A Summer of Owner Bashing?

July 21st, 2012 | Posted in Commentary
By: D'Arcy McGrath

Journalists like any other professionals come from writing programs in learning institutions, and are often in unions themselves.

They aren’t biased, they’re not jaded, and they don’t have an axe to grind. They simply see life from a certain perspective and because of that they can’t help but write opinion pieces from that perspective.

Similarly, many Calgarypuck readers toil downtown some in the tech industry, engineering firms, many from oil and gas and we too have a view that is similarly evolved from being in certain circles, having certain conversations, and forming certain opinions.

I’ve never been in a union, and I doubt I ever will.

The difference however, is impact, as my view certainly doesn’t have the push that hockey writers nationwide tend to have, and with that I really feel some huge issues in labour negotiations are over looked.

James Myrtle is one of my favourites, and he did an excellent job of getting into the numbers of the average NHL team and pointing out the bottom line.

 

He uses revenue, percentage to players, estimated other costs and a few other assumptions to come up with the number of 280M in profit for all 30 NHL franchises in recent seasons. A staggering figure.

The suggestion, a logical one in many ways, is that the NHL is going after players to fix a problem that going after each other for revenue sharing would actually solve.

Like I said there is some logic in there.

And despite the strength of this piece I really feel he missed some points that need to be addressed, and yes I’m fully aware of the war I’m about to start on my website.

1. Players Share of Revenue

Myrtle doesn’t mention, in fact I have seen only one mention of this fact in any newspaper in the last few weeks, and that is that baseball players get 50% of revenue, basketball and football (NFL) players get 48%, so an adjustment down is a very logical move by the NHL, and a starting point of 46% is more than reasonable in negotiations. If owners in one circuit get 10% less then their brethren across North America, the players had better hope they are huge fans of the sport or they will sell and move their capital elsewhere.

2. Competition for Capital

Owners of sports franchises get in because they love the sport primarily, not because they think it’s the best place to place their capital. I looked up the NHL franchise value average for 2011 (Forbes) and it came in at 240M. Using Myrtle’s average of 280M for the league in profit, that’s 9M per team per year. If someone wanted to buy this average team today and spent the 240M and owned the team for 15 years he’s have a net present value of that investment of 158M loss (discounted at 10%), and an Internal Rate of Return of -8% (negative). These are people that have investment handlers clamour for their portfolios by promising returns in excess of 20% a year. It’s an investment and they should be allowed to make money.

3. Revenue Sharing Doesn’t Work

Further to my point in 2., revenue sharing does little to help the investment health of a 30 team league as all it really does if done to equilibrium is ensure all 30 franchises are a bad target for wealthy capital. The Leafs and Rangers have huge returns on investment every season, but if they were forced to share with the weak they too would fail to be smart money for someone looking to park their money. In fact the average NHL team would need to make 33M in profit per season in order to break the net present value calculation even (keep in mind again that I’m only using 10% to discount).

A 50/50 split in revenue would only give the owners 18M in profits, which would be a 1% return on investment and a net present value of a 98M loss.

All these calculations are done to look at the average franchise, but the real spectrum means that this can’t continue and the owners have to dig in to fix the revenue stream or the league will be in real trouble.

Mr. Average Owner is fine, but the bottom ten franchises would need to be supported completely by the top 10 in order to stay in business, and in doing so as I mentioned above they’d make all 30 franchises unattractive for investment. Without that support the NHL would have to contract under the current structure as as many as 8 teams would disappear in the next five seasons. The NHL has been carrying the Coyotes for two seasons, and there are rumours of the Devils heading down the same road.

Every lockout or CBA negotiation results in a new set of rules, and these rules are picked apart for loop holes creating more of an issue down the road. Player enthusiasts point out the Weber signing as proof that the NHL doesn’t need to cry poor but I honestly think they’re missing the point. It’s ok for the league to suggest they need a new system that protects them from themselves. The very nature of sport is to compete, and competition creates bad decision with money that hurt the league.

They’ve established parity and great playoff races with the 2004 pact, and now they’re looking to bring the 30th franchise up to a break even point while still creating franchise value at the top end. That’s perfectly understandable to me.

At the end of the day I’m well aware that the players are the show, and they deserve to be compensated for their talents; I don’t begrudge them that one bit.

But without owners making the investment and taking the risk to operate franchises the show wouldn’t exist. The real key is to get 30 teams, and 800 players working together to grown the revenue pie with a mechanism to ensure the share results in everyone being happy.

So there’s my bias; fire away.


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