Owner’s term limit proposal a good thing for the league, and its fans

Recently, the owners fired the initial salvo across the CBA lines.  Amongst other things, they demanded a significant reduction in player revenue percentages, 10 seasons of service time before UFA status kicks in and, as Kevin so capably analyzed, 5-year entry level contracts.  Obviously, this is just an initial proposal, far from the eventual result.  One provision that the owners have asked for has sort of flown under the radar since the announcement; the 5-year term limit on contracts.  This is a provision I feel is not only reasonable, but necessary.

Before we get started I wanted to give you some context as to how I analyze these types of situations.  When it comes to national and global economics, I am a believer in a free-market system.  Industries with low barriers of entry provide healthy competition which in turn lowers prices and improves product quality for the consumer.  When corporations and other entities decide they want to adopt policies or practices which unfairly limit competition, anti-trust laws step in to keep the peace.

When it comes to professional sports, I am staunchly anti-salary cap.  I think it prevents economic natural selection and brings the overall quality of the game down.  I am of the opinion that if a market cannot support a healthy franchise, or the fans won’t part with their hard earned money to support the team, it should be relocated.  If an owner is not wealthy enough to compete with the big boys when it comes to salary level, the team should find a new owner, but I digress.  It is a reality that we have come to accept and decisions made must be sensitive to that context.

This isn’t to say that regulation of markets or industries is a bad thing.  We just need to know what we are regulating.  The current system has plenty of unintended consequences, including burying onerous contracts in the minors, the need for a team like the Blackhawks to gut their roster a month after winning the Cup, and these decade long mega-deals designed to squeeze as much high end-talent under the cap as possible.  The 5-year term maximum helps regulate the risk taken on by teams, which ultimately benefits the engine of revenue that drives the league: The Fans.  Sure, we all have our favorite players, and some players have a huge amount of importance to a franchise.  But ultimately, a fan’s allegiance lies with the team, not the player, and the league must balance the fan’s desire for a Cup in the short term with keeping the team competitive and financially healthy in the long term.

When these so-called “legacy” contracts first started being handed out, I thought little of it except how stupid a team that would give someone a 13-15 year contract would have to be, especially given the salary cap structure the league operates under.  Some cried, “cap-circumvention!”, but I was underwhelmed.  I didn’t think it would ever spiral to the point that it has, with non-elite players beginning to command contracts of 6+ years and as high as 15 years.  It’s crazy.

If there was no salary cap, I wouldn’t care at all.   I mean not even a little.  I would go back to laughing at the Islanders for having a front office so inept, that they would pay a injury-prone, non-elite goaltender for a decade and half.  I wouldn’t care if teams handed out straight “lifetime” contracts and ownership stakes in the team for $20 million per season.  But the cap exists, and now this moronic behavior is effecting the day to day economics of asset accumulation.

In traditional economic theory, the concept of supply and demand helps dictate price fluctuations.  This is also true in the NHL.  However, if Apple decided to sell the new iPad for $10,000 a piece, the majority of consumers would feel that it was a luxury they couldn’t afford and would continue on without one.  General Managers do not have this luxury.  They are required to pursue high end talent either through free agency, the draft, or trades in an effort to field a championship caliber team.  They simply cannot choose to ignore a artificial spike in asset cost.  All it takes is one Jay Feaster, Scott Howson or Brian Burke to skew the market all the way down the line with one massive overpayment.  This could take place for a number of stupid reasons: saving a GM’s job, enticing a player to an unattractive destination, or taking one big swing at Lord Stanley.

Because this is a closed industry, with high barriers of entry (just ask Jim Balsillie) the repercussions of one move are felt all over the league.  Obviously, the league itself cannot condone or endorse cap-circumventing contracts like the Kovalchuk disaster, but in order to keep the market value of elite players cap compliant, it has become a necessity for all teams.

This is where the whole situation becomes a problem.  There was a time where deals over five years in length were only handed out in unique situations where a player has transcendental value to that franchise, and in circumstances where losing a player down the line was a bigger risk than his contract becoming onerous.  This is now the case for every high-end free agent.  Ryan Suter and Zach Parise signed identical 13-year, $98 million contracts this off-season.  Both are highly skilled players with solid make-up and leadership skills, but as big a fan as I am of both players, those contracts are outlandish.

The problem with all of this is that the prudent, diligent general manager now has two choices when the franchise is in need of high-end assets.  They can either stand pat, refuse to engage in these financial shenanigans and look to another route for high-end asset acquisition.  The unfortunate effect of this is that star players who carry a reasonable cap hit for less than a decade have their market price artificially inflated.  The other choice is to engage in this market, risk a decade long albatross and possibly overburden your cap situation to the point of making a full rebuild necessary at the end of the competition cycle instead of an on-the-fly retool due to a lack of flexibility.

The current system essentially works like an unstable credit market.  Mortgage future cap space for a superstar today.  Who cares what that contract will look like 11 years from now, especially when your job is on the line, Mr. Incompetent Executive.  The term-limit provision brings us back to practical dollars.

The salary cap was designed to create parity between the big and small market clubs.  In this effect, it has worked exactly as according to plan.  It was designed to keep big market teams from scooping up all the marquee talent via free agency and to allocate the revenue differently between the players and owners.  It was not designed to allow the irresponsible decisions of their peers to handcuff the responsible GM.

Once doing things the right way becomes a detriment to your organization and fan base, something has to give.  In this case, we save GM’s from themselves by forcing them to allocate the cap hit evenly amongst a reasonable term.  No more of these contracts that make six years seem reasonable for James Wisnewski.  The market needs to be reigned in, for both the organizations and their fans.

Obviously, players and agents are not going to be happy with this suggestion, but we need to bring the system to a place where ten years from now, multiple franchises aren’t being suffocated by these decade long deals.  Players don’t want to take on the risk of having to sign another contract five years down the road, but that risk is a necessity when stacked up against the need for healthy, competitive organizations around the league going forward.