Friday, August 15, 2008

Cap concerns

In recently perusing the NHL/NHLPA collective bargaining agreement, I confirmed to myself something I've been suspecting for a while now. Since the 2005 lockout, the salary cap has grown from a 39-million dollar ceiling to this year's 56.7 million. The nearly 5o percent jump in the cap ceiling is largely attributable to the steep rise of the Canadian dollar to equal value with the US greenback since the lockout. Numbers leaked earlier this year revealed that 31 percent of league revenue is derived from the six Canadian franchises. But, outside the dollar's performance...and this is what I confirmed to myself when I read section 50 of the CBA...the league has very little room for further growth based on current revenue streams.

Right now, a team's revenue for cap-determination purposes, consists of a finite number of sources. For the Habs, they include: ticket sales for regular season, playoff, preseason and exhibition games; luxury box sales; advertising on the boards; the sale of licenced Habs' paraphernalia both in the rink and elsewhere; broadcast fees paid by RDS, TSN, CBC, CKAC, CJAD and any other station that broadcasts Habs' games; fees received from Bell for the sponsorship of the arena's name; any money derived from the team's internet site in advertising or sponsorships; advertising in and sales of the team magazine and programs; beer and hotdog sales at games; parking fees for game attendance; tuition from the team's hockey camp for kids; sale of gameworn equipment; fees collected from kids' memberships in the official fan club and fees paid for Youppi's and Saku Koivu's public appearances.

Those are the categories of income cited in the CBA as "hockey-related revenue." The Canadiens derive income from every one of those categories at prices that pretty much push the boundaries of what the average fan is willing to pay for the privilege of drinking a beer in the Bell centre or buying an authentic Habs' sweater to wear while he watches the games on RDS. We know many teams, especially those in weak southern United States markets, aren't bringing in the kind of money the Habs do and likely aren't able to derive income from as many sources as the Canadiens do. So, for now, thanks to the strong Canadian dollar and the huge popularity of Canadian franchises, the league has been able to increase the cap by leaps and bounds in the last three years. In fact, many teams seem to be basing their ability to pay their players on the assumption that the cap will continue to rise.

That's where my realization comes in. I believe the strength of the Canadian dollar has already inflated league revenue as much as it's able. Even if the dollar stays close to par with the US dollar, its steady performance won't give the NHL the same sort of boost as did its dramatic rise in the last year and a half. So, assuming there won't be another large bump in league revenue based on the dollar's value, any further increase in the cap has to come from increases in revenue derived from the "official" hockey-related sources cited in the CBA. The problem is, I just don't see much room for growth from those sources.

A team like the Canadiens, which contributes to the NHL's version of the federal equalization program, is already sold out in every game, including luxury boxes, at prices that already slide a little to the north each year. All of its games are televised and broadcast on radio on long-term contracts. It's got a fan club and hockey camp that are sold out and a very highly-subscribed team magazine. Sponsors line up for the privilege of advertising on the boards and on the scoreboard and beers at the games already cost eight bucks each. The term "supersaturation" could have been invented to describe the amount of money the Habs draw from the revenue sources available to them. Other Canadian teams are also doing very well, as are some of the better US-based teams, like Pittsburgh, the Rangers and the Flyers. Those that aren't doing well, like Carolina and Nashville, will probably never do much better than they are right now for a sustained period of time, because their regions just don't care to spend a ton of money on season tickets or on 'Canes or Preds' sweaters.

All of which makes me wonder, if the cap is to continue rising, where's the money coming from? The pipe dream of the big national US TV deal is no closer to reality now than it was when the league first expanded in 1967. Gary Bettman is publicly getting excited when the Stanley Cup finals, featuring two of the league's most exciting teams in the Wings and Pens, manages to outdraw bullriding on NBC. That doesn't give me a lot of confidence that American networks are lining up to broadcast hockey games. Without that kind of lucrative deal, the revenue streams for hockey are limited to three sources: local media fees, advertising and the fans. Media only pays to broadcast programming from which it can derive advertising other words, only sports events fans are dedicated to watching. Advertisers will only pay if they think lots of potential customers are viewing their other words, thousands of hockey fans watching the games at home or in person will see the ad and maybe buy the product. So really, it all comes down to the fans and how many of them are not only willing to watch games, but pay for the parking, sweaters, foam fingers, game-used equipment, player autograph sessions, expensive beer and the rising ticket costs. In cities like Montreal, Calgary and Toronto, the fan base is strong, but probably as large as it's going to get. In cities like Raleigh and Atlanta, the fan base is weak and not likely to get stronger for the long-term. In either case, the fans are already paying close to the maximum they're willing to, and there's no more room for revenue growth.

So, based on that logic, I can't see the NHL salary cap continuing to rise. In fact, if the Canadian dollar's performance drops or attendance in some of the US cities becomes worse, I can see a cap reduction coming. The next question is what that will mean for NHL teams. For those GMs, like Bob Gainey, who have not committed to ultra-long contracts or paying the player maximum to a marquee skater or two, a reduction won't be the end of the world. But for those who have a few players locked up for a lot of the cap, and who have many RFAs and UFAs becoming due for raises, a reduction could really hurt their ability to retain their players. Those teams are relying on cap increases in order to increase their players' salaries in the coming years. Without an increase, they'll be hard pressed to do that. With a reduction, they'll have to either convince players to take less in a new contract, or be forced to trade or let those players go. Even if a reduction means player salaries across the board are reduced by a certain percentage to fit under the cap, it will also inevitably mean raises are out of the question.

I like Bob Gainey's position right now if the cap stagnates or if there is a reduction. But if he chooses to commit long-term contracts or escalating salaries to many players with deal renewals pending, he could find himself in trouble if the cap goes down. I'm trusting Gainey to play the salary game as wisely as he has been doing so far. Because I believe it's a question of when, not if, the big cap increases stop coming.


Robert L said...

Should the Habs raise tickets prices by five bucks, it translates into about 4 million extra in the coffers. When all teams partake in small increases across the board, say an extra quarter for your program and a dime a beer, it adds up scary fast.

J.T. said...

Agreed...but there is an ultimate limit to how much fans will pay, or are able to pay, especially considering the rapid rise in other essentials like fuel and food these days. Hockey games are going to become more of a luxury than they were before. And considering the rapid rise in salaries, the supersaturation point isn't far off.

M. Ilard said...

I was looking at the cap numbers last year and the habs are going to be in tight even if the cap rises to 60M. Unless we have some shocking departures we will need to lose begin, kostop, dandy, bouillon and replace them with kids just to resign our RFA/UFA. Even if I'm off a by a whack on projected contracts I don't see how we add anyone of substance next year (unless we subtract one of our top 6 forwards).

The team that really looks in trouble next year is the Rangers. They are already at 40M with just 9 signed players ...

Jay in PA said...

I've said it before and I'll say it again... The cap is going to hit an asymptote sooner or later, and when it does, GMs who have overpaid for B-list free agents and given them long-term contracts are going to find themselves struggling to stay competitive for several years running. Call it the Bobby Holik syndrome with a Tampa Bay chaser.

By keeping contracts reasonable and proportionate, BG is going to keep the team competitive through the dark years that lie ahead for much of the rest of the league.