Friday, October 19, 2007

The revenue question

A regular commenter took issue with just about every bit of info I put in this post, The search for a partner, and while I feel my assessment of the board of governors stands on its own, the one thing I've never addressed here is just how little the league has grown revenue the past three-plus years.

Or to reiterate some more colourful phrasing, the NHL "is off chasing Jerry Bruckheimer's loose change while hockey's revenue base sits at a standstill."

The league's revenue was reported to be $2.1-billion in 2003-04 the year before the lockout, and many reports had that figure at $2.2-billion using the CBA's new method of calculating revenue. And while the salary cap for the first postlockout season, 2005-06, was based on a low-ball $1.8-billion figure, NHL revenues remained relatively equal to what they had been two years earlier.

Last season, 2006-07, we heard that NHL revenue rose to about $2.32-billion, which was enough to push the salary cap up over the $50-million threshold (with help from an NHLPA-invoked boost).

It's a figure that's somewhere between $120-million and $220-million more than what the league generated three years ago, a number that when you take into account factors such as inflation, the rise in the Canadian dollar, and a large, league-wide ticket price increase last season, means the NHL hasn't really generated any new revenues.

Now, I'm no economist, but three years of inflation alone could account for as much as a $150-million increase, which would indicate the league has gained absolutely nothing in recent years. They may have even lost ground.

This post is still a work in progress, and I know Tom Benjamin's done some work on this in the past, but I'd be interested to see what others think.

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23 Comments:

At 2:32 PM, October 19, 2007, Blogger BlackCapricorn said...

Well as hockey is primarily a gate driven business with no more seats being added and the fact that the Canadian dollar is now on par with the U.S.'s, it seems at first blush that the increase in revenue can be attributed to increased ticket prices and the devaluation of the American dollar. I am sure there have been some bump ups due to merchandise with the Sabres mania as well as the new RBK jerseys (is that counted?) but if the increase is really that small, then what did the lockout solve?

The lockout certainly seems to not have generated good tv deals or dealt effectively with low-attendance teams (two sources of unrealized income). Its still early under this CBA so we will see what happens. At this point, I would be much happier with stability rather than growth.

 
At 3:43 PM, October 19, 2007, Blogger Adam C said...

The lockout was not about increasing revenue, it was about reducing costs. It did that quite well, although without proper revenue sharing it doesn't look to be enough for small market teams.

I thought, James, that you were actually on the mark when it came to "revolving door" ownership. In addition to the two franchises currently for sale, a third (Tampa Bay) was sold in the summer and a fourth (Atlanta) is the subject of a legal dispute.

A fifth franchise changed hands when the owner died, but that's probably not part of an ongoing pattern.

 
At 3:45 PM, October 19, 2007, Anonymous David Johnson said...

Anyone who argues that the NHL has grown fan interest just has to look at the TV contracts, TV ratings, or attendance figures in most every city outside of Canada. It simply isn't true. The Rangers are complaining about the leagues inability to generate revenue and are suing the league over internet marketing rights. After next season the players have the right to opt out of the current CBA and with players salaries being directly linked to revenues now I can see them wanting more say in the on ice product, the marketing of the product and how revenues are generated. Don't be surprised if we see the players and the big market teams attempt to wrestle some power away from the small market teams that are keeping Bettman in power.

 
At 4:14 PM, October 19, 2007, Anonymous Gerald said...

Just let me know when I can jump in here, James.

 
At 4:15 PM, October 19, 2007, Anonymous Anonymous said...

Any growth is due to a CAD. If you account Canadian teams' current revenue with exchange rate of 2003 or 2004 numbers we would see that there's no real growth at all.

It's pretty simple to understand when you watch games on TV where you can only see lower bowl.

Atlanta, Florida, Nashville etc. looks like a junior game where only parents show up.

 
At 4:52 PM, October 19, 2007, Blogger McLea said...

It's a figure that's somewhere between $120-million and $220-million more than what the league generated three years ago, a number that when you take into account factors such as inflation, the rise in the Canadian dollar, and a large, league-wide ticket price increase last season, means the NHL hasn't really generated any new revenues.

I'm not sure if I understand this point. Higher prices are indicative of higher demand (unquestionably a good thing) and raising prices is a pretty standard way of increasing revenues.

 
At 4:53 PM, October 19, 2007, Anonymous pete said...

I for one am all ears, Gerry.

 
At 5:02 PM, October 19, 2007, Blogger James Mirtle said...

I'm not sure if I understand this point. Higher prices are indicative of higher demand (unquestionably a good thing) and raising prices is a pretty standard way of increasing revenues.

True, but are those simply taking ticket revenues up along with inflation? And if you eliminate the new revenues from increased ticket prices, is there anything left?

 
At 5:04 PM, October 19, 2007, Anonymous Frank said...

James, I agree with you completely (which is quite a change). Excuse the length of this comment, but I'll put together some numbers to support your (and my) opinion on this.

Using Andrew's numbers (which you linked), NHL revenues in 2001/02 were $1.875 million and $2.318 million 5 years later in 2006/07 (all US dollars).

Now, this increase of $443 million can come from three sources:
1) Price increases (inflation)
2) Volume increases (higher attendance and sales volumes and new revenue streams); and,
3) Changes in currency conversion values.

Lets first deal with changes from currency conversion values. In 2001/02 the Cdn. dollar averaged approx. $0.64 US for the NHL year. In 2006/07 it averaged $0.86 US fot the NHL year. This represents a 34% increase. Assuming Cdn. revenue is 30% of all NHL revenue, currency conversion over the last 5 years has boosted annual revenues by $191 million ($1.875m x 30% x 34%).

Now, lets deal with general price inflation. Lets assume on average for the 5 year period revenue streams (tickets, concessions, advertising, merchandising, broadcasting rights etc.) increased by 2.5% per annum (the average US and Cdn. inflation rates for this period). This results in a 13% compounded increase over the 5 years. Therefore, general inflation added $244 million over the 5 years ($1.875 x 13%).

Therefore general inflation and currency conversion values account for $435 million of the $443 million increase in revenue over this 5 year period, meaning volume increases and new revenue streams added only $8 million - an insignificant amount!

 
At 5:24 PM, October 19, 2007, Anonymous pete said...

Of course the league has made "more" money in that $2.3-billion is "more" than $2.1-billion.

But that $2.3-billion actually represents declining purchasing power when one considers the impact of inflation and the (apparently disputed?) rise in the loonie.

I don't understand the dissent. To me, it boils down to this:

If roughly 30% of the league's revenues come in Canadian dollars (which they do), and the "value" of those Canadian dollars has increased by roughly 30% since the 03/04 season (which it has) there has to be a correlating increase in overall revenues for them to truthfully be able to claim to be growing.

But there isn't anything close to that. Inflation and the loonie's rise are masking the fact that the purchasing power of the NHL's revenues is actually going down.

 
At 5:58 PM, October 19, 2007, Anonymous Anonymous said...

It's actually a lot more grim if you work from the premise that inflation is a lot higher than 2.5%. That's the figure the bureaucrats wants us to believe. Without getting into the myriad ways inflation's books are cooked, it's a lot higher than 2.5%. Let's see the NHL release its revenue figures based on, say, 2005 constant dollars.

 
At 8:47 PM, October 19, 2007, Anonymous Gerald said...

Whre to begin, where to begin?

I would note first of all that one way for someone to try to win a debate (when they know they have no guns and no ammo) is to try to reframe the debate and ask a different question or try to make a different point than they asked/made in the first place.

Old point/question: hockey's revenue base sits at a standstill.

New question/point: just how little the league has grown revenue the past three-plus years.

So now, rather than questioning whether revenues are at a standstill - a point which can be empirically proven by pointing out that $2.318 billion, even after deducting approximately $19 million (at most) for currency exchange differences year-over-year, is more than $2.178 billion - apparently we are now debating whether revenues are more or less the same while including one year in whihc the league was locked out and a second year in which the league was recovering from said lockout.

Such a basic argument technique might work for one side if the other side is not paying attention. Such is not the case here.

Let me save you some of the angst that you might be feeling over whether the underpinnings of what you believe you understand about the business of hockey - based apparently on what "everyone knows", it would seem - are correct.

I will concede that league revenue was down significantly in the 2004-05 season.

I will also concede that NHL revenues took a hit as a result of the lcokout and cancelled season.

To those concessions, I would add the following comment, delivered with the greatest respect to the assembled august business minds:

"Duh".

Do you really want to debate whether there is a point to asking the question as to whether league revenue growth, as measured over the past five years which included a lockout that was widely expected to decimate league revenues and a post-lockout season in which some markets were hurt by said lockout and in which (if memory serves) nineteen out of 30 teams reduced ticket prices, some quite dramatically? Is there a point to such a question?

I have a series of points here, but rather than put them all in one indigestible post, I think it might be better to split them up.

 
At 8:52 PM, October 19, 2007, Anonymous Gerald said...

For everyone's information, here are some relevant numbers for the past number of years (starting with most recent):

06/07 .8831
05/06 .8602
04/05 .8002
03/04 .7445
02/03 .6622

Here are the revenue growth rates:
06/07 6.42%
05/06 4.56% (post-lockout season)
04/05 -100% (lockout season)
03/04 4.36% (season with a subsequent lockout widely expected)
02/03 6.45%

 
At 9:54 PM, October 19, 2007, Anonymous Gerald said...

Let us deal first off with last season. If revenues are "at a standstill", we can certainly find that out, as the numbers are fairly widely known and disseminated.

As stated above, revenues went up from $2.178 billion to $2.318 billion - a difference of $140 million. Well, that seems more, but wait, some say "that is all exchange rate increases". Well, let's check that, since those numbers can easily be detemrined via the Bank of Canada. Why such newspaper legends such as the illustrious Mr. Brunt do not avail themselves of the numbers in order to verify their much-repeated claims is a mystery to me, but I digress.

05/06 - .8602
06/07 - .8831

But what to use for Canadian revenue? Well, there is the spring 2007 report that Canadian revenues were 1/3 of NHL revenues. That seems high to me; it was based on a mid-season report that skews in favour of the CDN market, but what the heck, let's use them. Let's also give the CDN market the benefit of the doubt and assume that it comprised 1/3 of revenues in the year before as well, rather than assuming that the increae in exchange rate in 2006/07 was what boosted it to 1/3.

$2.178 billion x 1/3 = US$726 million.

So, the Canadian market generated US$726 million in 2005/06. Using an exchange rate of .8602, that means that CDN$844 was generated in 2005/06.

In 2006/07, that CDN$844 million was worth US$745 million.

$745-$726 million = $19 million

Based on those calculations, that leaves US$121 million of revenue growth that was not due to exchange rate differences. That equates to 5.5% growth.

Incidentally, the above calcs are representative of very conservative calculations throughout. Based on published gate receipts, the CDN market generates 28% of NHL gate revenue. Also, as noted above, there is nothing to indicate that CDN revenues were as high as 1/3 in the 2005/06 season. Accordingly, the $19 million is IMO a maximum number.

Now, James, I appreciate that you are "no economist" (neither am I), but (as Mclea pointed out), ticket price increases are a perfectly valid source of increased revenue.

As for your statement that there was "a large, league-wide ticket price increase last season", I am not too sure wht you think the ticket price increase was last year. For your info, it was 5.7%. In the field of sports tickets (a Veblen good, for tose economists out there), that is not exactly a heft increase, particiularly coming (as it did)on a broadly-based ticket price reduction the year before. But for seven markets with double digit increases (led by Edmonton's 21.8%), the ticket price increase would have been much less. What i am saying is that the ticket price increase was neither "large" nor was it broadly based. Ticket revenue went up essentially by the same amount as the price increase (5.3% for revenue vs 5.7% for ticket prices). HOWEVER, that accounts for less than half of NHL revenues. As overall revenues went up 5.5% (excluding exchange rates), that means that the other 60% or so of NHL league revenues also went up by over 5%.

Accordingly, directly contrary to your statement above, the NHL has in the past year generated significant increased "new revenues".

2005/06 next ...

 
At 10:28 PM, October 19, 2007, Anonymous Gerald said...

For 2005/06, we have the problem of comparing it to two seasons ago due to the lockout.

As an initial comment, I would first regard this part of the analysis as relatively pointless. I think it is common ground that the lockout temporarily played havoc with the NHL's finances. Ticket prices were dramatically reduced in numerous cities (19 out of 30 had some decrease, and only four - I believe - had price increases), and sponsorship money HAD to be down, one would think.

In any event, the relevant exchange rates were:

2003/04 .7445
2005/06 .8602

Here there is a much greater exchange rate differential. One key problem that we have, however, is determining what the exchange rate impact is/was.

Should we use the 1/3 number above? I would argue strenuously that the answer is no, for the following reasons:

1. Pre-lockout, CDN attedance was not as strong as it was post-lockout (CAL minus 3000, OTT minus 2000, TOR/VAN same, EDM plus 800).

2. EDM's finances took a huge leap forward with huge price increases and a SCF final trip.

3. CAL and EDM benefitted hugely from the oil industry boom, undoubtedly helping in sponsorship dollars and corporate boxes.

4. VAN's revenues took a significant leap forward.

5. OTT took a major step forward attendance-wise.

The only numbers that I have are the generally very unreliable Forbes numbers, which put the CDN revenue share at 21%. LEt's use them, but recognize their limitations by also doing a separate calc for 25%.

At 21%:

CDN Revenue, 2003/04: US$471 million, or CDN$633 million

Same revenue, 2005/06: US$544 million

Exchange rate differential = $544-$471 = $73 million.

At 25%:

CDN Revenue, 2003/04: US$521 million, or CDN$700 million

Same revenue, 2005/06: US$602 million

Exchange rate differential = $602-$521 = $81 million.

The NHL's revenues increased overall by $95 million ($2.178-$2.083 billion). This makes non-exchange rate revenue growth at a relatively paltry US$14 to US$22 million (a growth rate of 0.7% to 1%, depending on the assumptions).

"Hey, that is way below the inlfation rate", you say. Well, yes, it is, but as stated above, in fact the hockey industry was in a state of massive deflation, with reduced ticket prices, reduced sponsorship rates (likely) and reduced costs as well (a huge reduction in salaries). In that environment, I would argue that any increase whatsoever is impressive. It certainly knocks the s**t out of what happened to baseball revenues when they cancelled the world series. Given the huge deflation in player salaries (the majority of team costs), a growth rate of 1% is actually impressive. The rate of inflation in the broader economy is mostly irrelevant when a chunk of expenses comprising over 50% of your costs have dropped by over US$400 million (over 30% of that component).

Conclusion: NHL revenues were essentially flat year-over-year from 2003/04 to 2005/06. In a deflationary environment, that is an acceptable price to pay for getting one's costs under control.

 
At 10:49 PM, October 19, 2007, Anonymous Gerald said...

Some separate thoughts resp[onding to individual poster points:

The lockout certainly seems to not have generated good tv deals or dealt effectively with low-attendance teams (two sources of unrealized income).

Capricorn, I respectfully disagree, given the excellent new HNIC contract. Also, Carolina (40% gate receipt increase last year), Buffalo (22.3%), Anaheim (17.7%), Washingotn (10.8%) and, yes, even much maligned Nashville (19.9% increase in gate revenues, and likely more) would beg to differ about lower attendance spots not being helped.

In addition to the two franchises currently for sale,

Adam C, I am not sure which one is the second one you are referring to - Nashville and ...? You already mentioed TB elsewhere in your post as "a third" one.

Anyone who argues that the NHL has grown fan interest just has to look at the TV contracts, TV ratings, or attendance figures in most every city outside of Canada.

David, if by "most every", you mean five (maybe 7 or 8) out of twenty-four non CDN cities, you are bang on. That is not how I understand the english language, but to each his own.

But that $2.3-billion actually represents declining purchasing power when one considers the impact of inflation and the (apparently disputed?) rise in the loonie.

Pete, in an inflationary environment, you would be correct. However, hockey has in the past few years been in a deflationary environment overall. Player salaries - 53 to 55% of league costs - have gone down by $400 million in the first post-lockout year, and are still $170 million below pre-lockout levels. Accordingly, those dollars in fact have increased purchasing power, even considering the 2.5% inflation levels that have applied to the remaining 47% of non-player costs. I give credit to you, however, as you are asking the better question - what is the purchasing power of the NHL's dollars (not nearly the same as James' and others' hypothesis that revenues are "at a standstill".) I would posit that the NHL is still in a deflationary period and will be until revenues are in the $2.6 billion level or so (when salaries will finally match pre-lockout levels).

Sorry if I have monopolized the discussion. I had a lot to get off my chest.

 
At 11:09 PM, October 19, 2007, Blogger Adam C said...

Pittsburgh.

 
At 10:29 AM, October 20, 2007, Anonymous Rickster said...

Gerald,
I agree on your revenue numbers - the Canadian dollar didn't fluctuate much at all during the past 2 seasons. The increase in stated revenues came from somewhere else.

The whole debate is clouded by the fact that we don't know what the NHL spin machine is claiming to be hockey revenue. Do concessions count? Upscale restaurants inside arenas? TV stations owned by the league or teams? Who knows what is actually happening.

What kills me is that the three stated problems that the lockout was supposed to address have not been solved:
1. Decrease ticket prices so the average fan can attend more games. Ticket prices are on the up-swing across the league, as noted by James in this post.
2. Stabilize weak franchises. Nashville is still asking for a bailout from the city, on top of their sweet-heart lease. The Penguins were going to move without a free arena. Does anyone think that Atlanta, Florida, or Phoenix are any more stable?
3. Lower salary costs. According to the historic salaries gathered at hockeyzoneplus (http://www.hockeyzoneplus.com/$maseq_e.htm) the average team payroll was $44M in 2003-04. According to NHLNumbers (http://www.nhlnumbers.com/tc-caphit.html) this year's average team payroll will be $45.6M (and creeping steadily higher). This comparison isn't exactly apples-to-apples, but the numbers are in the same ballpark.

When it is all said and done, the inept NHL management cancelled a season for nothing. No doubt they'll follow the same old Bettman pattern of expansion, paying players more, crying poor, and shutting down the league.

 
At 11:48 AM, October 20, 2007, Anonymous Gerald said...

3. Lower salary costs. According to the historic salaries gathered at hockeyzoneplus (http://www.hockeyzoneplus.com/$maseq_e.htm) the average team payroll was $44M in 2003-04. According to NHLNumbers (http://www.nhlnumbers.com/tc-caphit.html) this year's average team payroll will be $45.6M (and creeping steadily higher). This comparison isn't exactly apples-to-apples, but the numbers are in the same ballpark.

Rikster, thanks for the support re the numbers. However, this statement above illustrates another one of my pet peeves about received "wisdom" of the hockey fan community (not you per se; I am always impressed with your contributions wherever made).

Barring an increase of greater than 5% in revenues, the average payroll PLUS BENEFITS this season will be $42.6 million. The excess will return to the owners via escrow. That includes approximately $2.2 million in benefits, meaning the salary number is in fact $40.4 million.

Secondly, the average payroll was more than $44 million back then. In 2002/03, player compensation (excluding benefits) was $1.415 billion, or $47.17 million per team. I would bet folding money that it was higher in 2003/04.

We have $1.415 billion + $64 million for benefits in 2002/03, and (absent >5% growth) we will see $1.209 billion + $64 million in 2007/08.

Draw your own conclusions as to whether it was for nothing. Fans of Carolina, Anaheim, Nashville (whose revenue sharing funded an excellent team) and others probably feel differently, as might fans who have had several years of ticket inflation defelected that they otherwise would have sustained.

 
At 12:00 PM, October 20, 2007, Anonymous Rickster said...

Gerald - do you have a source for that 02-03 salary number?

And I doubt revenue sharing has helped Nashville as much as the minumum payroll has hurt them. They are losing even more money now than they were before. They'll be in KC before long.

 
At 12:44 PM, October 20, 2007, Anonymous Gerald said...

The Levitt Report is the source for the 2002/03 figures. I don't think the NHLPA debated that aspect ever.

As for revenue sharing and the minimum salary, I don't think so. They obtained $14 million in revenue sharing in the first year. I seem to recall that, pre-lockout, only one team (I want o say PITT) was below the minimum threshold and had to raise salary. Nashville was hugely benefitted by the CBA net. As for last year, I believe that their revenues went up (their ticket rvenues were up 20%!), so they probably got a smaller check. In any event, however, the mechanics of the CBA is that it gets qualifying teams to a position where the applicable percentage (between 53% and 57%, whatever is in force) gets applied to their own team HRR, and they get whatever money they need to get to the floor PLUS a minimum of $4 million (or more, if the NHL selects a target payroll higher than "minimum-plus-four"). Nashville got stung a little last year because they gambled on a much higher payroll than "minimum-plus-four" getting them deep into the playoffs, but that is not due to the CBA.

 
At 12:13 PM, October 21, 2007, Anonymous Rickster said...

Gerald,
Where did you get team-by-team revenue numbers? Are you saying that Nashville lost money last season because they needed to make it into Round Two to turn a profit? Isn't that exactly what was happening before the lockout? Isn't that why the league needed 'cost certainty'?

I don't think that there should be NHL teams in places where no one plays, watches, or cares about hockey. Any system that promotes those teams is wrong-headed and doomed to failure.

 
At 1:21 PM, October 22, 2007, Anonymous Gerald said...

Rickster, I obtained team-by-team ticket revenue numbers from the report published in the Globe earlier this year.

As for other numbers, as I indicated above (I think), I used the Forbes team-by-team numbers (although with a large caveat, as I also noted).

I don't think I am saying that NASH "needed" to go into the second round. I am saying that they made that choice. I would argue that they were able to make that choice because the cap (a) prevented other teams from bidding on the likes of Forsberg when he became available and (b) their payroll was much more competitive in the first place. Had they not had a chance as in the previous systme, they would not have even been in the game enough to get a roll of the dice.

Moving into virgin markets is the standard approach for businesses in just about any field. I suspect McDonalds had a lot of trepidation before they put their first store in China; who would think anyone would care about burgers and fries in a country where rice is a mainstay and there was questionable amounts of disposable income. Now we see the genius of it. That is just one of a million stories. Sometimes you have to have enough confidence in your product that it will create a market, and it has for hockey (CAR, LAK, ANA, SJ, TB for starters).

 

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