Does the NHL have a revenue sharing problem?

The National Hockey League is in a unique position in regard to salary management and revenue sharing.  The league currently sits with a gate revenue sharing agreement as well as a hard salary cap.  The salary cap is adjusted every year based on increases in league revenue. 

Using the facts of league revenue sharing and yearly increases in team salaries, we can assess two teams in dire straits and how the teams reacted internally, and what the league did in response to those internal actions.  For this purpose of this discussion, a comparison will be made with the 2007-08 Chicago Blackhawks and the 2002-03 Ottawa Senators.  There are stark similarities between the internal struggles of each organization and the leagues response to their circumstances.

In 2007 when John McDonough entered the Blackhawks organization from the Chicago Cubs, he immediately noticed deficiencies in the arena and team services and how those factors related to low attendance and poor on-ice product.  He famously asked the veterans on the team what they needed to feel comfortable, and more importantly, what Chicago was lacking after visiting and assessing multiple cities and arenas during the year.

Providing elevated travel services, pre and post-game meals, a professional closer-to-home practice facility, and other amenities quickly turned the Chicago Blackhawks into an organization players wanted to be a part of.  The Blackhawks made their organization desirable, and the on-ice product elevated in response.  Attendance went from one of the worst in the league to sell-out crowds.  Eventually, Chicago became the example of how an NHL team should operate, leading to three Stanley Cup championships in five years.

The changes the organization made internally, grew the product and brand.  From an economic stance, the Blackhawks increased profits and promoted attendance.  The success the team found from this reorganization resulted in the fans choosing to return to the event.  The team did not rely on the economic structure or policies from the National Hockey League.

Feess and Stahler (2005) find that revenue sharing in professional sports does not translate into an increase of talent demand.  The National Hockey League has a unique structure for gate revenue sharing.  “Gate revenue for the NHL is divided amongst the 15 clubs with the lowest revenues in the league, have a payroll below average, and play in a market with fewer than 2.5 million TV households” (Humphreys, 2015).  The issue with this structure according to the research conducted by Feess and Stahler indicates that the league is running an inefficient model of gate revenue sharing.

The Ottawa Senators organization is an example of a team that chose to turn to the league for financial help in a time of crisis.  The 2002-03 Senators ended their season as the Eastern Conference Champions and won the Presidents’ Trophy for being the league leader in points.  Despite the on-ice success of the team, home game attendance was barely in the upper 50% of the league.  The team received emergency financing from the NHL after filing for bankruptcy in January of 2003.

The Ottawa Senators attempted to be a profit maximizing team, while their product naturally skewed to a win maximizing structure.  The deficiencies of the team came in an era of the NHL that predates the salary cap; meaning the organization could players without any built-in restrictions.  While this was only a part of the problem, the league would eventually introduce a salary cap in the 2005 Collective Bargaining Agreement.

The example of the perplexing Ottawa Senators 2002-03 season reflects the study conducted by Stefan Kessenne entitled “Does a win bonus help to increase profit or wins in professional team sports?”  He notes that if a team introduces a premium system, the organization can expect to increase its profits or winning percentage with a reduced fixed salary.  The tragedy of the Senators is if they would have implemented this system, and keep salaries low, they likely could have saved themselves before the NHL stepped in.

Conversely, it is worth pondering how the team and the league would have responded to a relocation to a different city.  The weak Canadian Dollar, the debt accrued by team owner Eugene Melnyk, and stagnant game attendance despite the wins of the team should have signaled a relocation to a new and receptive market.  The Quebec Nordiques has similar financial and attendance woes before relocating to Denver in 1995; immediately winning the Stanley Cup.  

While the NHL and other leagues have systems in place to prevent financial pitfalls of their teams, the economic solution to regain footing in the market is to do so internally.  Even agreements like the gate revenue share ultimately do not contribute to the product.  Research and practice have shown that low cost incentives have a greater impact than the league can provide.

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