Thursday Thought Piece: Realignment Revenue Sharing

I've been mulling something in my head the last hour or so, and I figured I might as well put it into a post for math-checking and whatnot. Now you may not know it from my silly cartoons or lazy blogging, but back in my college days I was an economics major, studying things like incentives, indifference curves, and game theory. And I guess it's from all that line of thinking that I started wondering today about the financial repercussions of an imbalanced-conference NHL realignment scheme.

Now I know that idea has been killed for the upcoming season, but there's certainly some likelihood it will appear in the future. What will that mean in terms of each team's (east or west) expected revenues, specifically as it pertains to playoffs? After all, it seems reasonable that both conferences pull in about the same playoff money -- what would it mean to have that distributed among a differing number of teams? To think through this, I did some napkin math to illustrate:

Currently, the eastern and western conferences each have 15 teams, and 8 make the postseason from each -- every team has a theoretical 53% chance of making the playoffs, regardless of conference. Once in the playoffs, there are 15 total rounds that consist of an average of 5.5 games each (I'm kind of guessing), and each playoff game brings in $2 million (I'm REALLY guessing). For illustrative purposes, that's $165M that all 30 teams have an equal chance at getting at -- each team in theory has an expected postseason payout of $5.5M annually (though obviously that gets distributed quite unevenly depending on each team's success).

But what if the NHL did go to uneven conferences -- what if there were 16 western teams and 14 eastern teams, with still 8 making the playoffs from each conference? How does that change teams' expected playoff payouts, and how can this new inequality be balanced?

In the envisioned 16-team west, each team would make the playoffs in theory 50% of the time, whereas in a 14-team east, each team improves to 57% likelihood -- over time this imbalance will put more dollars and thus more spending power in the eastern conference, as there are fewer teams to distribute to.

Per my napkin-math example, each western team under realignment would have a new expected playoff payout of $5,156,250 ($82.5M divided by 16 teams), while each eastern team would have an expected payout of $5,892,857 ($82.5M divided by 14 teams). Each eastern team annually would have a better expected payout than each western team by $736,607, near the cost of a minimum-wage player.

It's not huge, but that sort of imbalance can add up, so I think if the NHL does move to an imbalanced-conference realignment, it really should include a revenue sharing program with it. To be very clear, this should be totally separate and additional to whatever other revenue sharing happens in the CBA, and there should be no restrictions on which teams are eligible for this redistribution -- this is purely to offset expected payout imbalance from uneven conferences. Here's what it would look like, compared to the current system:

Alignment Conference Teams Playoff% Expected Rev Distribution Post-Distribution
Balanced Eastern 15 53% $5,500,000 $0 $5,500,000
Western 15 53% $5,500,000 $0 $5,500,000
Imbalanced Eastern 14 57% $5,892,857 ($392,857) $5,500,000
Western 16 50% $5,156,250 $343,750 $5,500,000

In the example, all 14 eastern teams would give $392,857 each to be distributed among 16 western teams -- each of them would get a payout of $343,750. By doing this, now each team again has an expected payout of $5.5M annually again, regardless of conference. Of course, this number is based on a pure guess as to how much each playoff game is really worth (I guessed $2M), so probably it's better to think of this as a ratio:

However much a playoff game is worth, each eastern team should give up about 20% of that amount to a pool that goes to each western team, who would each pick up about 17% of a playoff game's revenue. It's not a terribly large amount in the scheme of total salary spending, but it's not nothing, either, and it does add up over time. As an annual payment, that would offset the economic imbalance of a disproportionate-conference realignment in a salary-cap-parity world.

Anyways, sorry for boring you all with math and logic -- next post will have a cartoon for sure. But does the expected-payout revenue sharing make sense to any of you economist-minded readers, and anything you want to add or correct? Have at it.

Prediction: Though I think this totally makes sense, whenever realignment happens, revenue sharing doesn't happen with it. And I start detesting eastern teams all the more. :)

Go economics.

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