Push-factor motivations are going to be stronger in major sports than ever before after the pandemic’s destruction of the market.
The COVID-19 pandemic has seen companies all over the globe adapting to ways of doing business that they never envisioned, and weren’t prepared for. Sporting leagues are no different – they’ve been particularly hurt as government shutdowns have forced them to operate without their main stream of revenue. Businesses are organisms and as they run up against shifting market calamities, they must adapt.
The NHL is set to lose hundreds of millions of dollars because of the pandemic. Their need to insulate themselves from these monetary blows will change the game as we know it today. Here are several ways we could see the game change over the next couple of years…
Major North American sports leagues have traditionally been hesitant (or resistant) to the idea of selling ad space on their uniforms. Gary Bettman has gone so far as to say that he’d have to be dragged “kicking and screaming” for the NHL to sign off on sponsorship patches.
A small, lower-tier league football team in England is generally credited with being the first European club to put a sponsorship logo on the front of their jerseys in the 1970’s. The deal purportedly earned the club a tidy 4-figure sum. While the league’s governing body vehemently rejected it at first (threatening the club with fines), some of the biggest names in English soccer now derive as much as a quarter of their income from these sponsorship deals.
The NBA is largely seen as the continent’s most innovative league from a branding standpoint. Their franchises are now earning anywhere from $9 million to $20 million a year through the jersey patch program. With a rival North American league taking any first-mover blowback and a need for fast cash, count on seeing sponsored logos adorning NHL jerseys soon.
Unforeseen financial setbacks are often the catalyst for an acceleration of thinking, and this was something that was going to happen eventually – the only questions were when, where, how big and how much?
The hard salary cap has been an incredible source of growth for the NHL. Just prior to the infamous lockout of 2004-05, the average value of an NHL franchise was pegged at $163.3 million USD. Today, the average worth of an NHL franchise is north of $660 million USD. That’s an increase in value of over 300%. This is important, because these capital gains keep investors interested – purchasing a team who loses modest amounts of money each year can still be seen as a sound investment, when there’s a virtual guarantee that the team could be flipped years later for much more money than was paid. That doesn’t even account for all of the tax breaks that come with ownership. This is the genius of the salary cap for the NHL – they can operate and grow the game in non-traditional markets with financial protection from the league’s cash-rich teams through revenue sharing. This keeps prospective, wealthy investors interested in the product and boosts valuations for everyone. Sometimes it really does pay for cash-rich teams to help keep everyone afloat.
Shortly after officially announcing Seattle’s expansion, Gary Bettman told reporters that there was no more appetite for expansion for the foreseeable future. In 2000, expansion fees totaled $80 million. But by 2016, Bill Foley and the Vegas Golden Knights paid $500 million for a franchise. Just two years later, Seattle ownership forked over $650 million for the right to ice the Kraken.
This exponential growth in expansion fees is a direct revenue stream for franchise owners, who split this money among themselves as it is not counted towards hockey-related revenue (we’ll see if that stands up during the next CBA negotiation with players). Among major North American sporting leagues, the NHL relies most heavily on ticket sales for positive cash-flow. That means that, almost certainly as Pat Hickey pointed out, whenever the league does return to play for the 2020-21 season, they will lose plenty of money with a second COVID surge keeping fans out of seats en masse.
With every franchise hemorrhaging cash, expansion provides the quickest route of offsetting these historic losses. By all accounts, the Quebecor ownership group is still patiently waiting for their shot at bringing back the Nordiques to the Centre Videotron in Quebec City. The company boasts nearly $2 billion in liquid assets, and a market with historic hockey roots. The company has avoided major financial pain due to the pandemic and has continued to beat earnings estimates through much of 2020. As a public company, they could even perform a secondary offering of shares and raise tens of millions of dollars to throw at an expansion bid. Given their financial position, share dilution is probably not prudent…but it is an option.
The NHL has made a clear point of choosing to focus expansion in non-traditional markets rather than cannibalizing business interests elsewhere, but the pandemic should give the Nordiques their shot:
It would balance the conferences alongside a Western expansion in Houston – long-favored by the league. Both of these cities also conveniently have buildings standing that can operate as NHL arenas – saving years of time on construction. Welcoming these two cities would provide the league with an injection of cash north of $1 billion, two new cash-rich ownership groups in Quebecor + Tilman Fertitta, and will provide instant rivalries with Dallas and Montreal.
Don’t expect decisions on this before the Kraken have finished their inaugural season. But, one thing is for sure: the pandemic’s financial effects on the NHL will expedite their hunger for expansion sooner rather than later.
A Depressed Trade Market
The NHL Trade Deadline used to be one of the most exciting days on the hockey calendar. As younger players took more market power and the league was confounded in parity, it has become less and less likely to see teams sell major future assets to plug a hole for a playoff run. A plethora of market forces induced by the pandemic will ensure this trend continues.
Almost as many President’s Trophy-winning teams have lost in the first round of the playoffs as have gone on to win the Cup since 1985. Only two have won the Cup since the ’04 lockout. Hockey has always been the one major sport whose outcomes are tainted by more luck than we might care to think about. The sheer intensity and physicality required of each NHL shift means the best players need to sit on the bench for over half of the game to rest – not something seen in a sport like basketball. This “over-reliance” on luck because of the nature of how the game is played has combined with the NHL’s salary cap construction – creating a league that is confounded by parity.
This is good from a business perspective. It keeps fanbases interested in the product for longer periods during the season as their team fights for a playoff spot. From a fan’s perspective, it may look much different…
As the league begins re-entering some sort of normalcy in late 2021 or even 2022, its monetary losses will be staggering even once they’ve returned to play this season. Given the parity and the hundreds of millions of dollars up for grabs from playoff hockey gates, we will see more teams with mandates on making the post-season. This will alter the league in one significant way: it will create too many buyers, result in a bottleneck and dampen an already soft trade market. Combined with less appetite for spending overall, expect to see teams filling roster holes from within as opposed to making big splashes through trades or free agency.
Will this depressed spending result in more players taking active roles on social media to build their own brands and earn cash elsewhere? Most definitely…Evander Kane is already in talks about a boxing match with Logan Paul.
Hockey players have been known as “reclusive” athletes. The traditional hockey paradigm tells you to show up in your suit, let your play do the talking, give scripted responses and avoid flash. But personality gains traction online and with that comes the potential for millions of engaged followers.
In 2019, NBC was averaging 1.7 million viewers per game through the first two rounds of the playoffs – PK Subban can reach more people than that with a tweet.
As large social media presences learn how to better monetize their platforms and a flatter cap puts downward pressure on player salaries, we can expect to see them wielding their Twitter muscles more. In a digital landscape, barriers to entry are low but that increases competition among new companies and can make earning money tough.
Equity deals allow these businesses to partner with athletes with no major upfront costs, and give the athletes ownership stakes in businesses that they can champion to millions of followers. It also allows players to invest their platform, not their dollars – a much more financially prudent risk. Social media followers are currency, and the time is just about right for a big shift in thinking about NHL players as “reclusive”.
It’s a weird world, and it’s going to get weirder.
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