Monday, August 20, 2007

What Did We Miss?

1) Caution: For those who get drowsy when we discuss salary cap and other related material, this post will contain such references. You have been warned! LOL An excellent story linked/written by Luke DeCock caused us to again ask a fundamental question that we here at FAUXRUMORS have been asking since the Bettman lockout; Why did we miss a season of hockey?


2) The reasons outlined at the time included:

  • Player salaries are too high

  • Too many teams are losing money

  • Ticket prices are too high

  • The NHL needs a salary cap to get parity in order to increase fan interest

3) Here's where we get confused. Before the Bettman lockout the average players salary was 1.8 million. The overall NHL income was stated as 1.9 billion. The NHL(Levitt report) said it lost 273 million that year. Jump ahead to this upcoming season. According to Decock, salaries will amazingly approach an average of a whopping 2.2 million! He goes on to say that revenues are estimated to be over 2.2 billion. Yes, ticket prices(as opposed to what Bettman promised) have risen, but certainly TV revenues have NOT increased all that much from pre lockout levels to account for this apparent(temporary in our opinion) amnesia the owners have over monetary losses.


4) Let us explain. It would seem that to stay out of the red the league would have to either increase their revenues from the pre lockout level of 1.9 bil to 2.3 bil and keep player salaries unchanged, OR increase income to 2.5 bil to keep pace with current player salary inflation. Else where is all this 'new money' coming from? Is the NHL really out of financial danger? It would seem so. If one goes by franchise values and the fact that there seem to be owners lined up to buy teams, business must be good, right?


5) Yes, yes, we all know about 'cost certainty, and how the players merely get a fixed % of income, but we want to know is the current NHL income inflated to allow player salaries to increase so much, or were revenues under reported(hidden) before to inflate losses before the Bettman lockout? Either answer means things have been/are being manipulated to get the result that is desired.


6)So what does this all mean? Of course its all conjecture on our part, but we are NOT optimistic about avoiding further lockouts in the future. It wouldn't be a stretch to forsee in the next 2-3 years before the CBA expires a resuption of owners complaining they are losing money and a 'change' needs to be made. The owners next goal, guarenteed contracts?!? Eliminating those would erase a huge headache. One that the NFL to this day has avoided. The players said they'd never capitulate on a salary cap, and they ultimately did, so the owners may feel they can impliment whatever system they want. Billionares always trump(no pun) millionares!

17 comments:

FAUXRUMORS said...

1) As you can see we have stopped comment moderation. We'll see how it goes. It didn't seem to slow responses, but we would prefer to have this forum stay as open as possible to all posters with their respective view points.
2) We will continue to delete all SPAM, and cluttering-non hockey related posts. Thanks in advance folks!

Jibblescribbits said...

Faux,

I think one thing that gets overlooked when talking about league revenue is the fact that the Canadian Dollar is, and has been, very strong against the American dollar since the end of the lockout.

It's no secret or surprise that Canadians buy more Hockey merchandise than Americans, and the strength of that dollar, and the high $ Canadian TV contracts, has allowed the NHL to increase revenue and have a higher total value.

This has allowed the NHL to hide the hit they are taking from the terrible American TV contracts.

Sauce said...

I think jibble is dead-on correct. The best way to prove the accuracy of the exchange rate effect is to have a peak at the financial statements of the Canadian teams. I'd be willing to bet that the income statements (the statement that shows how much profit is made) show a pretty big "exchange gain" amount. That's essentially the difference between the amount of the liability recorded on the books for salary (in Canadian $), and the amount of Canadian dollars it actually took to settle those salary liabilities in American dollars. As the Canadian $ gets stronger, those gains get bigger. And remember, the Canadian TV revenues are received in Candian dollars. Those Canadian dollars are then spread out and used to pay bills/salaries in American dollars.

This is ultimately the only real explanation for the revenue increase projection built into this year's cap number.

FAUXRUMORS said...

1) We have read conflicting stories the last year so about the actual effect(benefit) to the Canadian teams from the more favourable exchange rate.
2) Some have said that a great deal of the increased income up north can be attributed to this, while others have said this is over blown and only a fraction of their increased revenue can be directly tied to the positive exchange rate differential.
3) None of us are accountants/financial gurus so the jury remains out on that. What is not at issue is the fact that Canadian teams produce an inordinate % of league revenues. Some have published amounts as high as 40% for the 6 teams! A huge change from 5 years or so ago when all but Toronto/Montreal were bordering on financial ruin/bankruptcy.

I SPEAK YOU THE TRUTH said...

If the players are gonna make 2.2 million each I'd have to say they won the lockout battle!

FAUXRUMORS said...

1) Ya know 'Truth, we didn't say that in our post, but you have to wonder if that can't be argued.
2) The players took an across the board 24% cut, in addition to their salary cap concession, and still salaries are set to be HIGHER this next season (even adjusted for inflation) than what they were before the Bettman lockout.
3) That's what we find so peculiar Salaries are higher, ticket prices are higher, and yet we don't hear the cacophony (yet) of owners/Bettman saying the (financial) sky is falling

JP said...

I read that article that you had in your post. The thing that I don't understand is they said the players made 75% of the revenues before the strike. If they are making more now than then, why are they saying that they only get 54% now? Your right that the numbers don't seem to add up.

FAUXRUMORS said...

1) Another good point JP. We believe they will be allowed 55% this next season, but even with that slight increase one has to wonder how the owners can be getting by
2) At least the small market owners anyway, who now have the salary cap floor to stay above. Which is only a few mil lower than the cap maximum was 2 seasons ago!
3) A team like Edmonton for example was crying poverty when they had a payroll of 35 mil 3 years ago. How can they be making anything/surviving when their projected payroll is now slated to be 45 mil next season? Its so bad that a local businessman offered a huge sum to buy the team! LOL

The Dark Ranger said...

So Much for no more 'non-hockey' related blogs....

A friend of yours, faux?
;)

FAUXRUMORS said...

1) Dark: Sad, but it appears some have little else to do in their lives. We will continue to delete such inane posts as quickly as they appear. No biggie. Maybe when school resumnes we'll get fewer. LOL

FAUXRUMORS said...

1) The 'Hawk actually makes a valid point; that revenues are now more closely monitored than in the past.
2) Some, right after the CBA was implemented postulated just that; That the NHLPA may have actually come out on top in the lockout mess after all if/when they more closely determined what income constituted NHL revenue. Reducing the 'hidden profits' the owners had been shielding.
3) By doing so, the players would benefit directly because they were guaranteed a fixed % of this 'new' revenue, AND teams could no longer have negligible payrolls, with the salary cap floor, etc
4) Fauxrumors believes the jury is still out on all that. While it is true that previously hidden income was definitely now included, there are still WAY too many ways in which those numbers can be 'adjusted' by creative accountants.
5) As some have suggested the next war with the NHLPA(if/when they get their act together) could be if they demand an independent forensic accountant to go through the books to see what the real income of the NHL is.

JP said...

Didn't the owners and the players union have that part of the agreement? That they would allow the players to have someone look at what the owners made?

FAUXRUMORS said...

1) JP, we're sure there was a cursory method implemented, but you have to recall most of that agreement was made by now-discredited former NHLPA president Ted Saskin
2) There has to be a reason that Bettman, the owners and their flunkeys like Stan Fischler were so in love with Saskin.
3) We haven't yet seen any independent implicit proof that this was so, we believe there are on going investigations, but there was apparently enough superficial evidence to cause the players to immediately relieve Saskin of his duties this past spring.
4) As such, once a REAL NHLPA head comes on board, we can foresee him/her wanting a new method of determining what the real NHL income is and how it is computed. At that point the next war will commence. Just our opinion, but we believe all the signs point to this

Sauce said...

Section 50.1 of the CBA contains over 25 pages with an exhaustive, detailed description of "Hockey Related Revenues" ("HRR"). Section 50.12 contains the procedures for both the reporting of HRR by each team, and the procedures according to which each team's report iss verified by an independent accountant. There are also procedures outlined for a different independent account to audit any areas that are disputed by either the NHLPA or the club ownership.

The NHL is a business. And just like any other business, there are accounting rules and principles that are used in the measurement of all relevant numbers that are of financial consequence to any of the independent parties. Of course there are differing ways to interpret those rules and apply those priciples, but the judgements used to do so for the NHL are the same judgements used to do so for every listed company on any stock exchange that has a reputation to protect. The system of independent audit verification is not perfect (see Enron), but it's existence is probably THE reason why the U.S. financial markets are the most trusted in the world.

No one would argue that there wasn't a huge disagreement on what SHOULD be included in HRR when evaluating the economic health of the league. But the CBA was agree to and signed by both the players and owners - and the HRR definition, measurement procedures and verification procedures are clearly documented within.

Faux has written above that... "the next war with the NHLPA(if/when they get their act together) could be if they demand an independent forensic accountant to go through the books to see what the real income of the NHL is."

That is clearly incorrect. According to the CBA, the books of each team are open for inspection for the purposes of independent verification of HRR. As a CPA and one who has participated in the audits of some of the largest corporations in the world, I can personally vouch for the integrity of those who are hired to perform those audits.

FAUXRUMORS said...

1)Sauce: We don't necessarily dispute the integrity of the auditors themselves, but who is to say what they are looking at is the whole story? These guys(owners) have a long history of being less than on the up and up financially. We can name MANY current/former owners who have had 'trouble' with the feds for financial shenanigans. Your own buddy Charles Wang we read today is NOT out of the woods in that regard!
2) Our buddy Stan Fischler today was very nice and did a paragraph that dove tailed/illustrated very nicely on what our blog entry yesterday was saying. Stan asks: Is the salary cap going up too high/too fast?
3) If the cap is directly tied to revenues that would seem to not be an issue. The cap would seemingly only go up fast IF revenues are also going up, fast. Why then would Stan need to mention this?
4) We believe his question is but a start of the rhetoric that will slowly be ratcheted up as the CBA gets closer to expiration. The sky is falling owners will be back at it in force, and we will again be looking at another work stoppage.

Sauce said...

Audit procedures are designed to detect "financial shenanegans" of the variety that put Wang's buddy Kumar in jail. The crime in that case was the incorrect TIMING of recorded revenues - NOT whether or not those revenues were real. Other "mis-statements" are not as easily detected, but ownership is required to attest to the accuracy of their numbers are subject to criminal prosecution if its discovered that intentional mistatments were made. In other words, there is a potent deterrent to prevent cheating.

The reason for concern about a salary cap that is rising too quickly might be contained in section 49.3 of the CBA. It outlines the prerequisites that must be met for a team that would otherwise be eligible to receive "Cost Reditribution Funds" (i.e. shared revenues) to actually receive them. A team must average 13,175 in attendence, AND have a revenue growth rate in excess of the average growth rate for the league. So let's say that small market team Nashville wants to receive it's fair share of revenue redistribution (from the large market teams). If it's attendence is below 13,175 next year, AND it's revenue growth must be greater than the average for all the other teams. If either isn't met... no money. So even though the large market teams and Canadian teams are doing well, the small market teams don't necessarily benefit. But the cap would still go up, so a bad situation for those teams is just made worse.

FAUXRUMORS said...

1) Sauce: Your valid point that small market teams are still at financial risk despite the cap is something that we and many others stated as a possibility/likelyhood when the new CBA was signed.
2) Another(of many) of the rasons that we constantly ask: Why did we miss a season of hockey!?!

 
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