October 22 2008 07:18AM
At long last Wanye’s gotten around to sending over part one of his review of NHL financial problems. In the interests of saving time we will release them two a week—meaning the series will end next week. A big thanks to the Engineer for his assistance and graphs. We like graphs. Things are tough all around these days in the world of financial wizardry. Many companies are waking up to drastically reduced stock prices, the inability to find financing for their operations and in some cases even face closure. Sports, and entertainment in general, are saturated now unlike any time in history. There are professional leagues for every conceivable sport under the sun: 65+ wheelchair lawndarts, ape racing, and even Greco-Roman midget tossing. Some leagues may not survive a long recession. Others will only survive by consolidation; for example merging the 65+ wheelchair lawndarts with ape racing leagues to create a new super-league of old timers being chased by dart throwing apes. Officiated by once-tossed midgets. Sounds like a bright tomorrow, doesn't it? Recently, institutions such as Lehman Brothers and Merrill Lynch have been forced to close their doors, a sight many on Wall Street thought they wouldn't ever see in their lifetime. In our lifetime, we hope we don't ever see financial conditions impact the NHL, much less our beloved Oilers. This is the focus of this series of articles: do some research into the weak points around the finances of the NHL and discuss where/if they could be affected by this whole mess.
Part one: An overview of the NHL's finances and potential risks to the operations
There are three things that make an examination of NHL finances and discussing the impact of a deep recession a difficult proposition for your ol' pal Wanye. First, NHL owners guard their books like a state secret and there is very little information about NHLonomics on the interwebs.
Secondly, there is the fact that many NHL owners treat their team as a very expensive toy, a tax write-off or the final word in a billionaire wang measuring contest. As a result there should be no confusion between team finances and owner finances as the majority of the team owners are able to shoulder a significant financial load in the event of bad times.
Finally, we didn't think we would see things get as ugly as they have gotten in the financial markets. It's tough to predict a floor when you keep smashing through and continue heading down. Great Depression II? Or that thing we all laugh at/can't remember in 18 months? The former will certainly impact your NHL team, the latter not so much.
In a very interesting article on ESPN.com, NHL vice-president Ed Horne alluded to the NHL's ticket sales this season.
"We're in a soft and changing economy, (but) based on season-ticket renewals, new season tickets taken out, and buys of smaller packages and individual games, our sales [for the 2008–2009 season] are up four per cent from where they we were last year."
This is encouraging news for a league as dependent on ticket sales as the NHL, due primarily to the lack of a national TV deal. A big ol' TV deal will flatten out peaks and valleys of team revenue making the teams less dependent on Joe and Jane Lunchbox showing up and having a beer or two in the stands. Large media companies are able to withstand economic tough times better than the average family of four—and their payments to the teams are costs of doing business, whereas for your average fan it’s discretionary fun income. Having said all of that, the NHL's TV deal amounts to the Versus Network sending them a gift basket of muffins on Valentine's Day. So they’re disproportionately dependent on ticket sales from other leagues.
An NHL team is an expensive proposition to run, as noted by Jim Kelley of Sports Illustrated.
Reaching the cap automatically incurs payroll costs of $56.7 million. Then comes the price tags for insurance, pension and other costs, which can add another $3-4 million. That's before you factor in the minor league and scouting operation, arena maintenance and lease, non-hockey payroll and travel expenses. If a team has to budget for revenue sharing, it will be looking at $80 million or more in yearly operating costs.
Eighty million a year—that's some big smoke. The immediate question becomes determining the likelihood that all 30 teams will be able to meet these demands. If teams can afford to pay the majority of their bills, they will be able to run a short-term debt in the hopes that things will turn around. In the meantime, NHL brass are (hopefully) busy determining the weak points in the business of the NHL, calculating how likely they are to occur and figuring out workarounds.
We’ve done the very same exercise here, ranking what we believe to be the main risks to the teams as a general rule and assigned them an impact score. It should be noted that this isn't the likelihood that the event will occur, but rather the severity of its impact should the event actually occur. It should also be noted that these numbers would vary by market, by team and by owner. If Swift Transportation—the largest trucking company in the US—goes into the toilet, the Coyotes could go 82–0 and the owner Jerry Moyes would have bigger problems that would affect the Coyotes ability to make payroll.
Risk of fans losing ability to support league: impact severity 4/10
Some portion of the population will always to have enough money to shell out $200 for hockey tickets and a $10 beer. Over the past ten years we’ve already seen the NHL move out of affordability for most average fans to attend on the regular basis. Season tickets have been replaced with mini packs and cable TV for most fans. Companies now shoulder the majority of the load of ticket sales in many markets.
With most NHL teams currently sporting thousands of season-ticket- and mini-pack-holders whose cheques or credit card payments for the year have already cleared, the NHL has a solid base with which to work this season. Game-day sales in most markets are not large revenue centres and a short-term downturn can be offset by the millions of dollars the NHL collects prior to the puck dropping to start the season. It could be that season ticket holders are replaced with larger groups splitting tickets four ways—tickets could also be split at the front-office level into mini packs for sale. Mini pack holders can be replaced with larger groups of fans who will buy casual tickets at reduced levels.
If a mild recession hits, the NHL could adapt as the fans go down a notch on the pecking order. Ticket prices can be reduced, and teams don't need to have 100 per cent full buildings to operate a team. Anytime you have a risk that tens of thousands of people all start to behave in a largely different manner (ie, thousands of fans pull up stakes and don't attend a hockey game live for a number of years) sheer numbers make this risk substantially less than say an owner going bankrupt. Sheer numbers of fans shield the NHL from this risk having a dramatic impact on league revenues until things get really, really bad economically.
Risk of large corporations losing ability to support league: impact severity 6/10
Over the past twenty years, there has been a shift in NHL season ticket holder demographics away from average civilians owning season tickets to the majority of season ticket holders now being coporations. Redistributing season ticket holders from tens of thousands of average fans to hundreds of companies comes with its own risks and rewards.
Reward: Ticket prices go up as companies are able to afford more expensive tickets in the short term.
Risk: Your financial base is no longer tens of thousands of fans, but hundreds of companies which can be less stable in the long run.
Anytime you swap tens of thousands of customers for hundreds of customers, your economic stability generally decreases, even if they are able to pay more money in the short to medium term.
This riskiness gets even more intense as you climb the ladder of corporate support for the Oilers. Imagine the impact on the NHL if Ford were to go under—a real possibility. Ford is all up in most teams marketing grills, buying this, sponsoring that. But do you know where this advertising money comes from?
You: "Is it from all the profits Ford makes every year?"
Me: "No stupid. Ford loses money like the Leafs lose games."
You: "Oh Wanye, you so crazy. Ford is a huge company and can be a title sponsor for years to come."
Me: "They have lost over $8 billion in the last quarter alone. Tell me how long that can continue."
You: "Marry my hot cousin Wanye. I beg you."
Me: "I'll think about it."
You can't just go out and find a new major corporate sponsor like you can replace a season ticket holder. Major corporate sponsorship is much harder to find and is way harder to replace. This is a substantial risk to the NHL.
Risk of NHL owners losing the ability to operate the team: impact severity 9/10
Let's do some calculations. If there are 200,000 people in Edmonton with the financial means and desire to attend a game in Edmonton and they only need 16,839 for a sellout, really only need eight per cent of these people to attend a game. Now there are perhaps 100 companies in Edmonton capable of providing major financial support to the team. Say the Oilers need 25 to support the team to meet their budgetary goals. They need 25 per cent of the companies capable of pitching in to do so. With more reward comes more risk.
Now, how many Edmontonians are capable of buying the Oilers off of Daryl Katz if he hits tough times? This is hardly likely considering Kay-Z is made of solid gold and can always sell a toe or two to make payroll, but it bears consideration. It's not as though he could list the franchise on Comfree or on Craigslist. It's a tough sell in a down market.
The problem is that few people are in a position to spend the money necessary to buy and operate an NHL franchise. The bigger problem is that in tough times the amount of people able to do this shrinks even further as fortunes of the rich contract. The real problem is the rich people who are still in a position to take over a troubled financial team during a crisis are probably unwilling to do so—as an NHL team isn't usually a profitable investment when you compare it to other things you can do with $200 million in your chequing account. In bad economic times, things get cheaper and the rich use this opportunity to buy excellent investments on the cheap. This is why the rich get richer.
The only way you get rich off of 2/3 of the NHL teams is to sell the franchise. Think I'm full of it? Go ask the EIG how happy they were with their investment in 2005. Now ask them after the Katz cheque cleared. Now before you throw a whole bunch of stats at me about profitability of teams right now remember that we are considering a sale in a deep recession. This would make the assumption that revenues across the league have been slashed and see little hope of recovery in the short term.
The only clear path to making money off an NHL team is to sell it. This makes 1/3 of them crappy investments in good times and nearly all of them crappy investments heading into a recession. The idea of having the billionaire owner fund a team's burn is a little like robbing from your wife's purse to pay the bills of the family. Eventually you have to find someone else's money to steal not your own.
This is where the NHL is most vulnerable, though they will never discuss it openly.
Risk of the Canadian dollar tanking relative to the American dollar or vice versa: impact severity 7/10
As an article at NHL fanhouse recently noted, the increase in the value of the Canadian dollar may be responsible for as much as half of the league's revenue gains since the NHL went through the lockout of 2004–05.
"If you take out the Canadian teams, which have done so well since the lockout largely because of the Canadian dollar, the league's revenues are actually only growing at a 2 per cent clip per year," says an executive with a US-based NHL team, who requested anonymity.
As Mirtle pointed out when the Star article when live, the Cando averaged $1.007 USD from Oct 07 to Apr 08, a full 14 per cent increase over the same period the year previous. If the exchange rate collapse continues into the fall and the Canadian dollar trades as low as $0.90, the likelihood of reaching those revenue projections is doubtful at best.
Six out of 30 NHL teams are Canadian so the league is clearly more dependent on the American dollar than the Canadian dollar. Without boring you about how most currencies in the world have a spread of values but generally trend as a group, we will simply leave it at this: if the Canadian Dollar tanks it will be really bad for the NHL. If the US dollar tanks, look out. Er, lets take a peek at the Canadian dollar of late shall we?
More coming soon:
- Part two: The Good, the Bad and the Ugly: Three potential scenarios facing the NHL
- Part three: The potential impact on the Edmonton Oilers
- Part four: To infinity and beyond
—Have something to say? E-mail Wanye directly at firstname.lastname@example.org.