Impact of revenue growth on NHL and NHLPA Proposals

James Mirtle had a great summary of the NHL and NHLPA proposals, with the two sides currently about a total of $1 billion apart over five years. The $1 billion figure is based on an average annual growth of 7.1%, which is the annual growth in the league revenues since the last lockout. Comparing the NHL proposal to the NHLPA proposal, the players would receive $186 million less in the first year, $178 million in the second, $209 million in the third, $229 million in the fourth and $250 million in the last year, adding up to $1.052 billion. The 7.1% growth rate is what the players use, however the owners assume that the growth will be lower. From Mirtle, at 5% the difference between the two proposals rises to about $290 million a season instead of the $210 million at 7.1%. If the revenues grow by 8.5%, then the difference shrinks to $150 million/season over five seasons.

Basically, the higher the growth in revenue, the smaller the difference between the proposals. This is because as league revenues rise, in the player's proposal the league would take almost all of the new revenue, while in the league proposal the players would have a fixed percentage. The players are giving the owners a big incentive to grow revenue as much as possible because the owners can pocket a large chunk of it.

After the jump, I will examine the financial impact of various growth rates on the two proposals.

In 2011-2012, the total league revenues were $3.28 billion of which the players received $1.87 billion. In the players proposal, they would get a fixed increase of 2% on their 2011-2012 share resulting in the players receiving $1.91 billion. So what would the growth rate have to be for the players to get that amount in the NHL proposal? The league revenue would have to be 1.87*1.02/0.49 = $3.89 billion, which is a growth of 18.68%. In the NHLPA proposal the players get 4% growth in year 2, in year 3 they would get 6%. In year 4, the players receive their year 3 share plus 54% of new revenue. In year 5 the players receive their year 4 share plus 54% of new revenue. The owners proposal is simpler and gives the player 49% in year 1, 48% in year 2 and 47% in years 3, 4 and 5.

Going back to the 18.68% growth rate that would have the two proposals be identical in year 1, here is what the players total share would be between the NHL and NHLPA proposals. In year 1 they would be equal, but in the following years the league proposal would actually pay the players significantly more than the NHLPA proposal totalling $1.43 billion in extra money to the players. Now this scenario is contingent on an unlikely annual growth rate, and the players proposal has exceptions for a very high (or very low) growth rate in the last two years. Thus the last two years in the table below are actually understating the players actual share in the NHLPA proposal.

18.68%

So 18.68% makes the two proposals equal in the first year, and favours the owners heavily in the following years. What rate would make it a net equal in the first two years combined? The players would $1.91 billion and $1.98 billion for a total of $3.89 billion. The owners proposal would give the players 3.28*0.49x in the first year and 3.28*0.48x^2 in the second season, where x is the annual growth rate. For simplicity, I am assuming the growth is exactly the same in each season. Solving 1.57x^2 + 1.61x - 3.89 = 0 gives x = 1.1424 or an annual growth of 14.24%.

Here is how it would breakdown over the five years:

14.24%

The two proposals total $3.89 billion for the players in the first two years, but once more the final three years would favour the owners in the final three seasons, again keeping in mind the special adjustment for the last two seasons.

After some trial and error, an annual growth rate of 12.224% would have the two proposals identical with player compensation of $11.1547 billion over the five seasons. Although this does not include the time value of money. If the league revenue stay constant for each of the next five years, the players would receive a total of $2.39 billion more in the NHLPA proposal than in the NHL proposal.

Are such high (and low) growth rates likely? No they are not. But considering the NHL had 7.1% growth in the last CBA that included several years of a severe recession, perhaps the league can outgrow that number. The league is getting increased coverage in the US and the CBC contract will be up for renewal in 2014. A 10% annual growth rate would have the two sides still separated by $470 million or $94 million a season, still a large number but less than half the $1.052billion currently floating around.

What the players proposal is basically saying to the league is: grow your business and you can pocket a larger and larger share of the new money. The players are sacrificing huge chunks of money in the event of large growth in exchange for guaranteed money in the first three years regardless of revenue growth. No matter how much league revenues grow (or decrease) this season, the player share will increase 2%, 4% and 6%.

With the lockout looming at 11:59 tomorrow night, it is important to remember that the NHL and NHLPA are separated not only by their share of the pie, but also what they perceive the total size of the pie might grow to be.