Wednesday, November 07, 2007

Revenue sharing's ugly truth

Here's the problem: Teams like the Nashville Predators, Florida Panthers and Phoenix Coyotes, which rely on revenue-sharing money, must generate "a year-to-year revenue growth rate in excess of the league average revenue growth rate," the CBA says.

Put simply, if the average NHL club increases revenue 6 per cent this season, and the Predators increase revenue 5 per cent, the club would lose 25 per cent, or about $3 million, of its revenue-sharing stipend of $11 million (all figures U.S.).
Teams that miss the league's target for revenue growth in a second straight season suffer a 40 per cent hit, and 50 per cent if it happens a third season in a row.
A great deal of revenue growth these days in the NHL has been powered by the Canadian franchises, all six of which were on the giving end of revenue sharing after the 2006-07 season.

It's growth related to an increasing dollar value in this country, as well as new revenue streams in the form of pay per view television and new media, and really not something that can be duplicated in a place like Phoenix, where ticket sales are again down and the team on the ice, while overperforming, doesn't have a hope to make the playoffs this season.

A few owners have made it known in the past that the revenue sharing they receive is often the difference between breaking even and falling a few million dollars in the red, something that would only be exacerbated by this oft-overlooked article of the new CBA.

I've picked through revenue sharing stipulations before on this site, but it really is, as Westhead alludes, a tangled mess of legalese. Still, for reference sake, allow me to quote from the pertinent section, Article 49.3(d):
Beginning in the third League Year of this Agreement (the 2007-08 League Year), the eligibility of Clubs for a "full share" Distribution shall be conditioned on Club revenue performance standards ...
In the 2007-08 League Year, only those Clubs meeting the following criteria shall be eligible for a "full share" Distribution:

(1) The Club is generating a year-to-year revenue growth rate in excess of the League average revenue growth rate (i.e., the Club's revenue growth rate from 2006-07 to 2007-08 is greater than the League average revenue growth rate from 2006-07 to 2007-08); and

(2) The Club is averaging paid attendance at or exceeding a level that is the lesser of either 13,125 per game (seventy-five (75) percent of 17,500) or the average League-wide paid attendance.
That attendance marker rises to 14,000 per game (or the league average) for 2008-09.

Nashville was the biggest drain on the revenue sharing pool in the league, drawing at least $11-million in 2006-07 (many reports had the figure at $14-million), and even then the team lost money according to outgoing owner Craig Leipold. Given the tumult with the Predators and the low turnout at the gate, it seems exceptionally unlikely the team will experience any revenue growth at all this season, and stand to see at least $3-million shaved off that handout figure in the off-season.

At least we know where that city's latest allowance will be going.
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15 Comments:

At 4:43 PM, November 07, 2007, Anonymous Frank said...

James, in addition to the revenue sharing problem, the smaller teams are also getting "squeezed" by the way the MINIMUM CAP is calculated.

For example if the cap is $42 million ($50 million maximum and $34 million minimum) and total revenues grow by 10% in a year, the cap increases to $46.2 million ($54.2 million maximum and $38.2 million minimum).

Therefore while total revenues grow by 10% the minimum cap actually increases by 12.4%, while the maximum cap increases by only 8.4%. This is because the maximum and minimum caps are calculated at a flat $8 million plus/minus, instead of being set as a percentage of the average cap.

Given that the smaller teams will have below average revenue growth - having their salary budget (the minimum cap) grow at a faster rate than average revenue will really put the squeeze on them.

So add this one to the list of ammendments to the CBA the owners would like to see. Clearly, Bettman and the NHL made substantial mistakes when they negotiated the CBA.

Looks like the players have some leverage in negotiating some changes favourable to them, if they agree to helping the owners out on the revenue sharing and cap calculation problems.

 
At 4:53 PM, November 07, 2007, Anonymous Anonymous said...

Let's see if I have this right. Vancouver, Edmonton and Calgary sell out every night. For the privilege of paying ridiculous sums to attend a game, fans in those cities got to see Paul Kariya, Peter Forsberg, et al, come to town in Nashville garb, paid in large part by these Canadian fans.
And now Brian Blowhard wants to be able to offload his Bertuz...errr...mistakes on teams by throwing them a little cash along with the body bag.
That is one f@kked up system.

 
At 4:54 PM, November 07, 2007, Anonymous Matt said...

Man, I know I've banged this drum enough in the past, but: a team suffering financially for putting an inferior product on the ice -- or otherwise being unable to attract paying customers -- is in the grand scheme of things very good, not a problem, or something ugly.

If there are no negative financial consequences for failure, especially repeated failure, then where is the incentive to correct? Why would you want revenue sharing to be a robust and permanent enough source of $$ than certain teams could essentially plan their businesses around it?

 
At 5:14 PM, November 07, 2007, Blogger James Mirtle said...

I actually agree with you Matt, but the fact is that these penalties were camouflaged by the fact they weren't going to come in until after this season.

Other than this piece by Westhead, how often have they been brought up?

The thing that I find strange is that "failure" is determined to be not growing your business as the league average rate, something that is pretty much utterly impossible in places like Phoenix and Nashville. They're simply weaker markets that are already struggling to spend to the rising cap minimum even with full revenue sharing.

The 'ugly' part is that we're going to have five or six franchises bleeding even more than they are now once these stipulations come in. It's not quite as simple as saying "move 'em all" — and it seems ridiculous to imply punitive revenue sharing is going to be able help these clubs stay competitive.

It works as a deterrent if there are one or two welfare cases consistently feeding at the bottom, but what happens when that applies to every team that's revenue-sharing eligible? Does anyone think Nashville, Atlanta, Phoenix or Florida are going to see mass growth in revenues in the next two or three years?

 
At 5:14 PM, November 07, 2007, Anonymous Gerald said...

A great deal of revenue growth these days in the NHL has been powered by the Canadian franchises,

It's growth related to an increasing dollar value in this country

James, I would have thought that you would have given up the ghost on the above exchange rate canard, since I demonstrated on your own blog the erroneousness of that statement.

As to revenue being driven by Canadian teams, the evidence is to the contrary. Each of the Canadian teams has all of their tickets and suites sold out. Their only real avenue of revenue increases is through ticket price increases. The Leafs will make about $6 to $8 million extra from SportsNet, but that is 1/4 of 1 percent of NHL revenues.

The only way that the NHL is growing 6-7% per year (as they did last year) is through a broadly based increase from a variety of areas, including US revenue growth as an integral component. NHL revenues are too big to be moved by that percentage by isolated increases.

Given that the smaller teams will have below average revenue growth

Quite to the contrary, Frank. Smaller market or developing market teams have the most room to grow both in terms of attendance increases and rooom to increase prices. Does anyone think that Edmonton (for example) will be able to sustain 20%+ ticket price increases, when they are already among the league's highest?

With respect to Nashville, everyone's favourite whipping boy, I would actually expect that they are sustaining healthy revenue increases. They raised ticket prices by an average of 25% this season. While attendance is down, it is down only marginally, far less than 25%. Do the math from there.

To the extent that there is or will be league revenue growth, it will be in STL, PITT, ANA and NYI (assuming trends hold). Above average growth of a franchise comes from attendance and suite sale increases and associated sponsorship and advertising dollars. League-wide growth can only come from a broad-based increase.

 
At 5:38 PM, November 07, 2007, Blogger McLea said...

Gerald is right. A higher revenue growth rate should be easier for less successful franchises to achieve because:

a) Their existing revenue numbers are lower, so even small increases in revenue will be relatively higher percentage wise.

b) They have far more growth opportunties to take advantage of than more established franchises.

 
At 6:01 PM, November 07, 2007, Blogger James Mirtle said...

I think that's true in places like St. Louis, Boston and Chicago, etc., where they've had considerable success before, but how many teams have never had 5-per-cent growth in a season?

I'm willing to bet there are quite a few.

The gap between the Leafs and Rangers, who continue to increase revenues annually, is ever expanding.

Anyway, there isn't going to be a lot of sympathy for Nashville, Atlanta, Phoenix and Florida, who many hockey fans wish would just whither and die already, but there are going to be a lot of unhappy owners in those markets. (And maybe franchise values don't climb so readily if the revenue sharing isn't there for these teams?)

 
At 11:40 PM, November 07, 2007, Anonymous Gerald said...

but how many teams have never had 5-per-cent growth in a season?

I'm willing to bet there are quite a few.

Sadly for me, we will never have a way of proving that one way or the other, because I would otherwise be willing to bet you any amount of money that there is not an existing franchise that has NOT had that level of growth not just once, but many times each, and my pocketbook would be the better for such a wager. For the love of god, James ... you are reaching almost Benjaminian levels of hyperbole when you talk about this stuff (and that is not a good thing). Take a look at attendance figures and see how many teams have had increases of 10% or more in a season, much less 5%. Heck, a team will get more than a 5% boost in a season by getting a few playoff dates.

Anyway, there isn't going to be a lot of sympathy for Nashville, Atlanta, Phoenix and Florida, who many hockey fans wish would just whither and die already,

Anyone who would actually think that not only is NOT a hockey fan, but, if they would actually wish for a market - and his fellow hockey fans - to lose a team, they have some troubling personal "issues" as well and really should seek some professional help.

 
At 12:27 AM, November 08, 2007, Blogger J. Michael Neal said...

I actually agree with you Matt, but the fact is that these penalties were camouflaged by the fact they weren't going to come in until after this season.

They were camouflaged to you and me, maybe. If they were camouflaged to a team owner, it means that the team owner is a moron. The CBA is in writing. If this clause has snuck up on an owner, it means that the owner is paying a lot of high priced contract lawyers for absolutely nothing.

As I've said before, one of the problems with major sports leagues is that they are set up such that no one goes bankrupt. Any rational set-up for the NHL (or NFL or MLB, or what have you) is that incompetent ownership gets driven out of business. If these owners are only kind of incompetent, then they sell to someone else before they go bankrupt. If they are really incompetent, they file Chapter 11 (or Chapter 7), and sell to someone else.

Any system that protects incompetent owners can only hurt the league. Any owner that didn't realize that this addendum to revenue sharing was about to bite them in the *** is, by definition, incompetent, and should be driven out of business. Good riddance.

 
At 12:32 AM, November 08, 2007, Blogger J. Michael Neal said...

James, I would have thought that you would have given up the ghost on the above exchange rate canard, since I demonstrated on your own blog the erroneousness of that statement.


You are mistaking the fact that you were right about analysis of previous revenue growth with the idea that what was true then is still true now. What James, and others, missed was that the that the huge moves in the relative values of the $US and the $CDN didn't coincide with the years that they were looking at.

What you are now missing is that the exchange rate moves are going to have a huge impact on the numbers going forward. The $CDN is worth a lot more now than it was at the point of the last CBA calculation.

This wouldn't bug me so much, except that you are a complete *** when discussing the situation. And, based upon the idea that it takes one to know one, I recognize you as a complete ***.

 
At 1:28 PM, November 08, 2007, Anonymous Gerald said...

Michael, if you have a problem with my tone, please recognize that it is borne out of frustration with ongoing NHL business commentary from members of the hockey commentary community who have absolutely no business knowledge or experience. Reading critiques of the NHL leadership's business judgment and acumen from those people is more than a little offputting. With just a few exceptions sprinkled around the net, they have no clue. Sorry, but that is how it is.

As to your point, the fact remains that, as per my previous analysis, in the MOST OPTIMAL CASE of CDN revenues totalling 1/3 of NHL revenues, the impact of exchange rate escalation is less than $8 million for every cent increase in the average annual exchange rate. A gigantic 12 cent increase - sustained over the entire fiscal year - would impact NHL revenues by 4%. I know that people love to assume that the CDN$ will not go down, but IMO they are deluded. As soon as speculators are done shorting the US$, there will be a correction.

 
At 1:48 PM, November 08, 2007, Anonymous Anonymous said...

Gerald,

In regard to your comment on the Leafs deal with Sportsnet, you make it sound like a quarter of 1% of NHL revenues is a small figure, but I would think that this is not the case. First of all, we are after all talking about extra revenues, so this money is all growth. If the league grows at a rate of 6% this year, a quarter of 1% of league revenues overall would account for 4.4% of the growth in league revenue. If the league grows at a rate of 7% this year, a quarter of 1% results in 3.8% of the total growth in league revenue. In either instance, if the Leafs do nothing else to grow revenues they are already accounting for more than their share of league revenue growth (if all teams were equal they would all account for 3.3% of growth). In conclusion, one quarter of 1% of overall revenues, if it is all new revenue, is quite a lot. Also, I think it’s perfectly reasonable to expect the Leafs to grow revenues in other areas. The Leafs are, then, certainly one of the teams driving the revenue growth bus.

Scott.

 
At 4:21 PM, November 08, 2007, Anonymous Anonymous said...

Gerald the "problem" with your tone is that it's always the same.

 
At 5:36 PM, November 08, 2007, Anonymous Gerald said...

The source of it is unchanging, so ...

 
At 5:43 PM, November 08, 2007, Anonymous Gerald said...

Also, I think it’s perfectly reasonable to expect the Leafs to grow revenues in other areas. The Leafs are, then, certainly one of the teams driving the revenue growth bus.

Fair point, Scott, although it does not detract from my overall point that it is not a Canadian team thing. My point was/is that there are no team or teams who are "driving the bus".

You cannot get to 6-7% league revenue increases without contributions from a large segment of the league. At a league revenue level, $6 million moves the needle imperceptibly. This year, the Leafs new TV deal will help do their part, together with their 5% ticket price hike. However, other than merchandise price hikes, they have no new areas of growth or new revenue streams going forward.

 

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