Saturday, July 14, 2007

Brunt: Blame the Leafs

Simply put, no other team is coming into Southern Ontario, because the Leafs don't want it to happen. The Toronto owners are guaranteed enormous profits no matter how their team performs on the ice. They are in many ways the chief beneficiaries of Bettman's new economic order, forced to pocket tens of millions of dollars that they would have spent on player salaries in the old, cap-less world, while watching their revenues go up and up and up (not to mention the windfall of the 90-cent-plus Canadian dollar).

It's all good for them, and they don't plan on sharing, because they don't have to. It says so right in the NHL constitution.
UPDATE The Globe's Ottawa-based sports reporter David Naylor had a related piece on five reasons the Predators will never come to Hamilton.

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22 Comments:

At 2:18 AM, July 14, 2007, Anonymous Anonymous said...

Unless of course Balsillie wins his court challenge of that constitution.

 
At 6:41 AM, July 14, 2007, Blogger Joe said...

Eh, theres a lot more to it than just the Leafs, though they certainly do factor in significantly. The bigger part, whether it makes good business sense or not, is Bettman refusing to admit when he's wrong about markets in the US, and refusing to allow anyone to do anything that may possibly indicate that blindly sticking franchises all over the US map is a poor business strategy for the NHL.

 
At 11:00 AM, July 14, 2007, Anonymous Gerald said...

Brunt's analyses continually come up short on the financial end.

Toronto's ticket revenues in fact went up to a miniscule degree this year. Given that the boxes, singage and concessions are locked in long term for the greatest part, I would seriously doubt their revenue went up more than tiny amount (although it will next year as their new TV revenue kicks in).

As well, he couples the Canadian dollar to revenues going up?! Soeone should tell Mr. Brunt that the vast majority of Leafs revenue is denominated in Canadian dollars and does not actually get converted. The exchange rate issue is a cost issue for the Leafs, not a revenue item. They must convert their CDN$ to US$ in order to pay their payroll and league dues. To the extent that the CDN$ improves, that is a reduction in the Leafs' costs.

IN FACT, as far as the Leafs' REVENUE goes, the strong Canadian dollar is a negative on the revenue side. The Leafs get their $2 million in VS money and whatever they get from NBC denominated in US$, which they must convert to CDN$. As the Canadian dollar appreciates, that money is reduced - a REDUCTION in actual revenue.

I do not know how the NHL-CBC/TSN contracts are denominated, but given that the NHL is based in the US and 80% of the teams are US-based, it would not surprise me if those contracts are paid in US$. If that is the case, that is then a further reduction for the Leafs on the revenue side.

Those decreases in revenues would offset to a degree the cost reductions on the payroll conversion transactions.

I am sure Brunt would say "well, mayvbe but the overarching point is that the Leafs get a financial boost from the CDN$". Maybe, but it is sloppy writing and reporting nonetheless.

 
At 11:07 AM, July 14, 2007, Anonymous Gerald said...

In addition, the appreciating CDN$ would affect the Leafs' costs in terms of their revenue sharing payments to the league. While they would partly benefit in that it would cost them less to write their cheque, the appreciating CDN$ increases their share on the non-escrow portion. I forgot to mention that.

 
At 11:14 AM, July 14, 2007, Anonymous Anonymous said...

and whatever they get from NBC denominated in US$, which they must convert to CDN$.
Lemme see. $0 x 1.10 = $0.
And I didn't have to go to law school.

 
At 12:13 PM, July 14, 2007, Anonymous Gerald said...

Lemme see. NBC and the NHL have a profit-sharing deal. Both the NHL and NBC have publicly stated that NBC has made a profit on the deal.

Profit on the deal x percentage sharing > 0

Maybe you should have gone to law school. Or paid attention during math class.

Are we even on the sarcasm now? Care to comment on the substance of the post?

 
At 12:40 PM, July 14, 2007, Anonymous Frank said...

Well, Brunt is saying what I've been saying for the past couple of months on this post - that Bettman is not the problem here - its MLSE which is stoping Balsillie, and probabbly the other Canadian owners as well. The US owners probably have no problem with Balsillie, but they do not want to upset MLSE and will go along with them.

Remember Bettman is simply an employee. If he tries to impose his will over the direction the owners want to go in, they will quickly show him the door.

Gerald, good post. I agree completely with your analysis. I would simply add, that like you, I don't know if the CBC contract is in US or Canadian dollars, but as a taxpayer, I will be mightily upset if they are paying in US dollars. Since all of their advertising revenue comes in Canadian dollars, they should have tried to keep their costs (the right fees) in Canadian dollars as well. The CBC shouldn't be in the currency speculation business.

 
At 1:29 PM, July 14, 2007, Blogger McLea said...

while watching their profits go up and up and up

There, now Blunt's analysis is perfectly reasonable.

Cap on your most significant cost + that cost being denominated in US$ + static revenues in CAN$ = Big dividend year for the teachers.

Blunt was trying to say the Leafs made a killing last year, and they did. Gerald posts shows that he agrees. So we're really arguing over nothing.

 
At 2:27 PM, July 14, 2007, Blogger jon said...

Agreed with McLea. I basically disregarded Gerald's post after he indicated he didn't see how a player salary cap payed in American dollars could pair with a rising Canadian dollar to produce more profit for Toronto and all the other Canadian teams.

Toronto is and likely always will be the NHL franchise with the most power in the NHL.

 
At 4:08 PM, July 14, 2007, Anonymous Rob said...

It's extremely disappointing that the NHL has an anti-Canadian stance.

We have the Balsillie group already making bids for both the Penguins and Predators to bring to Hamilton.

We also have the Chipman group making a presentation to the NHL in January for a Winnipeg team.

Yet both are basically told to go away. Surely someone in power with the NHL can see that Canada is a boon, not a bust for them.

 
At 5:41 PM, July 14, 2007, Anonymous Gerald said...

I basically disregarded Gerald's post after he indicated he didn't see how a player salary cap payed in American dollars could pair with a rising Canadian dollar to produce more profit for Toronto and all the other Canadian teams.

Jon, i guess you might want to read my post again. My post was in reference to revenues going up as a result of the CDN$ appreciating. I am hopeful that you understand the difference between revenues and profits.

Just to apply a little math, would you like to know the actual impacts? Here you go:

Exchange Rates:
2005-06 season - .8602
2006-07 season - .8831

Assume the Leafs spent up to the cap in both seasons (I believe they spent a slight bit less, but assume the cap so as to maximize the impact).

Also ignore escrow recoupment, so as to maximize the impact.

2005-06 exchange rate impact on player costs:

US$39 million/.8602 = CDN$45.33 million

2006-07 exchange rate impact on player costs:

US$39 million/.8831 = CDN$44.16 million

Incremental payroll of US$6 million/.8831 = $6.79 million.

As you can see, the dollar-for-dollar impact of the exchange rate escalation in the past two years has been CDN$1.17 million. That is what the exchange rate has added to MLSE coffers.

On an actual profit basis, MLSE added about $5 million in payroll. This has added to their exchange rate bill as well, but to be fair I broke it out so as to show the dollar-for-dollar impact.

As for the impact the other way? As stated above, the VS deal gives MLSE US$2.3 million,. In 2005-06, that was CDN$2.67 million; in 2006-07, it was CDN$2.60 million. That is a small difference of $.07 million, bringing the net impact to CDN$1.1 million.

As for other sponsorship/signage/TV/other deals which might be denominated in US$ (and there are some - teams share a bunch of league-wide revenue, which includes merchandise), guessing that is a mug's game, so for the sake of maximizing the positive impact again, let's assume zero (even though it is far from that).

On to revenue sharing. As we all know, the Leafs are a revenue sharing contributor. Even if the LEafs were to only pay in the same amount as was reported for 2005-06 (in the order of $10 million), they would have to buy US$ with their CDN$. That would have cost CDN$11.6 million in 05-06, and $11.3 million in 06-07. MLSE gets a $.3 million benefit there, bringing the impact to CDN$1.4 million.

However, in terms of calculating their contribution, MLSE takes a hit. At th eexchange rate difference for the two years, the Leafs get credit for an extra US$230k for every CDN$10 million in HRR, even though their revenues in CDN$ do not actually go up. Assuming CDN$ revenue of $150 million, that is an extra $3.45 million that is deemed credited to their numbers. This is used to increase the Leafs revenue sharing portion under the third tranche of revenue sharing.

How much is that? It is impossible to say without more detailed numbers, but it is pretty far from nothing. A few hundred CDN$k? Perhaps.

So after taking into acocunt the lower exchange rate costs in some areas and the higher exchange rate costs in others, you are left with perhaps a million and change in positive CDN$ impact on the cost side. From that, one can certainly deduct what negative impact the Leafs experience in converting the US$ revenue that it gets in NHL central revenues.

Compared with the additional US$5 million in payroll offset by the mere US$1.2 million in additional gate revenue this year, it really is not a case of MLS's profits going up, up, up, is it? The exchange rate is really a red herring in this debate and any other debate regarding NHL finances EXCEPT for the very long term.

 
At 7:31 PM, July 14, 2007, Blogger McLea said...

Thanks for the numbers Gerald.

It looks like the effects of the rising dollar won't be felt until next year. For example, for a Leafs 2006/07 payroll of $45M US$ the effect would be:

October 2006-March 2007 Avg = 0.865
2007/2008 Assuming today's rate= 0.9545

2006/2007 = $45M/.865 = $52.02M CAN$

2007/2008 = $45M/.9545 = $47.145M CAN$

Now you are seeing some real differences. I can only imagine how much of an effect converting all 6 Canadian teams revenues and the Canadian television contracts into American dollars will have on league wide revenues next year.

Exchange rate numbers from Bank of Canada

 
At 8:03 PM, July 14, 2007, Anonymous Frank said...

Gerald, your analysis is correct, however, just focusing on the 2005/06 and 2006/07 seasons gives a misleading view of how MLSE profits have been affected by the RECENT rise in the dollar - and by recent - I mean sice the 2001/02 season.

At that time the Cdn. dollar bottomed out at approximately $0.63 US. Also, at that time the Leafs - in the pre cap era where spending nearly $60 million US on payroll. In effect their payroll costs were $95 million Cdn.

Now 6 years later with a US$50 million cap and a $0.95 Cdn dollar their payroll costs are approximately $53 million Canadian. The difference of $42 million per annum has flowed directly to increase bottom line profits by $42 million per year.

Also, over that 6 year period MLSE has substantially increase ticket prices, corporate suite revenue, advertising and merchandise prices, and has negotiated much more lucrative local television deals.

In short MLSE is rolling in money because of the cap, the dollar, and higher prices over the past 6 years.

Also, for this very reason I believe Teachers will soon put its majority ownership up for sale (in the next year or so)and will phase down to about 15 to 20% - with CTV Globe Media being the logical buyer to increase its current ownership from 15% to above 50%. Teachers' private equity arm has been very good at buying at the bottom and selling at the top.

Don't forget what goes up can go down. And that is very true of the Canadian dollar. Between 1976 to 1985 the dollar fell from $1.04 to $0.71.

From 1985 to 1990 it rose from $0.71 to $0.89. By the way when it hit $0.89 in 1990 everyone was predicting parity within a years time - sound familiar?

From 1990 to 2002 it fell from $0.89 to $0.62.

There is no way the fundamentals of the Canadian economy - and our productivity levels - can support a $0.95 dollar. The people at Teachers' know this, so watch them sell in the next year or so.

 
At 9:39 PM, July 14, 2007, Blogger Kel said...

Toronto's ticket revenues in fact went up to a miniscule degree this year. Given that the boxes, singage and concessions are locked in long term for the greatest part, I would seriously doubt their revenue went up more than tiny amount (although it will next year as their new TV revenue kicks in).

I am sure next year they'll have a significant increase, just by the fact that they announced a price ticket increase of 5% across the board.

By the way, can you explain why that "the boxes, singage and concessions are locked in long term " ? You'd tend to think that corporations don't commit to long term deal on luxury boxes, in case their business decides to cut cost? Same the advertising of the in-arena signs. (Assuming by singage you're referring to advertising in the arena) Concession sales come from the fans so it should fluctuate with actual attendance (not number of tickets bought, but I presume it's still close to 100% in Toronto), menu, price, food quality, people's appetite, etc, which may change year to year?

 
At 9:45 PM, July 14, 2007, Blogger MF37 said...

I'm probably missing something here, but as evil and as incompetent as MLSE is, as Brunt writes they are guaranteed massive profits no matter what product they put on the ice. So what do they have to gain by opposing another team in Southern Ontario?

Even with a team in Hamilton, the ACC will still sell out, the luxury suites will be full, the rinkside boards will be loaded with advertisers, Leafs TV will move from a digital subscription service to part of the monthly cable package and profits will continue to climb - both from hockey and ancilliary branding opportunites like condos.

If a second team does make it to the golden horseshoe the biggest losers will be the scalpers down at the ACC.

Territorial rights may be the core issue here (as the President of the Oilers alluded to on Prime Time Sports on Friday evening) and if that is the case, and if Betteman is as American focused and anti-Canadian as Naylor's column suggests, I would think Buffalo is as much, if not more of an obstacle, as MLSE. Especially when one considers their recent economic instability.

I guess when it comes to hockey and selling papers Blame Buffalo just doesn't make for a sexy headline.

 
At 10:32 PM, July 14, 2007, Anonymous Gerald said...

FYI, here are the exchange rates since the 1997-98 season (all rates are based on the CBA's definition of the applicable exchange rate of July 1 to June 30, so as to compare apples to apples:

97/98 .7059
98/99 .6622
99/00 .6788
00/01 .6583
01/02 .6376
02/03 .6622
03/04 .7445
04/05 .8002
05/06 .8602
06/07 .8831

 
At 10:51 PM, July 14, 2007, Anonymous Gerald said...

I can only imagine how much of an effect converting all 6 Canadian teams revenues and the Canadian television contracts into American dollars will have on league wide revenues next year.

Actually, Mclea, we do not have to imagine at all. Even if one takes the (IMO) patently absurd propositon that 1/3 of NHL revenues come from Canada, that is about US$780 million this year. At this year's exchange rate, that was CDN$883 million.

Accordingly, for every cent increase in the average exchange rate, that equates to approximately an additional US$8.9 million.

As an aside, the salary cap is realtively unimpacted by exchange rate fluctuations. The player's share of $8.9 million (at 55.5%) is $4.9 million, or an increase in the cap of about $160k per team. Even with the increae of 6 cents (th most it has ever fluctuatedin a single season in recent memory), that equates to less than $1 million in cap space.

I can understand why the mainstream media has not done the math, but I am a little puzzled why the blogosphere has seemed to think there is great mystery in determining these numbers.

 
At 11:13 PM, July 14, 2007, Anonymous Gerald said...

By the way, can you explain why that "the boxes, singage and concessions are locked in long term " ? You'd tend to think that corporations don't commit to long term deal on luxury boxes, in case their business decides to cut cost?

Actually, Kel, I am speaking from a bit of experience. A couple of jobs ago, I actually was involved in the review and negotiation of the contract between my employer and the Leafs for a box at the ACC. It was, if memory serves, for ten years. One of the reasons we ultimately declined was the longterm nature of the lease, which was "not negotiable". As well, the company for whom I currently work had a box at the ACC (we gave it up this year for - you guessed it - cost-cutting reasons).

The reason why the boxes are long term is because MLSE can demand and receive long term commitments based on market demand. It matters little what the companies would prefer. Suites at the ACC are a seller's market. To a degree, it is to the suiteholder's benefit, as it provides cost certainty for the suite's rental and insulates them form price increases.

As well, a further reason is that an arena will not receive construction financing unless the suites are sold on a long-term basis.

Same the advertising of the in-arena signs. (Assuming by singage you're referring to advertising in the arena)

Your assumption is correct. I cannot say for sure what the deal durations are for signage, but again it is a seller's market. With high ratings and high atendance, I would expect MLSE would get whatever durations they demand.

Concession sales come from the fans so it should fluctuate with actual attendance (not number of tickets bought, but I presume it's still close to 100% in Toronto), menu, price, food quality, people's appetite, etc, which may change year to year?

Actually, that presumption would be inaccurate. Concession contracts (and agian, I have some experience on this, as my current employer has a ton of concessions contracts) are structured such that there are two components - base rent which forms the vast majority of the rent, and a percentage rent based on a percentage of sales. The first component remains stable, whereas the second fluctuates. The general desire of the landlord is to maximize the base rent, thus leaving the tenant with more of the risk of fluctuating sales. This is how it is universally done in the concessions business. The teams do not sell hotdogs and cokes; the concessions companies do. With an extremely successful facility that is full a lot, I am sure that MLSE has base rents as high as they can go and has passed on the fluctuation risk to the concessionaires (since again they would similarly have people lining up for the concessions contracts). Accordingly, the relatively small percentage that would most likely apply for a venue like the ACC would fluctuate a little, but not very much at all, as a pretty educated guess.

Souvenirs and team merchandise might vary a little, I would grant you, assuming that the Leafs have not granted that concession. I doubt they would, given the intellectual property issues in team merchandise.

 
At 11:26 PM, July 14, 2007, Anonymous Gerald said...

I'm probably missing something here, but as evil and as incompetent as MLSE is, as Brunt writes they are guaranteed massive profits no matter what product they put on the ice. So what do they have to gain by opposing another team in Southern Ontario?

THe thing that you are missing, mf, (and I do not blame you, since everyone seems to be missing the real point) is that it is not merely about opposing another team in southern Ontario. It is about opposing three, or four, or five teams in southern Ontario. And it is about avoiding two or three teams in Chicago, and the same in Detroit. If you ignore teams' territories, then any and all future distressed teams will simply decide to move to southern Ontario, or Chicago (could you not imagine that any owner - say Phoenix - would asusme that he could market his team better in Chitown than Wirtz does?), or Detroit. If someone moves to Hamilton, then someone else will weant to move to Mississauga (which would kill Hamilton stone dead, by the way), and then someone else to Pickering or Whitby and another team to Markham (thus covering everywhere east, west and north). Soeone would move to Windsor or the Detroit suburbs and attract Detroit fans. If the NHL has someone leave their city if and when they feel like it and violate TO's or someone else's territory, they cannot keep any other team from doing it as well. You see the danger?

I think I can guarantee you that this has not escaped the consideration of the NHL or its member clubs. People talk about AL Davis having moved his team, but they do not actually know about his denouement. In the end, he moved out of LA because he could not get a stadium deal for himself, and THAT was because the NFL intimated to the city of LA that it was going to drop an expansion team in there RIGHT IN AL DAVIS' LAP. Mr. Davis learned a very hard lesson that, if you are going to say you can move anywhere, then other teams and/or the league can move in on you.

 
At 1:08 AM, July 15, 2007, Anonymous Rob said...

[quote]People talk about AL Davis having moved his team, but they do not actually know about his denouement. In the end, he moved out of LA because he could not get a stadium deal for himself, and THAT was because the NFL intimated to the city of LA that it was going to drop an expansion team in there RIGHT IN AL DAVIS' LAP. Mr. Davis learned a very hard lesson that, if you are going to say you can move anywhere, then other teams and/or the league can move in on you.[/quote]

If what you say is true, than why hasn't the all-powerful NFL been able to get a stadium built and an expansion team back in LA in the past 12-13 years ?

 
At 1:30 AM, July 15, 2007, Anonymous hawker14 said...

hey gerald !!!

I was emailed that you were finally able to get your buddies at the hfboards to ban talk about the return of the jets.

if you are ever serious about debating the pro's of canada with your pro's of america just send me an email at kerrberg@gmail.com.

Let's set up a strictly for fun/non-profit website of my pro-hamilton/winnipeg/canada views and your anti-hamilton/winnipeg/canada views.

Your apologist buddies at hfboards I see have closed discussion about the Return of the Jets of which you were the most common poster.

I know it would be fun to debate your views on a website that is impartial. let me know what you think.

 
At 11:16 AM, July 16, 2007, Anonymous Anshu said...

If what you say is true, than why hasn't the all-powerful NFL been able to get a stadium built and an expansion team back in LA in the past 12-13 years ?

What I've read/heard is that the NFL already maximizes viewership in LA, so an extra team wouldn't translate into any additional eyeballs, so wouldn't result in any more TV revenue. So expansion has been focused on areas where new viewers might be obtained, because that results in higher TV ratings, which results in more money for the league (and all its owners).

 

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