NHL Revenue Sharing: A Different Approach

Despite the fact that the discussions surrounding the negotiation of the pending CBA have been virtually innumerate, one topic has been receiving greater attention lately: revenue sharing. Technically termed the "Player Compensation Cost Redistribution System" and governed by Article 49 of the 2005 CBA, revenue sharing takes money from other sources and gives it to clubs that are, by the CBA's calculation, having difficulty meeting their obligations to players. In the NHLPA's CBA proposal, Donald Fehr and the players suggested that the current system was not robust enough to continue as formulated, and that a stronger version of "sharing the wealth," so to speak, was the solution to small-market teams' claims that they simply did not have enough money.

It is, indeed, a decent argument, and one that carries with it implications that go beyond economics. In calling for a greater role for the revenue sharing, Fehr has theoretically put higher-earning and lower-earning clubs at odds with each other. Pitting owner against owner could provide a tactical advantage for the PA in its negotiation with the League. Divide and conquer, so to speak.

But a discussion of revenue sharing reform can go even more deeply than simply putting owners in conflict. It can go so far as pitting the owners vs. the League. How, then, could this be the case? The answer is by looking at Article 49 as it currently stands. (For a primer on the NHL's revenue sharing system under the 2005 CBA, click here.)

The funds that are redistributed amongst clubs under Article 49 are not restricted to those revenues generated by individual teams, despite the fact that many articles and columns on the subject seem to assume or suggest otherwise. Article 49 is a monstrously long and confusing portion of the CBA, and the 2004-05 lockout partially owes its existence to its formulation. The total amount to be redistributed to those clubs who require them under this unique system is drawn from four separate sources. Each source forms a "funding phase."

And what is the very first source of funding? "Excess" centrally-generated league revenues. That's right, under the 2005 CBA, half of that amount exceeding $300 million is added to satisfy up to 25% of the redistributed amount. The other three sources of funding come from the players' Escrow Account, playoff ticket sales (based off of regular season ticket values), and only then does funding come from the top ten teams based on their revenues (less arena costs).

Under this top-down system, the league's contribution to the redistributed amount is limited. At the rate the league has grown on an overall economic basis, it would not be unreasonable to assume that centrally-generated revenues have grown on a similar scale. Allocating a larger portion of that pie to eligible teams will allow the larger-earning clubs to keep a larger percentage (or all, as the case may be) of their otherwise allocable revenues while still allowing those clubs that "cry poor" to meet their player salary commitments.

The result is a system that places a greater emphasis on centrally-generated revenues narrows or eliminates the gap between the richer and poorer clubs that exist under the current system. But, as in Newtonian physics, there is an opposite reaction; the League and its constituent clubs are placed at odds for the simple reason that the League, instead of the clubs, are giving up money to be distributed.

The League and the clubs would need to work out their preferred system with each other prior to even sitting down at the negotiating table and even discussing it with the PA. On the other side of the coin, the PA can use the idea as a way to appeal to the individual clubs, at the risk of causing delay by causing League disunity.

There are plenty of other simple fixes that could be made to the existing revenue sharing system, such as changing eligibility requirements (the 2.5 million household designated market area limit is highly problematic) and adjusting all numbers based on the consumer price index or inflation, for consistency's sake. Reallocating the burden of revenue sharing from the clubs to the League, on the other hand, unifies the club camp at the expense of fracturing the relationship between the clubs and the League and pulling from the League's coffers to a greater extent.