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NHL lockout 2012: Owners' proposed deal doesn't solve league's problems

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The NHL proposed a 50/50 split of HRR with the players, but that is hardly fair. Also, with a lockout 8 years after the last one, the NHL should instead look to MLB and institute a luxury tax.

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Bruce Bennett - Getty Images

On Tuesday, the NHL sent the NHLPA a new CBA proposal in the on-going negotiations to end their third lockout in less than twenty years. While asking for multiple concessions - ranging from limits on contract lengths, a longer wait to unrestricted free agency and more - the NHL also offered to split hockey related revenue (HRR) with the players down the middle. This, naturally, is seen as an equitable proposal as there is apparently an equal distribution of wealth.

However, that 50-50 split is hiding two things (at least).

  1. The pie being cut is not "all revenues". Instead, it is a pie that has excluded certain hockey-related revenues like those due to operating AHL clubs, expansion fees, relocation fees and more. Basically, the pie the owners are splitting is only some of the money the league is bringing in;
  2. The league will only ever pay the players 50 percent of this HRR, regardless of how much the owners contract to pay each individual player. Because revenues and player contracts are not completely known until the end of the year accounting, players have a portion of their paychecks withheld throughout the year to cover any potential shortfall. This is called "escrow".

So right off the bat, the NHL's proposed 50-50 split not only isn't 50-50, but it amounts to a dramatic pay cut from what the players contracted to receive this year. After the NHL made a record-$3.3 billion last year.

In case it wasn't obvious from that opening, I'm strongly pro-player here. The NHL forced a lockout 8 years ago because they had an unsustainable system where the league was losing money to get the deal that just expired. That deal, which saw the NHL experience record profits, averaging a 7 percent growth in revenue - including at least 5 percent growth in five of the last six years - is now claimed to be so untenable, the NHL is locking their players out again.

Seems like the last deal produced a sizable profit margin for both sides, but nevermind. The owners can't take it, so we're locked out. Again.

The NHL has now locked its players out twice in eight years and three times in 18 years. So what about the system is constantly broken that lockouts continue to happen?

That's a simple question with a very complicated answer. And I probably don't know the real answer anyway, but the NBA and NFL just suffered through lockouts last year, too. All three of these leagues have a salary cap and all three leagues want the players' share of revenue at or below 50 percent now.

That figure sure seems fair, but it was only 8 years ago, when salaries weren't set at a fixed percentage of revenues under a salary cap, that the NHL paid their players 74 percent of revenues. When teams would pay their players what they wanted, the market determined that a fair split of revenues was 74 percent.

The NHL claimed they were losing money, though. And naturally, this was the players' fault. Despite $1.9 billion in revenues, the NHL apparently couldn't turn a profit. So they imposed a salary cap, cut all salaries by 24 percent and tied player salaries directly to revenues. The league nearly doubled their revenues, but that isn't enough to prevent them from asking for more money from the players, and locking them out to accomplish it.

The only league without a salary cap or a lockout since 1990, however, is Major League Baseball. In 2011, if the back of the envelope calculations are right, players received roughly 55 percent of revenues ($3.5 billion salaries / [$212 million avg. * 30 teams]).

What baseball does have, though, is a luxury tax system. This allows teams to spend the money they bring in without forcing small-market teams to spend more than they can afford or large market teams to spend less than they can afford.

This absolutely leads to a fairly large discrepancy between the haves (i.e. Yankees, Red Sox, Phillies, Angels) and the have-nots (i.e. Padres, Athletics, Royals, Pirates) in terms of spending, and yet baseball has a good amount of parity.

In a league where barely a quarter of teams make the playoffs (8 of 30) every year - excluding the newly formed one-game Wild Card playoff - baseball has seen 26 teams reach the postseason at least twice since 1995. Over half the league (18 teams) have made the World Series in that time frame.

The exact same number of teams that have made the Stanley Cup Finals since then.

In the seven most recent years, there have been 11 teams to reach the World Series and 12 teams to make the Stanley Cup Finals.

Sure, there are perennial losers like Kansas City, Pittsburgh and (until this year) Washington in baseball, but in the NHL, there's perennial losers like Edmonton, NY Islanders, and (until last year) Florida.

Maybe a more - actually? - thorough look at parity would reveal a different story, but a high-level look shows that a luxury tax is equally good at creating parity as a salary cap.

Parity is created in baseball with revenue sharing. The NFL also has revenue sharing (even if Jerry Jones hates it), so does the NBA and, in case you weren't aware, so does the NHL. In addition to revenue sharing, MLB's luxury tax acts as a salary cap for some teams, including the Phillies. For others, it's a cost worth paying to go over. For still others, it's a limit they could never even dream about reaching.

The same tiers of spending exist in the salary capped NHL, too. Some teams spend over the cap - the Flyers and Rangers are two examples - while others spend right to it. Still others can't even dream of reaching it (Islanders, Coyotes).

The point is, in all professional sports, there is revenue sharing and there is a large disparity in team expenses. Three leagues utilize a salary cap and have each locked their players out in the past year, while another uses a luxury tax and hasn't had a lockout in 22 years (and no labor strife in 18 years).

I am hardly the first person to point out that the salary cap has not improved parity, as Kent Wilson spoke much more eloquently on this very topic earlier this month:

The cap did indeed improve competitive parity, with the rich guys spending less and frugal guys spending more, but the result was actually a widening gap between the two groups financially speaking; even as the differences on the ice shrunk. Parity meant more profit for the already rich, because the cap reigned in their expenses and (some) of their more extravagant spending habits. Unfortunately, parity meant more losses for the bottom third of the league because they were compelled to spend well beyond their means.

Ironically, the enforced parity of the salary cap grew the middle class on the ice by augmenting the off-ice differences between the various teams and ownership groups, in turn widening the gap between the haves and have nots.

Kent, similar to myself, proposed a model similar to MLB in that article. Unlike Kent, however, I ask why a luxury tax system is not thought of as a better model than a salary cap.

Last year, Forbes estimated that 18 NHL teams lost money. From that article:

The Toronto Maple Leafs, New York Rangers and Montreal Canadiens had an operating profit (in the sense of earnings before interest, taxes, depreciation and amortization) of $171 million combined. The other 27 NHL teams lost a collective $44 million. If you add the Vancouver Canucks and Edmonton Oilers to the fat cats ledger, profits hit $212 million with the remaining 25 teams posting a loss of $86 million.

That is a staggering amount of disparity, even when the league institutes a salary cap. Perhaps part of the reason NHL teams operated at a loss last year is because the salary floor was roughly $49 million. Three NHL teams had revenues under $75 million and ten teams were under $85 million. One third of the league was forced to spend over 57% of their revenues on salaries, and they were the teams that could least afford to do so.

Perhaps part of the NHL's problem is that it forces teams to spend money on salaries whether they can afford it or not, while simultaneously limiting the amount of money the high revenue teams can spend.

So why not scrap the cap and replace it with a luxury tax modeled after MLB's? Set the tax-free spending near where the current cap is - perhaps slightly lower - and let the richest of the rich exceed that figure if they are willing to pay a twenty percent tax on that money. Tie revenue sharing to revenue (as MLB does) instead of arguing over a fixed dollar amount every time the CBA expires (as the NHL does).

Instead of arguing over what percentage of revenue the players get, let each individual owner decide what each individual player gets when he's up for free agency, like MLB does (and the NHL used to). And if you wish to avoid a scenario like baseball had with the Pirates and Royals, you can even set a requirement that teams spend a certain percentage (perhaps all?) of their revenue sharing dollars on salaries.

No arguing over percentage of HRR or escrow cuts. No arguing over 35+ clauses or LTIR cheats. No arguing over dive-back years or averaged annual salary. Instead, keep the arguments to age for unrestricted free agency and number of years on an entry level deal.

If you think this is crazy, ask yourself two questions: 1) When and why did a salary cap become the only solution acceptable to control costs and create parity?; 2) When did Bud Selig become the clear choice for best Commissioner in North America?

It's time for the NHL to save itself and go to a luxury tax system.

Sadly, if anyone proposes this, it will be the NHLPA. And if that happens, hockey won't be back this year. But that doesn't mean it's a bad idea.

Related: NHL Lockout: Are we all just suckers?