Published on September 5th, 2012 | by James Conley2
Penguins Saved by Outgoing CBA Owners Now Claim is Flawed
NHL owners simply cannot continue to operate under the league’s current Collective Bargaining Agreement.
In the seven years since the outgoing CBA was ratified, they’ve watched annual revenues climb from $2.24 billion in 2004-05 to $3.3 billion in 2011-12. Franchise valuations have increased by an average of 47 percent, with some clubs as much as tripling their net worth. NBC signed a 10-year, $2 billion television deal for exclusive NHL rights—even launching a dedicated sports network with hockey as its centerpiece sport, the single-biggest move towards erasing years of network anonymity and pushing the NHL back into America’s household sports dialogue.
So while owners push inexorably towards a fourth work stoppage in 21 years, it’s important to remember that the outgoing agreement is one that saved a number of teams on the financial brink.
Namely, the Pittsburgh Penguins.
It’s hard to remember now just how dire the Pens’ finances were in the years before the last lockout. The Penguins were the second-least valuable franchise in hockey in 2004, valued at some $101 million—$33 million less than the league’s current least-valuable franchise, the Phoenix Coyotes. Pittsburgh played in the league’s oldest arena and fielded one of its thinnest payrolls, and hadn’t sniffed the postseason since 2001.
The team’s problems came from a decade of utter mismanagement. Former owners Howard Baldwin and Roger Marino outsourced many of the franchise’s revenue streams, average payrolls were driven increasingly higher by deep-pocket competition and a series of salary-dump trades yielded nothing in the way of young talent.
This was the team the Lemieux group purchased in 1999. From the Washington Post,
The Penguins were in trouble for much of the 1990s. Baldwin had bargained away several of the team’s vital revenue sources, such as luxury boxes, advertising and television and radio rights, to lenders in return for financing the purchase of the Penguins and for ongoing working capital. Things spiraled down from there, with player salaries increasing from an average of $271,000 in 1990-91 to $1.3 million in 1998-99. The Penguins’ payroll went from $9 million to $34 million in that time.
A league lockout for more than three months at the start of the 1994-95 season brought a halt to revenues while expenses continued to mount. The Penguins also had one of the most expensive players in the league in Lemieux himself, who signed a seven-year, $42 million contract in 1992. He missed one full season and parts of others because of disease and injuries. Lemieux agreed to repeated deferrals of payment on his salary to help the team.
Despite a financial reorganization and investment from Marino, a computer storage company executive from Boston who entered the scene in 1997, the Penguins’ fate already was sealed. Lemieux’s retirement at the end of the 1996-97 season was the final nail in the coffin. Penguins season ticket sales dropped from 12,000 in Lemieux’s last year to 8,300 last season, according to team spokesman Tom McMillan. By December 1997, the team needed an infusion of $2 million every two weeks.
“We just kept wiring money out,” said Harry Mannion, Marino’s Boston attorney.
A look into the not-so-distant past details a far different operation than the one that has become the NHL’s sixth-most valuable American franchise, and there have been plenty of players in that role reversal. Lemieux is chief among them, and the acquisition of Sidney Crosby and the long-awaited CONSOL Energy Center were also invaluable to making the Penguins a viable franchise on all fronts.
However, would any of those factors have meant anything without the 2005 CBA?
While almost every franchise has become more valuable in the seven years since the last lockout, no team made as significant a jump as the Penguins. Dave Manuel took a good look at just how far the franchise has come, with numbers from Forbes SportsMoney.
Average NHL Franchise Value – $163.3 million
Penguins Franchise Value – $101 million (29th in NHL)
Average NHL Franchise Value – $239.83 million (47 percent increase)
Penguins Franchise Value – $264 million (161 percent increase)
Pittsburgh’s 161 percent increase in value since the lockout is by far the biggest improvement of any NHL team over that span. While all but four teams have posted increases, only three others—the Canadiens, Oilers and Canucks—as much as doubled their net worth (Montreal the closest at a 128.2 percent growth rate).
This improvement would not have occurred without a hard salary cap. As noted in the Washington Post article, the average NHL player saw his annual salary jump from $271,000 in 1990-91 (the year of the Pens’ first Stanley Cup) to $1.3 million in 1998-99, when Lemieux purchased the team out of bankruptcy. The Penguins’ payroll jumped in accordance, from $9 million to $34 million over the course of just nine seasons.
While $34 million is a pittance now, that represented a 377 percent increase in payroll over nine seasons. Owners currently fighting to tear down the CBA they themselves fought for in 2004-05 have seen the salary cap increase from $39 million to $64.3 million last season. Though the cap ceiling has almost doubled since the lockout, the percentage of hockey-related revenues marked for player salaries has remain fixed at 57 percent. The hard salary cap has done its job in limiting player salaries from skyrocketing at a rate not commensurate to league revenues.
Pittsburgh is a small-market team with modest margins even now, but the cap helped them to become a source of revenue and renewed fan interest where the old model would have seen the franchise relocated or shuttered entirely. As a result, the Penguins have been able to target, sign and re-sign top-level talent, and it has made them one of the league’s model franchises both on the ice and on the books.
Payroll – $34 million
Operating Loss -$600,000
Revenue – $52 million
Value – $101 million
Payroll – $68 million (100 percent increase)
Operating Loss – $200,000 (66 percent decrease)
Revenue – $110 million (212 percent increase)
Value – $264 million (161 percent increase)
The Penguins’ growth in value comes from winning, something the franchise was unable to do on the crooked playing field of an uncapped market. Despite the success of the 1990s teams, losing crept in as star players left town.
Long-term commitments to the team’s homegrown talent is expected now, but is a sharp departure from the years before the lockout. The Pens of the late-90s and early 2000s were exercises in salary dumping, where talents like Ron Francis, Jaromir Jagr, Markus Naslund and Alex Kovalev left town because their salaries had become too much for the bankrupted franchise to bear.
Today, Sidney Crosby has taken Lemieux’s mantle, signing a 12-year and presumably life-long deal with the Penguins in July. Marc-Andre Fleury and James Neal have signed contracts of seven and six years, respectively, and next summer Evgeni Malkin will be offered as long and as rich a contract as the next iteration of the CBA will allow.
The salary cap is not thought to be at stake in the current negotiations. The NHLPA would be the ones in search of an uncapped market, and their first proposal to the NHL didn’t ask for its repeal. However, the CBA as it exists now has allowed teams like the Penguins to prosper. A meaningful change to revenue sharing or the salary floor might reasonably address the problems facing a number of low-revenue teams. Its difficult to find the rationale of systemic upheaval when the league is posting yearly gains of best-ever revenue, ratings and gate receipts.
Fan interest is high, ticket sales are strong and the game is creeping back into the national sports discussion, as it has begun to do with the NBC television contract and the popularity of the Winter Classic. Those are the signs of a strong product, and they are the things most at-risk during these negotiations. If the NHL loses sight of that and subjects itself to another work stoppage, owners won’t just eliminate the positive conditions that are needed to improve struggling franchises—they’ll set back some franchises who have become successful under the current CBA.
Knowing that, it must be hard for some at the owners’ table to hold the party line at the risk of damaging a good thing.