Is the Ottawa Senators new TV deal the beginning of a Robot Hockey League?
For now, humans play the game of hockey.
There's been great news in the short term for the Ottawa Senators off the ice this year in the form of two new broadcasting deals.
The first, a new national Canadian deal, was announced in late November of 2013. That deal was for 12 years and a total of $5.2 billion. Of that, the Senators expect to see $17-20 million yearly for the length of the deal, which, given the vagaries of estimates, means they'll get somewhere in the range of $2.5-5.5 million more than their U.S. counterparts due to so-called invasion fees. (Per Pierre LeBrun,"Invasion fees are designed to compensate the Canadian teams for the local inventory lost to the national TV deals.")
Today, the team announced a new 12-year deal with Bell Media for the Senators' regional broadcast rights. Official financial terms weren't disclosed, but per Bruce Garrioch, the deal could be worth "up to $400 million." That works out to a little more than $33.3 million per year, but Garrioch claims it won't be a blanket yearly number, and instead will escalate over the course of the agreement.
All told, the Sens just added some significant revenue to their budget without building a casino anywhere--possibly as much as $40 million.
This is extremely significant, because the team's internal cap has been a major point of consternation among fans worried about its competitive futures. Consider that if the team added $40 million in payroll to today's roster, they would exceed this year's salary cap by $32 million! So, that's good.
Of course, there's no guarantee that this newly found money will go towards team payroll. The team's debt has ballooned significantly since owner Eugene Melnyk purchased them, Canadian Tire Centre is an aging stadium, the team just added two new assistant general managers--expanding the hockey operations staff might be in order; there are plenty of other places to spend money. The extra cash simply represents an option the team previously didn't have.
For a small-market team like Ottawa, that money is crucial--there's no other viable way for them to keep up with the salary cap. Remember, both deals won't affect the salary cap until the 2015-16 season, because they don't take effect until next year, the 2014-15 season. And this is where things get interesting.
Cap economics are relatively straightforward: You add up all of the revenue, split it in half, subtract player expenses, and then divide that number by the number of teams in the league. That gives you a midpoint, and the CBA states that the ceiling and floor can't be more $8 million and less than $14 million than the midpoint. It's that first part of the calculation that affects the Ottawa Senators most--by tying the salary cap directly to revenue, the league makes the assumption that all 30 of its teams can keep up with its average yearly growth (historically in the 5-6% range). And, as any mathematician will tell you, "average" is a shitty number. There's a distinct revenue bell curve across the league, and though it has implemented revenue sharing to help mitigate that reality, revenue sharing is only designed to help teams reach the cap floor--not remain competitive with the top-spending teams dollar-for-dollar.
The good news for the Senators is that revenue is computed in the billions. While the national broadcast deal is worth a total of $5.2 billion, it only represents an increase in revenue of around $436 million per year, according to LeBrun. That number represents a cap increase in the $4 million range. We know the Senators will be getting at least $2.5 million more than their United States competitors (in addition to the net increase across the league from the old television deal), so in broad, net terms, the deal is good for them--their revenue exceeds the proportional cap increase.
The $400 million the team will supposedly see from its own television deal is outstanding news--an additional $33 million to hockey-related revenue in the billions is not a significant number. Revenue needs to change in deltas of hundreds of millions of dollars to see an impactful corresponding change in cap number. An additional $33 million into the team's war chest vastly outpaces the corresponding increase in league salary cap that will result. That the number is not a flat $33.3 million, and escalates, is even more crucial--as we'll soon see.
The bad news for the Senators is that the salary cap is directly tied to league revenue. The Senators don't have many other revenue options, and have not been able keep pace with league revenue growth in the salary cap era. And things are going to get worse, not better, for them.
This year's salary cap--the one Ottawa was unable to afford spending to--is a made-up number. The $64.3 million doesn't reflect last season's revenue, because last year's revenue was lower thanks to a pointless lockout. (We'll address the pointlessness in a second.) The NHL and NHLPA recognized, collectively, that revenue from a shortened season couldn't match the revenue from a complete season--even using the new calculation that forced the NHLPA to give up money. They also anticipated revenues would be lower than normal due to justifiable fan acrimony. Based on these two factors, they used the last complete picture they had (2011-12's record-setting $3.3 billion) and applied the new calculations to it, arriving at $64.3 million. Not coincidentally, this is the same number that the 2011-12 season operated at under the old CBA.
It turns out, though, that fears of a disinterested and jaded fanbase were misplaced. Last year's final revenue number exceeded $2.4 billion in only 48 games played, plus a full slate of playoffs. For comparative purposes, if over the 2011-12 season total revenues were $3.3 billion, at the 48-game mark, revenues were $1.9 billion--what the league actually saw was unprecedented growth. In fact, the league has seen revenue growth in every year of the salary cap era. As early as December of 2013, not less than two weeks after the national broadcast deal, the league announced that next year's cap would be projected in the $71.1 million range. That number correlates to a final revenue number for this season of around $3.8 billion--off of last year's $4.1 billion pace, but still significantly higher than anyone initially expected. In January of 2013, James Mirtle of The Globe and Mail suggested that, based on the NHL's historical 5% growth, the 2015-16 cap would be a mere $66.1 million. His assumption of $3.3 billion revenue for this season was logical--it was based on the same assumptions that caused to the NHL and NHLPA to artificially declare a cap: it would take some time for fans to return to pre-lockout levels of interest.
But, as we now know, that assumption was too conservative. This year's revenue will exceed that prediction by more than $500 million. Next year's revenue will see an automatic bump of $436 million--the new national Canadian television deal kicking in--before additional growth is factored in. Revenues for 2014-15 should easily exceed $4.2 billion (3.8+.436) which would mean the 2015-16 salary cap would reach at least $78 million. Both the $71.1 million and the projected $78 million absolutely bury anything under the previous cap (at $78 million, the cap floor would be in the $56 million range--this is Ottawa's current payroll today!) which means that the lockout did absolutely nothing to curb rising costs, thus making it completely pointless.
And even if the cap does not hit $78 million two years from now, that number is coming. Mirtle suggests that the cap could reach $90 million just with regular 5% growth, and we already know his initial projections were too conservative. The recent cap projection of $71.1 million means a $90 million cap under this CBA is inevitable.
Even with an extra $40 million coming in, that number looks unreachable for the Senators. One has to believe their regional deal escalates specifically because the cap is likely to escalate yearly as well. The deal essentially asks Bell to act as the team's cap inflation buffer.
The problem with that, though, is that the deal, as well as the national deal, run through 2025-26. The current CBA expires at the end of the 2021-22 season. We have no way of knowing what the economic landscape will look like at that time, but we do know that after the previous two lockouts, the new caps rapidly exceeded their predecessors. That means after the 2022-23 lockout, a $90 million salary cap is probably just the beginning.
Perhaps the Senators can convince GoogleFlix (you know it's coming) to shell out $90 million a year for Fibernet/EyeWire/whatever replaces television as the dominant medium broadcasting rights, but it's difficult to imagine that happening. At some point, based on current trends, revenues are going to outpace the Senators' ability to keep up. They'll be one of the first teams to feel the pinch, but they won't be the last. At some point, player costs will become so much that owners will seek to replace them with more cost-efficient alternatives. And that's when the robots come in.
I, for one, am looking forward to forming a special bond with a real MechaKarlsson.