Wednesday, October 24, 2007

NHL revenues
Accounting for inflation

This is a topic that's become a bit of a recurring issue among a few bloggers: How have NHL revenues changed coming out of the lockout?

We've only had two seasons, so the data set is certainly incomplete, but given historical figures, it would seem the league has had a hard time continuing to grow revenues since the 2003-04 season.

Here's my first attempt to adjust NHL revenues to account for inflation, putting every season in 1993-94 dollars (the first season we have the data):

Keep in mind that the 1994-95 season was a 48-game campaign.

I haven't included any allowances to account for expansion, which ended in 2000-01 when Columbus and Minnesota joined the fold, or the rise in the Canadian dollar. The creation of new teams and new rinks certainly fuelled the NHL's boon through the late '90s, but there's been a considerable levelling off ever since the end of Operation Add Teams.

And the past two seasons, minus inflation, revenues in real dollars are below 2002-03 levels.

No one's come out and said it quite yet, so perhaps I'll be the first: I expect the cap will go down for next season, ever so slightly, and in my mind, it's seems unlikely it will climb much higher than $55-million over the course of the agreement.

Take that for what it's worth.

Rough estimate
Season NHL revenues adj. for inflation
1993-94 $732,000,000 $732,000,000
1994-95* $568,000,000 $556,640,000
1995-96 $936,000,000 $879,840,000
1996-97 $1,105,000,000 $1,011,075,000
1997-98 $1,141,000,000 $1,004,080,000
1998-99 $1,285,000,000 $1,079,400,000
1999-00 $1,566,000,000 $1,291,950,000
2000-01 $1,769,000,000 $1,397,510,000
2001-02 $1,875,000,000 $1,443,750,000
2002-03 $1,996,000,000 $1,497,000,000
2003-04 $2,083,000,000 $1,541,420,000
2004-05 no hockey here sad time for James
2005-06 $2,178,000,000 $1,481,040,000
2006-07 $2,318,000,000 $1,483,520,000

Previously here
The revenue question
The search for a partner
Attendance: Hockey's magic number

On Bettman Bucks [Tom Benjamin]



At 2:12 a.m., October 24, 2007, Blogger Joe said...

I absolutely agree with you about the cap going down, and I think a few teams (The Flyers and Rangers come to mind) have set themselves up such that they REQUIRE the cap to continue to rise. That is a dangerous assumption, and I think a couple teams will pay for it dearly.

At 2:18 a.m., October 24, 2007, Blogger Art Vandelay said...

Well done on the inflation-adjusted figures. Now that we can compare apples and apples, it looks like a pyramid scheme run out of steam. Massive infusion of non-recurring revenue to juice the annual report, followed by flat or declining sales. This is not the picture of a healthy business.

At 2:53 a.m., October 24, 2007, Blogger justin said...

very interesting. i wonder just how much television revenues come into play in this equation. ESPN/ABC was paying $120 million a season for broadcast rights prior to the lockout.

Post lockout Versus is only paying $65 million a season, and the NHL does not receive a cent from NBC, it only splits advertisement dollars, which probably does not amount to much.

At 10:21 a.m., October 24, 2007, Anonymous PPP said...

Good post. It'll be interesting to see how teams cope with a decrease in the cap.

No hockey here sad time for James

I laughed very hard at that.

At 10:46 a.m., October 24, 2007, Blogger Darrell said...

I don't see how the cap is going to go down. While their won't be an extra "boost" from the 5% escalator, it will still apply. With the CAD$ over parity and a new local TV deal for the Leafs, Canadian revenues are going to be WAAY up. And while a couple American markets seem down, a few seem to be on the rise (led by St. Louis), not to mention NJ with their new Arena. I wouldn't expect the huge cap increase, but a couple million seems likely to me.

At 10:53 a.m., October 24, 2007, Anonymous Tom Benjamin said...

Very interesting James, but I don't get the connection between this work and the idea the cap won't keep rising.

The 5% "NHLPA" boost is actually part of the negotiated formula. Saskin waived it for 2005-06, but I don't expect that to be the norm unless experience shows escrow climbing.

At 1:09 p.m., October 24, 2007, Blogger James Mirtle said...

Tom, it's my understanding that the NHLPA boost is a one-time thing only.

At 1:17 p.m., October 24, 2007, Anonymous Gerald said...

That is not correct, James. Section 50.5(b) of the CBA explains it pretty clearly. The parties can mutually agree upon a diferent escalation fctor, but in the absence of such agreement it is 5%.

At 1:25 p.m., October 24, 2007, Blogger James Mirtle said...

Hmmm, I have no idea why that was on my mind. Here's the info from a Pierre LeBrun story:

As stipulated in the collective agreement, a five per cent "inflator" automatically gets tacked on top of the figure that the league and union accountants calculate from hockey-related revenues of over US$2.1 billion — unless the NHLPA and NHL agree to do otherwise. Last summer both sides agreed to zero per cent inflation instead of five per cent, the union worried about having to pay back owners in escrow payments if they earned more than their allotted share.

Perhaps because escrow may be so high this season, it's been speculator the inflater won't be built-in?

I guess we'll have to wait and see.

At 1:53 p.m., October 24, 2007, Anonymous Anonymous said...

Any idea what the operating costs were during the lockout? Bettamn was still being paid as well as coaching staffs and general arena upkeep and the like. How long after the lockout for the NHL to recoup lost revenues versus the cost? Strictly hockey, not counting impact on local business'.

At 1:57 p.m., October 24, 2007, Anonymous Tom Benjamin said...

I think the speculation came about because Bettman kept talking about a lower cap number for so long, with the caveat that the NHLPA might trigger a boost. It made it seem like the norm would be no boost unless the NHLPA insisted. It was really the other way around.

I haven't seen any numbers but escrow was set at 9.5% this year which is a lower starting point than it was last year. Remember the cap - and escrow - is set based on last year's revenues and the player percentage based on last year's revenues. As long as there is an increase in revenues, escrow will quickly go down.

It started at 12% last year IIRC and ended up at 3%. It did that because revenues - and the player percentage - went up.

As long as that is the case, I think the NHLPA will insist on the 5% escalator.

At 2:02 p.m., October 24, 2007, Blogger James Mirtle said...

That said, the only way the cap reached $60-million (not including the boost) is if revenues top $3.15-billion.

That's not happening any time soon, so even if we're not getting a declining cap, we're not getting one rising at an alarming rate. You can bet your life we're looking at a $48- to $58-million ceiling for a while.

At 2:52 p.m., October 24, 2007, Blogger Nick said...

Looking at your graph, it looks like revenues tripled over 10 years, and that's inflation adjusted too - so one has to wonder what the problem was. Why did we have to go through a lockout? From a revenue standpoint, it probably did more harm than good.

At 3:04 p.m., October 24, 2007, Anonymous Tom Benjamin said...

Maybe it is my arithmetic that is off, but my calculation goes like this on $3.15 Billion:

1) .57*3.15 = 1.8 BB

2) 1.8 BB - 90 MM = 1.71 BB

3) 1.71 BB / 30 = 57 MM

4) Add 5% = 59.35 midpoint

5) Add $8 MM - 67.35 MM salary cap

I don't really mean to disagree because I agree that this is not going to happen anytime soon. I do expect the growth in the cap to slow, but as long as the player percentage keeps rising, as long as revenues keep rising - however slowly in real terms - it's hard for the cap not to keep rising too.

At 3:19 p.m., October 24, 2007, Anonymous Frank said...

Sorry James, but on this one I have to respectfully disagree with you. There is no way the cap is going down anytime soon. Here are my calculations for the MAXIMUM cap for the next two years:

2008/09 - $56.8 (39.8 min. 56.8 max
2009/10 - $57.7 (41.7 min. 57.7 max
and could go as high as $60 million

My calculations are explained below for those who want to read further.


As Gerald has correctly pointed out in previous posts, the Canadian dollar appreciation has had minimal affects on revenues over the past TWO years. It only started shooting up dramatically in March 2007 - the last three months of last year's NHL revenue year. Therefore its impact will only start to be felt this year and next.

An NHL revenue year is from July 1 to June 30. Monthly revenues are reported and converted at the average exchange rate for that month. Based on this I have forecasted Canadian currency translation values as follows:

2006/07 - .8831
2007/08 - 1.0134
2008/09 - 1.0479

This forecast is based on Jeff Rubin's (CIBC World Markets) forecast which says the current value of 1.0250 will gradually increase to 1.05 by Dec. 2008 and stay at 1.05 for the first half of 2009. Warren Buffet also believes the Canadian dollar will stay high for several more years until the US solves its huge budget and trade deficits.

So in 07/08 the Cdn. dollar will appreciate by 14.75% (for NHL purposes) - from .8831 to 1.0134.

In 08/09 it will increase by 3.40% - from 1.0134 to 1.0479.

Now assuming Canadian dollar revenue is 33% of all NHL revenue, the appreciation of the Canadian dollar will cause total NHL revenues to rise by 4.87% in 2007/08 (14.75% x 33%) and by 1.12% in 2008/09 (3.4% x 33%).


As pointed out by others who have posted - revenues will rise substantially in 2007/08 because of large increases in local TV contracts for the Canadian clubs and the CBC/TSN national contract, large ticket price increases especially in Canada, new jersey sales etc. I have projected a 5.5% increase for 2007/08.

For 2008/09 I have assumed this factor will ease back to a more normal 3.0%


Adding the currency and inflation factors together we get the following growth rates for total revenues;

2007/08 - 10.37% (4.87% plus 5.50%
2008/09 - 4.10% (1.12% plus 3.00%

Now applying these growth rates to the 2006/07 base of $2,318 million we get the following revenue numbers;

2006/07 - $2,318
2007/08 - $2,559 (+10.37%)
2008/09 - $2,664 ( +4.12%)


FOR 2008/09

2007/08 revenue of $2,559 x 56% divided by 30 teams = $47.8 million. The maximum cap is $8 million higher or $56.8 million, while the minimum cap is $8 million lower or $39.8 million.

FOR 2009/10

2008/09 revenue of $2,664 x 56% divided by 30 teams = $49.7 million. The naximum is $8 million higher at $57.7 million, while the minimum cap is $8 million lower at $41.7 million.

HOWEVER, should the Canadian dollar hit $1.10 and or price inflation be higher than projected, 2008/09 revenues could exceed $2,700 million and the player share would increase to 57% (not 56%) and the 2009/10 CAP COULD WELL EXCEED $60 MILLION.


Because of the large increase in 2007/08 revenues the players are likely not only to get their 9.5% escrow payments back but NHL teams may be forced to give them 2% or 3% bonus payments at the end of the year so that they get their full share of revenue.

Low revenue teams like Phoenix and Nashville will be hard hit as the lack of escrow will result in lower revenue sharing payments as well as having to pay 2% or 3% moere salary.

With minimum caps rising from $34 million this year to $42 million or more in two years time, low revenue teams will be bleeding even more red ink.

This could lead to contraction or teams being moved to higher revenue areas like Canada. However, by eliminating low revenue teams and replacing them with higher revenue teams - this will cause the maximum team caps to rise even higher into the low $60 millions.

Finally, GMs who locked their star players into long term contracts will look like geniuses, while GMs who didn't will end up paying marginal players huge amounts of money in the next two years.

Similarily, star players will see themselves being paid well below less talented player - causing all sorts of team discontent.

I believe the next two to three years will be very interesting to watch.

At 3:52 p.m., October 24, 2007, Anonymous Tom Benjamin said...

Two errors that make the numbers a little low, Frank:

1) Your cap calculation does not include the 5% esclator.

2) The player percentage is not the same for the two years. The player percentage is on a sliding scale. It is 56% at $2.4 BB, and 57% at $2.7 BB. At 2.55 BB, it will be 56.5%. At 2.6x, it will be 56.x and so on up to the 57%.

At 4:44 p.m., October 24, 2007, Blogger JavaGeek said...

Inflation targeting started in the early 1990's and has continued ever since. Inflation targeting requires the central bank to maintain inflation between 1-3% and average approximately 2% over the long term. Why are you using inflation at 3.5%?

Try the US government Inflation Calculator to get better estimates for inflation.

I get $1,647,000,000 for last year instead of $1,483,000,000.

It looks like you're using GDP growth % as opposed to inflation. GDP increases include non-inflationary growth (productivity & population growth)

At 4:56 p.m., October 24, 2007, Blogger James Mirtle said...

I think you're right, at least in part. I'm afraid I rattled this off rather quickly, looking to use somewhere in the neighbourhood of 2.7 per cent for inflation, but it might need an adjustment.

I don't think the graph will change dramatically, however.

At 5:49 p.m., October 24, 2007, Anonymous Frank said...

To: Tom Benjamin

Thanks for the info. I didn't realize there was a sliding scale between 56% and 57%. On this basis the new MAX. CAP for 2008/09 is $57.2 million and the new MAX CAP for 2009/10 is $58.5 million.

I didn't include the 5% escalator as I believe now that the NHLPA has a professional in charge (Kelly) he will show the players that it is in the interests of ALL the players not to include it in order to:

1) reduce the upfront escrow payments; and,
2) if revenues comes in better than expected ALL players will get an equal percentage increase in their pay at the end of the year.

If you use the escalator at the beginning of the year - to increase the cap - it mainly helps only those players who are UFAs that year to negotiate higher salaries.

Also, when I referred to - "price inflation" - I should have said "price inflation AND volume increases".

At 7:53 p.m., October 24, 2007, Anonymous Rickster said...

Good analysis: the low revenue teams (who play in places where people don't like, watch, or play hockey) will become unprofitable as the high revenue teams rake it in over the coming years. Hockey's never been bigger in Toronto, NY and Philly are making comebacks, and the Blackhawks might finally start acting like a real business. The floor will go up without new revenue sharing, and Phoenix is even worse off.

But why would any of the high revenue teams allow a low revenue team to move to a place where it can make more money? It would drive the cap up without helping their revenue and immediately take a bite out of profits. For instance, Nashville moving to Hamilton might drive up revenue by $100M in one year alone (considering new local TV dollars, merchandising, ticket sales, &c). 56% of that goes to the players. The other 44% goes to Jim Ballsilie.

This system can't work with some really strong cities and some really weak cities. That is why we're going to see another lockout (instigated by the unprofitable teams) when this deal is up. We'll miss another year for the sake of Nashville

At 11:39 p.m., October 24, 2007, Anonymous Frank said...

Rickster, I agree that there could be another lockout as the system is clearly not going to work the way Bettman thought it would because of strong revenue growth in Canada (and traditional US markets) and the exchange rate issue.

However, a lot of the problems could be solved if the minimum cap could be lowered more than currently allowed, while the maximum cap is increased to offset this. This would allow the low revenue teams to survive. However, competitive balance would be sacrificed. My bet is that if Bettman has to chose he will sacrifice competitive balance to allow low revenue teams to survive.

My bet is Bettman will raise this with the NHLPA in the next two years to see if they will agree to it. Obviously the NHL will have to give the players someting in exchange - maybe an extra 0.5% of revenue. It will also be in the NHLPA's interest to do so as contraction would lead to fewer jobs.

Nonetheless, Winnipeg and Quebec City will start to look much better as locations to these low revenue teams. As for Hamilton, I believe an existing owner has a better chance of moving there than a new owner. Once the NHL gets into enough financial trouble where the choice is contraction versus moving to Hamilton the league will allow the relocation - in spite of MLSE's objections.


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