Revenue Disaster for the NHL?

Following up on my post from last week about the US Dollar's rise potentially affecting the salary cap, Tom Benjamin had a short post today about this issue. On the subject of revenues vs. the cap Tom B. has this to say:

If revenues actually do fall we are into uncharted waters, but the cap formula includes an automatic 5% increase. As a result revenues have to fall a lot to actually drop the salary cap. A zero increase in the cap is probably my worst case scenario. I don't think that would cause significant problems. It would, however, help the Russian league compete for players.

His point about the Russian competition is an excellent one, especially in light of Alexander Radulov's recent statements. Given that I believe there is a paradigm shift in world finance underway with the power-base shifting eastward towards Russia, China and the Arab world any drop in revenues for the NHL would be yet another data point in favor of that analysis, a potential nail in the coffin of the NHL's dominance over the hockey world.

But, that said, I have to take umbrage with Tom's assertion that it would take a large drop in revenues to drop the cap. On the contrary, given what we know about the league's revenues last year, the $56.7 million salary cap for this season includes the 5% kicker, so any drop in revenue would cause the cap to drop. Unless the numbers being bandied about are way off ($2.56 billion), the only way for the cap to be $56.7 million was if the 5% kicker was added to the cap for 2008-09. If the NHLPA waived the 5% increase, then the cap would have been set at approximately $54 million. If I'm wrong about this, please someone correct me.

Now, the likelihood of league revenues contracting is subject to much debate, and the more I discuss this the less convinced I am that revenues are likely to drop a lot. As I pointed out last week, even in a revenue neutral setting the current spending on salaries means that the escrow payments would stay with the teams as that equals ~59% of revenues where the players are due only 56.53%. This does not bode well for next year's extension of the CBA.

Tom's original point in the post is more salient and forward-thinking, which is in relation to the recent exchange rate move:

First, I don't think the Canadian dollar will necessarily stay where it is. The value of the dollar is tied to oil prices and I expect energy prices to rise, not fall. Second, even if the Canadian dollar continues to fall, the impact next year will not be enough to actually drop NHL revenues. [...] Third, any adverse impact of the changing Canadian dollar will fall mostly on the Canadian teams. It will mostly help the revenue challenged teams in the United States if the salary cap level stabilizes.

I must quibble with Tom on his view of the US Dollar, the value of which is not tied to the price of oil, that is nonsense. It may be true that there is some correlation between moves in the two of them, but the US Dollar's strength is tied both to its relative strength to the Euro (57.6% of the USD Index) and the willingness of the Fed to bail out troubled financial institutions known commonly as banks (Spelled: T-H-I-E-V-E-S), having to print money to do so; money for which there is a shrinking number of Central Banks willing to buy in large quantities. Oil is the tail that sometimes can wag the dog but not for any meaningful length of time and only in, I think, over-extended market conditions. I agree with him on rising energy prices, but that is not causative dollar negative, rather an indicator of dollar weakness.

The rest of this quote I completely agree with having been reminded of the increase in Canadian revenues the league is going to see, which should offset any sustained weakness in the Loonie. Tom also echoes my thoughts on the state of the US Economy which is the factor most likely to be the cause of any downward shift in revenues. Given that Bernanke and the Fed have finally started inflating the core money supply as recently as last month after an 18 month period of slow to negative growth in the Adjusted Monetary Base, I would not bet on continued US Dollar strength in the long-term. The potential for a significant amount of inflation may be right around the corner, putting even further pressure on the cash-strapped, energy-poor American consumer. And that would be a recipe for an NHL revenue disaster.

Ta,