by Nick Anglewicz and Jurgen Brauer, February 2005
Copyright: J. Brauer. No reproduction without permission.

American professional ice-hockey has been canceled for the 2005/06 season. Negotiations between team owners and the players collapsed ostensibly around the issue of how much of a salary pool to make available per team. The owners offered a salary cap of $42.5 million per team, whereas the players asked for $49 million.

NHL teams share only around 11 percent of their revenue. This is less than half of MLB's 26 percent and is dwarfed by NFL's 63 percent. Because of this miserly sharing, many of the 30 NHL teams are struggling financially and cannot finance the $49 million per team cap the players want.

The function of the salary cap is to ensure that each team has an equal pool of funding with which to attract players. Since an equal pot of money buys, roughly, an equal pool of player talent, a salary cap helps ensure continuous competitive balance among the teams. After all, what fun would it be if the Detroit Red Wings won hockey's Superbowl - the Stanley Cup - every year merely because the team could outbid every other team for player talent year after year? Lots of fun, to be sure, for Red Wing fans, but not for the league's other 29 teams and their supporters.

But for a salary cap to work sufficient general revenue sharing among the teams is necessary. Presently, NHL teams share only around 11 percent of their revenue. This is less than half of MLB's 26 percent and is dwarfed by NFL's 63 percent. Because of this miserly sharing, many of the 30 NHL teams are struggling financially and cannot finance the $49 million per team cap the players want. In fact, for the past few years almost two-thirds of the NHL teams were loss-making franchises. Broad revenue-sharing arrangements from which to finance an adequate team salary cap are typical for all the other major U.S. sports leagues, and it would behoove the NHL to follow suit.

It will not be easy to settle the current dispute. Significant problems exist not only between owners and players but also among the owners and among the players. Unlike the NFL which tightly limits the supply of professional football franchises relative to demand and has therefore reaped substantial monopoly profits shared among owners and players, the NHL built too many franchises too rapidly during the gung-ho 1990s. Supply outstripped demand, revenue lagged, and losses mounted. Team franchise values have dropped precipitously, and many an owner looks to lose a substantial investment if the league were to collapse. As for the owners of the richer teams, it is not clear why they would want to share revenue (i.e., reduce their own profits) to help their loss-making fellow businessmen, except that every day a settlement is delayed even the rich-team owners lose money.

The average player makes $1.8 million a season, and the salary caps currently in discussion wouldn't melt any zeros off any players' annual paycheck. It's better to play for $1.6 million than not to play at all.

On the players' side, things are not any easier. 388 of the 700 NHL players secured European contracts for the current season (displacing professional players there). The others have either found second jobs or are living off personal savings and union stipends. Like the rich-team owners, the star players sit pretty. It is the less talented ones who pay the price in foregone earnings and stalled careers. The salary cap idea does not sit well with the star players. For top earners, a $45 million multi-year deal may be reduced to a mere $25 million under a salary cap. But with a salary cap, the league's low-earners also lose as large chunks of the available salary pool are spent on the top players. Indeed, evidence from the other leagues suggests that salary caps increase income inequality among players. Presumably, this was the reason why players opposed the cap to begin with, and it was only under threat of league failure that they ultimately took the $49 million salary cap per team position. Nonetheless, the average player makes $1.8 million a season, and the salary caps currently in discussion wouldn't melt any zeros off any players' annual paycheck. It's better to play for $1.6 million than not to play at all.

One solution to the impasse would be to negotiate a flexible salary cap, adjusted annually to total league revenue. At the moment, the owners final offer is a cap of $42.5 million per team; the players want $49 million. Split the difference, let's play hockey, and rebuild the fan base. If revenue permits (audited by an external auditor appointed jointly by owners and players), adjust the cap toward $49 million; if revenue does not permit, adjust it toward $42.5 million. The alternative is league collapse; a number of franchises will go bankrupt and players will permanently lose their jobs. Much better to compromise, delay some of the contract issues into the future, and meanwhile focus on rebuilding the hockey brand.