to pay the players an estimated $1.7B more over the next six years than we paid them over the previous six years and they have said that that’s not good enough” has the advantage of being a) mathematically true and b) sounding like a massive increase in the money offered. Talking about “shared sacrifice” sounds stupid at a time when everyone knows the sport is doing well. Be honest: you aren’t asking them to sacrifice. You’re asking them to gorge themselves on an extra $1.7B in salary over the next six years and start playing hockey.

    Email Tyler Dellow at tyler@mc79hockey.com

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    12 Responses to The Narrowing Financial Gap Between the NHL and NHLPA

    1. JonB
      October 21, 2012 at

      I can’t think of any reason why either the NHLPA and the NHL would have had any desire to start this season in October.

      If you’re an NHL owner is there any logical benefit to not starting the season later?

      It always makes me laugh when fans or media get on the “just lock them in a room until they make deal” bandwagon. It’s a great mental experiement, what would actually happen if you locked Donald Fehr and Bettman in a room for 10 hours in July? My guess is they’d probably play crib for 9.5 hours after agreeing not to agree in the first 5 minutes.

      When you look at these labour disputes from a pure incentive point of view there’s just so little reason not to drag them out to the last possible starting gate. The owners have basically lost nothing and have already reduced their major expense line by 12.5%. That’s f*&^ing wonderful if I’m an owner, I’m getting my trophy wife to put extra brandy in my poolside creamsicle milkshake.

      Concurrently if i’m a player my line of thinking is “are they just going to beat the $h#% out of us every 6 years, maybe be need to make this fight as nasty as possible”

      I don’t for a second beleive the math adds up for a lost season on either side but I can’t see any incentive to solve this dispute in the next 2-3 weeks

    2. Tangotiger
      October 21, 2012 at

      Tyler: great stuff.

      Can you run one with no growth? Because that’s the one that explain’s Daly’s comment regarding the third proposal of three, when he said the players would still get 56% or 57%, and they “ran the numbers”. Of course he didn’t present his numbers and no one in the media got those numbers. The media ran that press release instead.

      Also, for Bettman to characterize the proposal as not even speaking the same language is incredibly disingenuous. They are speaking exactly the same language.

      • October 21, 2012 at

        I have the numbers on Proposal 3 and they’re close to 57% for Year 1. How could they not be? The premise is existing deals are paid at 57% and new ones are at 50%. For next season, most contracts are given out.

        Proposal 3 was a bit of a red herring anyway. Tyler was right to ignore it. (What he’s calling PA-P3 here is not the same thing, remember.)

        Tyler, did you factor the “make whole” into the owners’ offer? And did you factor in the PA gets slightly more than 50% if growth exceeds 5%?

        • tangotiger
          October 26, 2012 at

          Actually, they don’t have to be at 57% in the first year, if contracts remained at 1.88 billion$ year over year (that 1.88 would be a 53-54% share, assuming an increase in revenue of 5%-7%).

          If the face value of the contracts ALSO went up by the expected 5% to 7% that the revenue is expected to go up, then naturally it’ll still be 57%.

          But that’s also true only in year 1.

      • October 21, 2012 at

        Just to clarify: neither side is doing calcs with “no growth.” League has been using 5% and players 7.1 or 7.2%. The idea the league wouldn’t grow at all in six years is absurd.

        As for what I said about “make whole,” it’s probably irrelevant in that the league’s offer ends up as 50% overall. But it’s worth noting that that deal is more like 55-52-48-48-49-49 than 50-50.

        • spOILer
          October 25, 2012 at

          While it might be improbable, the possibility that the league will not have greater real revenues over 6 years is not 0. And that possibility is probably higher now than it has been in the past. In fact, the 7.2% used by the NHLPA by my eye looks like a ridiculous assumption. Is there any industry in North America expecting 7.2% annual real growth over the next 6 years?

          But, very fine work reporting on these issues, Mr. Mirtle. Thank you for all the time and hard work.

    3. Cam Charron
      October 21, 2012 at

      I should probably clarify my original comment…

      The difference between “PA1″ and “NHL2″ was a little over a billion dollars at 7.1% growth. The difference between the PA and NHL currently with 7.1% growth is $268M over the five-year period ($10,460M minus $10,192M). My guess was that the NHL had moved more to bridge that gap, I think your chart shows both sides have moved about as much.

      From what I’m seeing, the NHL has moved $502.9M over the last month in that 7.1% growth scenario and the PA has moved about $287.9M.

      The next thing I’d like to see is an economist explain how much the Canadian dollar rising $0.20 between 2005 and 2012 contributed to the revenue growth the NHL saw in the last seven years.

      • October 22, 2012 at

        You don’t need an economist – I’ve written about this. The effect of the Canadian dollar was roughly 12 per cent of the growth in this period, meaning there was 6.3% annual growth (through a recession).

        • spOILer
          October 25, 2012 at

          Then someone in this bargaining should be taking into consideration a potential 20% drop in the USDCAD pair over the next 6 years. Or do the parties involved only believe in one-directional currency moves?

    4. Hawerchuk
      October 21, 2012 at

      “I haven’t even mentioned the guy who reads all the stat papers that get sent to Brian Burke and assures him that they’re useless.”

      I’m pretty sure that guy makes in a year roughly what Colton Orr made per NHL game.

    5. Ray
      October 22, 2012 at

      Thanks very much for this. Three questions about currency.

      1. Did you arrive at the currency-adjusted figure by a.) using actual revenue figures of Canadian teams; b.) using the percentage of Canadian teams (i.e. in 2011-12, 23.3% of teams were Canadian, so[revgrowth x .233 x CADappr]; or c.) something else, such as a widely-held estimate of % of rev from Canadian franchises?

      2. Did you calculate currency change annually or did you multiply the revgrowth average by cumulative currency change from the start date?

      3. What was the start date for the currency chart? Signing date of the last agreement? Start of 2004-2005 season?

      Thanks again.

    6. dawgbone
      October 22, 2012 at

      It’s funny you mention the spin the spin you expected the NHL to make in your last paragraph. Isn’t that exactly the route the PA has been taking when they talk about how much money they are going to lose?

      I’d love to listen to both Fehr and Bettman sit on a panel with the PA talking about how much money they’ll lose based on the owners proposal and the NHL talking about how much more they are still going to have to pay the players.

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