Monday, July 07, 2008

The loonie boost
The dollar's effect on the salary cap



The discussion of the Canadian dollar's rise and its relation to the NHL has been done to death, both in the blogosphere and the media, but with the summer lull settling in, a question came to mind this weekend...

What would next year's salary cap, set at $56.7-million, be if the dollar had remained constant since the CBA was signed in July, 2005?

In other words, if the agreement was put together with an .82 cent dollar in mind, what floor and cap was reasonable to expect four seasons in?

And I knew who to ask.

Gerald Carpenter, a regular reader and commenter here, has been typing until blue in the face for years about how the effect of the Canadian dollar's shift has been exaggerated. According to his math, the cap would be down to roughly $54-million had the loonie stayed right where it was three summers ago:

NHL Revenues 2007-08 = $2.56-billion (U.S.)
Canadian team's share = 31 per cent (est.)
Canadian team's revenue = $794-million (U.S.)

Exchange rate (July 1, 2007, to June 30, 2008) = .9897
$794-million (U.S.) in Canadian funds = $802-million

Exchange rate as of when CBA was put together (June 30, 2005) = .8159
At that exchange rate, the $802-million is worth $654-million (U.S.)

Difference in revenue generated = $139-million (U.S.)

"Accordingly, NHL revenues would have been $139-million (U.S.) less this year if the exchange rate had stayed as it was on June 30, 2005."

The players' share these days is approximately 56 per cent.
$139-million x .56 = $78-million (U.S.)

So the players' share would have been $78-million (U.S.) less.
$78-million divided by 30 teams = $2.6-million (U.S.)




Those are Gerald's figures. Now, that's all pretty rough fudging, and calculating that there is $2.6-million less salary per team available does not necessarily reflect how high the cap would be.

Plugging the same figures into the salary midpoint equation in the CBA, however, we can come up with a best guesstimate. If NHL revenues were $139-million lower last season, from $2.56-billion to $2.421-billion, we could calculate the midpoint like so:

(56 per cent of $2.421-billion) - $70-million (benefits) / 30 teams

Midpoint = $42.9-million
Floor = $34.9-million
Cap = $50.9-million

Add in the 5-per-cent boost:
Floor = $37-million
Cap = $53-million

Absent all influence of currency change since the summer of 2005, I'd say we'd have a salary cap between $3- and $4-million lower than $56.7-million. The biggest x-factor here, however, is what is the true figure for the percentage of revenue generated in Canadian funds, a number that could be larger than the 31 per cent we're plugging in here.

That drop isn't insignificant, but it also makes up only about 20 per cent of the growth we've seen from the cap, which has risen $17.7-million, an average of $5.9-million a season, in the past three years.

The chart below shows where the cap's headed if it continues to increase at that same rate over the next four seasons (Series 1), as well as a look at what those increases would look like if we take currency changes out of the equation (Series 2):

Tom Benjamin put together a good look yesterday at why that growth's unlikely to happen — and it's a good thing, too.

I'm not sure many teams can stomach a $64-million floor, even four years off.

UPDATE Benjamin has an update for us, and it addresses the fact that projected revenues were set artificially low under that first year after the lockout:

"First, most of the increase in the cap came because the cap was set too low the first year. In year 1, the league projected $1.7 billion in revenues. It came in at $2.1 B. That $400 MM was not growth driving up the cap. It was a (deliberately) inaccurate forecast of revenues. Carpenter's analysis is disingenuous. The $17.7 MM increase in the cap is an increase reflecting a rise in revenues from $1.7 B to $2.6 B. The actual rise in revenues was $2.1 B to $2.6 B. Almost half the increase in the cap had nothing to do with revenue increases and everything to do with the fact that the first cap was set on the assumption NHL revenues coming out of the lockout were going to drop by $400 MM.

"The $39 MM cap was a PR number. Carpenter has done the analysis as if it was real. As if revenues coming out of the lockout actually went up by $400 MM. The cap should have been about $46 MM the first year. The analysis implies that there was a real revenue increase of $400 MM. I really don't understand why Carpenter does this sort of thing. I'm so sick of the MSM chant "Wow! The new floor is higher than the first cap!" as if the first cap was anything except a fairy tale number."


Benjamin's right in that the $39-million figure is a misnomer, an inaccurate reflection of revenues given what the league generated in 2003-04. It's interesting, though, that if we go with his $46-million figure, the cap would have remained essentially flat the first two years after the lockout before shooting up the way it has.

It's hard not to conclude that the league wanted a $50-million+ cap at this point given the way the calculations are determined. Throwing out that first $5-million increase in the cap, it has really only risen $12.7-million, $3- to $4-million of which is due to the currency change.
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18 Comments:

At 3:36 AM, July 07, 2008, Anonymous Ryan said...

I'm definitely no expert in this, but... I think the league earns Canadian dollars from national broadcast deals in Canada. I'm struggling to find estimates for most deals, but CBC paid an estimated $60 million for HNIC rights each of the last six years. That's the largest deal by a wide margin, so there's a likely range of $75-90 million in additional Canadian revenues that go straight to the league. I imagine the league and individual teams split the licensing revenue from merchandise as well, but I have no idea how much that might be worth or what the split is.

 
At 7:41 AM, July 07, 2008, Anonymous Gerald said...

James, I have determined the discrepancy in your figures. You did:

(HRR x 56 per cent) - Benefits / 30 teams

What is supposed to happen is this:

(HRR - Benefits) x 56 percent / 30 teams.

I think the benefits are closer to $60 mil, and the percentage was 56.7% but would, at $2.421 billion, be only a share over 56% (call it 56.1%)

 
At 8:29 AM, July 07, 2008, Blogger Jeremy said...

I think you also need to factor in that all 30 teams won't be getting brand new jerseys for quite some time. The cap went up by an astronomical 14% this year, a huge number, largely influenced by the fact that all 30 teams had brand-new, re-designed RBK jerseys released to the fans. I believe that this promoted false revenue in the league, and I for one will not be surprised if revenues are actually down at this time next year.

 
At 8:31 AM, July 07, 2008, Blogger Jeremy said...

Sorry that should read false revenue growth.

 
At 9:13 AM, July 07, 2008, Blogger Big Picture Guy said...

It's all well and good to discuss operating revenues and expenses but it misses the point that the market value of an NHL franchise continues to escalate dramatically and that is the main financial incentive for many owners. Four franchises changed hands in the last year, all were either bought or founded 10 or 11 years ago:Edmonton: original price-75 million, sale price 200 million. Tampa Bay-original price 100 million, sale price 200 million. Minnesota and Nashville were expansion franchises so they were bought for the $80 million fee, MLSE chipped in $45 million for the Xcel Center, Nashville contributed 31% of the expansion fee in the Leipold purchase. Sale price: Wild-260 million ,Predators-193 million. Of course there were losses in operating the teams, Leipold claims 70 million, Tampa Bay 80 million but some, perhaps a substantial amount, of those losses can be written off under US tax laws.IMO, the real driver here is the vast imbalance in wealth creation in the US (and Canada to a lesser degree) in the last 10-15 years, supplying a ready pool of new billionaires and multi-billionaires who enjoy the perks and profits of NHL ownership.

 
At 10:10 AM, July 07, 2008, Anonymous Gerald said...

That's the largest deal by a wide margin, so there's a likely range of $75-90 million in additional Canadian revenues that go straight to the league.

Firstly, Ryan, the CBC deal (until the new one kicks in this year) was for slightly less than the Versus one, so you are wrong about that.

Secondly, there is a large amount of US dollar money that also goes back to the CDN teams through US sponsorships.

At best, it washes out IMO.

 
At 12:10 PM, July 07, 2008, Anonymous Gerald said...

The cap went up by an astronomical 14% this year, a huge number, largely influenced by the fact that all 30 teams had brand-new, re-designed RBK jerseys released to the fans.

Jeremy, to say that the cap has been "largely influenced" by anything merchandise related is grossly incorrect. Licencing revenue is relatively minimal for the NHL in the grand scheme of things. The NHL is not in the business of manufacturing jerseys. With all due respect, you probably need to understand a little bit more about how licencing concessions work. The NHL for the most part gets just a little piece of that pie.

 
At 12:20 PM, July 07, 2008, Blogger James Mirtle said...

Gerald, this is the cap calculation formula, right from the CBA:

The Midpoint is (54% of $1.9 billion) - $66 million
----------------------------------------- =
30 Clubs in the NHL

 
At 1:05 PM, July 07, 2008, Anonymous Gerald said...

Right you are, James, my apologies.

I suspect it is the benefits aspect that skewers the calculations off of the straight quick-n-dirty calculations that I did. Also, there is a half-percent increase in the players' share that ensues due to the sliding scale for revenues between $2.4 and $2.7 billion.

 
At 1:10 PM, July 07, 2008, Anonymous Gerald said...

Regarding the comments of the estimable Mr. Benjamin, i don't exactly know what he is talking about.

As you know, my calculations were made not as part of an agenda, but rather because you asked me the question.

Secondly, I did not even assess or comment upon any aspect of the increase in the cap from the low plug number that the NHL and NHLPA agreed to for the first year. None of this has anything to do with the increases in the cap; it is more of what would it be if the dollar stayed the same? His comment is so completely out of whack to the question (which was, I reiterate, YOUR question) that I am flummoxed, to be frank.

 
At 1:58 PM, July 07, 2008, Blogger J. Michael Neal said...

Another thing to keep in mind is that we are talking about nominal dollars. The real increase has been smaller. How much smaller depends upon what you think inflation is.

 
At 2:45 PM, July 07, 2008, Blogger dave in Rocha said...

I have to agree with Gerald that Benjamin took his analysis and skewed it to fit his anti-NHL views. You can't claim that the first cap was based on "a (deliberately) inaccurate forecast of revenues", when there were no revenues the previous season on which to base the cap! Throw in the fact that everyone from fans to bloggers to MSM were anticipating that losing the full season to the lockout would hurt revenues and you arrive at the logical conclusion of a $39M cap. The fact that the revenue projection ended up being extremely low should be viewed as a positive, not a negative.

 
At 2:57 PM, July 07, 2008, Blogger namflashback said...

The other objective of a low cap# in year 1 of the CBA would be to help insure that increases would be seen by the PA as they progress through the years of the CBA.

Players are happy and getting rich. Supports the idea of the "linkage."

Paul Kelly doesn't seem to be posturing to begin the argument on the premise that the players are not benefitting.

Next up for the PA should be a seat at the table that makes the decisions on things like a Balsillie sale and reloc of a franchise.

That is affecting the ability of the league to maximize HRR and therefore the players' take.

If I were Kelly, I would be pushing to have 3 franchises reloc to Winnipeg, QC, Hamilton.

 
At 3:16 PM, July 07, 2008, Anonymous Anonymous said...

Winnipeg? Hey, Victoria was the last non-NHL team awarded the Stanley Cup. We want a team. And would be more likely than Winnipeg to afford one. Come to think of it, Len Barrie is based here. And Tampa can't be long for this world. Mmmmmm.....

 
At 4:07 PM, July 07, 2008, Anonymous snafu said...

Furthermore, HRR under the old CBA and the current one aren't necessarily the same. This makes it a bit harder to compare growth or even actual HRR from 2004 and earlier to current figures.

 
At 5:03 PM, July 07, 2008, Anonymous Gerald said...

Kinda why no one was actually doing that here ...

 
At 9:46 PM, July 07, 2008, Anonymous Tom Benjamin said...

I apologise, Gerald. I did not expect James was going to publish parts of my email verbatim or I would have spent the time to make it clearer. I also would have left your name out of it. I was trying to point out an error while staying out of it.

I think you are too smart not to realize James framed the question incorrectly. "How much has the value of the looney impacted on the rise in the cap?" is wrong because the rise in the cap is misleading.

You can get an answer to the question - about 20% of the rise in the cap is due to the Canadian dollar - but that understates the significance of the currency fluctuation. It also leaves readers with the idea that the other 80% is due to real revenue increases.

That's wrong.

The correct answer to James' question in my opinion is:

We can't get a good handle on that because the way the cap was set in the first two years of the agreement. The rise in the cap so far does not represent a trend that can be projected into the future. The first time the cap formula was actually applied was 2006-07.

We can see the impact on league revenues since the lockout. Revenues have increased by $380 MM with a boost of $140 MM coming from the increase in the value of the loonie.

 
At 10:49 PM, July 08, 2008, Anonymous Gerald said...

Apology accepted, Tom, but please bear in mind that the question you posed ("How much has the value of the looney impacted on the rise in the cap?") is not actually the original question. THAT was, as James pointed out at the beginning:

"What would next year's salary cap, set at $56.7-million, be if the dollar had remained constant since the CBA was signed in July, 2005?"

That wqas the focus of this particular analysis, I believe.

THe reason I come back to this and point this out is because this statement:

Revenues have increased by $380 MM with a boost of $140 MM coming from the increase in the value of the loonie.

... is not correct, either.

To get $140 million, one has to use the exchange rate for July 2005. However, this is drastically different from the number that was used to arrive at $2.180 billion (which is the base revenue number, that leads to the $380 million figure).

In fact, the exchange rate for 2005-06 was .8602, NOT .8159. That means that the CDN$802 million was NOT US$654 million, but rather US$690 million.

Accordingly, if you want to ask the question "how much has the exchange rate contributed to the increase in revenue ?" (a different question than "what would the cap be if we used the exchange rate in July 2005?"), the answer is NOT $139 million, but rather only $104 million.

This is a little over 1/4 of the $380 million increase in revenue (ignoring, as you properly point out, the $400 million underestimate in the first post-lockout year).

 

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