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.

The 2016 World Series: An Economic Tale of 2 Cities

The Chicago Cubs and Cleveland Indians played in the World Series in 2016. The series went the maximum seven games; four of which were played in Cleveland and three played in Chicago.  The event effected the city’s economy in different ways; while the close proximity of both cities also played a role in the overall economic impact.

Jacob Duritsky, vice president of strategy and research for Ohio-based business development firm Team Neo, noted the imbalance of incoming funds of the two fan bases.  The money coming into the city of Cleveland was a reflection of the spikes in airline travel, bars, hotels, restaurants, retailers, and 2nd party home retailers such as Airbnb.

A common note from several reporters is the value of entertainment budgets.  Local sports fans make the decision to allocate their funds to these types of sporting events, however “the pool of dollars generally doesn’t change” said Duritsky.  This reinforces how any noticeable economic impact to a city hosting the World Series will come heavily from individuals traveling into the city, and the money spent will be focused on the immediate area.      

Cleveland’s major jump in their economy came in the hotel market.  Occupancy rate and revenue spikes were higher than the Cavaliers’ and Golden State Warriors seven-game NBA Finals series.  Laurel Keller, VP of Hotel & Leisure Advisors cites the travel distance between Chicago and Cleveland as the impetus for extremely elevated hotel demand.

The time of year and participating cities are important factors when predicting cities economic impact on sporting events.  A potential log jam is created in October during convention season as hotels can experience a high demand for rooms in the fall.  The distance between the two competing cities, roughly 344 miles and just over 5 hours by car, put pressure on traveling fans to find these accommodations.

Crain’s Cleveland Business points to the influx of Chicago Cubs fans and their hope for an end to the historic 108-year championship drought as the biggest factor in the boost in the local Cleveland market.  On the other hand, the boom in Chicago was focused on local businesses.  The immediate area surrounding Wrigley Field is packed with restaurants and bars, while the hotels are downtown several miles from the ballpark. Most bars in close proximity to Wrigley Field were charging as much as $1,000 at the door watch the game.

To put baseball’s postseason financials in perspective, New York City estimated the Met’s 2015 postseason run generated $81.2 million for the economy of New York. To put that figure in perspective, Jade Scipioni of Fox Business reported that New York City’s overall tourism generated over $61 billion in that year.

Royals win World Series in 5 games against the New York Mets
Source: Jeff Curry/USA Today Sports

Lake Forest College economic professor Robert Baade looked at Major League Baseball’s postseason economic effect for all host cities during 1972-2001.  His estimated the impact per home game was roughly $6.8 million. In regards to the Cubs World Series run in 2016, using Baade’s outlook this estimates the impact on Chicago’s economy was 0.003%.

Efficient planning of the World Series can be difficult, considering the many outside factors the host cities cannot control. 

In both cities circumstances, hotel rates and occupancy will be an indicator of how the remainder of the series will affect the city’s economies.  Location of the participating ballparks and options for fans outside of the stadium will play a major factor as well.  While a city cannot build a hotel overnight, cities like Chicago can integrate new methods of cash flow; such as street vendors, expanded menu options at local eateries, or longer business hours.

The year after the Series victory, the Chicago Cubs completed Hotel Zachary. Sitting across the street from Wrigley Field, they can now take advantage of the hotel piece the neighborhood was missing.

Hotel Zachary completed in 2017 as part of the Wrigley Field 1060 Renovation Project
Source: http://www.hotelzachary.com

Most economic impact comes from individuals traveling into the host city. When examining the World Series, the clearest and most predictable rise in economic growth is the immediate area around the event.  Neighborhood bars and other business benefit most from the event; the city as a whole sees little impact economically.

Economic Activity and Structure of Competitive Sports

Many variables contribute to the competitive economic activity of the professional sport market. The simple structure of the sports broadcast market outlines the flow of revenue streams from leagues/teams to media and onto advertisers.  The flow goes back and forth between these three factors.  

The type of sport, the market that sport is played in, and the structure of the league are three variables that carry significance in relation to the economic actively of the market.

Source of Revenue:

Not all sources of revenue are equal across all North American sports.  The National Football League.  “NFL teams derive most of their revenues from national media contracts and those contracts are shared equally among all NFL teams.”  (Humphreys, 2015 p. 29)

The huge and equal influx of national media revenue puts less pressure on smaller markets in the NFL. The NHL, for example, has little national coverage and is able to thrive in smaller markets.

Costs:

The NHL has a hard salary cap imposed on all teams equally.  This means that every team is allotted the same amount of money to spend on players.  The number is determined by the previous year’s league-wide revenue.  By contrast, Major League Baseball does not impose a salary cap on player salaries.  This provides less restriction and therefor more guarantees for their on-field product.

League Structure:

All 4 major North American sports are unionized.  Each league has a collective bargaining agreement (CBA) between the player’s union and the league as a whole that governs the economic movement between the players and the teams as a whole.

Because these CBAs typically last 5 years, renegotiating the arrangement allows for forecasting potential issues.  The NHL has been either completely or partially locked out 3 times since 1992.  The lockout in 2005 was in-part related to the implementation of a league-wide salary cap.  The NHL is currently bracing itself for another showdown with the players association as the current CBA expires in 2022.  This time around, speculation on the work stoppage stems from the freedom of contract structure allowed to General Managers.  Under the current system, teams can “front load” (pay more upfront) to a player, or offer unusually high signing bonuses, which under the current CBA do not count against the salary cap.

These three variables work together to create a unique economic system in professional North American sports.

Branding, Implementation, and Manchester United

A brand communicates through four different channels; each of which offer value for both the buyers and marketers.  Understanding the identity, image, promise and relationships associated with the product or service demonstrates what the seller is attempting to offer.  Marketers use a branding strategy to “communicate or promote an association with a sports property by a sponsor to it’s target market” (Fetchko, Roy and Clow, 2013, p. 295).

Organizations can use a concept known as integrated marketing communications (IMC) to define and utilize channels used to communicate to a target audience.  IMC integrates every marketing tool, avenue, and other sources within an organization.  The purpose of the IMC concept is to create a program that will maximize the message to the audience at the lowest possible cost.  The challenge of the marketer is to keep the identity and message of the brand consistent amongst all channels within the IMC concept. 

Within the IMC and brand communication are the pull and push strategies.  The consideration of how the brand message will be intercepted by the consumer will direct the marketer to one of these strategies.  A pull strategy is implemented to entice the consumer to receive the product “by seeking it out through channels where it is available” (Fetchko, et al, 2013, p. 211).  A common usage of this strategy is marketing the date, time, and place of an event coinciding with images or references to the stars of the event.  Receiving more knowledge of the brand through this channel requires little to no action from the consumer.  This creates an awareness of the brand as a whole, while not expecting to immediately transfer into ticket sales for an event.

Manchester United implemented the pull strategy on a worldwide scale, after US businessman Malcom Glazer purchased financial control of the football club in 2005.  Creating a Chinese language website was a key factor in the globalization of the sport of football as a whole, yet more specifically created more awareness for Manchester United.  The team created relationships with brands such as Vodafine, Pepsi, Budweiser and Fuji which helped the team leverage their brand worldwide (Hill and Vincent, 2006).  Manchester United strategized the customer involvement factor to people all over the globe.  The relationship between the fan and the team increased as the visibility leveraged from the aforementioned brands.

While the pull strategy does not require action from the consumer, the push strategy relies on persuasion for consumers to take action within distribution channels.  Sales forces are typically instrumental in initiating pull strategies; the implementation of building and maintaining relationships with consumers.  Major League Soccer (MLS) implemented a ground breaking program in which they developed a training program for incoming sales people.

The MLS National Sales Center in Blaine, Minnesota is the first centralized sales training program offered by a professional sports league.  Fetchko, Roy and Clow note that 85% of MLS teams’ sales reps had less than three years sales experience (p. 212).  The league took advantage of the opportunity to grow and learn as a unit, while addressing the importance of personal selling and the path to loyal customers.  In addition to specialized training, incentives for sales people to reach specific goals is a push strategy often used by sales forces.  Organizations can direct these incentives to various product categories with the goal of raising revenues.

Each strategy has strengths and goals within the marketing operation.  “Both approaches are needed to advance an organization’s brand and achieve business objects” (Fetchko, et al 2013, p. 212.).  Many consumers within a target market are not yet ready to commit to action in terms of brand relationship that a push tactic might elicit.  On the other hand, communication from the brand is needed to create awareness and build relationships within the market.  The steps taken toward relationship progression “result from using both pull and push strategies and lead people closer to taking actions that have business impact such as buying tickets or licensed merchandise” (Fetchko, et al 2013, p. 212).

The brand image is the representation of thoughts or mental associations that people hold for a product or service (Fetchko, et al 2013, p .119).  Cultivating the brand image leads to the brand identity, which consists of associations that a marketer wants to communicate to the target audience.  According to Fetcho, Roy and Clow there is a gap between brand image and brand identity that exists for nearly every brand. (2013, pg. 119).  The goal of the marketer in this case is to align the image with the identity.  In doing so, one can drive to establish the image in a multitude of ways. 

The term “new media,” as defined by James Shomeier (2006) is “The convergence of telecommunications, computing and traditional media.”  These technologies include websites, broadband internet, streaming audio and video content and smart phones.  Brands have a shorter distance to customers and the target market than they ever have with the advent of this technology.  Because of this new access to potential consumers, sport brands have created integrated and immediate content that projects the brand image.

A partnership between NASCAR and Sprint Nextel allowed innovative new access to live events.  With the sponsorship, consumers at an event a handheld device called “FanView.”  This device allowed access to telecasts, live audio feeds from drivers and other otherwise unavailable content.  The sponsorship was mutually beneficial to both parties and provided value added entertainment and increased non-traditional revenue. 

New media leverages brand equity because consumers can be communicated to any time.  This access allows brands to mitigate any perceived changes in their identity when necessary.  A brand can quickly identify with consumers and maintain brand associations. 

History Favors the Bold; Compensation Favors the Meek

General Managers have the responsibility of creating a winning culture and delineating that culture to fans.

The ethos of the team and brand allows the team to have a clear identity. Organizations with clear identities that are able to communicate it to fans have a higher rate of follower retention.

Building a foundation:

1) Players 
Take a hard look at your main roster and farm system to begin the process of weeding out inefficiencies while elevating strengths of individual players.

2) Culture
Who is this team? What is this team? Our leaders on the ice need to be properly defined. If the team has not found sustainable success in recent memory, I want to take the time to understand what has been holding us back. Are we taking advantage of unique opportunities in our market? What is our repeat guest rate?

3) The Fans
Under the assumption the team has a history of falling short in the regular season, everything we do must send the message that the organization is changing. The trust of the fans is something the organization can never want to take for granted. Is there a memorable player from this team that fans miss? Engaging with fans is vital for our organizations success

4) Differentiation
Small changes from new and unique promotional items to going completely digital with tickets sends the message that the organization is innovating and creating new practices. There are so many other spaces for entertainment today, and differentiation is the key to bring in new fans and keep them as avid followers.

It would be worth the investment to allocate team funds to new promotional items, historical throwback nights with the goal of increased fan engagement.

5) Perceived value
By investing in the in-game experience, we create a more unique product. This serves as a catalyst for creating customer value. Flexible ticket packages (which can include concessions), limited edition merchandise and other activities around the stadium and provides increased benefits to the fan, as well as a reduction in sacrifices required.

The Arbiter of Relevance

ESPN has faced criticism in the past for a lack of coverage of certain sports and possible reporting biases.  Maury Brown of Forbes detailed what he considered an “uncomfortable and unnerving relationship” the network has with the NFL in reference to how ESPN reports on and speaks to the National Football League.  ESPN fired nearly the entire National Hockey League division of reporters in the middle of the Stanley Cup playoffs in April of 2017, cementing the lack of priority in the sport.  

While the media empire does not have the monopoly on sports journalism, it does carry the lion’s share of responsibility of distributing sports related information to the public.  Forbes values ESPN at $14 billion as of 2016.  Since the inception in 1979, ESPN’s programs have expanded to 47 international stations and a variety of expanded channels such as ESPN Classic and ESPNews.

The framework created by a network as large as ESPN has become is a direct reflection of what is currently popular in the world of sports. To put it simply, ESPN casts the widest net in sports journalism.  By not covering woman’s athletic events, for example, they are effectively de-prioritizing and devaluing that event. With 24-hour coverage on Sportcenter, ESPN can singlehandedly create priorities or elevate narratives.

ESPN is missing an opportunity to educate viewers on the politics of sport and the ensuing ripple effects.  While the dominating conversation of the network is up-to-the-minute sports journalism, in the background of these stories is a larger piece of the socio-economic puzzle of sports entertainment.  Spectators seeking analysis or scores of pivotal games will find what they are looking for on the channel.  

The Calgary Flames of the National Hockey League are currently at a standstill over the future of the Saddledome, the team’s home arena in Alberta.  Built in 1983, the arena will be the second oldest stadium in the league after the New York Islanders move to Belmont Park Arena in 2021.  The facility’s ability to host events and generate the revenue of newer stadiums decreases each passing year.  The future of the stadium, and potentially the Flames presence in the city of Calgary, are in question.

The Commissioner of the National Hockey League Gary Bettman recognized the need for a new stadium in Calgary and supported Alberta’s government in the funding of it.  Calgary Mayor Naheed Nenshi has publicly stated his opposition to putting tax payer money into a new stadium for the team. Nenshi offered a Plan B solution which would ask for partial funding from the team’s owners. President of the Flames Ken King turned down this proposal.

During the mayoral campaign of 2017 when Nesnshi was up for reelection, a series of negative tweets came from the Flames front office group. Sean Kelso, media and communications director called the mayor “arrogant” and used the hashtag #bracefordisaster.  Clearly seeking to elect a mayor that would push for government funding of a new area, the Flames continued the social media onslaught when vice president of marketing Gordon Norrie urged citizens of Calgary to vote for Nenshi rival Bill Smith.

Nenshi was reelected at the conversation between the league and the government have stalled after new funding proposals fell flat.

With both parties still far apart on a stadium deal, the Flames have not put relocation to another city off the table.  While it may be unlikely, a move out of Canada into a U.S. market is still a possibility.  Houston and Kansas City have shown interest in an NHL team during the Las Vegas and Seattle expansion process.

While this issue may not be as vital or socially pressing as racism or a steroid scandal, the Saddledome issue is an example of unethical practices in a front office organization.  A professional sports organization attempting to sway a mayoral race in an effort to win a new stadium would likely send shockwaves in an American market in a sport more heavily covered than hockey.

While ESPN reflects the biggest stories in the world of sports, the visibility generated by ESPN coverage could potentially change out this situation is resolved.  

Moreover, ESPN acknowledging this story as vital would elevate the situation and shed light to a notable issue in one of the world’s most profitable leagues.  Over the last 4 decades, ESPN became the arbiter of relevance in the sports entertainment market.  

Fans have latched on to sports dynasties and embraced slogans like “the Patriots Way” when referring to the operational structure of the New England football team. The popular mythos of sports cultures is reported on and detailed to individuals increasingly hungry for this information. ESPN is missing the opportunity to further educate this growing population.

What does it convey?

In August of 2015, Chicago Blackhawks star right winger Patrick Kane was at the subject of a rape allegation.  Police in Hamburg, New York told the Buffalo News the hockey player was accused of sexual assault after an incident in the suburb of Kane’s hometown of Buffalo.  Kane, slowly becoming infamous for his off-ice incidents, denied the allegations. The player plead guilty to a noncriminal charge of disorderly conduct in 2009 shortly after he and a family member were accused of assaulting a cab driver, also in Buffalo New York.  He was also not disciplined by the league in that instance either.  Kane wasn’t charged with a crime and was not disciplined by the Chicago Blackhawks following the rape accusations.  The accuser did not press charges.

Before the Patrick Kane allegations, another National Hockey League player faced accusations of a different sort.  Los Angeles Kings defenseman Slava Voynov was suspended indefinitely in late October 2014 after an arrest on misdemeanor domestic violence charges.  Voynov was arrested and plead not-guilty and would later be charged with one felony count of “corporal injury to a spouse with a great bodily injury.” The team was fined $100,000 after attempting to bring Voynov to a team practice following the league’s suspension. And despite only playing six games that season, Voynov was paid a full salary.  In July 2015 was sentenced to ninety days in jail with three years of probation.  He has not played in the NHL since the 2014-15 season.

There have been other public relations problems with hockey players with various degrees of seriousness.  Semyon Varlamov of the Colorado Avalanche turned himself into police in October 2013 and was charged with second-degree kidnapping and third-degree assault.  The charges against him were eventually dropped after being unable to prove the case beyond a reasonable doubt.  While he faced felony charges, Varlamov was allowed to travel with the team and saw no suspension from the organization.

The National Hockey League is the only one of the four major sport leagues to not have a formal, written player off-ice conduct policy.  This could turn into a public relations problem if the league doesn’t have a consistent and autonomous way of handling player misconduct. However, the players collective bargaining agreement (CBA) states that a player can suspended while they are part of a criminal investigation as seen with the Voynov situation. It is also important to note that the league or NHLPA does not require the suspension of the player involved, as seen with the Varlamov case.  

Unpredictability cultivates dilemma in complex legal circumstances.  Without a standard by which to handle negative public relation situations involving players, how would the Blackhawks handle the Patrick Kane situation if he was charged?  What if he was on a different team, or less notable?  The NHL has a written action plan written in the CBA about how discipline is executed and includes detailed instructions on how communication on the punishment is sent and received.  What the NHL CBA does not include is specific prohibited conduct that will subject the player to discipline, or explicit guidelines the league will follow if a player violates the policy.  The National Football League has all of this and more detailed in their Personal Conduct Policy.  The NFL personal conduct policy also includes clear definitions for repeat offenders.

Gary Bettman once said regarding league policy, “Our code of conduct is we expect you to do the right thing, and if you don’t, we hold you accountable.” Using the Cynefin Framework, the lack of a rigid conduct policy by the National Hockey League is creating an environment that in itself is producing complex problems.  If the league and players association agreed on a conduct policy similar to the NFL, or reinvented the modern policy on player conduct, the league’s conduct problems would be simplified.  Currently, the league currently handles off-ice issues on a “case-by-case basis.”

Cynefin framework via Wikipedia.

The complex node of the Cynefin Framework defines the outlined system of player conduct formalities in the NHL. Not only is the problem of the lack of clarity on conduct issues a complex problem, but the ripple effects of how discipline is or isn’t established will continue to breed issues.   Collaborative thought to creating a structure that can solve player conduct issues can be a solution to a rigid conduct policy.  

The NHL would benefit from looking to the NFL to mirror their bulleted list of behavior deemed worthy of investigation.  Written commitment on character assessment to rebuild the athlete after a public transgression would cement Gary Bettman’s and the league’s commitment to education and reform.

Reform, education, and clear guidelines for player off-ice conduct would transform into a simple “cause and effect” relationship.  The consequences of violating league conduct policies would no longer be vague.  Eliminating case-by-case basis for league wide problem solving creates autonomy and immediate understanding for the athlete upon signing a contract.  To create simplicity, the players association would need to agree on fair consequences for player actions.  It would be in the league’s best interest have a balance between on-ice conduct and off-ice conduct.  Article 18 of the CBA has eight (8) pages of on-ice conduct polices.  The definitions of transgressions, penalties, appeals and education are among the detailed efforts to curb on-ice injury.  Off-ice conduct occupies three (3) pages.

Using the Bolman and Deal’s Frames of Reference, I would begin the process of reform with the human resource frame. There is an incalculable value to investing in the people of your organization.  Outside of the organization, the human resource frame would show an empathy to those effected by a violation of the off-ice policies.  The support and concern for everyone involved creates a culture of intentional education and growth.  An often-undervalued element of the NFL conduct policy is the importance of reform and education.  The verbiage in the policy doesn’t completely rely on punishment and penalties.

Bolman and Deal’s Four Framework Approach to Leadership. Via nwlink.com

The structural frame would be vital in controlling the creation and implementation of a player conduct policy.  Stressing accountability can be the cornerstone of the new expectations following new regulations.  This frame also implies a strong “right or wrong” methodology.  What is hurting the NHL right now is the lack of clarity and enforcement on this issue.  As seen with the Varlamov accusation, past practice would say he would be suspended. Under a structural frame, options are eliminated, and a rigid structure remains.

Bringing in representatives from other leagues familiar with player conduct policies to create one for the NHL would be a first step to create a long-term plan.

Approaching the Cynefin framework as a compass for how inevitable problems can be corrected and learned from was an interesting exercise.  It appears as if the NHL is built with leaders who assess issues with the political frame.  Compromises and negotiations are the main tools of problem solving; indicative of the “case-by-case” off-ice conduct policy.  

It became clear that not only was the lack of a player conduct policy a complex issue, it was creating further complex issues.  The Cynefin framework helped digest the inconsistencies and lack of framework in the NHL’s CBA. The cases of Varlamov, Kane and Voynov indicate how the NHL can create restrictions on unfavorable conduct and facilitate initiatives that help the player.