Tuesday, October 7, 2008

The economy and the cap

As we watch stock markets plummet to three-year lows and the value of the Canadian dollar against the greenback drop, most of us probably have more important things to worry about than how all this will affect the NHL salary cap. But the fact is, the cap will feel the economic crisis and most GMs are not doing anything to protect themselves.

I ran into Julien BriseBois, the Canadiens' capologist, last week, and I had a chance to ask him what he thinks is going to happen. It was an interesting conversation, not least because he says the economic crisis won't be felt at its worst by NHL teams right away. That's because the cap for next year is based on this year's league revenue. If you look at the collective bargaining agreement, you'll see "hockey-based revenue" described pretty specifically. It includes things like ticket sales, merchandise sales, television and radio deals, advertising on boards, ice and arena buildings, concessions, team publications like magazines and programs, and special appearances by team personnel and mascots. BriseBois says most teams have already sold their season tickets for this year, and many healthy markets have sold out individual games as well. So, once the tickets are sold, fans tend to buy the concessions and programs at the games, and some will continue to pick up a hat or jersey while they're there. BriseBois also explains most of the advertising deals, like those for naming rights on arenas, as well as broadcasting deals between teams and their radio and TV carriers include escalating clauses, so they pay a little more each year of the deal to retain those rights.

What that all means is that much of the league revenue on which next year's cap will be based was generated before the worst of the financial crisis hit. So when the capologists at the NHL get together this summer, they'll calculate the cap for 2009-10 according to how much the league made this year, without taking into consideration the fact that next year's revenue is quite likely to fall. Which means the cap two years from now will be forced to either stand pat, or quite possibly drop.

BriseBois explains that the NHL survives on the middle class spending money. They're the ones who buy the jerseys, the game tickets and the ten-dollar beers. They're the ones who buy the Centre Ice package to watch their team's games. But when they're worried about their investments going into the tank and losing their jobs as companies tighten their belts, they stop spending on luxuries like hockey games. Then you take the companies themselves. They're the ones buying season tickets and corporate boxes to entertain clients. They're the ones paying for advertising on arena boards. But it's been proven in the past that when economic times get tough, advertising and entertainment budgets are the first expenses to be slashed. Of course, existing advertising and broadcasting contracts will continue to provide increasing revenue to league coffers. But there's concern that those up for renewal will disappear.

Then, you must consider the Canadian dollar. With huge increases in the dollar's value last year because of skyrocketing commodity prices and a depressed US economy, the six Canadian franchises contributed thirty-one percent to the NHL's total revenue, according to a leaked league document. Now, with sinking oil prices and a rallying US dollar, the loonie's value against the greenback is falling. Experts predict the downward trend will continue for the next several months. So the huge hockey revenue earned in Canadian dollars and converted to even more US dollars will take a hit this year.

The inherent problem with this is that next year's cap will likely go up slightly because the money it's based upon has already been made. So, when teams like the Canadiens sit down to sign their players this summer, players and agents will look at an increased cap and the big, juicy contracts their peers signed last year, and expect no less. However, GMs have to know a cap crunch is probably coming the year after next. So, if they sign players up to or over the cap like they did last summer, especially on long-term escalating contracts, they're going to end up having to dump players the following year, just to get under the cap when it fails to go up or falls. The problem is, many teams will be in the same boat so there won't be a market for the players everyone's trying to dump. Teams' financial hands will be tied and we'll see respected players waived and demoted because their clubs can no longer afford them. We'll also likely see good young players stagnate in the minors because teams can't afford their contracts.

So, knowing this, you might wonder why GMs wouldn't take the sensible approach and try to save cap space in anticipation of an approaching drop in the ceiling. An NHL source explained it simply this way: "Most GMs don't care. They know they won't be in those jobs in five years' time and they want to win now. They'll spend as much money as they think they need to to beat out the other GMs with little thought to future consequences."

BriseBois compares the situation to the US banking crisis, in which institutions lent money they couldn't hope to get back out of recklessness and greed. Hockey teams, driven by the same vices, will spend more money this summer than they can realistically expect to have in hand in two years' time. But there's no US government to come to the aid of the NHL. We might see the teams come on bended knee to the NHLPA for a one-time across-the-board salary reduction in their own version of a bailout. Or the teams may just try to cut where they can and muddle through.

Which, as Habs' fans leaves us with two pressing questions. One, will Bob Gainey join the spendthrift club when he faces re-signing his ten unrestricted free agents and four restricted ones in the coming summer, or will he try to be prudent and let someone go if their demands put the team's financial future in jeopardy? And, two, will the Canadiens' free agents settle for lower money or less term in order to keep the team together when the cap crisis comes? Pressing questions...with unpredictable answers. But one thing is certain: the NHL may be able to delay the reality the rest of the business world is dealing with, but it can't escape it.


NailaJ said...

Excellent blog, once again.
I even posted it on Facebook.

Oh, and love the quote!

24 Cups said...

Even more reason for Gainey to be careful when he doles out long term contracts next summer. Long term planning is still the key.