THE ECONOMICS OF SPORT AND THE NHL LOCKOUT

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CHAPTER 11

• THE ECONOMICS OF SPORTAND THE NHL LOCKOUT

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Collective bargaining at work Gary Bettman (NHL
Commissioner) and Bob Goodenow (President of
NHL Players Association) shaking hands.
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Wide field of economics of sports

• Analyses of demand for sport
• Cost-benefit analyses of sporting events and
  sporting activities
• Sporting governance (labor-management)
• Business and finance of professional leagues
• Wage determination
• Labour-market discrimination
• Trade in sporting goods industry
• Media coverage
• Sponsoring, endorsements
• Related issues

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Differing outlook on sports economics

• N America, Britain, Australia
• Applied tools of standard supply/demand analyses
• Focused mostly on pr sport, especially mens team
  sports

• Continental European
• More institutionalist
• Relies on descriptive statistics
• Devote more attention to sporting goods industry
• Also to amateur sport, Olympic Games

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CHAPTER AGENDA

• Focus on National Hockey League
• Because it
• Is most representative of Canadian outlook
• Has most data available
• There is much media attention on NHL
• Illustrates many of the issues involved
• 2004-05 lockout big event in Canadian sport

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• Objectives of chapter
• Put hockey lockout in economic perspective
• Explain economic motives and constraints that
  rule NHL hockey
• Impart and understanding of dynamics of labour
  conflict in team sports
• Compare economics of NHL hockey with NBA, NFL and
  MLB

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NHL PROBLEMS

• Problems identified by NHL previous to 2004
  strike
• Free-market mechanisms allow the foolish
  decisions of one or two clubs to have detrimental
  financial consequences on all clubs (this is
  called a negative externality in economics)
• The NHL needs cost certainty, which turned out
  to mean a hard payroll cap, the value of which
  was linked to league-wide revenue
• Revenue and payroll disparities have widened to
  unprecedented levels, inducing competitive
  imbalance on the ice, thus requiring the creation
  of an economic system where 30 clubs can ice a
  competitive team and be stable
• A new economic system must also provide
  entertainment to the fans at an affordable and
  competitive price, meaning lower ticket prices.

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Overview of lockout

• Lockout Employer stops employees from working
• Lasted 300 days
• Settlement negotiated through collective
  bargaining
• Players took overall 24-percent pay cut
• Revenue-tied payroll ceiling imposed

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• OWNERS
• Want impediments on labour (player) movement
• Want imposed salary determination

• PLAYERS UNION
• Ask that players be free to move from team to
  team
• Want salaries freely determined

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Some definitions

• CBA Collective bargaining agreement
• Perpetual reserve clause player forever
  forbidden to change teams without being traded
• Unrestricted free agent able to move freely
  from one team to another
• Restricted free agent player can move to other
  team at end of standard-length contract,
  receiving team pays penalty

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Salary Inflation

• 1995 restrictions in CBA designed to slow down
  inflation of players salaries by
• Maintaining restrictive free agency rules
• Introducing salary caps at entry level
• Reducing arbitration rights by
• Restricting its access
• Allowing teams to avoid rulings of arbitrators

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Salary Inflation (2)

• Inspection of table 11.3 (p.202) reveals that
  above measures did not work.
• Salaries of all major league sports increased in
  1990a
• Salaries of NHL players increased most quickly

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Reasons for salary inflation

• Creation of World Hockey Association increased
  demand for players
• Publication of salary information
• More aggressive NHL Player Association
• Several very large contracts, notably to Wayne
  Gretsky and Eric Lindros
• Attempts to raid restricted free agents
• Changes in structure of ownership, financing of
  teams

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Levitts report on NHL finances2004

• Only one-third of teams profitable
• Owners lost 273 million in 2002-3, 225 million
  in 2003-4
• Results challenged by NHLPA who claim that audit
  of four teams show that net revenues were
  underestimated
• Creative accounting may account for some of
  these discrepancies

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Comparison 1993/4 -2002/3
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NHL PROBLEMS AND THEIR SOLUTIONS

• Free-market mechanisms allow the foolish
  decisions of one or two clubs to have detrimental
  financial consequences on all clubs (this is
  called a negative externality in economics)
• The NHL needs cost certainty, which turned
  out to mean a hard payroll cap, the value of
  which was linked to league-wide revenue
• Revenue and payroll disparities have widened
  to unprecedented levels, inducing competitive
  imbalance on the ice, thus requiring the creation
  of an economic system where 30 clubs can ice a
  competitive team and be stable
• A new economic system must also provide
  entertainment to the fans at an affordable and
  competitive price, meaning lower ticket prices.
• NHL, 2004

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2005 Collective AgreementSix major points

• Salary contracts rolled back by 24
• Owners imposed payroll cap and floor
• Payroll cap linked to league revenues
• Salary of individual player limited
• Rookie salaries and bonuses capped
• Qualifying offers and players access to salary
  arbitration tightened owners bring overpaid
  players to arbitration

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Results of these changes

• New outlook for Canadian franchises
• Ticket prices have gone down
• Canadian teams rank better in attendance
• Bottom line of Canadian teams improved

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Role of the Public Sector

• In US, construction of arenas often subsidized
  directly or indirectly by government agencies
• Canada not so receptive to this 1999 government
  reversed decision to help NHL teams after public
  outcry
• Better outlook for NHL teams in Canada probably
  mean less government handouts or tax breaks.

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CONCLUSION

• Economics of NHL changed radically in few years
• Partly due to general economic conditions
• May be partly due to payroll cap in 2005 CBA
• Outlook for NHL hockey good