The Cold War of Hockey

The NHL, KHL, and International Player Transfer

By: Ryan Larson

INTRODUCTION During a four day stretch in mid-July 2013, something happened that would send shockwaves through the world of professional hockey. On July 11th, New Jersey Devils forward Ilya Kovalchuk retired from an extremely successful National Hockey League (NHL) career. While player retirements are not unusual, Kovalchuks was. He was only 30 years old at the time and was in the prime of his career. Kovalchuk was a bona fide superstar in the NHL. Originally from Tver, Russia, he was selected first overall by the Atlanta Thrashers in the 2001 NHL entry draft.1 After years as the face of the Thrashers franchise, Kovalchuk was traded to New Jersey in 2010 when he turned down a contract extension to re-sign with Atlanta.2 During the next offseason and after some controversy, Kovalchuk signed a 15 year, $100 million contract.3 When he retired, there were 12 years and $77 million remaining.4 In 816 career NHL games, Kovalchuk recorded 816 points (goals + assists). A point-pergame player is generally considered to be among the best in the NHL. This is especially true when the player sustains that success over multiple seasons. Had Kovalchuk continued to produce at this rate for another five to six years, he likely would have been inducted into the Hockey Hall of Fame. When the news broke, Kovalchuks sudden retirement was a mystery to everyone. However, his intentions became clear four days later. On July 15, he signed a four year contract with SKA

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Ilya Kovalchuk Player Profile, NHL.com, http://www.nhl.com/ice/player.htm?id=8469454. st Thrashers Ship Kovalchuk to Devils for Players, 1 Rounder, TSN (Feb 5, 2010) http://www.tsn.ca/nhl/story/?id=308953. 3 Dan Rosen, Kovy deal registered as NHL, NHLPA reach settlement, NHL.com (Sept 4, 2010) http://www.nhl.com/ice/news.htm?id=536524&navid=DL. 4 Adam Gertz, Ilya Kovalchuk announces retirement from the NHL , CBS Sports (July 11, 2013) http://www.cbssports.com/nhl/eye-on-hockey/22722800/ilya-kovalchuk-announces-retirement.

St. Petersburg (SKA) of the Kontinental Hockey League (KHL).5 Although terms were not made public, it is believed that SKA is paying Kovalchuk a salary comparable with what he made in New Jersey.6 In hindsight, it seems so obvious that Kovalchuk would sign with SKA. First, its not logical that he would quit playing hockey at only 30 years old, considering his level of skill and earning potential. Second, he is a Russian player that takes great pride in his country. Hes represented Russia in multiple Olympic Games and IIHF World Championships. Third, Kovalchuk played for SKA during the 2012-13 NHL lockout.7 This brief taste of playing in the KHL left Kovalchuk yearning to return home, excited by the prospect of playing in front of friends and family. The NHL would be foolish to dismiss Kovalchuks departure as an outlier. Many of the leagues star players are European. Even though the KHL is still a young league, they have expressed a desire to bring in top European talent. If the KHL shows that they can provide elite hockey at a comparable salary, its reasonable to assume that many of these European players would relish the opportunity to play closer to home. The NHL should be proactive in confronting this threat. In a market where they compete with giants like the NFL and NBA, the last thing the league wants is to compete with another professional hockey league. A second hockey superpower, if seen by players as a viable alternative, will almost certainly deplete the leagues talent pool. This will result in the NHL putting an inferior product on the ice, hurting their image in a competitive domestic sports

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Ilya Kovalchuk is with SKA!, KHL (July 15, 2013) http://www.ska.ru/news/en/10993.html. Jeff Klein, Kovalchuk Signs With SKA St. Petersburg of K.H.L., New York Times (July 15, 2013) http://www.nytimes.com/2013/07/16/sports/hockey/kovalchuk-signs-with-ska-st-petersburg-of-khl.html?_r=1&. 7 Katie Strang, Kovalchuk going to SKA St. Petersburg, ESPN (Sept 17, 2012) http://espn.go.com/blog/nhl/post/_/id/19280/kovalchuk-signs-with-ska-st-petersburg.

market, as well as abroad. This paper will propose three recommendations which will help the National Hockey League combat the growing threat posed by the Kontinental Hockey League.

BACKGROUND National Hockey League Founded in 1917, the NHL is universally considered to be the best professional hockey league in the world. What began with the Original Six, today is comprised of 30 teams within the United States and Canada. The greatest players in the history of the game have played in the NHL, including: Wayne Gretzky, Gordie Howe, Mario Lemieux, and others. The league has seen dynasties such as the 1950s and 1970s Montreal Canadians, the 1980s New York Islanders and Edmonton Oilers. Perhaps most important, the NHL is the guardian of sports most historic and revered trophy, the Stanley Cup (the holy grail of hockey, first awarded in 1893), which is given to the league champion every June. The NHL has established itself as the league of legends. Each member club is an individual business that collaborates with other clubs to form the league. Each team appoints a governor (and two alternates) to the Board of Governors.8 The Board of Governors is responsible for establishing league policies. Team revenues come not only from ticket sales, but also merchandise sales, concession sales, corporate sponsorship and television revenue. The NHL sets strict standards regarding arena and ice quality.9 With high quality play and a great fan experience, the league creates an exciting atmosphere, encouraging repeat business and increased corporate sponsorships. Like in any American business, the goal is to maximize the value of a team owners investment. The league has succeeded in this respect.
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Tim Wharnsby, Just who are these NHL governors?, CBC Sports (Dec 5, 2012) http://www.cbc.ca/sportscontent/hockey/opinion/2012/12/wharnsby-just-who-are-these-governors.html. 9 Robert Dvorchak, Ice wars: Mellon Arena crew battles to meet NHL standards, Pittsburgh Post-Gazette (June 4, 2008) http://www.post-gazette.com/sports/penguins/2008/06/04/Ice-wars-Mellon-Arena-crew-battles-to-meetNHL-standards/stories/200806040231.

They continue to break revenue and attendance records, and team valuations are at an all-time high.1011 The leagues relationship with its players is regulated by a collective bargaining agreement (CBA).12 The CBA is negotiated between league executives and the National Hockey League Players Association (NHLPA). This comprehensive agreement covers everything from player equipment to pay restrictions. The CBA sets a floor (minimum) and cap (maximum) that a team may spend on total player salary.13 This helps maintain competitive balance and keep player salaries under control. In the 2013-14 season, the salary cap was set at $64.3 million.14 The salary floor is usually set at $16 million below the cap; however the new CBA sets it at $44 million for the 2013-14 season.15 The CBA also sets both a minimum and maximum amount that an individual player may be paid.16 For example, during the 2013-14, the minimum amount a player can make is $550,000.17 Kontinental Hockey League Founded in 2008, the KHL has emerged as the worlds second major professional hockey league. What began as a Russian professional league, the KHL is gaining momentum and

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Trevor Sudbury, Daily Links: Despite Lockout, NHL Is Bringing In Record Percentage Revenues, SB Nation (Mar 5, 2013) http://www.defendingbigd.com/2013/3/5/4066222/daily-links-despite-lockout-nhl-is-bringing-in-recordpercentage. 11 Mike Ozanian, The NHLs Most Valuable Teams, Forbes (Nov 25, 2013) http://www.forbes.com/sites/mikeozanian/2013/11/25/the-nhls-most-valuable-teams/. 12 Collective Bargaining Agreement, NHLPA, http://www.nhlpa.com/inside-nhlpa/collective-bargaining-agreement. 13 Collective Bargaining Agreement Between National Hockey League And National Hockey League Players Association, Article 50.5 (2012), available at http://cdn.agilitycms.com/nhlpacom/PDF/NHL_NHLPA_2013_CBA.pdf [hereafter NHL CBA]. 14 NHL AND NHLPA REACH TENTATIVE DEAL ON NEW CBA, TSN (Jan 7, 2013) http://www.tsn.ca/nhl/story/?id=412844. 15 Id. 16 NHL CBA, supra note 14, Article 50.6. 17 FAQ, Capgeek, http://www.capgeek.com/faq/new-cba.

becoming the top professional league in Europe. The league has 28 teams spread across eight Eastern European countries.18 However, most of these teams (21) are located in Russia. Unlike the NHL, the KHL sets roster restrictions based on nationality. For Russian teams, it restricts the number of foreign born players to five.19 This means that Russian clubs have to rely primarily on home-grown talent. Non-Russian KHL teams must carry at least five players from their own country. For example, a team in Belarus must have at least five Belarusians. For teams in non-traditional hockey countries, this may set them at a competitive disadvantage. There is also a limit to how many foreign born goaltenders a team can sign.20 This encourages the development of home-grown goaltenders. To attract top foreign-born talent and compete with the NHL, the KHL must drop these roster restrictions. The regular season is 54 games (contrast this with an 82 game NHL season). Sixteen teams make the playoffs and compete for the Gagarin Cup.21 This is the KHLs equivalent to the Stanley Cup. The 12 teams that miss the playoffs compete for the Nadezhda Cup. While the quality of hockey is rapidly improving, the KHL still has significant improvements to make on their business model in order to overtake the NHL. Many teams play in small Soviet-era towns that do not have the business community or income to adequately support it.22 Many of these teams play in old arenas that seat less than 10,000 people. This negatively affects their ability to charge a premium for tickets and improve their bottom line. Teams also have a difficult time getting access to capital in order to improve the facilities and fan experience.
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About The KHL, KHL, http://en.khl.ru/official/22007/. Peter Adler, KHL Contemplating Major Changes, Peter Adler reports, Edmonton Journal (Feb 14, 2013) http://blogs.edmontonjournal.com/2013/02/14/khl-contemplating-major-changes-peter-adler-reports/. 20 Id. 21 About the KHL, KHL, http://en.khl.ru/official/22007/. 22 Matthew Fisher, KHL is good hockey, bad business, National Post (Oct 19, 2012) http://sports.nationalpost.com/2012/10/19/khl-is-good-hockey-bad-business/.

Like the NHL, the KHL does have salary restrictions. However, these restrictions are seen as suggestions and are often broken. The salary cap is set at $36 million. The salary floor is set at $8 million.23 The economic climate and loose salary restrictions create a system of haves and have-nots. Teams in bigger cities such as Moscow or St. Petersburg are able to generate funds to pay higher salaries (like Ilya Kovalchuks). Whereas teams that play in the old Sovietera industrial towns that face the problems stated above, cannot pay these high salaries. This results in a significant competitive imbalance. To become a world hockey superpower, the KHL must refine and enforce their salary restrictions. IIHF Player Transfer Bylaws Located in Zurich, Switzerland, the International Ice Hockey Federation (IIHF) governs international hockey around the world. The IIHF has 72 Member National Associations (MNA). Among these members are the United States, Canada, and Russia.24 One of the IIHFs responsibilities is to regulate international player transfer and maintain order between MNAs.25 To transfer from one MNA to another, a player must have a valid IIHF international transfer card (ITC).26 The ITC must be signed by the player, the MNA the player is coming from, and the new MNA.27 The ITC must then be approved by the IIHF.28 A player can request either a limited or unlimited transfer.29 A limited transfer restricts a players playing rights to a specified club and a specific duration.30 A limited transfer player will

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Id. IIHF Member National Associations, IIHF, http://www.iihf.com/iihf-home/the-iihf/members.html. 25 IIHF Bylaws and Statutes, Bylaw 407 (2012), available at http://www.iihf.com/fileadmin/user_upload/PDF/The_IIHF/2012-2014_IIHF_Statutes_and_Bylaws.pdf [hereafter IIHF Bylaws]. 26 Id. 27 Id. 28 Id. 29 IIHF Bylaws, supra note 25, Bylaw 409. 30 Id.

eventually be sent back to his original MNA or team. A player with an unlimited transfer becomes a full-time member of their new MNA.31 When an MNA signs the ITC, they certify that there is no reasonable purpose in restricting the player from transferring. If an MNA refuses to sign the ITC, the player may appeal to the IIHF.32 The IIHF does a good job at ensuring that teams to not use a player without an ITC. If this happens, both the team and player will be subject to discipline.33 If a player moves without obtaining an ITC, the player must establish residency for 18 months before being permitted to play in the new MNA.34 Memorandum of Understanding On May 9th, 2013, it was announced that the NHL and multiple national hockey federations had agreed in principle to a player transfer agreement.35 These countries include Sweden, Finland, Czech Republic, Slovakia, France, Denmark, Norway, Switzerland and Germany. Notably missing from this agreement was the Russian Federation, home to the KHL. The NHL calls the discussions ongoing. There is no level of expectation really, at this point, Daly said. Obviously the KHL and its clubs represent somewhat different issues, but we opened further dialogue with them both on an individual basis and in a group basis, and we hope to continue that dialogue.36

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Id. IIHF Bylaws, supra note 25, Bylaw 410. 33 IIHF Bylaws, supra note 25, Bylaw 411. 34 IIHF Bylaws, supra note 25, Bylaw 412. 35 Dan Rosen, NHL nears new Player Transfer Agreement, NHL.com (May 9, 2013) http://www.nhl.com/ice/news.htm?id=669998. 36 Id.

The NHL and Russia have not had a transfer agreement in place since 2004. Instead, theyve relied on a memorandum of understanding.37 The purpose of the memorandum is to require that both NHL and KHL teams honor contracts that exist in the other league. Although the terms of the new memorandum have not been made public, it is likely that the major points of the 2012 memorandum have carried over. Some of the main points include38: 1. Both leagues must maintain an up-to-date database of existing contracts. 2. Both leagues shall exchange a list of free agents. 3. The leagues shall respect each others contracts. 4. In the event of a dispute, the leagues shall resolve the dispute through negotiation in either New York or Toronto.

DISCUSSION Ilya Kovalchuk Current rules show why Ilya Kovalchuk had to retire from the NHL before signing with SKA St. Petersburg. Because of the leagues memorandum of understanding, a KHL team could not sign him while he was still under contract with New Jersey. If Kovalchuk would have tried to leave the NHL while under contract, the league would not have signed the ITC. That would have resulted in Kovalchuk being forced to sit out 18 months while establishing residency. Retiring was his only option. Since he was content to finish his career in Russia, it doesnt matter that Kovalchuk cant play in the United States again. KHL v NHL

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Id. Memorandum of Understanding 2012, KHL, http://en.khl.ru/news/2012/7/15/24648.html.

From a hockey standpoint, the NHL is clearly the better league. There are a few reasons for this. First, the NHL has significantly more money to pay its players. The NHLs salary cap is almost double (about $30 million) what is offered the KHL. This makes the NHL the natural destination for top talent. Second, the NHL has a great reputation as the best hockey league in the world. Third, the NHL plays on a smaller ice surface. This allows for a more physical game and lets the star players show off their skills. This results in high scoring games. Compare this to the international surface, where players tend to get lost in all that open ice and play a more defensive game. Fourth, the NHL plays 26 more regular season games than the KHL. While this results in more injuries, it also allows time for players to establish a rhythm and play at a high level against the best competition. Finally, the KHLs roster restrictions hurt the leagues quality of play. By restricting the number of foreign born players a team can use, it forces teams to use lower quality local players. From a business perspective, the KHL model needs significant refinement in order to compete with the NHL. Eastern Europe has a developing economy. While the median incomes of these markets are growing, they are significantly lower than those in the United States or Canada. The KHL is limited in how much they can charge customers to attend games. In a developing economy, there just arent enough customers who can purchase premium seating or suites. There is an elastic demand for professional hockey in Russia. People need to make sure that their physical needs (food, water, shelter) are met before spending on luxury goods and services. In professional sports, corporate sponsorships and television money have become a teams primary sources of revenue. Many KHL markets do not have the business climate conducive to such an arrangement.

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Corporations drive television revenue. They use a leagues television broadcasting as an advertising platform. The Russian television market is not near as developed as in North America. For one, there are significantly more television viewers in North America. With more potential customers, the value of the advertising increases. Even if we assume the same viewership, businesses in North America are willing to pay more money on advertising than those in Russia. This means that an advertisement targeted to the same 100,000 people will cost more in New York than in St. Petersburg. For this reason, teams in Russia will never be able to generate as much television revenue as those in North America. The KHL would be smart to reduce the number of teams. They should start by conducting research into which markets will not support their team in the long run. They should eliminate the teams that face bleak long-term success. That will do two things. First, it makes the league as a whole more profitable by eliminating teams that bleed cash. These teams would not survive without additional league support. The league can reinvest those profits into higher player salaries, improving arenas and the fan experience. Continuing to develop higher potential markets will improve the overall health of the league. Second, reducing the number of teams will improve the quality of play. When the league eliminates teams, they are also eliminating the total number of roster positions available. The best will be retained and the fringe players will not.

RECOMMENDATIONS Player Transfer Agreement The first step is for the NHL to negotiate for a more favorable player transfer relationship with Russia and the KHL. If possible, the NHL should try to arrange a formal player transfer

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agreement, although such an agreement has not existed since 2004. It will be difficult to persuade Russia to come to such an agreement. It goes against Russias interest to further regulate itself in the realm of international player transfer. The KHL is aggressively trying to lure high level talent from the NHL. They may see additional regulation as stunting their growth. At minimum, the NHL should continue to hold Russia accountable to the terms set forth in the memorandum of understanding. No matter what agreement the parties come to, its important to ensure that Russia and the KHL continue to honor all NHL contracts. This is good policy because it holds a player accountable for agreements they sign. It is also good because it keeps the peace between the leagues. Even if the leagues continue to honor each others contracts, there is still the Ilya Kovalchuk loophole. He knew that he could retire from New Jersey, sign with SKA and play immediately. Otherwise, he would have to establish residency for 18 months before playing. Other NHL players seeking to do the same will follow his lead, retiring from their NHL contract. Its not good policy to have such a loophole in place. Teams (from both leagues) spend significant money and resources training and marketing these players. This loophole undermines their efforts and could create an environment that undermines player contracts. Keep Paying Higher Salaries Another way for the NHL to keep the top talent is to continue to offer a higher salary than the KHL. While this seems obvious, its critical. If the KHL can create more competitive balance and put forth an improved product, they will continue to gain prestige and loyalty among Eastern European customers. This will lead these customers to purchase merchandise and watch more

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games, resulting in greater financial stability for the league. A financially healthy KHL will better compete with the NHL for top European talent. The NHL and NHLPA need to closely monitor the financial health of KHL teams and player salaries. Both have significant interests at stake. A stronger NHL benefits both the league and the players association. If they notice a significant rise in KHL player salaries, it is a direct threat because it makes the KHL more attractive to top European players. The NHL loses talent, and the NHLPA loses dues paying members. They can address this in an addendum or renegotiation of the CBA. By nature, human beings tend to be greedy. This is definitely true for professional hockey players. It helps explain why a free agent will go to a terrible team if that team offers the most money. Professional hockey players spend their whole lives training to play at the highest level. This usually prevents them from learning other professional skills and becoming employable outside the world of professional hockey. It also helps explain the unfortunate phenomenon of former professional athletes going bankrupt after their career ends. Without any other valuable work skills, hockey is the players only way to provide for himself and his family. Unfortunately, a hockey career is very short when compared to a persons lifespan. Players need to earn as much as they can before their career ends. If the NHL continues to outspend the KHL in player salaries, it is only natural for players to stay. Marketing Regardless of how good the quality of play in the KHL becomes, they will never have a rich history and tradition like the NHL. The NHL can and should leverage that history to attract and keep top European talent.

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The NHL must target the players ego and desire to be part of such a rich history. The message is simple. If a player wants to be seen as one of the greatest hockey players of all time (a legend in the game), they have to play in the NHL. For example, possibly the greatest goaltender of all time is Vladislav Tretiak. Tretiak played for the famed Red Army team. Globally, most hockey fans (except Russians and die-hard hockey historians) today have no idea who he is. His name has been replaced by the likes of Patrick Roy and Martin Brodeur. The best players in the KHL today are not even in the conversation for best in the world because they are not doing it on the highest level. To achieve their goal, the NHL needs to be active in the European (both western and eastern) market. First, they need a television agreement that will allow European hockey fans to watch NHL games regularly. Many fans are currently without access to games.39 A better television agreement will help raise the NHLs awareness in the European market, creating a bond with customers, leading to brand loyalty. European consumers, especially Russians, want to watch the NHL. Russians want to see local superstars like Alexander Ovechkin and Evgeni Malkin succeeding on the highest level. If the NHL can make games available to European customers, it will be a significant victory for the league and its global reputation. Second, the NHL needs to educate European consumers (perspective players included) on the history of the league and the game. They can do this through special programming highlighting the greatest players in the history of the game, hallowed records and legendary teams. They should localize programming to highlight the achievements of Europeans (Russians in Russia, Swedish in Sweden, etc.) in the NHL. For example, the NHL could create a documentary series on the ten best Russians to ever play in the NHL. This will link the league
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David Shoalts, NHL takes small step toward solving its TV problem in Europe, The Globe and Mail (Sept 10, 2012) http://www.theglobeandmail.com/sports/hockey/globe-on-hockey/nhl-takes-small-step-toward-solving-its-tvproblem-in-europe/article618454/.

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with national pride. Players will want to follow in the footsteps of the greats who have come before them. Fans will want to track the progress of their national heroes as they carve their names into NHL history. This will improve the leagues reputation and make it more desirable for players and consumers.

CONCLUSION The Kontinental Hockey League has a lot of work to do if they hope to become a legitimate alternative to the National Hockey League. The KHLs quality of play is not equal to the NHL and their business model is lacking. However, the KHL seems determined to press forward in with their goal of becoming a hockey superpower. Theyve taken the first step by signing superstar player Ilya Kovalchuk. The NHL cannot treat this as an outlier. They need to be diligent and aggressively seek to maintain their position as market leader. They can do this in three ways. First, they should seek a favorable player transfer agreement with Russia. Second, the NHL needs to ensure that they continue to have the highest player salaries. Finally, they need to aggressively market their position as the worlds top hockey league. If the NHL follows these steps, they will be equipped to counter any advances made by the KHL.

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