Why a Salary Cap Will Not Guarantee Profits for Owners

Discussion in 'The Business of Hockey' started by The Maltais Falcon, Jan 11, 2005.

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  1. The Maltais Falcon

    The Maltais Falcon Registered User

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    There seems to be this misconception on the part of many posters that a salary cap will be some sort of "Idiot Proof" system that will mathematically ensure the owners will make a profit no matter what. This would be true if players' salaries were the only cost the owners had. If team staff donated their labor for free, practice facilities gave away their ice time, arenas leased their buildings for free, airlines donated their flights for free, hotels donated their rooms for free, and media outlets gave away their advertising then a cap might guarantee profitability for owners. Unfortunately, none of these things happen. Operating costs are substantial and they cannot be linked to revenue the way salaries can. They should more or less stay fixed and even rise slightly over the years with inflation.

    According to the Levitt report (if you feel the report is bogus, humor me - the numbers may not be right but the principles remain), league revenues in 2003 were $1.996 billion. Player salaries were $1.494 billion and operating costs were $775 million. This lead to a $273 million loss for the league. Assuming a 54% salary cap is put into place and revenues and operating costs stay the same, player salaries will be $1.078 billion and the owners will see a profit of $143 million (8.5% of revenues.)

    Since operating costs are fixed, revenues will need to be at least $1.685 billion for the league to break even. If revenues dip below this point, it won't matter that player salaries are a fixed percentage of revenue - operating costs will tip the league into the red again. If the nightmare scenario that many predict occurs where revenues are cut in half to $998 million, the league will lose $316 million (31.66% of revenues.) Owners will be worse off than they were last year. Players will too.

    To make a long story short, a salary cap doesn't guarantee anything other than a fixed relationship between player salaries and revenues. It is not an idiot-proof system and it definitely won't guarantee the owners turn a profit, so let's just nip that myth in the bud and put it out to the pasture where it belongs.
     
  2. djhn579

    djhn579 Registered User

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    And that does not even mention that while the percentage of revenues the cap is set at is a league wide number, the percentage of each individual teams budget used to get to the cap will be different. If a cap is set at $38M, that may only be 38% of the NYR revenuse, but could be 76% of Buffalo's (for example) revenues. Revenue sharing will help narrow that difference, but there will still be a difference. If something goes wrong for Buffalo (poor drafts, bad weather, injuries, etc...) and attendance drops, it is still very possible for Buffalo to lose money. (I used Buffalo above, but this could also apply to many other teams...)
     
  3. The Maltais Falcon

    The Maltais Falcon Registered User

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    Good point.

    I should also mention I used the owners' initial offer of 54% as a cap. If the cap was negotiated upwards, which I'm sure the owners would do, to 56 or 57%, the margin for how low revenues could go while maintaining profitability would decrease. Leaguewide revenues would have to be on the order of $1.762 billion with a 56% cap for owners to stay in the black as a whole.
     
  4. txpd

    txpd Registered User

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    first, I don't think most posters that support a salary cap think that its a guarantee that a team will be profitable "no matter what". that's ridiculous. "no matter what"
    come on...it does just about guarantee some important things.

    first and foremost it gives smaller markets teams, teams that will never be able to make a profit if they have to spend 60% of what the Red Wings spend in order to compete on the ice with them, a chance to be a regular winning team. the payroll advantage is taken away from the big market teams and each team has to win with their choices and can't bail themselves out by throwing money at their mistakes.

    Consider the Nashville Preditors. They spend 1/3 or what Detroit, Colorado, St Louis and Dallas spend. With a team that is a regular playoff participant the Preditors could afford a $38m salary cap, but as with the current system they have to look at reality. Detroit, St Louis, Colorado and Dallas, all with $60m plus payrolls, are just about guaranteed a playoff spot. Over that last 10 years those teams have missed the playoffs combined once. That means that Nashville is competing with 11 other teams for only 4 playoff spots. So they choose not to spend money they will lose if they miss the playoffs until they are in the playoffs.
    Its the smart way to do business, but it makes it VERY hard to compete on the ice.

    IMO I would trust David Poile's judgement with $38m a lot more than Ken Holland.
    There are several GM's in the league that if allowed to compete on something resembling a level playing field would be very competitive in building winning teams where they have no chance under the current system.
     
  5. Its not about gauranteeing a profit for the owners, its about cost certainty, it always has been. And you want to be able to control your greatests costs.
     
  6. The Maltais Falcon

    The Maltais Falcon Registered User

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    Ahh, but it's not the pro-cap posters saying it - it's the pro-NHLPA ones. One of their favorite rallying cries is that it's unfair that the owners want to put in an idiot-proof system and that the players shouldn't be expected to correct the owners' mistakes. Great rhetoric, but ultimately meaningless.

    I think the cap is less about competitive parity and more about trying to reestablish the profitability of the league. Parity will just be a somewhat positive byproduct of the cap - it's not the reason the owners are going after a cap in the first place.
     
  7. Jaded-Fan

    Jaded-Fan Registered User

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    Absolutely. I am not so pro-Owner because I am deluded that they give a damn about me aside from as a revenue source. Their position is just best for the future of the game in this case so sign me up as on board.

    Sort of like France and Britain during WWI. Niether could stand one another . . . . more likely to fight one another than side by side . . . that is until Germany became the bigger threat. The NHL is like France to me right now, I will stand by them to the end on this, but only because my interests and theirs overcome any disagreements.
     
  8. Guest

    Guest Registered User

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    Great post, not enough credit is given to people who are able to convey a solid opinion. However, I am anti-hard-cap because I think there are more reasonable methods of solving the issue.
     
  9. ti-vite

    ti-vite Registered User

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    If a cap 'minimum' level were also implemented (must spend a minimum amount of dollars on payroll), which GMs do you think would get the proverbial AXE by the team president first? In other words, who, irrespective of revenue are the best GMs and who would be the first to get booted...

    Glen? Are you there?
     
  10. Jaded-Fan

    Jaded-Fan Registered User

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    Do we really need a salary cap and floor (which I am in favor of btw) to know that Sather sucks?
     
  11. jcpenny

    jcpenny Registered User

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    Like?
     
  12. nyr7andcounting

    nyr7andcounting Registered User

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    It's a very good point. I am certainly pro-PA, and I am certain that a hard cap is more idiot proof than some other solutions (which is why the owners want it), however you are right that it is not competely idiot proof.

    Because of fixed cost, even if every team were at $38 million the leagues owners can't just sit around and do nothing and make a profit because once revenues dip below a certain point it would be impossible to make money, no matter how low a player cost cap may be.

    But it really is funny that people have to make this point. When people are talking about a situation in which a leagues revenues won't allow it to make money simply because of fixed costs it really lets you know where the NHL is right now and where it could be heading if this lockout isn't dealt with quickly. If we ever reached the kind of situation you are talking about, which at this pace may not be far off, the NHL would have to fold.
     
  13. vanlady

    vanlady Registered User

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    Your theory would work if under the Levitt report things like hotels, insurance, equipment costs, travel stipend and flights were not all listed under player payroll costs. The only costs that teams should have is cost associated with front office staff and arena leases.
     
  14. trentmccleary

    trentmccleary Registered User

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    Ya know, I find that the really sad thing is that both players and fans think that the players are actually the #1 resource in the NHL. When, the advertising/media has more more do with our attachment to these players than most will admit.
     
  15. No a salary cap wont make everyone profitable, but in the long run yes it will eventually make teams make a profit. Revenue sharing is what is gonna make teams break even. The cap lets a team retain talent, and a set a cost going into each season without it being disrupted by a Mike Peca holdout.
     
  16. The Maltais Falcon

    The Maltais Falcon Registered User

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    According to Schedule III of the Unified Report of Operations (Appendix B of the Levitt Report,) player costs are made up of salaries, signing and performance bonuses, NHL awards, deferred compensation, buyouts, minor league salaries, pension, worker's compensation, medical/dental/life insurance, per diems, and payroll taxes for major and minor league players and payments to the IIHF and national federations for player acquisitions and player movement and payments made to the NHLPA, presumably for player dues.

    According to Schedule IV, team travel and lodging - as well as sticks, uniforms, and protective equipment - clearly fall under "Team Operating Costs." All the costs I listed in my original post (team staff, practice facilities, arena leases, airlines, hotels, and advertising) fall under operating costs, so there was nothing wrong with my post.

    Without having even looked at the Levitt report, though, how exactly could the NHL hope to lump things like travel and equipment costs under player costs and thus a salary cap? They can go to their employees, the players, and argue "we're going to cap your salary as a percentage of revenues" but they can't go to their external vendors and say "we're going to cap what you charge us as a percentage of revenues." No company is going to have any part of that from one of their customers.
     
  17. txpd

    txpd Registered User

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    I agree and disagree. Part of what makes teams profitable is being competitive on the ice. Calgary was 22nd, 24th and so on in attendance as their streak of non playoff seasons continued. these smaller budget teams that miss the playoffs 5, 6 and 7 years in a row just have very little chance of attracting a paying audience.
    they can't be profitable without it. look at chicago. huge market, huge franchise and they suck and the building is empty. the cap will give teams a that cant afford to compete a chance to win and sell tickets.

    the capitals are a great example of that. they did well the first two years til the newness wore off and then it was bad news as they were the worst team in the league for a good while then missed the playoffs for their first 8 years. the simmer before the 9th year they had to have a "save the caps" ticket drive to keep from losing the team. during that offseason the team traded for rod langway and they made the playoffs and didnt miss again for more than 20 years. During their playoff run they were a good drawing, solid franchise.

    the same could easily be true of atlanta, tampa, florida, pheonix, nashville. its true of san jose.
     
  18. PhillyNucksFan

    PhillyNucksFan Registered User

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    First of all, I havent read any of the response posts.. but just responding to the original post.. :)

    This is about COST CERTAINTY, which is the term being repeatly used by the NHL. Salary cap and etc were used/implied by others. Point is to know exactly how much of your revenue will go to your biggest expense, player salary. This is not a profit-guarantee measure, but a cost certainty. We know its not profit-guarantee.



    Are we talking about salary caps here? Correct me if I am wrong, the NHL wants a salary cap of say, 40Million per team, no? Not a 54% of total revenue each year. Total revenue each year is a variable so you cant really control that, can you? If this is the case, all of your assumption of 54% salary cap and etc does not really imply here then?

    I have yet to see any organization's operating costs being fixed. Operating costs is not limited to fixed costs such as facilities or office rent and etc. It also includes overhead costs and salaries and other short term or long term expenses such as diminishing depreciation, loans, etc etc etc. Since this is not fixed, the premise of this argument does not really exist IMO. But I do see your point though.

    [/quote]

    Maybe you are right in that perspective, but IMO, that is hardly the reason why they NHL wants a salary cap. Knowing your expenses and costs allows you to be better financially prepared to devise future budgets and whatnot. To know the financial way of an organization is worth more than anything IMO.
     
    Last edited: Jan 12, 2005
  19. PhillyNucksFan

    PhillyNucksFan Registered User

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    What do you mean??

    I dont understand your statement here.
     
  20. The Maltais Falcon

    The Maltais Falcon Registered User

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    The cap will be a percentage of revenue. It will be adjusted upwards or downwards each year depending on league revenues. That was the gist of the last league offer anyways. They offered around 54% of last year's revenues, which came out to about $38 million a team. If league revenues go up next year, the cap dollar amount goes up; if revenues go down, the dollar cap goes down - the percentage stays fixed.

    They're not absolutely fixed, you're correct, but compared to fluctuations in revenues and player salaries over the years, they're relatively fixed.

    The important point is that operating costs are going to be independent of league revenues, no matter what, and therefore owners can't be guaranteed profits just because their primary cost is fixed relative to revenues. Vendors aren't going to adjust their prices upwards or downwards depending on how much the NHL made the prior year. I'm sure they'll be willing to negotiate prices on an ongoing basis, but the league will still be at the mercy of the larger market and not its own revenues. If revenues dip below a certain point - as many fear - the league will be awash in red ink again despite having a salary cap.

    On this point, we'll just have to agree to disagree. I think this is an important point you make but not as important as the fact that instating a cap should return the league to profitability as long as it can maintain its revenue streams. I think that's more important than being able to forecast expenses a little more accurately.
     
  21. FlyersFan10*

    FlyersFan10* Guest

    The only problem with a cap, and you see it in football, is that great teams who draft well are at the mercy of the cap. They can't afford to keep their talent for fear of going over the cap. Hence, they have to let players walk away. And that's the problem that I have with a cap. It punishes good teams who are great at player procurement and development. While I understand the need to ensure that all teams are on a level playing field, something has to be done to ensure teams who draft well and develop well don't get shafted with regards to losing good players.

    Now, if a cap system were to come into place, full revenue sharing is the way to go. However, it seems that owners want no part of full revenue sharing. And the fact that Bettman and company hasn't laid down any kind of significant revenue sharing plan indicates that they haven't really thought about revenue sharing or what kind of plan they anticipate on having.

    So far, out of all the proposals, the only proposal we've seen that's been heavily detailed has been the player's proposal. The owners have laid out nothing other than "we need to connect salaries to revenue" or the proposals have been less than a page in length and the proposals have been entirely about salary capping.

    So, my question then is, if the owners are in such need of a salary cap and the sport isn't going to survive without one, why don't they have a proposal of substance laid out for all to see? Or when Ted Saskin called out Bill Daly to name the teams who are in financial trouble, why didn't Daly do so? So far, players have given no reason to hide behind anything, yet the owners have this cloak of secrecy which to me means that they're hiding something. And I think the silence of the owners and the secrecy of the owners should be what's being questioned here.
     
  22. thinkwild

    thinkwild Veni Vidi Toga

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    The predictable costs remove risk from the investment which increases its value. Risk management is big business. Cost certainty removes risk because its an idiot proof system.

    Operational costs are purchased in the marketplace and all managers have to deal with these. THey are tied to revenue, because management determibnes what operational costs it can afford based on it revenue. If they are losing money, they get cheaper hotels, new ice technology, remove interconfernce travel, etc. THat they arent formally tied to the revenues in no way makes it less an idiot proof system.
     
  23. PhillyNucksFan

    PhillyNucksFan Registered User

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    Oh really? So they have a variable percentage on the cap!? Excuse my ignorance. I been kinda out of hockey for some time. haha. Anyhow, i dont know about you, but my opinion would be that, a varaible cap doesnt do anything much and besides, it would complicate things a bit, as in the cap is variable, but the player salary is not (they're under contract). so, i dont see how that is going to help if they do have that in proposal.

    I dont exactly understand what you mean by O/C to be independant of league revenues. Do you mean O/C should not be included when NHL is saying they have made a loss of XXX millions last year?
    Anyhow, I think there are quite a few variable in this and quite a few multi-dimention C/B analysis to be done. However, I do think the O/C should be included in the expense column, simply because they are directly related to generate revenue. You cant just say, lets just count player salary and not the expenses. Sure the revenue is not fixed, but that is not the point IMO. The point again, is related to establishing a cost certainty on the biggest expense of any organization, salaries. In this case, Player Salaries. Sure, the bottom line could be red again, but there are much more certainty and therefore, appropriate counter measures are easier to be devised, no?

    Sort of agree/disagree here. Forcasting expenses is just as important as forcasting revenues in any business in my opinion, and personally, I am a pessimistic person and I value thorough knowledge of expenses more than thorough knowledge of revenues. The main reason being, I can easily control my expenses, to a degree anyway; whereas, I cannot control my revenues. sure, I can do a better job marketing or selling, but the returns of those measures may not be as expected. As for costs, if no other route, I can lay off people. see my point?

    There is no question the long term goal is to bring the league back to profitibility and RE-ESTABILISH NHL as a premier professional sports league.

    But for a short term goal, to improve any organization, first thing is to, know your cost, understand your cost and LOWER your cost. This is exactly the difference between NHL and NHLPA. NHL is approaching like a CEO who just took over a failing business, whereas NHLPA is more of, well, we want to get a fair share of what the organization is making and to get a fair share, they must not allow "cost certainty".
     
    Last edited: Jan 13, 2005
  24. PhillyNucksFan

    PhillyNucksFan Registered User

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    Cost certainty lowers the risk and increases the value.

    Cost certainty or cap or whatever just provides a Ceiling, at least for Player Salary expenses. Budgeting wise, the organization then is able to write off and assume this is what it will cost them already; therefore, if they dont reach the cap (the team is under the cap), the difference would be just their unexpected revenue or however you want to call it on the statement.
     
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