On November 28 2007 I handed in a paper for an economics class, and I was pretty proud of it. While not my best work in literary terms, it garnered me the best mark on any essay in my University career, a 97%. I’m not sure the paper was deserving of a mark that high, but regardless I look back on it as one of the best things I’ve produced at Queen’s. I had the odds stacked in my favor, though, given the opportunity to write about any relevant Labor Relations topic in the past decade in Canada. Despite my recent fall out with the NHL, I could think of no better topic than the NHL Lockout, a topic that qualified on the grounds of industrial relations (collective bargaining), recency, and Canadian content. Below is that paper, for better or worse in its entirety. Please keep in mind when reading that it was written as an Economics paper, and not a sports opinion column like most of my work here on the site. I have made some small changes, editing out higher level economic theory to make it more On Deck Circle appropriate, but it is still an academic paper at heart, for sure. Warning—it is pretty long. So here is my look back at the NHL Lockout and the farce that was the players’ union’s approach to collective bargaining.

In January of 2003, fans of the NHL had reason to be optimistic. With the league’s active collective bargaining agreement between the player’s association (NHLPA) and the owners set to expire in September of 2004, NHLPA executive director Bob Goodenow and league commissioner Gary Bettman had a private meeting to open the negotiation process. This private meeting had information leaked to the public not long after with the general feeling of optimism abound. Over the next few months, parties and counsel from both sides would hold several closed door private meetings, though the public was not aware of progress or the general nature of the talks. With all but the most advanced fans ignorant to the bargaining process and the business side of hockey, there seemed no reason to be skeptical about the labor talks with the current deal’s expiry date a year away still. In October of 2003, though, NHL fans everywhere were shocked with the results made public from the first public meeting between the two sides: the players’ union and the league were miles apart on an agreement, and the eleven and a half months remaining in the current deal may not be long enough to strike an agreement. A work stoppage was imminent.

Industry & Company Overview
The sports industry generates nearly $200B USD annually across the world. Of this, 14 percent is based on advertising, 13 percent relates to merchandise, 13 percent pertains to spectator spending, 12 percent is attributable to operating expenses, and 10 percent is tacked on to gambling, with the remainder spread out across many small areas and trickle down industries. With such a large aggregate product for the industry, the fifth largest player on a continent should consider themselves in good shape. At the time of the NHL lockout, the league was in no position to risk a work stoppage, though. Participating in the broad category of entertainment, the NHL is a relatively small player. However, if you limit the parameters of their market to the sports industry, the NHL could (debatably) be considered the fifth largest player but could be argued down to eighth or ninth, too. In Canada, where the NHL’s core operations emanate from and where six of its thirty teams call home, the NHL is by far the largest sports player. However in the crowded U.S. market, the NHL was struggling to maintain viewers, develop committed fan bases, fill arenas, and move merchandise for its unfamiliar game, all of which obviously hampered its ability to attract advertising revenues. Competing in the United States sport market, the NHL was a struggling middle tier player that really could not afford reputational or product damage.

The Lockout
Having described the challenges facing the NHL in the sports industry, one wonders how the league could allow a work stoppage to take place; clearly the issues at hand must have been grave. At the aforementioned October 2003 meeting, each side tendered an initial offer that the opposite side found to be ludicrous. The player’s union offered a five percent salary rollback recognizing that salaries were getting out of hand and outstripping revenue growth. The league countered by demanding a salary cap for the league, the first the NHL would ever know, following in the path of the NFL and NBA. Immediately after the initial proposals, the sides took nearly three months off before meeting again, seeking to fact find and develop negotiating strategy. A key point to make here is that the NHL is incorporated in the United States (despite having headquarters first in Toronto and later also in New York, NY), so there was no mandatory conciliation for the parties as there is in Canada. Thus, the two parties were free to remain as far apart as they desired on agreement proposals, facing no threat of final offer arbitration or conciliation making issues public in the long run (though most information was leaked to the public, regardless). With no process of arbitration written into the prior agreement, the parties had no incentive to make more reasonable offers. That is, with no final offer arbitration looming, the incentives to cooperate or bargain in good faith inherent with the risk of having the other side’s offer accepted in its entirety were not apparent. The reason given by both sides is that this was not just a labor-management squabble but an issue of competitive balance and it would be costly and timely to bring a mediator up to speed enough to make reasonable decisions.

The lockout seemed imminent from the very beginning for several reasons. Looking at historical industrial relations events and data, there are several indicators of work stoppage potential and length. Foremost, the relationship was suffering some hangover effects from the previous negotiating process in 1994-95, and it is obvious that unresolved grievances can increase work stoppage potential. Additionally, the league seemed ready from the outset to use a work stoppage both to reduce expectations on the part of the player’s union and as a means of sending a strong message about their stance. Similarly, the union almost certainly required a work stoppage as a means of information revelation, not truly knowing the limits of the owners’ side. The Theory of Different Individuals posits that work stoppages occur because the two parties are operating from and looking at different information sets. This was exceedingly true in the case of the NHL lockout, as the players union was focusing on issues like individual salary rollbacks and arbitration, whereas the league was looking at team salary caps and minimum and maximum salaries. Here, the players union was looking at annual salary trends and the link between performance and compensation whereas the league was focused primarily on data relating salaries to team revenues and owner profits.

Key Players
The NHL’s labor dispute situation was unique given the nature of the industry and the league in general. Rather than having a firm and a union only, the NHL is made up of a collection of teams (franchises) with one union representing all players. The matter is further complicated by having Gary Bettman, the league’s commissioner, acting on behalf of the owners and having to keep the league’s overall health, not just owner profits, in mind. Essentially the type of bargaining structure that emerges is one similar to the ones governments deal with, with a single employer (the NHL), multiple establishments (30 teams), and a single union (NHLPA). Thus, the league must bargain on behalf of multiple parties with a single union.
Gary Bettman, a lawyer and former NBA counsel, maintains a polarized image in the sports world, with many supporting his aggressive Americanization of hockey, and many feeling he is very anti-player and ignores the Canadian roots of the game. Regardless, the collection of owners loves him, and with good reason since what is good for the owners is usually good for the league as a whole. Thus, Bettman was a strong, well-informed, and well-educated representative on behalf of the league.

On the other hand, the union’s leadership was questioned throughout the entire process. Acting at the top was executive director Bob Goodenow, a Harvard graduate and lawyer, who is a notoriously extravagant union head. Immediately upon taking over for the removed Alan Eagleson in 1992, Goodenow lead a 10-day player strike right before the Stanley Cup Playoffs that many felt was a move made to destroy his reputation as an owner’s union head, but was really a sign of his volatile nature and things to come. Goodenow accomplished a great deal as executive director though, increasing salaries a great deal for players, but this salary inflation threatened the league’s long-term success. Throughout the lockout there was opinion among player representatives and the media that Goodenow had made severe mistakes in the negotiation process and would end up brokering the players a less favorable deal than was originally on the table. His leadership was questioned further as the lockout continued and some of his duties were undertaken by CBA-specialist Ted Saskin, who would later take over for Goodenow upon his forced resignation. Thus, throughout the negotiating process the union was at a serious disadvantage facing a successful, knowledgeable, and determined opponent while being operated with questionable leadership and an operation largely lacking in transparency.

Outcomes: The Collective Bargaining Agreement
It has become readily apparent that there was an inherent imbalance of bargaining power in these negotiations. Foremost, the league had the benefit of better representation and leadership, with Gary Bettman providing a more experienced and stable source than Bob Goodenow and Ted Saskin. Additionally, the economic factors acting on the league and the relevant accounting data favored a new agreement that was biased towards owners over players. Specifically, the league as a whole lost $273M in the prior season. One key advantage that presented itself once the lockout took place was the support of fans and media, which surprisingly went to the league side instead of the union. Media heads and the league’s fans generally found Bettman’s six-pronged plan for cost certainty to be reasonable, though the lack of revenue sharing with players was attacked. With the strong media coverage of hockey in Canada, specifically in Toronto where negotiations were held, pressure was applied to the union side after time, with the media and fans blaming the union (not necessarily the players) for causing the delay of the season.

On January 17 2005, players’ executive committee president Trevor Linden, captain of the Vancouver Canucks, convinced the sides to return to the negotiating table. After several months of slow moving talks with the union only willing to make one large concession (a 24 percent salary rollback), there was still not much optimism. On February 16, Gary Bettman held a press conference to announce the season had been officially cancelled, eliminating any hope fans still held for a hockey season. The media increased pressure on both sides at this time, and information that was leaked from negotiations and players’ meetings showed a declining level of support for the union heads. It was also around this time that a public opinion poll revealed that over half of the surveyed population blamed the player side rather than the ownership side, sending the first legitimate signal to players that they were losing on all fronts. Finally, on July 21, after an almost two-year long negotiating debacle and a 310 day lockout, the players union voted 87 percent in favor of ratifying a new agreement, officially ending the work stoppage.

The new agreement had three distinct changes from prior agreements. Foremost, the NHL had adopted a salary cap for the first time ever, limiting team spending to $39M on salaries for a season and putting caps on individual salaries depending on length of service and the rest of the team’s salary makeup. This was considered an enormous loss for the union side as they had been strongly opposed to a salary cap from the beginning, having initially stated they would refuse to accept any type of cap on player earnings. In a related blow to the union side, teams were given one week to release players from contracts at a sizable discount from existing salaries in order to comply with the new salary cap. The second major change was the aforementioned agreement to a 24 percent rollback of all current player salaries regardless of service time or skill level, immediately providing teams a greater likelihood of profitability and increased financial flexibility in their operations. The third major departure from previous agreements was one that almost solely affected team owners but was meant to help overall league health moving into the future. This element was the introduction of revenue sharing among teams, where the top-ten earning teams contribute to a fund shared by the 15 lowest earning teams. This initiative was meant to ensure all teams can spend equal amounts in future years and create parity amongst the league’s teams. A final change, though minor in scope, that can be considered a victory for the union side, was the further development of arbitration options. Although the new agreement gave teams the option to take a player to arbitration over new contracts and contract extensions, it also increased the number of scenarios in which players had the right to do so. When parties decide to go to arbitration, it is final offer arbitration employed using a previously approved arbitrator listed in the agreement. Looking at the main changes versus the previous agreement, it is very clear that the owners were successful in out-maneuvering the players’ union, proving the old adage that unions win short strikes and firms win long ones.

Other Outcomes
With two and a half seasons having been played since the lockout ended, several trickle-down outcomes have become apparent. Foremost, the union has undertaken serious leadership changes. Bob Goodenow resigned (under heavy pressure) almost immediately following the end of negotiations and was replaced by Ted Saskin, who had been a positive presence towards the end of negotiations and was largely credited for helping end the lockout. However, Saskin was removed not long after when he was suspected of tampering with players’ e-mails and personal information and when his close personal relationship with new deputy commissioner Bill Daly (another instrumental negotiating figure, on the league side) became public information. The union now has almost completely new management and leadership, though it is still unclear if the new brass will attempt to renegotiate the agreement at the end of the fourth year (it is a six year agreement) as the agreement allows. This is because the salary cap has increased rather quickly, leading some to believe the deal isn’t as bad for players as initially thought.

The effect on the league overall has been somewhat ambiguous. There are signs indicating both positive and negative changes for the league. On one hand, television ratings have been lower since the league returned from the stoppage, attributable mostly to the NHL’s loss of a major television network to air on, losing ESPN and NBC and settling instead for the Versus Network. Additionally, small market teams continue struggling to fill arenas and move merchandise, though this has been offset to some degree by the revenue sharing implemented between teams. Neither of these effects are apparent in Canada, where the game pretty much resumed as if it had not left, solidifying the game’s Canadian image and the belief that there will always be sizable demand for the product on its home turf. On the positive side, league revenues have increased since the new agreement came into effect. Profits, then, obviously increased as well since the increased revenues accompanied the decreased salary levels. There is strong evidence of this increased financial health of the league in the increases made to the salary cap. The cap has moved from $39M to $50M in just three seasons, and the cap level can only reach a maximum of 54 percent of league revenues. Regardless of the ambiguous aggregate nature of these changes, the struggle to regain and maintain popularity makes it clear that this work stoppage was ill advised and the league’s long term future would be seriously compromised by another work stoppage in the near future.