Getting Off the Treadmill

In the next few days, it’s expected that the National Hockey League Players’ Association will announce that Boston-based lawyer Paul Kelly will become the fourth executive director in the union’s 40-year history. The union’s selection committee is believed to have chosen Kelly by a unanimous vote, and they officially recommended his hiring on a conference call with the players on Monday.

A former U.S. assistant district attorney, Kelly tried to have the founder of the NHLPA, Alan Eagleson, extradited to America to face charges of fraud and embezzlement in the late 1990s. Eagleson later accepted a plea bargain under which he was fined in America and sentenced to 18 months in a Canadian correctional facility. Having undergone that tremendous effort, Kelly no doubt understands better than most the unique machinations of the NHLPA and its history of corruption and confrontation.

“(Kelly’s) a great choice for players and families, and for the game and their fans,” said Hall of Fame hockey writer Russ Conway, himself a huge figure in the Eagleson takedown. “The reason is because he can get things done in a manner that isn’t always a battle and a war. He has the ability to get people to listen to different points of view… He isn’t a warmonger.”

The hiring of Kelly comes at a critical time for the NHL and its players. Though a rosy picture has been painted regarding fast-rising league-wide revenue, there are some causes for very serious concern that he’ll need to immediately address.

Two weeks ago, the Detroit Red Wings played their home opener to scores of empty seats at the Joe Louis Arena. For years Detroit was the NHL’s strongest foothold in the United States. Empty seats in “Hockeytown” seems a clear sign that the NHL may be in more trouble than ever before.

Now, many observers correctly pointed out that the Wings have more competition for the area’s sports fans with the recent successes of the Lions, Tigers, and Pistons. And of course, the auto industry’s struggles are substantially reducing the area fans’ disposable incomes. But there’s another possible reason behind the diminished ticket sales, one that could have seriously negative repercussions throughout the league.

Because of the way the Collective Bargaining Agreement (CBA) functions, most NHL owners actually have no choice but to raise ticket prices and/or keep them at a level that many loyal fans cannot afford to pay.

The players are now guaranteed about 55% of league revenue. In theory, that provides “cost certainty” for the owners. But in reality, all it guarantees is that the fans will continue to be squeezed. Approximately 93% of NHL revenue is generated locally, meaning in-arena and local TV. Without question, the NHL is a gate-driven business. Only about 3% of NHL revenue comes from its national TV contract with Versus, and the $70 million total is dwarfed by what the NFL, MLB, NBA, and NASCAR rake in.

Now, as long as the other costs contained with the remaining 45% of league revenue continue to rise — and inflation ensures that they will — there’s only one way for owners to maintain profit levels, much less see them rise: to raise ticket prices. So if a 10% ticket price increase results in only a 5% drop-off in attendance, it could be argued that the price hike is a sound business maneuver. With that, look for the owners to continue raising ticket prices until the point where the diminished attendance outweighs the benefit of the higher prices.

Prior to the 2004–05 lockout, former S.E.C. chairman Arthur Levitt famously said that the NHL was on “a treadmill to obscurity.” But some critical concerns are far worse today than they were back then. Prior to the lockout, the owners actually had the option to pay the players less than 55% of their revenues. Today, the payroll minimums force struggling teams like the Nashville Predators and Phoenix Coyotes to spend more on players than they can probably afford.

Perhaps short-term profit and revenue goals can be met by hiking the price of hockey tickets. But in the long run, that will likely prove to be disastrous. Nothing drives television viewership quite as well as a sold-out event, and when casual fans tune in and see empty seats in the most coveted sections, it sends a clear message that hockey isn’t must-watch TV.

In Nashville, the expected purchase by a local ownership group looks to be falling through, and Canadian businessman Jim Balsillie has again emerged as the most likely candidate to purchase the team. Balsillie has made it abundantly clear that he wants to move the Predators to Canada, even going so far as to sell ticket deposits online at Ticketmaster.ca. His latest offer for the team includes a higher penalty for breaking the lease and relocating the team, but perhaps that’s just another indication of how lucrative he thinks moving the team to Hamilton could be.

Further complicating matters, recent contracts handed out to high-profile players such as Daniel Briere, Scott Gomez, and Thomas Vanek were front-loaded. All three players are earning $10 million this season, though their cost against the salary cap is substantially lower (the total value of the contract divided by the number of years).

As a result, there will be a secondary market down the road, where over-the-hill veterans are highly coveted by small-market teams. Acquiring players such as Briere, Gomez, and Vanek at the ends of their respective contracts will bring their new teams closer to the payroll minimum without costing them much in terms of real dollars. But such maneuvers will hardly help these teams to ice competitive lineups.

When the large-market teams figure this out — and every indication is that they already have — the disparity in talent between large- and small-market teams will become greater than it’s ever been. The answer, without question, lies in the partnership between the owners and players, and in the ability of both sides to cooperate and grow league-wide (national) revenues. By doing so, the NHL’s economic structure will begin to more closely mirror that of the NFL and NBA, where small-market teams have a much better shot at competing for championships.

Recent online initiatives with the likes of Apple and YouTube are hugely positive steps. The NHL is uncharacteristically making its content readily available to fans in a wide variety of formats and options, in sharp contrast to the NFL’s staunch refusal to do so.

Should they continue to be forward-thinking with regard to online content distribution — and should Kelly succeed in fostering a more cooperative relationship between the players and owners — look for the NHL to finally get off the treadmill and start gaining ground on its less progressive rivals.

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