Mar 062009
 

We all know that we are in a global recession right now and that this is likely to have a serious impact on a number of industries, including professional sports. We have seen several sports leagues and organizations cut back staff or cut ticket prices and we have all read about the speculation of how the recession will impact salary caps in leagues where the salary cap exists. No doubt the recession is going to have an economic impact in the short term, but what kind of effect will it have in the long term?

The last 20-30 years has no doubt been a boon for pro sports as players salaries and franchise valuations have skyrocketed. A big reason for this has been the role of sports media. In September, ESPN will celebrate its thirtieth anniversary as the first “all sports” television station and from it began a huge growth in sports coverage. Now there are several all sports stations including sport specific sports stations and dozens, if not hundred plus all sports radio stations. All of these television and radio stations have needed content which has driven up local and national broadcast rights revenue and all of the sports talk shows have really boosted the overall interest in sports. Then the internet and blogs came along and fans themselves could create their own sports content and generate their own sports buzz.

It didn’t stop with fans either. City, state/provincial and even federal politicians got all caught up in the sports buzz and many of them took a ‘if you build it they will come’ attitude and several cities built, largely with taxpayer money, sports stadiums and arenas. Some cities didn’t even have pro sports franchises but built them in hopes of attracting one (see Las Vegas and Kansas City who are looking for hockey or basketball franchises for their mostly empty arenas). Sports leagues accepted many cities offers and expanded, landing themselves huge expansion fee revenue in the process.

But things are changing. The boon in professional sports has coincided with an overall boon in personal consumption of everything from big houses, to big SUVs to big screen TVs, and spending hundreds of dollars, several times a year to go watch a sporting event. The result is that the savings rate for individuals has fallen from 10+ percent in the early 1980s to the point where the American savings rate was negative meaning people on average spend more of their disposable income than they actually had. As you can imagine, this isn’t sustainable for very long and the end result is what we have now: an economic collapse.

So what happens if people, and businesses, decide they can no longer spend without concern for the future and decide that instead of spending every penny they have, and then some, they should save money closer to historical norms, 8-10%, how is this going to affect professional sports? It is quite possible that we see an unravelling of much of what has happened in the professional sports industry over the last 20-30 years. If people decide, as they pretty much have to, to spend less money, not only will that mean they will likely choose to go to fewer sporting events, but also they will be buying fewer cars, taking fewer vacations, going out to dinner less frequently, buying fewer ‘designer’ items. That in turn will put business in a crunch while will force them to cut advertising budgets (if no one is buying, there is no need to advertise anyway) and advertising revenue for sports franchises will take a significant hit. It will also mean less advertising revenue for sports media outlets which will result in those media outlets being less interested in paying big bucks for broadcasting rights.

As the North American economy shifts from a largely consumption based economy back to a more balanced consumption/savings based economy professional sports will have to adjust. This is not just going to be managing through a one to two year recession; which will have a quick and immediate impact on league revenues. This will also entail a more long-term adjustment process where individuals will value saving money as much or more than spending it. Adjustments have begun to occur as well both within sports leagues and franchises and in related industries (one of the first, and once highly successful, all-sports radio stations, WDFN in Detroit, has eliminated all local content). The professional sports heyday is over and an era of recession likely followed by a decade stagnation is likely in store for professional sports.

Jan 222009
 

Over the past several weeks we have had several tidbits of information come out giving indication to the general state of the NHL economy.

Dec. 22: NHL defies economy, projects rise in revenue

The NHL projects a 2 percent increase in league revenue for the 2008-09 season despite facing one of the worst economic crises to hit North America since the league contracted from 10 to six franchises around the time of the Great Depression

Dec. 24: Report: Coyotes receiving financial assistance from NHL

According to The Globe and Mail, the Coyotes are receiving financial assistance from the National Hockey League to keep the team afloat. The report indicates the team is receiving advances on their share of league revenue.

Jan 18: Paul Kelly Admits Escrow Payments to Rise”

Last night between games on HNIC, NHLPA executive director Paul Kelly was interviewed by Ron MacLean (link to HD video of the entire interview). The first thing they discussed was the rumor that escrow payments made by the players would be rising from 13% of their pay to 17-20%. Kelly wouldn’t say exactly how much the payment would rise, but he did answer in the affirmative that the 17-20% range was accurate.

Jan. 22: Report: Predators may buy own tickets to ensure NHL funds

According to the Tennessean, Predators officials have discussed the option of buying up unsold tickets to ensure they collect the maximum revenue-sharing from the league. Earlier this month, an ESPN.com report indicated the Coyotes forfeited 25% of their full share for failing to meet specific targets.

So, what can we conclude from all of this. First off, not everything is all rosey in all NHL locations despite what Gary Bettman would want you to believe. Clearly the Coyotes and Predators continue to struggle financially and I am sure Tampa, Florida, Atlanta, the Islanders and a few others are not that much better off.

Second, the players are going to have to give back a huge chunk of money because their salaries will far exceed the percentage of revenue they are allotted. This, I believe, will be a first for the players under the new CBA and it will be interesting to see how the players react to not getting as much money as they contracts stipulate. We can be pretty certain that the players will decide not to opt out of the current CBA (a smart thing to do in tough economic times) but when it expires for real in a couple of years when hopefully the economy has turned around and they might be in a better bargaining position, lets see how much of an issue this becomes.

Finally, the 2% revenue increase should give us some insight into what next years salary cap could be. When the salary cap gets set it is based on the previous years revenue and then the players can opt to boost it by up to 5% pending revenue growth projections. The players have always opted to do this including for this season. But, revenue growth has not grown by 5% and thus the cap is essentially higher, by about 3%, that it should be based on this years revenues and this will be reflected in next years salary cap numbers.

A few months ago <a href=”http://www.hockeyanalysis.com/?p=804″I discussed a variety of scenarios of revenue growth and the falling Canadian dollar and the impact they will have on the salary cap next season. I can now refine that projection using the 2% revenue growth number.

2007-08 Revenue: $2.62 billion
2008-09 Revenue: $2.67 billion (estimated based on 2% growth)

With revenue of $2.67 billion next years salary cap will be approximately $55.8 million with the players having the option to increase it to $58.2 million. So far the players have always opted to increase the salary cap the maximum amount they are allowed to but with projections being next years revenue will drop, not increase, it is quite likely they will not opt to implement the salary cap increase.

The NHL probably has fairly good projections for the remainder of this years regular season as many teams have sold a significant portion of their tickets and advertising revenues are all pretty much booked and accounted for. Playoff revenue is a different story as not a single playoff ticket has been sold yet and if the economy is still in the dumpers as many people expect, will NHL teams be able to jack up playoff ticket prices as much this year as they have in the past? If they can’t, that 2% revenue growth could be an optimistic number. Only time will tell but everything seems to be pointing to a drop in the salary cap of $1-2 million next season and quite possibly stagnant or dropping further the following season.

Dec 162008
 

Mark Spector of Sportsnet.ca is reporting that there could be an increase in the percentage of the players salaries that are kept in escrow. The players have always paid money into the escrow account which is set up to ensure the owners don’t pay the players more than the percentage of revenues the players are set to receive as determined by the CBA.

This season the NHL and NHLPA initially set the escrow to 12.5% meaning 12.5% of every players salary would be put into the escrow account. The 12.5% number represents the highest level ever required. But Mark Spector is reporting that in January that number could increase to 13.5% which would be the first time the escrow hold back percentage has increased, and not decreased, mid season. What this means is the NHL is more pessimistic about revenue projections than they were before the season began (but don’t tell Gary Bettman, he thinks everything is just fine).

A while back I discussed the impact of the falling Canadian dollar on league revenues and the salary cap for next season. If this increase in escrow payments is an indication of little or now growth in league wide revenues this season it may be a safe assumption that at best the salary cap stays the same next year with a greater potential for it to drop by possibly up to $3 million and if the economic downturn continues the following season could see the salary cap drop even further. If this happens several teams could find themselves with serious salary cap problems.

Oct 292008
 

On Monday NHL Players Associations Executive Director Paul Kelly was on Prime Time Sports with Bob McCown discussing several topics but of particular interest was the light he shed on NHL revenues, the contribution of Canadian teams to those revenues, and the impact of the Canadian dollar on those revenues. You can listen to the complete interview but let me summarize.

He stated that 27% of all league revenues are generated by the 6 Canadian NHL franchises and that of the 12% revenue growth the league saw last season, one quarter, or approximately 3% growth, was attributed to the rise in the Canadian dollar. This to me was the clearest statement I have heard from anyone in regards to the percentage of league revenues generated by Canadian teams and the extent of impact it had on the league wide revenue. He went on to say that the rise in the Canadian dollar contributed approximately $75 million to league revenue increase in 2007-08 over 2006-07.

From these numbers, which I believe are pretty accurate, and with the salary cap numbers, which we know exactly, we can estimate what actual league revenues over the past two seasons.

The 2008-09 salary cap was set at $56.7 million which according to the CBA is $8 million above the ‘midpoint’ which is what is calculated from 2007-08 league revenues plus 5%. Crunching the numbers we get $56.7 million less $8 million less 5% multiplied by 30 teams gives us $1391 million, which is what the 2007-08 players share of revenue should have been. This would then put the total league revenues at approximately $2.62 billion. Doing the same calculations for the 2006-07 season I have calculated the 2006-07 total league revenue to be $2.32 billion.

From those numbers we can determine that league revenues rose $300 million from 2006-07 to 2007-08 which is a 12.9% increase in revenues which seems a bit higher than Paul Kelly’s statement of 12% revenue increase but the rise of $300 million matches exactly with his claim that the rise in the Canadian dollar accounted for 25% of the increase in revenue as 25% of $300 million is $75 million. I haven’t seen or heard any firm numbers but rumours were that last years revenue was in the $2.6 billion range so my numbers seem reasonable.

It should be noted that in calculating the salary cap the formula takes into account player benefit costs. I do not know what the player benefit costs are but I estimated them based on a sample formula found in the CBA and scaled it at the same rate of increase as player compensation which may or may not be correct and may lead to some of the disparity with the numbers.

So, what does all this mean looking forward and how much the salary cap be affected? Lets take a few scenarios while assuming that the Canadian-US dollar exchange rate for the 2007-08 season was parity (i.e. one Canadian dollar equals one U.S. dollar) and that the players choose to adjust upward the salary cap by 5% for the 2009-10 season.

Scenario: The Canadian dollar drops to an average of $0.80 US while there is an across the board revenue increase of 5% not accounting for the exchange rate. Based on this scenario, the Canadian portion of revenue would be cut by 20% from the dollar and then increased by 5% for estimated revenue growth while the U.S. revenues would simply increase by 5%. Under this scenario total league revenues would be $2.602 billion or a drop of about .67%. This would result in the salary cap dropping slightly to $56.5 million per team.

Here are some other scenarios.

Exchange
Rate
Revenue
Growth
Estimated
Revenue
Estimated
Salary Cap
0.75 3% 2.516 54.5
0.75 5% 2.565 55.6
0.75 7% 2.614 56.7
0.75 9% 2.663 57.9
0.80 3% 2.553 55.3
0.80 5% 2.602 56.5
0.80 7% 2.652 57.6
0.80 9% 2.702 58.7
0.85 3% 2.589 56.2
0.85 5% 2.64 57.3
0.85 7% 2.69 58.5
0.85 9% 2.74 59.5
0.90 3% 2.626 57
0.90 5% 2.676 58.2
0.90 7% 2.728 59.3
0.90 9% 2.779 60.3

Revenues are in Billions of dollars and salary cap is in Millions of dollars.

If my projections are accurate, so long as the league can increase revenues (not including currency factors) then the salary cap isn’t likely to be impacted negatively in any significant way and could increase by a couple million dollars if the Canadian dollar rebounds measurably (it has jumped a couple of cents today). But in a worst case scenario where the league cannot grow at the same pace as it has and the Canadian dollar remains where it is today the salary cap is likely to fall by up to a couple million dollars.

In the Paul Kelly interview there were a couple of other tidbits that I found interesting and might signal the direction the players want to go in future CBA negations. When asked if he thought the NHL-NHLPA is really in a partnership he responded “I think it is clear the answer to that is no.” He went on to say “It would be a fallacy to call it a partnership because we don’t have an equal voice on a number of issues.” He mentioned expansion and re-location of franchises as a couple of examples where the players have no input. Expect this to be a bargaining point or a bargaining chip during the next CBA negotiation.

When discussing expansion and relocation he praised RIM CEO Jim Balsillie and stated that having someone like him and his wealth in the NHL would be a positive but also mentioned that he believes that there are people within the NHL that do not want him to be a part of the league. Paul Kelly was also very positive and receptive to the idea of having another NHL team in Toronto or southern Ontario and eluded to the fact that he thinks the Toronto area could probably support 3 teams.

It’ll be interesting to see how the NHL-NHLPA relationship develops over the next year or two but it is becoming clear to me that the next great battle might the players to push for expanding the ‘partnership’ beyond just revenue sharing but into all areas of revenue development including franchise relocation and expansion.

Oct 242008
 

I have written here several times before but I think it deserves repeating because this is could be a major issue in the months and possibly years to come and could have a significant negative impact on the smaller Canadian NHL franchises. The issue is the falling Canadian dollar. A season ago the dollar averaged fairly close to parity. Right now the Canadian dollar has dropped below 79 cents in US dollar terms. This is real bad news for teams like the Calgary Flames, Ottawa Senators and Edmonton Oilers, all of whom struggled for their survival in the late 1990′s and early 2000′s when the dollar ranged just 10 to 15 cents below where the dollar sits right now.

The reality is, the approximately 20 cent drop from a season ago essentially equates to a 25% rise in player salaries solely due to the drop in the Canadian dollar. Add to that the increase in the salary cap, which rose nearly 13%, and the Canadian franchises could see player costs rise as much as 45% this season in Canadian dollar terms.

Let’s use the Calgary Flames as an example. Last season they spent slightly below the cap at approximately $48.5 million and this season they are scheduled to spend about $57 million in salaries. In Canadian dollar terms, assuming a parity exchange rate a year ago and 80 cent exchange rate this season, last years payroll was $48.5 million CDN and this years payroll would equate to $71.25 million. In one year the Calgary Flames payroll increased $22.75 million, or 46.9%. Ouch. That has to hurt a businesses bottom line.

So far we haven’t seen much fall out from this but if the Canadian dollar remains this low next summer don’t be surprised if we see some Canadian franchises, particularly Ottawa, Calgary and Edmonton, look to shed salary. If the Canadian dollar drops to 70 cents or below we may once again hear talk of the small Canadian franchises struggling to be profitable and maybe even struggle to survive.

The CBC has an interesting article on this issue outlining how each of the Canadian teams payrolls will increase in Canadian dollar terms based on the exchange rate. Although the article is informative it should be noted that they calculated the exchange rates incorrectly and the actual values are higher than they present. For example, at the 80 cent mark they multiplied the teams payroll by 1.2 (increased it by 20%) but in fact they should have divided by 0.8 which in fact would increase it by 25%.