NHL Revenue and how it’s confusing the issue – Part II

In Part 1 of this series, we looked at the fact that the NHLPAs recent CBA proposals are tied to NHL revenue growth, as well as the possibility that this growth is unsustainable. Let’s take a further look at that possibility here.

Let’s be clear – the NHL never expected its revenue to grow as quickly as it has since the last lockout. If they had, they would never have setup a system in which the salary floor could ever have risen as high as $54 million. Why did the numbers grow so quickly? Well, there’s been some organic growth, and some of the poorer markets have acquitted themselves well since the last lockout. But the majority can be attributed to two reasons which might have been unthinkable during the last lockout: a Canadian dollar that rose to par with the US dollar, and skyrocketing ticket prices in a few major markets.

Let’s first take a look at the organic growth. According to ESPN.com, nine NHL cities have seen attendance increases of more than 10% since the 2003-04 season. Remarkably, Pittsburgh’s attendance has risen 56.3% while Chicago’s rose 62.50%, increases which can be attributed to much-improved teams in those markets (and a new building in Pittsburgh). Even strong markets like Calgary and Boston rose over 16%. Meanwhile, just 4 teams have seen attendance decreases of over 10% during that period – Dallas, Colorado, Columbus and Phoenix. In all cases, it would be fair to attribute those decreases to declining team success, as well as ownership issues in the case of Dallas and Phoenix.

The overall attendance numbers for the NHL are up 5% since the last lockout – not overwhelming numbers, but healthy growth. Considering that a number of markets are selling out every night, you could argue that the numbers might be artificially constrained by building sizes. Assuming that ticket prices stayed the same or rose slightly over the past 7 seasons, this should have translated into modest revenue increases for the NHL.

But there’s where it gets a little sketchy. Remember that talk about NHL teams lowering ticket prices after the last lockout? Not so much. According to agent Allan Walsh, “The average NHL ticket price has increased 39% since 2004”. ESPN reports that the average ticket price last season was $57.10. Now, no-one should have put much stock in the idea that ticket prices would go down after the last lockout. NHL tickets are a commodity, whose prices are governed by supply and demand. The NHL product itself has arguably become more entertaining due to tighter enforcement of obstruction rules, and as such fans have returned in droves. But are going to see another 40% increase in ticket prices over the course of this next CBA? This guy doesn’t think so, and points to a recent poll by Leger Marketing to prove it. He says that “70% of Canadians making less than $40,000 a year say they haven’t attended a single NHL game in the past five years,” and that the NHL has priced itself out of reach of the average Canadian. Certainly in many Canadian cities, the NHL has become a big ticket, where the best tickets are owned by corporations who want to impress their clients. You don’t see a lot of dads taking young kids anymore – it’s just too expensive. The average ticket price in Toronto is now $123. Meanwhile, in cities where there are lots of seats available, teams are still having to make tickets a bargain in order to draw a crowd. It’s just not realistic to think that even the biggest markets can continue to absorb huge price increases, nor is it realistic to pretend that sun-belt markets will ever be paying big-dollar prices for tickets. Do you think Winnipeg, whose tickets average $99 already, is going to go for $140 tickets in 5 years? Or that Nashville fans will pay what Rangers fans pay now? Unlikely.

The biggest concern, however, is the effect of currency on revenues. In the past decade, the Canadian dollar has risen from around 63 cents US to just over par, a climb of approximately 60%. Remember the Canadian Relief Program, the supplement for northern teams to compensate for the fact that they were paying US salaries with Canadian dollars? These days the seven Canadian teams are accounting for around 40% of the NHL’s revenue. This has been a tremendous boon for the NHL, and one which they could not have fully predicted. Unfortunately, it’s not sustainable. There is very little likelihood that the Canadian dollar will rise another 60%; in fact it might be reasonable to think that it could drop somewhat as the US economy recovers.

If you combine the 60% rise in the Canadian dollar with 40% increases in ticket prices, it’s likely that gate revenue from Canadian teams has increased 120% since 2004. Undoubtedly there is still room for growth in revenue, but growth at this rate is absolutely unsustainable. Given that the Canadian teams account for around 40% of NHL gate revenue, it has to be a concern for the NHL when the NHLPA’s proposals make assumptions of 5% year-over-year growth. It’s not inconceivable that revenues could decrease slightly during one or two of the years covered by the next CBA. Thus, don’t be surprised as the NHL rejects player proposals which guarantee player-revenue increases.

In Part 3 of this series, we’ll take a look at the myth and reality of profit and loss for NHL teams.

NHL Revenue and how it’s confusing the issue – Part 1

The more one reads about the current NHL lockout, the easier it is to become confused about the revenue issues.  In part, this is because the issues are complex. It’s also because both the league and the NHLPA muddy the waters with their terminology and statistics.

At the risk of seeming a bit pretentious after 4 whole blog posts, I’m starting a three-part series examining some of what’s been said and written about NHL revenue (and a little on profit).

In this opening salvo, let’s take a look at the recent rhetoric from the NHLPA regarding revenue splits. On October 18, the NHLPA made three mini-proposals to the NHL, attempting to bridge the gap on revenue sharing. James Mirtle of the Globe and Mail summarized them succinctly. In the first proposal, “Players would receive a set revenue figure for a small raise in Years 1, 2 and 3 but would have their salary frozen at the Year 3 number until their share hit 50 per cent. If league revenues increased at 5 per cent a season, the players would receive a share of 55.4 per cent in Year 1 and 50 per cent in Year 5.”  The NHLPA trumpeted this as a big concession in which they agreed to a 50/50 split of revenue. To be fair, it’s a big step from the guaranteed 57% they received in the previous CBA. But this proposal only gets to 50/50 if NHL revenues continue to increase as quickly as they have the past few years. Let’s say, just for the sake of argument, that the lockout really affects the fan base, and the NHL revenues begin a slow decline over the next several years. With fixed revenue amounts, actually increasing over the first 3 years, that would have the effect of actually increasing the players’ share above that previous 57% number. You could say that decreasing revenue is the fault of the owners, especially having tested the fanbase with this lockout, but you definitely can’t say that the players have agreed to a 50/50 split. They’ve agreed to a plan that could conceivably end up in a 50/50 split one day, but that’s a far cry from what the owners are asking for. (And I’m not even confusing the issue further by talking about the so-called “make-whole” proposal, which would return some money to the players over the first few years in order to soften the blow of an immediate move to a 50/50 split.)

We’ve heard the the league complaining that the NHLPA has refused to negotiate off the league’s proposals. Ever wonder why that’s a big deal? Why can’t the league work off the players’ proposals? Because the players, until this week, have never proposed any deal which tied the cap to league revenue on a percentage basis. And while they did finally do so this week, they also included a “ratchet” clause, which essentially means that as revenues change over time, the dollar amount of the players’ share can increase but never decrease. (Think the league’s going to agree to that one?) Every proposal by the players thus far has had guaranteed minimum dollar figures, regardless of what happens to league revenues. The NHL prefers to share the risk and reward of revenue movement, which is why they’ve appeared appalled at the players’ proposals so far.

So why haven’t the players wanted to go to a percentage split? At least in part, it’s because they wanted to try to hold the league’s feet to the fire on the revenue split in year one. The NHLPA has argued that revenue losses due to the league-imposed lockout should be the responsibility of the owners. Let’s back up and think about it. They’ve proposed to have their share go up slowly – for the sake of argument, let’s say $1.8B in year one, $1.85B in year two, etc., and as league revenues grow at 5% per year, maybe from $3.3B in year 1 to $3.45B in year 2 and $3.6B in year three, pretty soon you’re down to 54% instead of 57%.  Keep going and you eventually hit 50%. But what happens in year 1 when the season is only 64 games, or even 48 games as we had in 1994? League revenue goes way down in that year – given that the league is largely gate driven, every game lost might mean $30-$40M. In a 64-game season, you might reasonably assume that a $1.8B player share would be around 70% of league revenues. In a 48-game season, it might be more like 90%. With that as a starting point, eventually agreeing to a pro-rated number for this first shortened season might seem like a huge concession. Remember the league’s first proposal, which was completely unreasonable? Well, so is the idea of a non-prorated amount for year one, aka. making the owners responsible for the losses incurred by the lockout.

After this week’s proposal, NHLPA head Donald Fehr sent a memo to the players, informing them that the owners had declined their offer. In it, he said “Under our proposal, it is now undisputed that the gap is only $182M over 5 years.” Since then, many respected journalists have parroted that statement, yet NHL Commissioner Gary Bettman has said that the two sides are still far apart. You can see why they’d disagree, given the numbers above.

All of this leads me to wonder why the NHLPA has been so set on fixed numbers rather than percentages. I suppose it could just the year 1 issue, but I don’t think so.  I think that the players think the current rate of growth of league revenue is unsustainable, thus they’re better off locking in some numbers rather than allowing their share to float up and down along with league revenues. So, in part 2 (coming soon), let’s take a look at revenue growth, the myth and the reality.