SBJ/November 10 - 16, 2003/Opinion

NHL can avoid lockout if sides start talking

The NHL's collective-bargaining agreement runs out after this year. Contrary to the tough rhetoric out of the commissioner's office, the league can ill afford a work stoppage, let alone a protracted one.

With the very real prospect of a smaller national TV contract, lower sponsorship agreements and growing competition from the broader entertainment industry, a lockout could have devastating effects.

The good news is that, despite the escalating war of words between Gary Bettman and Bill Daly on the owners' side and Bob Goodenow and Ted Saskin from the players association, a lockout is eminently avoidable.

NHL player salaries have grown considerably more rapidly than league revenues — though not so much as the owners would have you think.

In his new book, "Money Players," Bruce Dowbiggin comes to the same conclusion. He argues that the current collective-bargaining agreement can be modified to give owners protection from their own spending habits and keep the industry financially sound. Only the desire to break the players union — and turn the clock back to Alan Eagleson days — can provoke a sustained work stoppage, according to Dowbiggin.

Let's begin by clearing the recent, multilayered smoke blowing over the league's financial status.

Layer one is the debate about how much faster salaries have grown than revenues during the course of the present collective-bargaining agreement, dating back to the 1994-95 season when 32 of 82 games were lost due to the lockout. As with all time-series data, the growth rate you get depends on the years you pick to start and end your period.

The union picked 1994-95 as the starting point, arguing that it was the first year of the agreement. True enough, but it was also an atypical year.

Salaries were disproportionately higher because the size of prorated signing bonuses was not diminished by the work stoppage and because injured players generally continued to be paid.

So, if you start with 1994-95 when the salary share was artificially inflated, you get very little difference in the growth of salaries and revenues through 2002-03.

The proper statistical procedure is to "smooth out" the start and finish by taking the average of two or three years at each end. If we average the player-cost share in revenues for 1993-94 and 1995-96 (leaving out the distorted year) and compare it with the average player-cost share during 2001-02 and 2002-03, the player cost increases from 62 percent to 73.8 percent of reported revenues.

Thus, by reasonable standards, salaries have been growing considerably more rapidly than revenues — though perhaps not so much as originally portrayed by the owners.

One further caveat is important here. Player cost can be defined in various ways (depending on, for instance, the discount rate used for deferred salaries, the treatment of amateur signing bonuses or the drafting rights fees paid to international organizations). The 73.8 percent share above uses a very inclusive definition of salaries.

Gary Bettman reaches for cost certainty, but risk is a given under capitalism.

The next layer of dispute concerns revenues. The union asserts that because teams sometimes own the arenas, media companies or other businesses connected to the team, they can arrange to have the team underpaid for its rights or services. Such contracts are called related-party transactions.

The union, in fact, was given access to the books of four teams of its choice. The union selected these four teams because it expected them to be more heavily engaged in related-party transactions. The union says it found $50 million in hidden revenue in just these four teams — or $12.5 million per team.

For argument's sake, let us assume that the other 26 teams (less suspected by the union) together hid an additional $100 million in revenues. If we added the $50 million and $100 million to the revenue figures from the commissioner's office, the share of player costs in total revenues would fall to 68.4 percent — still well above the 62 percent share at the beginning of the period and well above the roughly 60 percent player-cost shares in the NBA, MLB and NFL.

Similarly, the league figures suggest losses last year of $300 million. If we add back $150 million in hidden revenues, the league still lost $150 million — suggesting the likelihood of an overall financial problem (even allowing for some manipulation of reported franchise costs).

In any event, the union seems to recognize that there is a structural, financial problem. Reportedly, the union has proposed to the league: (a) an across-the-board 5 percent cut in salaries, (b) increased revenue sharing and (c) luxury taxes on high team payrolls.

So, the debate is not about whether something needs to be done to restrain salaries; rather, it is about how best to achieve the restraint.

NHL Commissioner Bettman has repeated over and over the mantra of cost certainty. He says that other businesses have it.

Perhaps he is referring to businesses in the former Soviet Union. Under capitalism, there is risk and neither cost certainty nor revenue certainty.

In the NHL's "Collective Bargaining Agreement Backgrounder" report, the league states that cost certainty is "a sensible and enforceable relationship between revenues and expenses." It goes on to state that "there are numerous ways to achieve cost certainty."

Taken at its word, the league is saying that it does not need a hard salary cap.

That's a start. After all, the two U.S. sports leagues that have a cap system, the NFL and NBA, each have loopholes so teams have some room to maneuver in setting their yearly payroll.

Andrew Zimbalist is Robert A. Woods professor of economics at Smith College and adjunct professor in sports management at the University of Massachusetts.

Editor’s note: This is the first of two columns examining the NHL’s collective-bargaining status. Today: Sorting through the rhetoric. Next week: Crafting a new agreement.

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