Saturday, 8 December 2012

Hills to Die On

The "theatre" that is known as the NHL collective bargaining negotiations reached a crescendo on Thursday night with the animated NHL press conference where Gary Bettman almost blew a gasket while addressing the media.  I had to chuckle when TSN broke away from regular programming to cover the press conference live as though it were some seminal moment in World history akin to Neil Armstrong walking on the moon.  We really need to get a life here in Canada.

That all said, it was very interesting to me that one of the key things that came out of this week's failed attempt to reach a new collective agreement was Bill Daly's comment that the League's insistence on a maximum 5 year contract length (7 for teams signing their own free agents) is "the hill we [the NHL] will die on".

That was a curious comment, both for the conviction with which it was made, but more interestingly if one asks why the League thinks the issue is worth dying over.

To me, the tone of Daly's voice was borne out of utter frustration with the state of the negotiations, but more importantly the League was trying to send a very public message directly to all Players, particularly about the 5 year contract limit.  On its face, how many of the NHLPA members are actually going to be concerned by whether contracts can be more than 5 years?  That is not to say that a 5 year contract limit will not have an impact on player salaries, but that impact is something that is more esoteric and difficult to accurately explain or predict to the majority of NHLPA members.  The NHLPA is saying it will gut the middle class, and likely has lots of neat illustrations as to why that might be the case.  Maybe, but as we have seen from the last two collective bargaining agreements, things turn out vastly different once the Clubs start competing for players and start "working" the CBA for their own self interests.  So is the contract limit issue a hill the players really want to die on?

On a substantive basis, why is the 5 (or 7) year limit so important to the Owners?  Originally, I thought the position was based on the Owners wanting to eliminate the back-diving long term contracts that Clubs and Players structured to work the salary cap to their benefit.  But the so-called "evil" of those contracts could be easily addressed by a compromise position.  Set the limit of the length of the contract based on the Player's age at the time he signs his contract.  For example, (i) age 20-24: 8 years, (ii) ages 25-27: 7 years, (iii) age 28, 6 years, (iv) ages 29 or older, five (5) years.  This (or a similar) compromise, combined with the League's insistence that year to year salaries not vary by more than 5% under the contract, should protect against any of the "back-diving" problems in the expired CBA.  At the same time, it would allow Players to continue to secure long term deals of more than 5 years to be played throughout their prime playing years.

But if it isn't just the back diving contract issue behind the League's purported insistence on 5 (or 7) year limits, what is it that is worth dying over?  The first thing that jumps out is the simple issue of guaranteed contracts.  The Players have enjoyed, as they rightly should, the benefit of contracts that are guaranteed for their full term in the event of injury.  By limiting Clubs to signing only 5 (or 7) year contracts, the Clubs will be protected from putting themselves under long term liabilities to Players who can't play due to injury (e.g. Rick Di Pietro).  However, the Clubs already mitigate this risk by taking out disability insurance policies on a handful of the highest paid players on their Clubs.  In my time working at the NHLPA, this was a mandatory requirement that the League placed on each Club.

Second, the contract term limit, combined with the 5% variance restriction, may even the playing field a bit between large market and small market teams competing to sign free agents.  The large market clubs can financially afford the mistake of signing a very long term deal if the Player ends up injured or simply loses skill much more than a small market team can.  In addition, the universe of comparable contracts raised in a negotiation becomes much smaller and more standardized.

Based on all that, is the strict 5 year limit really a hill the NHL will die on if push comes to shove in January?  Is the issue important enough to the vast majority of Club owners to cancel an entire season?  Is the issue important enough to them to go through the uncertainty of what might result from a potential decertification by the NHLPA and anti-trust lawsuits?  Is the issue important enough to them to risk the potential damage a lost season (or more) might have on business relationships with League and team sponsors.   In my opinion, the answer is no.  And I think that is what the NHLPA is banking on as well.


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  2. I had a thought on this. Is it possible that long term liabilities like long player contracts weigh negatively on franchise value? The value of such a liability is easy to determine by looking to the NPV of the dollar value of the contract, but the value of the corresponding asset (ie player performance) is far more difficult to assess. Given the turnover we've seen in team ownership recently, is it possible that owners are seeking to limit players to short term deals in an effort to bolster franchise values?

    1. There might be some of that thinking...but I (personally) don't believe that's the main issue here. Teams have what...maybe 2-3 long contracts each? That's going to have a negligible effect on franchise values. True franchise value comes from ancillary revenues, not team profits.

    2. I have heard it mentioned. It isn't unlike the impact that long term or contingent liabilities have on the value of any business. Another potential reason to want the term limits, but the risks can be mitigated. Agree with AWF that long term franchise value may have a whole lot more to do with growing the game as the League has been over the last several years.