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.

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.

In Vogue/In Vain

As of January 1st 2019, the Seattle Mariners will play their home games in the recently renamed T-Mobile Park. Forgoing the Safeco moniker as old as the park itself, constructed in 1999.

Cano, Paxton, Segura and AL Reliever of the Year Edwin Diaz were all traded away at the beginning of December, confirming a full rebuild was in effect. Nelson Cruz was also granted Free Agency.

2018 also marked the 17th straight year the club has missed the post-season; ending the season at 89-73 and 3rd in the A.L. West.

The Mariners are doubling-down on their rebranding strategy.  The team announced a total revamp of the exterior color scheme to coincide with the T-Mobile aesthetic.

Individuals who demonstrate strong identity towards the the team are threatened with the lack of distinction when a stadium undergoes a name change. Wann (1997) defined team identification as “the extent that a fan feels psychologically connected to a team.”

Engineering team identification is an important and delicate task, one of the few that is complete control of the organization. Team loyalty, civic pride, perception of the organization as a whole and measurable ‘“fanship” from these fans is directly related to team identification.

Organizations routinely trade players at the height of their value to receive long-term gains. This practice can (read: should) create future sustainable wins. What makes the Mariners’ situation unique is everything is happening at once.

Average attendance at Safeco was highest its been in 10 years in 2018, yet Seattle is still in the middle of pack league-wide at an average attendance of just over 28,000. Time will tell what these major team adjustments will have on attendance levels and fan engagement. While I don’t think anyone is predicting the Mariners to be October bound in 2019; the organization will need new ways to fill the seats. Draining the identity without a coherent replacement will result in less dollars spent and less fans at the park.

Source: Branscombe, Reysen, Snider. Corporate Renaming of Stadiums, Team Identification, and Threat to Distinctiveness. Journal of Sports Management. 2012.