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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.

24 Responses to “Owner’s term limit proposal a good thing for the league, and its fans”

  1. Hatrick Swayze says:

    More articles like these would be awesome. Combining two things I like reading about, hockey and economics, makes for a great read. For the most part I fully agree with your article. The only part I take issue with is your stance against the salary cap. The way I see it, the cap actually increases competition by putting all organizations on a more level playing field. This increases league parity, which increases the number of competitive teams, thus giving us more intense playoff races and divisional rivalries, among other things. I do agree that it prevents super teams, so to speak, but I believe that byproduct is a good one. The ice is flat in the arena when the puck is dropped, just as it should be for managers when trying to build a contender.

    • Justin says:

      Thanks for the kind words Hatrick (fantastic handle by the way). I agree with your points on the salary cap to an extent. I agree that the cap has created tremendous parity around the league with many more competitive teams in any given year, which has increased revenue for all parties involved.

      At this point, it might be an academic issue, but I feel the cap takes away team identities. We are lead to believe that asset accumulation has three legitimate and commendable avenues: draft, trades and free agency. In the Rangers case, they have been relatively modest with marquee free agents (relative to the practices of the early 2000’s) and have grown their core. However, in order to pay for the quality development of their own young players, they need to curtail their pursuit of talent in those other avenues. Does that seem fair?

      I’m all about removing predatory practices from the league, but like the Blackhawks circa 2010, is having a well rounded contender with a variety of acquisition methods the type of evil we need to eradicate from the game?

      If anything we are punishing the haves to make up for the shortcomings of the have nots. This concept is much more reasonable in a physical society because it involves all walks of life. The NHL however, is comprised of incredibly wealthy people, so why wouldn’t we mandate that for ownership, you need to have a certain level of wealth and be willing to make a minimum investment into player salaries as a qualification for ownership, with disincentives for exceeding certain salary levels, as opposed to stifling responsible team building with a salary cap?

      • Walt says:

        Personally the Cap is a farce. Teams should run themselves as a business, not be forced to spend at a minimum, or maximum for that matter. You draft, develope players, trade, and or pick up FA as needed. You will have owners who for years, Boston, Blackhawks for years under Wirtz, Preds, who are cheap, and won’t spend unless forced to do so. Hay if you don’t want to pay, the team you put out will be weak, and don’t cry the blues that other teams are richer.

        Good example, the Pens always cried hunger, with a grocery bag of food under their arm, always bitched that they were a small market. Well if the city doesn’t want to support them go elseware. Then along comes a Cap era, and the Pens are handing out major contracts. That my friend is BS, again, pay the players what you think they are worth, no ceiling, and let the chips fall where they may! Please, don’t cry the blues, it’s sh*t or get off the pot.

  2. Rickyrants13 says:

    I dont think anyone should have to wait ten years to become an UFA if his team is known to not try everything in its power to be a winner. It would be a shame for a player to have to play all of his good years on a known loser.

    But at the same time teams like Nashville shouldnt have to worry about losing its good players every 3 to 4 years.

    • Justin says:

      I agree Ricky your 10 year UFA point Ricky. I actually think baseball has the perfect system for free agency. Its simple, three years of near league minimum salary, three years arbitration eligibility, then FA. No restricted free agency or age based eligibility. The younger you are able to crack into the show, the younger you can hit the free agent market.

      Free agency needs to be balanced with the needs of the drafting team. The drafting team needs several good, cost-controlled years out of the player, but he needs to be young enough to make up for the financial shortfall in his younger seasons when he hits free agency.

      If a player breaks into the league at 22, and has to wait 10 years, he isn’t going to get nearly as a big a contract at 32 as say 28. This one is all about moderation and compromise.

      What do you think of the 5 year maximum for UFA’s?

      • Lord Stanley says:

        How about non guaranteed deals like the NFL? If u cut a player u live with the cap hit etc. I agree the 13 year deals are absurd, Parise doesn’t have to do Anything the rest of his career and hell get that money. Keep it to 5 years Max it will still keep those players motivated to play out the deal and try for another deal when the contract ends.

        • Justin says:

          That’s an interesting suggestion, however, to me cap space is more valuable than actual dollars. Especially for big market teams. I have no problem having the insanely wealthy owners be on the hook for a sunk cost, but the fans and the organization suffer when future moves to remain/become competitive are stifled by the cap hit.

          What about making cap space in itself a commodity? Teams like Nashville, Florida and the Islanders could trade their cap space to bigger market clubs for inexpensive assets. Unless they agree to some type of livable buy-out provision for sunk contracts, this will likely continue to be a problem for big market clubs.

          • Lord Stanley says:

            I think this idea was floated around by Donald Fehr as part of the counter proposal. Makes sense. Big market teams that can take on more money can trade cheap talent for another teams cap space.
            But would there be a cap to how high u can go? I’m sure Dolan could go up to 100 million in payroll and not blink an eye. The problem is though that the big clubs can just deplete the rest of te league of their stars which would make it a 10 team league of the wealthy. Do a soft cap and hit teams with luxury taxes if u go over the cap limit.

  3. evan says:

    Great article. I am sure this issue has been on everyone’s mind since the ridiculous proposal of the owners.

    My one issue with a 5 year deal is what kind of affect it would have on caps. The one good thing I could see coming from the 5 year max is that players who are not very good will finally be valued properly. However, the 5 year deal is totally unfortunate for a guy like Henrik. In 2 years his deal is up and I am sure he was going to get like a 9 year 60 to keep his cap hit reasonable. What will he command then on a 5 year deal? It could have drastic implications to a team’s cap situation if they have a super star who deserves a big contract, especially if they owners manage to get a really low cap number.

    I am not a huge fan of the cap, but there is no reason the cap should be going down given how well the league is doing financially.

    On your point of teams having to be “gutted”, I think the NHL could actually learn something from the NBA on this front. Shouldn’t teams be able to exceed the cap to keep their youth? NHL teams should be rewarded for drafting and scouting well, not having to trade everyone to remain under the cap.

    Whatever the resolution is, it better happened soon cause I just want to watch our rangers squad play. Sather has put together an incredible team.

    • Justin says:

      Thanks Evan, I agree with you completely on many of your points. Your example of Henrik is exactly why I don’t like the salary cap at all. Even with 5 year maximums, the Rangers could pay Hank his 7-9 million per season and he would be compensated fairly.

      That said, I think if the owners are serious about the 5 year maximums, the logical place for a concession to the players would be the actual salary cap number. If they are making teams value players in actual dollars, they can’t expect star players to be compensated properly with a reduced salary cap. It will be incredibly interesting to watch play out, depending on where the value really lies for both sides.

      Your NBA example makes a lot of sense. I don’t really follow the economics of basketball to an educated extent, so I’ll take your word for it, but I think teams should have a “soft-cap” if you will on their own young players. I’d have to look into it further, but it seems like there could be a lot of potential for abuse (mad grab for FA before having to re-sign your own kind of thing), but if you have any more insight into the matter, I’d love to hear your proposal.

      • evan says:

        I mainly made the point for a team like Chicago who had to be gutted. Also, even though the Rangers are in a good cap situation right now, in 2 years Kreider, Stepan, hagelin, Staal, Girardi, Mcdanagh will all be do big raises and rangers may have issues keeping everyone.

        However, I do agree with you that then really wealthy teams could just throw a ton of money at FAs and then have no problem paying their own with a soft cap.

        Either way, the bigger issue is that I am tired of the owners asking the players to save them from themselves. Billionaires are asking multi-millionaires for concessions. It is ridiculous. No one told Calagry to give Wideman a third pairing defenseman last year a 26.5 million dollar deal.

        Also, I am not sure you read Larry Brooks article last week after Dan Snider gave Holmgren of the Flyers approval to Offer Sheet of Weber. Snider is reportedly one of the biggest “hawks” of the owners trying to slash payrolls and get players to concede. Yet he offered a 110 million dollar deal that is front loaded? Furthermore, Snider has an agreement with the NHL for the television rights that still pays his company i think 150 million whether there is a season or not. So snider is holding the players hostage, while knowing full well that he will get a full pay day if there is a lock out. I’ve never seen a more egregious conflict of interest and I cannot believe other owners allow Snider to sway decision making when his interests are not aligned with those of the league

        • Justin says:

          I think as far as billionaires asking multi-millionaires for concessions is a ridiculous notion on its face, however there is a risk analysis that makes some sense. Since NHL contracts are guaranteed, once a player signs he faces no more financial (or any other type for that matter) risk. So, although the owners have a far greater amount of wealth, they assume a far greater risk. They run a business that depends on the performance of assets, and I can understand their desire to hedge such a huge risk (especially in non-traditional markets)

          I do agree with you 100% on Ed Snider. The whole situation reeks of terrible corporate governance. With regard to the offer-sheet, I think it would be in the league’s best interest to distance themselves from Snider for the CBA negotiations. However, there is no express conflict of interest from a business or legal standpoint, but its sleazy.

          His TV deal, however, I have a huge issue with. Not only does he have a conflict of interest between himself and the league with the TV deal as an owner, but a conflict of interest between his TV deal and his team. The TV contract should have been awarded to an independent 3rd party. If Ed wants to own the NHL TV rights, he should sell the team. If he wants to run a team, he should have let the TV rights go to another bidder. It could end up being a huge problem going forward.

        • rob sahm says:

          great point but its ed snider not dan . dan is the owner of the redskins lol lol

  4. rob sahm says:

    trust me there is no way the players are going to go for 10 year UFA. like one of the posts said if your a 22 year old and get to free agency in 10 years your average age will be 32 to 35 and do you expect a owner to give you a max contract at that age for millions of dollars i cant see it happening maybe a 5 year UFA is more reasonable at this point.

  5. Steffen says:

    First of all I’d like to complement you for an really interesting article. I think you point out some of the problems of a complex organisation, the league, has to deal with.

    There are some mindleaps however I do not agree with. The example you give with the apple thingie, some people, like Burke, will be crazy enough to go for a toy like that, even though their budget might not like it in the short and long run. Especially when that toy does not function as good as advertised or believed, see Redden. But that is not the problem in my mind. In a market environment, the market should govern itself by the rules, salary cap or not… What I’m trying to say is that the Chicago situation is the market at work and fair, although perhaps not pleasurable for their fans. They took some decisions and now they have to face the consequenses.
    The situations with Redden, Kovalchuck, Parise, Suter and perhaps even Richards are different in my mind. What happens here is people playing by the rules, but not by the intent of the rules. They create contracts to circumvent the cap, but the organisations do not have to pay for it. Redden is buried and the others probably will retire before the end of the contract. A solution for this might be to count the actual salary against the cap, or let their contracts count against the cap untill it officially ends, with other words, let the team pay for their short sightedness. Hmmm we got Sather right, god save us!

    A rule by itself is nothing, it is depending on context and perhaps intent here. So when we change the context, we change the rule too in some way.

    And yeah, it’s pretty … hypocrite asking the players returning money because they need the mony and giving out mega-contracts on the other hand…

    • Justin says:

      Thanks Steffen. I tend to agree with all your points in general sovereign economics when it comes to market effects, however, in this case, there is no real consequence to those decisions.

      In the corporate arena, if a company makes a miscalculation to the extent of the Apple example, they have better options than in the NHL. They can fire the leadership who made the decision and lower the price, if it was a speculative venture, the company could file bankruptcy, or they could be bought out. The NHL is a different animal. Teams who make horrible decisions don’t simply go out of business (see the Blue Jackets), they limp on in the basement of their divisions while the consequences of their miscalculated investments still permeate through the rest of the league.

      You make a good point about the Blackhawks, and I won’t argue you on the semantics, but them having to sell of immediately after capturing the ultimate prize just feels…wrong. I’m not here advocating for dynasties, but I would love to see well built clubs be contenders for multiple years at a time.

      I would love to hear more of your thoughts on the matter, your post added a lot to the discussion.

  6. Josh says:

    Why do we limit the contract years? Why cant it just be cap hit equals average of 5 top salary years.

    Kovy Cap hit-11.4
    Parise Cap hit-10.6
    Luongo Cap hit-7.37

    • Justin says:

      Impressive Josh. Very interesting suggestion. I would love to hear more about your thoughts on some of the unintended consequences of that system, but at its face, I could get behind that…well done sir.

      • Seahorse says:

        the only issue i could see is that it wont limit the length of the contract, so you could still give 13 year 98 million dollar contracts, they just wouldnt be front loaded and be spread evenly over the length of the contract.

        this might be good for a small market team like nashville who cant pay a single player 20 mil for a year, however, players would be more enticed to stay longer in the league.

        problems with this: those players with injuries would more likely choose to continue to play instead of retire to get their money. players in their late 30s and early 40s who dont have it anymore would try and stick around keeping spots from young up and comers, and as a result would be “reddened”. where all of this money is being thrown into the AHL, not good for the owners or the fans.

        i believe that the world is neither black or white, but indeed different shades of gray. why cant we incorporate both solutions, both year limits and cap hit averages and it can change based on age.

        just a suggestion but say U-30 max contract length of 10 with cap hit equal to average of top 5 years.

        and over 30 or maybe 32, again just spit balling, max contract length of 5-7 years with cap hit equal to top 3 years.

        this means no player will be on the same contract from their 20’s to their 40’s and players might actually get paid what they are worth.

        course we could say screw this all and just say cap hit is what their actual salary is for that year but i doubt the players or owners would like that.

        also i agree 100% that players drafted should be allowed to be kept over the salary cap, keeps players home at salaries they deserve (in this market Staal deserves more than 4 mil a year based on play, not necessarily his health)

  7. The Suit says:

    First time in recent memory I strongly disagree with Justin. Compelling argument though. Good stuff J-Keeps.

    • Jess says:

      I am with The Suit on this as well. Why is it that the players have to be the ones who suffer from the lack of self control that owners and GMs have?

      Justin you say you are all for a free market system but of all the pro leagues it is the NHL that has the most restrictive systems.

      Michael Del Zotto has absolutely zero leverage in his next contract. Nobody is going to offer him an offer sheet and he can’t file for arbitration.

      Like Dubinsky before him if MDZ holds out then he is painted as a greedy SOB by the Rangers and the fans believe those words.

      If he signs just a 1 year deal then next year he would have been eligible for arbitration but not if the NHL owners get their way. Del Zotto would have almost no bargaining power until he reaches 10 years of service under the owner’s proposal.

      Sorry Justin but come back when you show me what the owners would give back to the players.

      Tell you what here is my counter offer, the NHL owners open up their books not only to the players but to each other. In exchange for a 5 year limit, the owners agree to fully share all TV revenue (including local) with each other.

      The owners I bet would rather die than do that. The NHL is the only league where you have one owner who provide the league’s TV contract (Flyers), another owner who makes their living operating sports arenas (AEG Kings) and a 3rd who makes their money operating the concessions in said arenas (Bruins).

      Yet all 3 are on the NHL’s labor team, a team where 8 owners can prevent the other 22 from seeing any proposal the NHLPA offers.

      Sorry Justin fix the owners first before expecting the players to give up anything.

      • Justin says:

        Thanks Suit, would love to hear your take on the matter.

        Jess- This was analysis was taking place in a vacuum. As with any negotiation, if this provision is something the owner’s really want in the next CBA, they are going to have to concede something else to the players. Maybe its revenue sharing, maybe its the ultimate salary cap number, who knows.

        As I said above, I think the current service time system is broken and I dislike the salary cap because of how restrictive it is. I agree that the NHL is the most restrictive, but for the purpose of the analysis, I was resigning myself to the reality of the situation. It would have turned into a “this is why I disagree with the salary cap” post very quickly if I let it go any further.

        And what was the whole point of the post. Within the context of the system that I admittedly disagree with, this provision is necessary for the sake of the sustainability of the market itself.

        • Steffen says:

          Hi guys,

          Not sure, but what about this? http://snyrangersblog.com/2012-13-lockout/read-is-a-luxury-tax-the-way-to-go/

          On the other hand, I think it is not only the problem of the owners, also that of the players. They all want a bigger piece of the pie, so somethings gotta give… If their only concern was to win the cup, the could all go for a couple of years of 2 million and then you would easily have a team with 25 players earning enough money for their families. Would they? I guess not, ego plays a role, but I would not turn down some extra dollars if they would offer it to me.
          Just a bold statement, but I’m curious for your thoughts.