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A Salary Cap Primer

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Old
09-27-2003, 09:25 PM
  #1
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A Salary Cap Primer

"If they [the owners] want to pay us, they must be making money, it's not up to us to say: 'No, don't give us that much money.' " - Vincent Damphousse.

"Be careful what you ask for you just might get it." - Wetcoaster

Many are braying for a salary cap without faintest clue of what it is and what it entails.

It is complex and takes some time to wrap your mind around the concepts. Fortunately there was a consultant and statistician in Washington, DC, Matt Witting, who did an incredibly detailed and exhaustive in-depth study comparing the salary capped NFL and NBA to the capless MLB and NHL in February 2003. His figures, charts and analysis reveal some very interesting things. They also explode a number of popular myths about salary caps and their effects on competition and the movement of players.

There is a lot of simplistic bashing of the NHLPA and the players. It takes place IMHO because the players' salaries are visible. Crank up the NHLPA website and others and you can see what each player makes. Salary disclosure was one of the best things Bob Goodenow pushed so that teams could not trade on player ignorance in negotiations as had been the past practise but it is a two-edged sword. However try and find out what owners make off the game - good luck.

Most team owners run a series of companies, usually private, with the hockey operations in one company while revenue generation from hockey related operations are held elsewhere. The NHLPA has challenged the owners to open up all the books and prove their contention that the game is not economically viable. The owners have steadfastly refused the request.

If you intend to institute a salary cap as in the NFL or NBA, the first requirement is complete financial disclosure by ownership (as was done in those leagues) as there has to be some form of revenue equalization and establishment of a formula which forms the cap. Any other approach is pure salary suppression and done only on the backs of the players.

The NHL owners refusal to disclose leads me to conclude what they are looking to do is cap salaries without revenue sharing. In other words the entire burden will fall on the players and ownership is free to do what it wishes. This was actually done in the last CBA where the NHLPA agreed to salary restrictions for new players entering the NHL. The maximum salary was set at $1.175 million for 2002 and bonuses were restricted. If you want to see this check out Article 9 of the CBA "Entry level Compensation". The CBA can be found at:
http://www-ix.oit.umass.edu/~splaw488/NHL_CBA.htm
or http://letsgopens.com/nhl_cba.php

It simply is not going to happen this way for established players. In restricting entry level compensation the NHLPA in effect gave away rights for players who were not yet even part of the association - cynical yes but a very good bargaining chip. Besides who was going to complain.

When salary controls are proposed they are supposed to accomplish all or at least most of the following:
-keep team salaries down
-keep individual player salaries at a reasonable levels
-keep ticket prices increases under control
-reduce the difference between "haves" and "have-nots" and
-increase competition on ice league-wide.

Salary caps are not the be-all and end-all and do not necessarily work as intended and they have side effects. For example under the NFL cap system trades of any skilled player is virtually impossible. Just think no more trade deadline fun in the NHL. The "Law of Unintended Consequences" has dogged the salary cap systems in the NBA and NFL

As I noted above many fans fail to realize that the NHL already has a salary cap in place. The maximum entry-level compensation for players under the age of 25 is dealt with under Article 9 of the NHL CBA which limits the maximum yearly compensation for rookies to just over $1.25 million in salary and 50% of that in signing, reporting and roster bonuses for 2002. It went up another $50,000 this year. Rookie contracts are also deemed to be two-way deals under the CBA.

A general salary cap for other players without the NHL owners agreeing to revenue sharing will be a non-starter. The NHLPA will never agree and do not forget the players have their agents and their own legal and finacial advisers who keep them informed of the effects and ramifications of any changes in the CBA. This is not the 1950's when you can give Gordie Howe a team jacket to keep him happy.

The NBA and NFL caps are based on calculating league-wide revenue from most basketball/football sources and revenue streams to generate a figure against which an allowable salary ceiling for each team is calculated. If you have ever read the CBA's for the NBA or NFL (and I have) you will realize they are two of the most complicated and convoluted labour relations documents ever produced. Teams employ an army of legal and accounting consultants on a full-time basis to assist them in conducting their business and in negotiating contracts. It takes three weeks in the NBA to figure out if you can make a trade.

The NHL owners have consistently refused to consider revenue sharing and will not disclose how much money is being made from all hockey related enterprises. In most cases the hockey operation, i.e. the team is run under one set of books while other income is generated through other companies. The NHLPA has challenged the owners to open the books so a true picture of the financial system can be seen. The owners have refused.

Quite rightly the players resist being the only side making the financial sacrifice. Historically in the NHL the owners r@ped and pillaged the players before the advent of the NHLPA. Probably the single most important move by the NHLPA was Goodenow publishing individual salaries and making contracts public. In the past players were forbidden from discussing salary on pain of suspension or being blackballed. It led to such things as Gordie Howe in his heyday being only the fourth or fifth highest paid player on the Wings while he was the best player in the league.

There are various forms of salary control.

The NBA cap which Bettman helped design and implement is a "soft" cap. The teams must disclose their Basketball Related Income ("BRI") which includes revenue from tickets, advertising, local concession and souvenir sales, local media and other league, team and arena income streams. The current NBA cap for each team is 55% of the total BRI for the league. Only two teams (Detroit and LA Clippers) were under the cap - the other 28 teams were over. There is also a luxury tax in the NBA. However there are so many exceptions and loopholes the cap is more honoured in the breach rather than compliance. Since most exceptions relate to the star players and their higher salaries, the cap has virtually no effect on the players for whom the cap was intended in the first place but it does hurt the journeymen.

The NFL has what is referred to as a "hard" cap. Again league revenue is calculated in much the same way as the NBA but it is called Defined Gross Revenues ("DGR"). There are virtually no exceptions - hence it is a "hard" cap. The cap is set at 63% - higher than the NBA but remember that football rosters are much larger.

Also you often hear of huge long term NFL deals. However if a player is cut, his contract ends. So if he has 5 years left on a $5 million per year 7 year contract once he is released, the team is no longer obligated to pay. This differs from the NHL where contracts are guaranteed and if you want to end a contract you must pay out the remainder at 2/3 or negotiate a buy-out. This is the Pierre Turgeon situation in Dallas.

Of course many star NFL'ers (and their agents) know this and they sign deals with huge signing bonuses. Under the NFL system teams can then average out the bonus over the term of the contract for the purposes of calculating the team's yearly cap number.

So taking the example above a player may sign a $35 million contract with a 7 year term. His salary is $2 million per year and he has $21 million dollar signing bonus in his pocket. Essentially he has a $23 million guaranteed contract. The team is not charged $23 million in the first year under its cap but rather is permitted to spread out the total contract over the total term so it is only charged $5 million per year against its cap. However if the player is released, traded or injured the entire signing bonus (or its remainder) now becomes part of the team's next year cap. For example our player blows out his knee and retires. Now the cap room is lessened by $19 million dollars and you must still try to replace the player. Many NFL teams have run into this problem. Also do you think there is any way this player is going to be traded?

Mark Witting in his extremely detailed study of salary caps has concluded a number of things. If a cap is in place there is less of a gap between the "haves and "have nots" and the wealth distribution is more even. That is not surprising since that is the starting point for a salary cap.

However he found that in the NFL the competitive balance difference pre- and post cap was negligible and had done nothing for league wide parity.

In the NBA the cap was instituted (according to the league) to protect smaller market teams and increase their competitiveness. It has not worked as in 18 years the 4 largest markets have won 14 titles while in the previous 18 years (pre-cap) the 4 largest market team only won 5 titles.

He finds that baseball with no salary cap has excellent competitive balance across the league and that the NHL has been its most competitive in the last 20 years looking at each decade since 1926-27.

After his detailed calculations and analysis he concludes:

" The two leagues (NHL and MLB) without caps and significant revenue sharing seem to produce more balanced competition than the leagues with cost-of-labour restrictions over the last 8 years. In addition, we saw that the restrictions did little if anything to improve competition in the NFL and may have actually hurt the NBA's pursuit of parity."

How about player salaries? He found as follows:

"Just like in un-capped sports, salary caps don't strongly influence the escalation of player salaries. Players perceived as stars are being paid tremendous sums in all four sports (hockey least of all) while the salaries and job status of the low end and mid range players are adjusted to compensate."

On trades he finds:
"Salary caps were not set up to decrease the ability of teams to better themselves for the post-season/future through trades, but they have had that effect in both the NBA and NFL."

How about the effect of salary caps in rebuilding a team:

"(NFL) teams are often encumbered with "dead money", payable to players no longer on the roster but still counting against the cap. Teams with significant dead money can't afford to sign as many experienced/quality players and suffer for it. The descent into salary cap hell is often caused by a team doing everything possible to win in one season by knowingly compromising the future. The team and fans are then forced to pay for a short period of prosperity with what can be a long stretch of mediocrity or worse. This peculiar phenomenon is not found in baseball or hockey, although it is appearing occasionally in the NBA."

The moral - be careful what you ask for you just might get it.

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Old
09-28-2003, 04:58 AM
  #2
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Any logical person who is a fan of their team in the NHL should NOT want a salary cap.

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09-28-2003, 05:27 AM
  #3
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Quote:
Originally Posted by Wetcoaster
As I noted above many fans fail to realize that the NHL already has a salary cap in place. The maximum entry-level compensation for players under the age of 25 is dealt with under Article 9 of the NHL CBA which limits the maximum yearly compensation for rookies to just over $1.25 million in salary and 50% of that in signing, reporting and roster bonuses for 2002. It went up another $50,000 this year. Rookie contracts are also deemed to be two-way deals under the CBA.
This is not a salary cap. It is a salary limit for a certain class of players.

Quote:
A general salary cap for other players without the NHL owners agreeing to revenue sharing will be a non-starter. The NHLPA will never agree and do not forget the players have their agents and their own legal and finacial advisers who keep them informed of the effects and ramifications of any changes in the CBA.
Goodenow has flatly stated that there will be no salary cap. There has been no indication by the NHLPA that revenue sharing would make a salary cap a viable option in their minds.

Quote:
Mark Witting in his extremely detailed study of salary caps has concluded a number of things. If a cap is in place there is less of a gap between the "haves and "have nots" and the wealth distribution is more even. That is not surprising since that is the starting point for a salary cap.

However he found that in the NFL the competitive balance difference pre- and post cap was negligible and had done nothing for league wide parity.
This is not his conclusion. To quote Mr. Witting: "More teams making the finals means more competitive balance, fewer means less." He then goes to show how the NFL post-salary cap meets this criteria for competitive balance.

He then talks about the standard deviations of winning percentages as an indicator of overall league parity. Since these are virtually the same pre- and post-cap, he argues that there has been no net effect on parity league-wide. But this argument is limited to season by season winning percentages. Having all NFL teams finish 8-8 (or 0-0-16), which he would consider evidence of ultimate parity, is not realistic. Parity should be measured as equal opportunity for franchises at the beginning of each season, not equal results at the end.

Quote:
In the NBA the cap was instituted (according to the league) to protect smaller market teams and increase their competitiveness. It has not worked as in 18 years the 4 largest markets have won 14 titles while in the previous 18 years (pre-cap) the 4 largest market team only won 5 titles.
Largest markets overall or largest basketball markets? If the analysis had been conducted using basketball revenue for each team instead of overall market size, the results would have been quite different.

Quote:
He finds that baseball with no salary cap has excellent competitive balance across the league and that the NHL has been its most competitive in the last 20 years looking at each decade since 1926-27.
But the analysis of competitiveness fails to take into account the number of teams in the league. It's no surprise a six team league will much less 'competitive' than a thirty team league if you are analyzing based on the number of teams winning the championship and making the finals.

A salary cap is just like anything else: it can only work as well as it is designed. Bad implementation ensures bad results.

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09-28-2003, 05:31 AM
  #4
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Originally Posted by scaredsensfan
Any logical person who is a fan of their team in the NHL should NOT want a salary cap.
Any logicial person would not have made the ridiculous statement you just made.

The only evidence he posted against a cap was that we would lose our exciting trade deadline days. Big f'ing deal.

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09-28-2003, 05:34 AM
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Originally Posted by Weary
But the analysis of competitiveness fails to take into account the number of teams in the league. It's no surprise a six team league will much less 'competitive' than a thirty team league if you are analyzing based on the number of teams winning the championship and making the finals.
Nor does this analysis of competitiveness take into consideration that the world of sports had dramatically changed over the past few years. Any data collected prior to 1990 might as well be thrown out the window.

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09-28-2003, 12:01 PM
  #6
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Outstanding post Wetcoaster. I agree fully. And slowly, there seems to be more and more people opening their minds to this perspective which is a good thing. It is a difficult perception to open your mind to though.

The idea that a payroll cap is a simple solution is one of the greatest fallacies of fans. Marks data was quite eye opening. As often happens when you actually test a hypothesis, the facts lead you to a conculsion different than than being supposed.

And indeed, that we actually do have a salary cap. What fans are actually asking for is a payroll cap.

Wetcoasters post should become our fan manifesto. We will not be corporate toadies any longer. We will not support owners in their greed should they decide to cancel a season. We are not blind to the simpleton propaganda they are spewing.

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09-28-2003, 04:43 PM
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Originally Posted by thinkwild
We are not blind to the simpleton propaganda they are spewing.


You mean like the simpleton propoganda that Wetcoaster is spewing?

Here are the facts:

$1.93B revenue generated.
76% of that went to player salaries.

Period.

That is no propoganda. That is fact.

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09-28-2003, 05:45 PM
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Quote:
Originally Posted by degroat

$1.93B revenue generated.
76% of that went to player salaries.

Period.

That is no propoganda. That is fact.
And you are privy to the owners' financial records who?

I could say that I'm 8 feet tall. Does that make that a fact?

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09-28-2003, 05:58 PM
  #9
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Quote:
Originally Posted by degroat


You mean like the simpleton propoganda that Wetcoaster is spewing?

Here are the facts:

$1.93B revenue generated.
76% of that went to player salaries.

Period.

That is no propoganda. That is fact.
WHOA !!!!

Who said 1,93B are facts ? Owners said so , so it's true ? come on !!!

It's known since the history of the business createad that the owner will tell #'s they comfortable with it.

You are directly feeding the owners propaganda & you dont know it.

Westcoast is not an NHLPA agent or manifesto & he wrote an outstanding post & you put it down because of #'s plead by owners ?

Come on now you are smarter than this.

----------------------------------------------------------------------
To continue the subject I've said numerous time , fans often gives a solution by thinking the players does not have any leverage during the CBA negotiation which is false. Every sports fan said this exact same thing in baseball, football, hockey, basketball & we heard the exact same thing in different words from every commish ''this is an historical agreement, we will be on our way to a great future bla bla bla.....''

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09-28-2003, 06:18 PM
  #10
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Yes, I will go on record saying those numbers are fact, for two reasons....

1) If the PA did agree to a cap, then it would quickly be determined what the actual league revenues are and those revenues would be made public. If those numbers were significantly off, Bettman's reputation would be ruined. He wouldn't allow that to happen to himself.

2) Salary caps are determined by a percentages. 65% of anything higher than 1.93 is higher than 65% of 1.93, meaning a cap on a higher amount of revenues would be more desireable to the PA than a cap on 1.93.

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09-28-2003, 06:24 PM
  #11
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Originally Posted by Russian Fan
Westcoast is not an NHLPA agent or manifesto & he wrote an outstanding post & you put it down because of #'s plead by owners ?
'

What is so "outstanding" about his post? He did a wonderful job explaining what a cap is, but, thanks, I already knew what it was. As i said above, the only thing he posted against a thread was the fact that we will lose our exciting trade deadlines. What he didn't tell you that in the NBA there are huge blockbusters regularly. So, it has been proven that a cap with certain exceptions doesn't put an end to trades. Nor does it put an end to dynasties. What it does is give every team a CHANCE because the rich teams cannot spend well beyond that of the bottom teams.

BTW... 75% of NBA teams were losing money in the early 80's. Bettman was part of turning that around.

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09-29-2003, 04:40 AM
  #12
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Quote:
Originally Posted by degroat
Yes, I will go on record saying those numbers are fact, for two reasons....

1) If the PA did agree to a cap, then it would quickly be determined what the actual league revenues are and those revenues would be made public.
Incorrect. The NBA CBA went the other route, hiding player salaries instead of opening the books. There is no requirement for a public accounting of team revenues in this kind of salary cap scheme, only that 'designated' revenues (as distinct from total revenues or anciliary profit advantages) be shared with representatives of the players' union.

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09-29-2003, 08:13 AM
  #13
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Originally Posted by Other Dave
Incorrect. The NBA CBA went the other route, hiding player salaries instead of opening the books. There is no requirement for a public accounting of team revenues in this kind of salary cap scheme, only that 'designated' revenues (as distinct from total revenues or anciliary profit advantages) be shared with representatives of the players' union.

Other Dave
Not incorrect. If the PA were to agree to a cap, the percentage would be made public as would the actual cap. One could easily figure out total league revenues based on those numbers.

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09-29-2003, 08:24 AM
  #14
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Quote:
Originally Posted by degroat
Not incorrect. If the PA were to agree to a cap, the percentage would be made public as would the actual cap. One could easily figure out total league revenues based on those numbers.
But the point was that the percentage would not be based on total league revenues. Instead, the NHL and NHLPA would agree on which revenues the cap will be based on (i.e. gate revenue, luxury boxes, broadcasting, concessions, parking and sponsorship). If any team can find alternate revenue sources, or is able to shuffle the revenue elsewhere, then the total league revenues determined for cap revenues will be incomplete.

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09-29-2003, 08:28 AM
  #15
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Originally Posted by discostu
But the point was that the percentage would not be based on total league revenues. Instead, the NHL and NHLPA would agree on which revenues the cap will be based on (i.e. gate revenue, luxury boxes, broadcasting, concessions, parking and sponsorship). If any team can find alternate revenue sources, or is able to shuffle the revenue elsewhere, then the total league revenues determined for cap revenues will be incomplete.
So, if the revenue that is the cap is based off is any higher than the $2B he said then he obviously lied.

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09-29-2003, 08:52 AM
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Quote:
Originally Posted by degroat
So, if the revenue that is the cap is based off is any higher than the $2B he said then he obviously lied.
Well it is quite possible that the $2B figure is a lie. Many people here believe that. I think it's fairly accurate, based on some of my assumptions. The point is, it's impossible to state definitively whether it is true or not. All we can do is fans is say what we believe them to be (and hopefully, explain why).

My feeling is that if a revenue sharing system were to be implemented, the total revenues for the league (as calculated for revenue sharing purposes) would be less than $2 B, probably in the neighbourhood of $1.5 to $1.7 B. The following type of transactions would occur:

-Teams that own their own arenas, separately incorporated, would record more revenue at the arena level, particularly luxury box revenue and sponsorship.

-Teams that are owned by a broadcasting company will sell the broadcasting rights at a reduced rate.

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09-29-2003, 12:54 PM
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Originally Posted by discostu
But the point was that the percentage would not be based on total league revenues. Instead, the NHL and NHLPA would agree on which revenues the cap will be based on (i.e. gate revenue, luxury boxes, broadcasting, concessions, parking and sponsorship). If any team can find alternate revenue sources, or is able to shuffle the revenue elsewhere, then the total league revenues determined for cap revenues will be incomplete.
However that would be considered fraud. If the owners and players agree on a cap based on such revenues and the owners shuffle the revenue elsewhere, then they would be defrauding players by trying no to pay them their fair share. Now that would be a criminal offense...

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09-29-2003, 03:09 PM
  #18
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Originally Posted by degroat
Not incorrect. If the PA were to agree to a cap, the percentage would be made public as would the actual cap. One could easily figure out total league revenues based on those numbers.
What is the actual dollar figure cap for NBA teams (who have a cap based on DGR)? This is a serious question; I recall looking for it and being unable to find it.

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09-29-2003, 03:13 PM
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Quote:
Originally Posted by Other Dave
What is the actual dollar figure cap for NBA teams (who have a cap based on DGR)? This is a serious question; I recall looking for it and being unable to find it.

Other Dave
Cap at $43.84M and a floor at $32.8M.

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09-29-2003, 03:15 PM
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Originally Posted by DeathFromAbove
Cap at $43.84M and a floor at $32.8M.
Thanks. Where's that from?

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09-29-2003, 05:17 PM
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Quote:
Originally Posted by Other Dave
Thanks. Where's that from?

Other Dave

Link

You could just yahoo! search it and find all kinds of articles on the topic.

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09-30-2003, 03:50 AM
  #22
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Originally Posted by Smail
However that would be considered fraud. If the owners and players agree on a cap based on such revenues and the owners shuffle the revenue elsewhere, then they would be defrauding players by trying no to pay them their fair share. Now that would be a criminal offense...
It would be very hard to prove that it is fraud. If I own a team and a television broadcasting company, and I sell my the broadcast rights for the team for $8 million a season to my broadcasting company, how can they prove that it is the fair value for the team. Maybe the rights are worth $15 million a season.

Also, arena deals are very complex. Whose to say what the fair market value for use of the arena is. With arena's its even harder to judge than broadcast rights, since their likely isn't any competitors to the arena in each market. In most cases, for each market there's one supplier (only one NHL calibre arena) and one consumer (one NHL team). It is very easy to create a deal that is more favourable for one party than the other, and there isn't any benchmark to compare against.

Also, as new revenues streams are developed, it gives owners more options. Let's say PPV revenues are not included in the original cap agreement. An owner can now expand that form of revenue at the expense of other revenue streams. Let's say that eliminating all free broadcast games will cost a team $20 million in revenues, however making all games PPV will increase revenues by $15 million. Looking at those facts, the obvious solution is to show games on free broadcast TV, however, if those revenues must be shared, a team may be inclined to show all games on PPV. It's not fraud. It's just a team making it's business decisions based on the factors that allow it to maximize it's own profits.

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09-30-2003, 03:57 AM
  #23
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Originally Posted by DeathFromAbove
Link

You could just yahoo! search it and find all kinds of articles on the topic.
The "google" research I had previously done on the topic suggested that there was no public disclosure of the cap amount. Or I just plain misremembered. I'm happy to be corrected on that misconception.

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09-30-2003, 08:46 AM
  #24
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Originally Posted by discostu
It would be very hard to prove that it is fraud. If I own a team and a television broadcasting company, and I sell my the broadcast rights for the team for $8 million a season to my broadcasting company, how can they prove that it is the fair value for the team. Maybe the rights are worth $15 million a season.

Also, arena deals are very complex. Whose to say what the fair market value for use of the arena is. With arena's its even harder to judge than broadcast rights, since their likely isn't any competitors to the arena in each market. In most cases, for each market there's one supplier (only one NHL calibre arena) and one consumer (one NHL team). It is very easy to create a deal that is more favourable for one party than the other, and there isn't any benchmark to compare against.

Also, as new revenues streams are developed, it gives owners more options. Let's say PPV revenues are not included in the original cap agreement. An owner can now expand that form of revenue at the expense of other revenue streams. Let's say that eliminating all free broadcast games will cost a team $20 million in revenues, however making all games PPV will increase revenues by $15 million. Looking at those facts, the obvious solution is to show games on free broadcast TV, however, if those revenues must be shared, a team may be inclined to show all games on PPV. It's not fraud. It's just a team making it's business decisions based on the factors that allow it to maximize it's own profits.
Well, it could be verified by doing a market study. Also, the total revenues could be calculated based on evaluations and not actual values. (like municipal taxes in Canada).

Something's for sure: If the players can prove that an owner deliberately (on purpose) gets around the CBA (which says they must share a part of their revenues), that's called fraud and players could sue the owner for damages and compensation.

This situation already happens where there are multiple owners in a company and where an owner takes a company decision that would favor his interests over the interests of the other owners. If the players get a fixed share of the total revenues, they become in a partnership with the owners for revenues and the situation it would put both parties into would be similar to the one I just described.

Of course there could be new revenue streams like PPV, but those should be covered as much as possible by the NHLPA. Also, the CBA would probably include means by which revenue streams could be added during the CBA course if they become significant.

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09-30-2003, 08:47 AM
  #25
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Quote:
Originally Posted by discostu
It's not fraud. It's just a team making it's business decisions based on the factors that allow it to maximize it's own profits.
The CBA would have to be written to where it would be fraud if teams make those business decisions.

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