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Sunday, July 31, 2005

The New NHL?

From today's Star-Telegram is a good article describing some of the early fallout from the NHL's new Collective Bargaining Agreement. Owners and general managers are already feeling a bit of buyer's remorse because the CBA establishes a hard salary cap - there is not the flexibility as there is in the NBA and the NFL. Specifically, the NBA allows for the Larry Bird exemption and luxury tax payments to exceed the league-mandated cap, which just about every team exceeds. In the NFL, teams are allowed to restructure contracts so that deferred-compensation reduces today's expenditures and the team is given credit for being under the cap.

The NHL has neither.

To ensure that salaries do not escalate, the owners insisted on the hard cap. However much a hard cap will keep salaries from increasing it will not be able to keep the hockey labor market from adjusting, and perhaps adjusting in ways that were not intended or desired. Wwners and GMs are now realizing that they have to cut some good verteran players because the CBA has essentially created a zero-sum game between younger players and older players. What will happen to the 35 year old NHL player with lots of experience but not a lot of hockey life left? Permanent journeyman class of players, much like in the NBA and the NFL.

It is impossible for the teams to insist on the hard salary cap and at the same time be able to field the most competitive team possible. Owners and GMs seem to be waking up to the fact that their profitability is not so much tied to the player salaries as it is to the revenue stream that is generated by the quality of the players on their teams. Quality players are more expensive than bad players, but quality players generate more revenue and (hopefully) profit. Can a team make a profit with bad players? Perhaps, but it is not very easy.

If, say, the Stars or the Coyotes have to hire a lower quality combination of player talent because of the cap, the revenues of these teams might decline very fast, whereas the same loss of team quality might not have any effect on team revenue in Atlanta or in Buffalo. At least a luxury tax type buy-out of the cap allows teams some flexibility to hire the marginal player, if it is profitable to do so. In the case of the hard salary cap, a team may not be able to hire an additional player even if the team's internal marginal benefit=marginal cost condition is met.

It seems The NHL will have to relearn, as it seems many people and industry leaders must do occassionally, that it is very difficult to harness and control every aspect of a market. If you limit the ability for prices (wages) to change, then quantity or quality will adjust instead. What is the least painful way to let markets adjust? Perhaps to let all variables adjust a little bit rather than one or two adjust a lot.

Some highlights of what is advertised as a 600 page collective bargaining agreement:

The new NHL

Salary cap It's a hard cap tied to league-wide revenue, and it does not allow contracts to be restructured.

Lowered age for free agency It will drop from 31 this summer to 29 next summer. It will then drop by one year, every year, until it reaches 27.

Two-way salary arbitration Giving teams, as well as the players, the ability to file for arbitration almost ensures that players who are arbitration-eligible will no longer be able to hold out. Also, players are eligible for arbitration after four years of NHL service rather than five.

Annual average salary The average annual salary of a contract counts against the salary cap. This clause makes it pointless for teams to structure front-loaded or back-loaded contracts.

Non-compliant buyout periods To get under the salary cap, the NHL will allow a period for teams to buy out contracts to reduce payroll every summer.

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