Thursday, July 22, 2010


Cost certainty

The chatter continues about Ilya Kovalchuk, cap circumvention, and lifetime contracts with phony-baloney years tacked on to the end, but amazingly, that’s not the biggest CBA failure that was exposed this week. That happened yesterday, when Oilers owner Daryl Katz stood up in front of Edmonton city council and informed them that hockey-related revenues are not sufficient to operate an NHL team sustainably.

The NHL and its owners locked the players out for a full season because of the critical, non-negotiable imperative that player salaries needed to be indexed to league revenues. This isn’t just something I read into Gary Bettman’s public comments, or something that I assumed but was never stated. This was drilled into the fans over and over by Bettman and Daly, by numerous owners, and by sympathetic media. Cost certainty. Salaries would track revenues, down to the dollar.

Lots of other teams may receive concert revenues or operate non-hockey businesses, but the success or failure of those ventures do not impact player salary expenses – which are contractually determined by hockey-related revenue only – nor other hockey expenses like executive salaries, scouting, travel, etc. which clearly have no relationship to (e.g.) concert revenues.

It's just so bloody galling. I never for a second believed the lockout fairy tales about more affordable tickets, nor did (do) I think the 2005 CBA was good for the league as a whole, on balance. I thought I had a healthy amount of skepticism towards the motives of the very wealthy & successful people who own and run the NHL. But in 2005, I never would have anticipated an owner coming out and saying, Hey, sure we had a year-long lockout to limit player costs to a fixed percentage of hockey revenue, but that doesn’t mean hockey revenue is sufficient to run a team.
Katz Group chief financial officer Paul Marcaccio said owner Daryl Katz has subsidized the Oilers by several million dollars in each of the last two years because revenues are too low.

Unlike other NHL clubs, they don't receive concert and other non-hockey revenue from their home at Rexall Place, he said.

"If professional hockey in Edmonton is going to be sustainable, something has to change, regardless of who owns the team," he said.

"Many factors, such as the size of our market, cannot be helped ... Others can only be addressed by a new arena and having the same operating model as the Calgary Flames and all other NHL teams."

Round and round the mulberry bush. In conclusion, if you went to bat for the owners during the lockout, now would be a good time to hang your head in shame. Also, if you picture the "several million dollars" in the first quoted sentence above as "exactly 3.75 million dollars", it's good for a laugh.



Am I the only one wondering how the hell the Oilers lost money this year? Am I the only one wondering if this is another bit of bullshit, just like the last ownership group tended towards? The cap was flat, attendance was flat, and salaries actually went down compared to last year because of the dumps, if memory serves. Did merchandising take a complete shit? Did the minor drop in the dollar have that big of an effect? (I don't have a reference point of past revenues to have a guess at the effect changes in currency have.) I'm baffled.

Maybe running an NHL team is just an inherently horrible business proposition that we taxpayers are obliged to prop up because it would be fucking terrible if a completely unsustainable business model paying guys millions of dollars to hit shit with a stick didn't work out.

The current system doesn't guarantee a profit, it only places some constrains on how much teams can spend.

A small market team that spends in the upper portion of the cap & floor range, while icing a last-place team, shouldn't be surprised to lose money.

"Maybe running an NHL team is just an inherently horrible business proposition..."

See, while I'm sympathetic to this general possibililty, I don't think so. That would mean that this inherent-ness existed during the lockout, and the owners were willing to lose a whole season but NOT willing to ask for the concessions that were truly necessary. Also, it doesn't explain franchise values/sale prices over the past ~4 years.

The entire, explicit premise of the lockout was that player salaries were spiralling out of control, and if they were indexed to revenues, not only would it address the problem at the time, but ensure that the spiral didn't start over again.

Now we're being told, "Oh, sure, we're sold out all the time, and salaries are pretty much a linear function of ticket sales, but we can't afford to go on like this."

Either that, or: this is a problem deriving from the revenues of the poorest teams in the league. And lousy ticket sales in Carolina or Long Island or Calgary should not be an Edmonton taxpayer problem.

Forechecker, you're right of course. Except that the Oilers had no attendance problems the past couple of years, or any other peripheral revenue problems AFAIK.

And if the Oilers are financially sound -except that- Khabibulin's salary has to come straight out of the owner's pocket, how much damn sympathy is anyone supposed to feel for him?

It's an accounting trick.

SOP is:

- Team is purchased

- Cost of purchase is transferred to team via a loan

- Team pays back loan principal and interest incurring losses that are legitimate to the entity (the team in this case)

- Owner shuffles money around but actually, on a consolidated basis, isn't losing a dime**

- Owner holds city of residence hostage per 'money losing operation'

Whether it be the EIG or Katz or someone else - just rinse and repeat.

** not always true - some teams are legit moneypits (see also: the Phoenix Coyotes)

What YK said.

City council should be concerned with cash flow here. Nothing else.

IIRC the teams are all required to submit audited Unified Report of Operations (URO) forms annually.

It would take about one minute for the Oilers to email a copy of that to a city accountant. And no more than 20 minutes for said accountant to have a reasonably accurate estimate of the Oiler's cash flow situation.

It irks me that nobody in civic politics even has the stones to ask for this information.

I'm not an Edmonton tax payer, so it doesn't irk me THAT much. Still, you have an NHL owner requesting an enormous subsidy from local government, one of the key components of his argument is that his business is not financially viable in it's current arena. And everyone just takes his word for it. It's madness.

Maybe the huge turnstile dip had a chilling effect on concessions. No worry - they'll be great this year - Nik is back, baby!

It irks me that nobody in civic politics even has the stones to ask for this information.

It was asked repeatedly at the meeting on Wednesday. The Katz group refused to turn it over. Said they were a private corp. who didn't share these figures. If it wasn't repeated very much in the MSM, well, can we be surprised? They are as overwhelmed on this issue as most of the councillors.

Thanks Andy, that's encouraging.

It is encouraging, but only so long as they stick with it. That's the test. We'll see how well they do.

Addendum to what Vic said:

re: cash flow

It is important that the cash flowed out of the organization be sourced - i.e. WHO is has final receipt of the $

In this way you know if the loan is legit, for purposes of the 'losing money arguement', or not.

Had there not been a cap imposed, a handful of teams would have been at or over $100-million by now. Easily.

More, overall, would have been spent, much of it by the richest teams in the league. Total salary expenditures have been clawed back successfully, but the bulk of that came from the wealthiest teams.

But one of the major reasons the CBA didn't fix the issue is that the gap between the high and low revenue teams keeps expanding. Almost all of those new revenues that have come in and raised the cap were generated by teams already doing well.

(The great success of that lockout, Bettman would tell you, is in the parity in the league. That's likely what he was after as much as anything. Cost certainty is all but impossible when you have some teams pulling in three or four times those on the bottom.)

Also, someone should newsflash Katz that if your organization is the worst in the industry, you probably stand to lose a few bucks.

Katz bought the team only two years ago. What material change has occurred in his business such that the taxpayer needs to step in?

Maybe he didn't look at the books? (That's sarcasm).

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