On Money

The Ottawa Senators' finances are the elephant in the room, except everybody is talking about them.

When Eugene Melnyk first bought the Ottawa Senators, he was hailed as a hero. Rescued from bankruptcy and the looming threat of relocation, the team enjoyed an era of prosperity and success, culminating in a Stanley Cup finals appearance in 2007.

In the early days of the salary cap, the Senators were a cap team. In fact, their spending to the cap is what forced them to choose between Wade Redden and Zdeno Chara. History holds that they chose poorly, but at that time, the Redden was one of the top defensemen in the game, and the Senators paid him like it, signing him to a two-year deal that paid a total of $13M--or $6.5M a year, the same as Erik Karlsson is making now.

In fact, as late as 2008, the Senators were spending like a cap team, signing center Jason Spezza to a 7-year, $49M deal and winger Dany Heatley to a 6-year, $45M deal. Spezza and Heatley currently carry cap hits of $7M and $7.5M, respectively. Even in 2010, they were willing to pay defenseman Sergei Gonchar market value, giving him a 3-year, $16.5M deal with a cap hit of $5.5M per year.

In 2010-11, the league's salary cap had increased to $59M, and the Senators spent $56M that year. It's only in 2011-12 where a divergence between the Senators and the salary cap really started to manifest. The cap that year was $64M, and the Senators, having cleared $12.5M off of their books in the form of Alex Kovalev, Mike Fisher, Chris Kelly, and Jarkko Ruutu, now came in at a comfortable $51M. Last season, their cap number was $53M, and this year, it's currently $50M (though actual payroll is $48M). It's like this "internal cap" number manifested overnight.

Where did it come from? How did it get here?

Much has been written about this in the past few weeks. Melnyk's public financials have been analyzed to death. Senators fans have scoured Forbes' estimates of the team's valuation for any kind of clue. General manager Bryan Murray has admitted to budget limitations while at the same time vehemently denying the owner's financial situation is affecting the team's ability to spend.

is Eugene Melnyk's financial situation the same thing as the Ottawa Senators' financial situation? We simply don't know. The league is notoriously protective of its financial details--they wouldn't even share them with the NHLPA during either lockout without all kinds of debate over what the numbers even were. The raw data is the league's most closely-guarded secret, behind which big-market team they're going to tell the referees to be biased towards this year (Pittsburgh, AM I RIGHT?). So in the absence of information, we're going to fill in the gaps with our own speculation. That's human nature. And everything we see tells us that the Senators' financial situation is the same as Melnyk's.

Why is Melnyk saying he needs other revenue sources? Why did the Senators just sign a new deal for naming rights? Why are we getting quotes like this:

When in 2011, we were getting quotes like this:

"We don't have to make the playoffs anymore to make money. We don't have to. I'm telling you now."

What's going on here? Well, nothing new, apparently, because in the same interview, Melnyk says:

Five years from now, I won't be able to afford the salaries of all the stars I have.

He goes on to say that he can afford to pay them if the team goes deep (four rounds) in the playoffs, because that's where the money is, but acknowledges the difficulty in pulling that off consistently.

So, what's really going on here? I'll tell you what I think. The NHL has developed a failed system, and their refusal to acknowledge it is creating a schism that will simply become harder to fix as it grows wider. The money is there--the league posts record revenues every year. The challenge is dividing it equally. That challenge exists because there's no competitive advantage towards subsidizing your rivals. Except, of course, that a universally competitive league generates far more revenue than a hierarchically competitive one. The NFL figured this out sooner than everyone else, and this is why it has come to dominate the MLB in just a few decades. Remember, baseball was "America's pastime." Now, it's that in name only, and a look at the league revenue distribution makes it clear why.

The NHL is headed down the same path, and they appear blind to that fact. The harsh truth is that despite our worries about Eugene Melnyk's finances, what the Senators are experiencing is not unique. Just this Tuesday, Hasso Plattner, one of the owners of the San Jose Sharks, announced his own arena rights deal: The Sharks will now play in the SAP Center. And Plattner had some interesting things to say about his team:

Initially, Plattner alluded to a statement that Mayor Chuck Reed made, calling the arena a "cash-positive" venture for the city, noting he cannot say "the same for the Sharks. We’re struggling. You know the other teams in the league are struggling, Phoenix and others. We have to find a way out of this. We cannot continue as usual. It is a serious problem. We tried to fix it.

And here's Forbes talking about the same situation:

The Sharks are emblematic of why it is so difficult for an NHL team to make money without also sharing its arena with an NBA team. The Sharks have sold out 110 consecutive games at HP Pavilion at San Jose, yet lead owner Kevin Compton said Sharks Sports & Entertainment, the team's parent company, lost $15 million during the 2011-12 season. One reason the Sharks, which control the city-owned arena, are not in the financial trouble of other NHL teams that do not share their arena with NBA teams, such as the Coyotes, Blue Jackets and Blues, is because their investors have been funding operating losses with capital calls instead of debt. It also helps that the team has been a Stanley Cup contender in recent years.

That's it in a nutshell. Despite two lockouts, the NHL is a league that has come up with a financial system that makes it hard for most of its teams to actually generate positive cash flow. The owners claim they tried to fix it, but their plan--taking more money from the players--fundamentally ignores the growing disparity between large and small markets. Until they manage to figure out a way to close that gap, it won't matter what Melnyk's personal situation is. The problem is larger than Melnyk. It is larger than the Ottawa Senators. And it is not magically going away with a revenue-based salary cap.

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