Financial Crisis: What does the future hold for the NHL?

Unless you have been living under a rock I am sure you know about the current economic crisis in the U.S. and around the world. There is seemingly no doubt that the U.S. is going to enter into a recession, if it is not already there, but the depth and duration of that recession is still anyones guess. Even the best economists are admitting that no one really knows how bad things will get and for how long and how much the U.S. woes will spread into Canada and around the world.

I am no economist or even a business guy but one has to wonder how this is going to effect the NHL, which although things have stabalized a bit post lock-out, there are still a number of franchises that are not that stable. The Nashville situation is a complete mess and several other teams are likely teetering on the edge of serious problems. For example, the Atlanta Thrashsers season ticket renewal rate has been reported to be as low as 40% and if they as a team stink on the ice this season like they did last one has to wonder if fans will give up on them completely. One has to wonder if the situation is going to be much better in Florida or Carolina or Tampa or Phoenix, or even in Columbus where there is concern that the fans are going to start fading away if they can’t soon make the playoffs for the first time in team history.

But the situation may soon not be so rosey in Canada as well. Most Canadian teams have been doing fairly well financially and hve been able to spend close to the salary cap every season since the lock out. But if you have been watching the financial markets the past week you may have also noticed that the Canadian Dollar has dropped significantly as well. This morning it dropped to just over 84 cents U.S, the lowest it has been since the end of the lock out. Through the 2007-08 NHL season, the dollar averaged close to parity. I don’t know where the dollar will average this season but if it stuck around the 85 cent mark that would mark a close to 15% drop in revenues for the Canadian teams. That is certainly going to impact the smaller teams like Ottawa, Calgary and Edmonton.

The drop in the Canadian dollar is also going to impact the salary cap. There are no definitive reports as to what percentage of league-wide revenue comes from Canada but the talk is that it is upwards of 30%. If 30% of league revenue gets impacted negative 15% by the drop in the Canadian dollar, that would slash league revenues by 4.5%. If that in fact happened it would almost certainly put a halt to the rising salary cap. In fact, if the Canadian dollar stays low and ticket sales dry up in some of the U.S. markets because of the hurting economy, it is possible that the salary cap might even drop.

If the salary cap drops, that will in turn help out those small U.S. markets because it would mean the salary floor would also drop meaning they could reduce their expenses. It’s interesting how some teams may in fact benefit from a falling Canadian dollar and slowing economy. But if the salary cap stays where it is or falls slightly, where will that put teams that have committed long term to a lot of big contracts. The Philadelphia Flyers have committed $45 million to players for the 2009-10 season already and they don’t have a goalie signed and only 4 defensemen signed. They have $37 million committed for the 2010-11 season to just 7 players. Several other teams aren’t in much better situations.

On top of all this economic turmoil is the fact that the players have the right to opt out of the existing CBA after this NHL season. Most people don’t expect them to opt out outright, but if the economic conditions slow down revenue growth the result could be that the players salaries get clawed back in order to get total player compensation down to the players share of total revenue. If they players start seeing their salaries clawed back by 5% or more they might investigate the benefits of opting out of the CBA. Until they decide to officially pick up their option to continue operating under the existing CBA for 2 more seasons, no one can really be sure what rules the NHL teams will be operating under next season.

In summary, the business side of the NHL is in a state of significant turmoil. A slowing economy, a falling Canadian dollar, unstable ownership in a few NHL franchises (particularly Nashville) and an uncertain CBA mean off the ice this is going to be one interesting season.

Oh, and if all this sounds confusing, just imaging what it would be like if the NHL had a European division playing in 6 different countries with 6 different economies and currencies. Wrapping your head around the business side of hockey then will be near impossible.

This article has 3 Comments

  1. I think Bob McCown on Fan590 was right the other day to speculate about teams folding overnight. With frozen credit markets, the easy loans that sustain money-losing teams will disappear. And the owners’ incentive to keep such teams afloat — increasing franchise value — will markedly reverse if it hasn’t already done so.

    $238 million for Nashville? In a couple of years, that franchise could sell for half that. Or maybe Balsille will be able to land his team for $50 million in some bankruptcy court.

    The current mess is being compared to the 1930s and 70s. Both of those eras saw moving and folding of NHL franchises. The “Original Six” were only original because the healthy transcontinental competition in the early 20s couldn’t survive the late 20s and the 30s.

    Bob McCown also speculated about a 24-team NHL. Not unreasonable in a couple of years, IMO. (And none of those teams will be in Europe 🙂 )

  2. Bob McCown has been one of the top guys looking into the business side of hockey and in particular the Nashville situation. He knows more about the details than I do.

    So far the NHL has been able to sweep some of its issues under the rug but one has to wonder how much longer that will last. They have always found new owners for old owners that wanted to bail the league. But in an economic down turn where credit is hard to get that may not be possible.

    The question is whether the NHL will choose to sell their franchises dirt cheap to keep a 30 team league going or whether they might choose to see franchises fold. It’ll be interesting to see what they choose should they be put in that position.

    If this develops as Bob (and I) think it may, the end result will be a power shift from Bettman and his group the ‘new owners’ back to the big market teams. If there is a credit crunch and teams struggle to make payroll, it will be the big market teams who will choose whether to keep these franchises afloat with more revenue sharing, force the teams to be sold dirt cheap (possibly through bankruptcy) or whether they just want them to fold altogether which will reduce the overall revenue sharing burden they currently have. It’ll all come down to how much money the big market teams want to continue to spend propping up the small market teams. If the Canadian dollar continues to drop you may even find some Canadian teams shifting back into the small revenue category again.

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