Waste Not, Want Not

30 Sep

“The fans want to get to the other (fiscal) side. That’s what I get in my e-mails, about 99 per cent in favour of a new system. They tell us to fix the NHL, so we’re going to try and do it.” —Patrick LaForge, President & CEO, Edmonton Oilers, September 17, 2004

“Today, our board of governors gave its unanimous approval to a collective-bargaining agreement that signals a new era for our league, an era of economic stability for our franchises, an era of heightened competitive balance for our players, an era of unparalleled excitement and entertainment for our fans.” —Gary Bettman, NHL Commissioner, July 22, 2005

“In the hockey business, expenses are somewhat similar across all teams, given that the single largest component of expense are player salaries, which are bound by a cap and floor, calculated based on league wide Hockey Related Revenues.

As a result, hockey is a business where the operator does not have much discretion over its most significant cost item.”Paul Marcaccio, EVP & CFO, Katz Group, July 21, 2010

———–

Well, that story has certainly changed over the past five years. It didn’t take long to go from “we need cost-certainty or we’ll die!” to “we have cost-certainty!” to “cost-certainty is killing is!” As Matt noted, it’s pretty galling to have an NHL owner complain about the restraints of the Collective Bargaining Agreement, the salary cap and revenue sharing after they locked the players out for a year in order to achieve that exact goal. Cost-certainty was the endgame that fans were told would save the game of hockey. Now we have an owner saying it’s not enough, and that he needs non-Hockey Related Revenues, which can’t even be used to operate the team*, to survive. We’ve gone through the looking glass, down the rabbit hole, and drunk every bottle in sight.

During the presentation to Edmonton’s City Council on July 21, Mr. Marcaccio claimed that “Daryl Katz has had to subsidize the team by several million dollars in each of the past two years in order for the team to break even,” and that “sustainability can only be addressed by a new arena….” Having already examined the NHL’s Collective Bargaining Agreement, we can move past the question of how exactly one can aid the Oilers on-ice product by getting more non-Hockey Related Revenue (you can’t), and instead focus on the ways the Oilers might lose money that have nothing to do with getting revenues from a Coldplay concert. I don’t actually believe that the Oilers are losing money, at least not in a way that is anything other than fancy accounting, but since they refuse to be transparent and open up their books, I thought I’d take a look at ways in which their own mismanagement may be affecting their bottom line.

Spending Too Much

The NHL has a salary cap and salary floor. In the CBA, they are called the “Upper Limit of the Payroll Range” and the “Lower Limit of the Payroll Range.” Teams are required to spend above the salary floor, but below the salary cap. There are almost no exceptions to this, which makes the NHL’s a “hard” cap system.

Looking at the charts below, one can see that over the past five years, since the end of the NHL lockout, the Oilers have spent over 90% of their cap limit in every single year. Over the past three years, it’s been over 97%, making them the 6th, 13th and 7th highest spending teams in the league in those years. Last year the team spent $58,855,000, which actually exceeded the salary cap (they were allowed to do so because of long term injuries to players on the team). They didn’t need to spend that much money. They could have spent $5 or $6 million less without anyone complaining. In fact, considering the results, they probably should have done just that.

Year Cap Max. (Millions) Floor (Millions) Oilers Payroll
2005-2006 $39 $21.5 $35,604,891
2006-2007 $44 $28 $40,929,194
2007-2008 $50.3 $34.3 $49,747,000
2008-2009 $56.7 $40.7 $55,208,000
2009-2010 $56.8 $40.8 $58,855,000
Year % of Cap Used Payroll Ranking NHL Standings
2005-2006 91.3% 16th 14th
2006-2007 93% 22nd 25th
2007-2008 98.9% 6th 19th
2008-2009 97.4% 13th 21st
2009-2010 104% 7th 30th

Not Making The Playoffs

Looking at those same charts, one sees that the Oilers have only made the playoffs once since the lockout. That was the first year after the lockout, when they went to the Stanley Cup Finals. Every other year they’ve missed the playoffs, often by a wide margin. In fact, last year they spent $58.86 million dollars on the worst team in the NHL. So while they’ve been investing an enormous amount of money in player salaries, they are not getting any return in terms of additional playoff revenues.

Spending Poorly

In the chart below, I’ve listed a few examples of expensive contracts the Oilers have signed, extended or attempted to sign since the lockout. This is not an exhaustive list, and not all of the contracts on it have been bad decisions hockey-wise, but it’s a list that reinforces how little a team that claims to be broke has worried about being frugal. And this list only shows the overall contract value, which averaged out over the length of term would indicate the cap hit the team must take on the contract. It doesn’t show how the individual contracts are structured, and how that may affect the bottom line from one year to the next. Shawn Horcoff’s cap hit is $5.5 million a year, for example, but he doesn’t get paid that much every year. The Oilers paid him $7 million in 09/10, and will pay him $3 million in the last year of his contract (14/15). Structuring his contract that way may make sense hockey-wise, but it’s easy to see how frontloading that contract may negatively affect the bottom line of the 09/10 Oilers.

Player Year Term/$
Michael Nylander 2007 ≈ 4 years/$22 million
Thomas Vanek 2007 7 years/$50 million
Dustin Penner 2007 5 years/$21.25 million
Sheldon Souray 2007 5 years/$27 million
Lubomir Visnovsky 2008 5 years/$28 million
Marian Hossa 2008 ≈ 9 years/$80 million
Shawn Horcoff 2008 6 years/$33 million
Dany Heatley 2009 5 years on 6 year/$45 million
Nikolai Khabibulin 2009 4 years/$15 million

One response to all of these examples is going to be that Daryl Katz has not owned the team for the entire post-lockout period. This is true. The Edmonton Investors Group (EIG) owned the Oilers until the spring of 2008. But the argument isn’t just about the Daryl Katz-led Oilers being financially viable. It’s about the Oilers being financially viable in the Edmonton market. Furthermore, in the time Mr. Katz has owned the team, the team payroll has continued to rise (right now the Oilers payroll for 10/11 is $54.4 million, or about 91.6% of the cap limit), he’s tried to sign players like Marian Hossa to huge, expensive contracts, and his team has won 65 of 164 hockey games. Rather than sending out his CFO to make the claim that the team is losing money, and that only a new arena will make professional hockey sustainable in Edmonton, Mr. Katz should probably consider spending less, spending smarter, and putting in place managers, coaches and players who can take his team to the NHL playoffs.

***Cap numbers taken from NHL Numbers and Cap Geek.***

*Note* Please read this link for errors I made in the writing of this post.

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4 Responses to “Waste Not, Want Not”

  1. chartleys October 1, 2010 at 12:17 pm #

    I love the work here, but this honestly should be left at just they are doing some fancy book-keeping. Sinking low enough to argue in their diluted version of the truth really doesn’t get us anywhere.

    Keep up the good work!

  2. David S September 30, 2010 at 4:14 pm #

    I don’t think anybody is going to argue with your last paragraph, as it’s basically what every astute blog has been saying for a while now. Unless they undergo a financial restructuring, its my thinking that the team will not make money unless it makes the playoffs. This is primarily because they reside in a relatively small market with limited opportunity to expand existing revenue streams or add new ones. One stroll around the arena tells you they’re using every damn square inch they can already. Until they start upping their TV audience by (what you assert) winning, then the only way to increase revenue is by adding corporate space (boxes and suites).

    I understand the idea behind wanting more non-HRR. “Rexall Sports” is the parent company of the Oilers, so you’d think they could absorb the fiscal idiocy of the team by using additional revenues from other streams like concerts, etc. to offset the Oilers losses. Profit would then be realized when those shiny new suites come online.

    Bottom line is that while we may not agree with their business practices, it is what it is. From their point of view (which may be rather convenient for them), they’re losing money and will continue to do so unless they can secure additional revenue opportunities afforded by a larger corporate base.

    • Chad D October 3, 2010 at 9:43 am #

      David S, why is that the taxpayers’ problem?

Trackbacks/Pingbacks

  1. The Corrections « Why Downtown? - October 14, 2010

    […] Oct After re-reading my posts from two weeks ago on the Collective Bargaining Agreement and salaries, and discussing the CBA with people, like Tyler Dellow, who understand it much better than I do, […]

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