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Isn’t it almost time for prospect and training camps to open up? Forget it. We won’t see those until November at the earliest and possibly not until December. The economic reality of the current National Hockey League structure suggests that to gouge every single penny from the fan as possible, some teams may have to shut down for a month or so.

One thing that strikes me about the current labour negotiations is how determined the NHL seems to be at beating the union in every way possible. Their initial offer was pretty laughable and takes away a lot of the power from players. After a year without hockey last time around, the union had little power and an agreement was forced on them. There was a salary cap, originally a non-starter for the Player’s Association, was now implemented and tied to modest league revenue. No way the players had won this round of bargaining.

I even heard the “idiot-proof system” mantra floated about. Owners had cost-certainty and there would be parity. Seven years later, player salaries and league revenue have escalated. Are we really convinced that if the player’s share of hockey-related revenue is reduced, that player salaries will stop escalating?

Revenue, from my standpoint, is tied to demand of the product, not how much it costs to run a hockey team. The current system will be changed, but not overhauled, for the simple reason that too many big-market clubs have everything to gain by keeping their revenues high and player salaries low.

Let’s look at Michael Grange’s excellent column in Sportsnet yesterday. Let’s look at all the idealistic plans from people over Twitter yesterday to reduce the amount of teams, to create a breakaway league, or to create a real competition system in the NHL. The reason I say “idealistic” is because I simply don’t see a benefit to most the big-market teams if there were to be a breakaway league.

Most of the big-market teams use the NHL as a chance for greater profit. Consider that the Toronto Maple Leafs, the only team to not make the playoffs during the last CBA, recently sold for $1.3-billion to an alliance of two cable giants. Draglikepull explained why those teams made all that money in a good post at Pension Plan Puppets yesterday:

What lowering the share of HRR given to the players does do is allow those big markets like Toronto and Philadelphia to pocket some of that additional revenue at the expense of the small markets. If Toronto generates $10 million in new revenue, MLSE is guaranteed that some of that money will be pure profit – they’re not allowed to spend all of it on player salaries. But the small market teams who have not generated a single dollar of additional revenue are now required by the CBA to spend more money. The salary cap forces small market teams to continually outspend their revenues so that the large markets are guaranteed a certain profit threshold. As long as the NHL insists on there being a cap floor of any kind, this simple fact will not change. Contrary to the NHL’s position, the salary cap does not enable the small market teams to be financially solvent; in reality, the salary cap actively bankrupts them.

For the big clubs, they’re profit ventures that soak up a lot of revenue thanks to being able to sell the team’s greatest stars that are locked up in smaller markets. If there were a breakaway league that was made up of, say, the Original Six, the remaining five Canadian clubs and Philadelphia, where’s the guarantee that this money is going into the pockets of shareholders rather than stars like Steven Stamkos, Sidney Crosby, Ilya Kovalchuk, John Tavares, Joe Thornton who are all marketed by the league, but not paid for by the big clubs.

For the smaller clubs, sports teams are vanity projects. Is Greg Jamieson really buying the Phoenix Coyotes because he thinks he can turn them into a profitable franchise? Check out the disparity in ticket revenue linked in the above piece I’ve linked to. Phoenix generated an estimated (and I’d suggest generous) $18.4M in ticket revenue last season, while the league median was about $40M, over twice as much.

Is the City of Glendale subsidizing the Coyotes because they think they’ll get a positive return on their investment, or is it just because cities enjoy having sports teams around? As long as there’s prestige attached to owning or running a team, that creates a market inefficiency for people to exploit.

mc79hockey, both a hockey blogger and advocate for greater competition across the board, linked on his Twitter feed to a paper from Stephen F. Ross of the University of Illinois about competition among sports clubs. This paragraph on the fourth page particularly interested me:

One could adopt the view that any governmental ‘cure’ through intervention in the free market is likely to be worse than the disease, and opt for a complete laissez-faire approach to sports. Although monopolistic abuses in sport, to be sure, raise less of a societal concern than when products essential to the economy are subject to output restraints or inefficiencies, huge social-welfare costs still exist. Without threat of entry, North American clubs receive billions of dollars in tax subsidies for stadiums, while many are deprived of high-level competition by the closed league structure there; freed from any governmental restraint.

Basically, here’s the structure I see: The owners with the financial clout to own and operate and collect all the revenue from their own buildings do so off the backs of smaller market teams who are paying for an equal amount of the league’s star talent. The small-market owners can afford to do this thanks to government subsidies, and are forced to due to the nature of the salary floor and cap.

In order to keep the high-level competition in the small-market, government-subsidized arenas, the NHL is attempting to impose restrictions on free agency which would effectively keep draft picks locked in certain cities. Somebody would have to pay these players, since a cap floor guarantees that even the poorest teams have to shell out a certain amount to John Tavares or to the next John Tavares who is currently developing in the Canadian junior leagues.

As Ross notes later, “history reveals that competition between rival North American leagues have inevitably ended owing to merger, predatory conduct, or imprudent business decisions.” All of the four major sports leagues in North America have swallowed up a league that was going out of business attempting to compete. It’s just not financially viable to open up a competing franchise. The leagues themselves are entertainment franchises, competing against other sports, theatre, cinema and music, so they can theoretically argue they aren’t a monopoly. They aren’t the only entertainment option in town.

I don’t think it’s right, but the structure will change. Eventually the players and owners will come to a new agreement, and it will benefit the best players and the biggest teams down the line, while creating enough of an illusion of parity that make businessmen and communities want to invest in hockey players that can eventually be sold and profited upon by somebody else.

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