The NHL's Misleading Stance on the Decline of the Canadian Dollar
By Chirag Gandhi
As the Canadian dollar has dropped over 30% in the last three years against its U.S. counterpart, National Hockey League (NHL) executives and NHL team owners have complained about its negative impact on the league. Gary Bettman, the commissioner of the NHL, quantified the financial impact on the league to Sportsnet in May 2016 by stating that “if the Canadian dollar were still at par, we’d be $100 million or $200 million higher".
Furthermore, this summer, the NHL decided to discard Quebec's City's bid for a team. Gary Bettman explained the decision to the long awaiting fans of Quebec City by saying that "the fluctuation of the Canadian dollar throughout the process, including its decline to a low of 68 cents earlier this year was a factor”. Yet, Quebec City was a strong candidate for expansion by offering the 500 million dollar expansion fee and having an 18,000 seat stadium ready for hockey. NHL executives repeated time and time again to Quebec City fans and potential owners that they would not expand with such uncertainty surrounding the Canadian dollar. However, by examining the impact of the low Canadian dollar on the NHL players, owners and the fans, it is clear that the NHL is misrepresenting the facts to their fans and the media by focusing on the negative changes to the bottom line.
As is the case with most financial uncertainty, there are winners and losers. At first thought, NHL players appear to be the losers from the drop of the Canadian dollar. Fans and media have a preconceived notion that a weak dollar will hurt the NHL's bottom line, thus dropping player salaries. However, NHL player salaries are more complex than they appear. The Globe and Mail affirms that under the old Collective Bargaining Agreement (CBA) which took effect from 2005-2012, the players claimed a 57% stake in the $3.3 billion USD in revenues, amounting to $1.88 billion USD. Yet, under the new CBA which was signed in the 2012-2013 season, the players would only claim a 50% share. This amounts to $1.65-billion, resulting in a drop of $230-million USD.
The 50/50 split brought on by the new CBA ensures that owners and players split total revenues equally. Revenues are only calculated at the end of the year, but players must be paid throughout; this is where the concept of escrow takes center stage. Escrow acts like a tax that withholds a certain percentage of salary from each paycheque. Players are paid throughout the season based on end of year revenue estimates. According to JP Starkey from SB Nation, at the end of the season, if all the players combined earned a salary in excess of 50% of total revenue, then the players will lose their escrow money. On the other hand, if the players made less than 50% of the revenue, they get a refund. In other words, if league wide revenues decline, they will lose exactly the same amount as owners.
If we take a look at NHL revenues as reported by Bloomberg in May 2016, the league had total revenue amounting to 3.7 billion USD last season and they expect it to increase by 8% to 4 billion USD by the end of this season. In spite of a weak Canadian dollar and the inability of any Canadian team to make the playoffs last year, league revenues are on the rise. It can be argued that the weak dollar has inhibited a much bigger growth in revenue because seven out of the thirty teams are based in Canada. Canadian teams generate revenue in CAD dollars from merchandise, tickets and TV deals (including advertising deals). However, from a player's perspective, a projected growth of 8% in revenues will increase the salary cap. The salary cap jumped from 69.3 million USD to 71.4 million USD this past season. Consequently, as league revenues rise, the salary cap continues to rise which increases player salaries.
Moreover, nearly one quarter of NHL teams are based in Canada. Thus, nearly 25% of players live in Canada during the season. In addition, Frank Seravalli of TSN asserts that 50% of NHL players seen within the first two weeks of the 2015-16 season are Canadian-born. It is important to recall that all salaries are paid in USD regardless of the team's location. Consequently, 25-50% of all current NHL players benefit from a weak Canadian dollar. While working in Canada, expenses such as lodging, meals and insurances are all paid in Canadian dollar. With the current exchange rate, salaries of Canadian players are up 20-30% from the 2014-2015 season.
Furthermore, Canadians that play for American teams usually like to come back during the summer time. They keep their primary residence in Canada and sometimes their families prefer to stay in Canada during the season. Thus, they will also benefit from the current 20-30% premium on salaries arising from the conversion rate. As the conversion rate remains at these present levels, more and more NHL players may look to play for Canadian teams as they will be able to save a lot of money on their expenses while playing for traditional hockey markets.
As NHL owners continue to complain about the low Canadian dollar, the valuations of their franchises have been growing. Figure 1 shows all thirty NHL teams ranked from most to least valuable.
Even with the fall of the dollar, operating revenues for all seven Canadian teams were well above breaking even. Operating revenue for all thirty teams were close to 100 million dollars USD and above, with only three teams reporting operating losses. It can be argued that the one-year value change of the price of the franchise has been dropping for the Canadian teams. Insiders will argue that only the Montreal Canadiens were able to secure a capital gain amongst the seven Canadian teams. Nonetheless, it is important to remember that no Canadian teams made the playoffs last season and only a few the year before. Consequently, the playoffs lead to higher revenue and fan engagement which increases the value of the team as a whole. The players are not paid during the playoffs which is by far the largest expense for team owners.
Canadian team owners and executives have been complaining that the value of their teams have started to decrease due to a weak dollar. Since salaries are paid in USD, Canadian team owners have to pay a premium for salaries because of the conversion rate compared to when the dollar was near par during the 2013-2014 season. However, the league has revenue sharing in USD which will ease this extra expense. Dirk Hoag from SB Nation explains that revenue sharing allows the NHL to take a portion of revenue generated from the top ten most profitable teams, and subsequently redistribute this revenue to teams that are struggling to break even or that have are facing a loss in franchise value. Hence, the owners are well protected from a falling Canadian dollar because league wide revenues are going up and teams like the Montreal Canadiens and Toronto Maple Leafs have growing revenues and capital gains.
Although NHL owners and executives continue to make profit from the growing revenue and the appreciation of their assets, the low dollar does leave an impact, as can be seen with the broadcasting deal signed between the NHL and Rogers. This 12 year 5.2 billion dollar deal was signed in December 2013, at a time when the dollar was worth 94 cents US in December 2013. An anonymous NHL governor told The Globe and Mail, "the currency hit for the 2014-2015 season was pegged at about 17 per cent, which, based on the annual average rights fee of $433-million, works out to a $73.61 million loss for the league" from the broadcasting deal. Thus, NHL owners and executives lost over 73 million dollars in revenue in 2014-2015 alone, due to the weak Canadian dollar. In addition, in April 2015, NHL commissioner Gary Bettman confirmed that "the Rogers contract is paid in Canadian dollars with no allowances for currency fluctuations" and declined to say how much the currency issue will cost the league. As the Canadian dollar slowly recovers and moves closer to 80 cents, these losses will become smaller. All in all, however, the losses sustained are in the few hundred million. Nonetheless, one league insider told the Globe and Mail that he is "concerned the NHL’s [executives] failed to protect itself in the Rogers deal, either by hedging or requiring that it must be paid in Canadian dollars at or near the rate that was in effect on the day it was signed". Therefore, NHL owners and executives themselves are responsible for this decrease in revenue, which could have been avoided. Further, the growth from other sources such as the broadcasting deal signed with NBC and the appreciation of franchise values puts the NHL in a profitable situation overall.
NHL fans’ willingness to spend money and to follow hockey religiously are the reasons it has grown into a multi-billion dollar organization. However, year after year, fans bear a large part of the increases in cost or in this case, the fall of the Canadian dollar. Before breaking down the impact of the low Canadian dollar, it is imperative to acknowledge the significance of hockey in a Canadian market. According to a survey on the importance of hockey to Canada's cultural and social fabric, nearly one-third of Canadians between the ages of 18-34 consider hockey to be "extremely important". This is the age that most marketing departments target because they have the highest percentage of disposable income. Overall, over one quarter of adults in Canada rated hockey as “extremely important” to Canada’s cultural and social fabric. Thus, it is not surprising that Canadian team owners have been significantly increasing ticket prices to compensate for the low Canadian dollar because they know that fans value hockey as a part of their culture.
Although franchise net worth and revenue for the majority of the Canadian teams have been increasing, team owners have used the low Canadian dollar to defend the hike in concessions and ticket prices. Team Marketing Report conducted a research survey before the 2014-2015 season when $1 USD was equal to $0.89 CAD; they found that ticket prices were higher in six out of seven Canadian cities compared to the league average. In addition, they used a special formula called the "Fan Index Cost" in order to compare the total cost of an average family per game, explained below.
They found that five out of the seven Canadian teams had a total FIC over the league average. Hence, the majority of Canadian fans pay ticket and concessions prices above most other American markets when compared in USD. Calgary was the only city where fans paid very close to the league average in ticket prices and FIC. Ottawa was the only under city under average because they saw ticket prices and FIC cost go up by nearly 10% to compensate for the dropping value of the Canadian dollar. Therefore, it seems that owners are taking advantage of Canadian fans by using the low Canadian dollar as an excuse to increase prices.
As discussed earlier, league wide revenues are increasing even while paying premiums for player salaries. Canadian hockey fans pays on average 25% more money for a complete experience at a hockey game compared to their American counterparts. As a direct consequence to higher ticket prices in Canada, American fans cannot take advantage of a weak Canadian dollar. A fan from Buffalo or New Jersey would pay more for a ticket in Montreal compared to their own city even after taking the 20-30% exchange rate benefit. Thus, it can be argued that owners are not benefiting from tourists coming from the U.S. and spending money on tickets and merchandise. Nonetheless, NHL fans focus on their team’s on-ice performance. As mentioned previously, the low Canadian dollar will help attract high end players to Canada. Since NHL players make a living in US dollars, living expenses in Canada come at a discount. The low Canadian dollar will help Canadian markets compete against cities with virtually no tax such as Tampa Bay. Overall, NHL fans should benefit from impact players coming to Canada but ticket, concession and merchandise prices will keep increasing as owners try to achieve record breaking revenues every season.
Over the past few years, NHL owners and executives have considered the drop in the Canadian dollar to be a huge obstacle. However, though Gary Bettman hints at a loss of over 100 million dollars USD per season because of the low exchange rate, it is clear that NHL fans are the biggest losers. NHL expansion to Quebec City was rejected because of the weak dollar even though they had a stadium and the potential owners were willing to pay 500 million USD. In addition, the CBA protects NHL owners by securing 50% of the league revenue, as opposed to the former 43% indicated by the old CBA. The most profitable NHL teams also share a percentage of their profits with teams who are having a harder time generating revenue. The NHL failed to protect themselves when they signed the mega broadcasting deal with Rogers before the collapse of the Canadian dollar. Hence, Canadian NHL fans are stuck paying a premium on tickets, concessions and merchandise to secure peak revenues for owners, even as player and travel expenses are dropping. While revenues for owners and salaries for players continue to grow, both parties should find ways to help make hockey more affordable for fans instead of using the weak Canadian dollar to take unfair advantage of them.