Why it makes sense to postpone NHL games due to capacity limits

The pandemic has continued to wreak havoc on this NHL season. With dozens of players on multiple teams catching the virus and being forced to isolate, the league has been put in a tough position to try and reschedule games in an already condensed year. While they do have extra days due to NHL players not going to the 2022 Winter Olympics, this is making for an especially tight finish.

The latest complication has been the limitations on the number of fans in the stands in Canadian arenas, as imposed by provincial governments. While they are technically able to play, teams would be forced to play in front of 50% of their arena’s capacity, which is not only a logistical nightmare for team staff, but also creates a huge revenue concern not only now but for the escrow going forward. So far there are nine Canadian games postponed, with more expected. Here’s how it all breaks down.

What is the average revenue difference?

One of the big differences between the NHL and other sports is the amount that they make from gate revenue, bringing fans into the stands. According to a graphic developed by Christine Gough, last season alone, gate revenue accounted for just over 35% of the league’s total revenue. This number has fluctuated between 34% and 42% over the last decade. In the NBA, gate revenue accounts for approximately 22% while the NFL gate revenue accounts for around 15%. This is an enormous difference.

Of course, these numbers are team dependent, and this makes matters worse. Of the nine postponed games, five were happening at the home arenas of the Toronto Maple Leafs and Montreal Canadiens, the league’s most profitable and third most profitable teams by gate-revenue. The remaining four impacted two middle-income teams, the Calgary Flames and Winnipeg Jets, and the league’s lowest revenue team by gate revenue, the Ottawa Senators.

According to the graphic mentioned above, the Leafs earned $91 million dollars from gate revenue, the Habs $85 million, the Flames and Jets brought in $48 million dollars each, and the Senators brought in $25 million. Put together, these nine postponed games mean a revenue deferral (money that will be paid assuming the games are eventually played) of $14.8 million dollars just on gate revenue alone.

This does not factor for other revenue sources including merchandise sales, concession sales, and other revenue like contests and parking, as well as advertising revenue, which has built-in assumptions of number of eyes seeing collateral. This one is hard to measure as it is team-specific, but Scott Burnside at the Athletic estimates that these other additional revenue sources could be worth between $200,000 and $500,000 per game.

Call it an average of $400,000 given the number of games in Montreal, and you add $3.6 million to that number, which now sits at $18.4 million dollars without even accounting for any losses from ad revenue arrangements that teams had made.

Then you have to account for operating costs, which includes utilities, staff, and so much more, which could run anywhere from $150,000 to $300,000 per game, which would likely cost teams a similar amount regardless of whether the stands were full or half-full. You cannot just turn off the lights to one side of the arena or limit the number of ushers as you have people sitting in all of the different zones to maximize distancing. Add in another $250,000 per game and you have an extra $2.3 million dollars. Because these are costs, they are deducted from the overall loss of $18.4 million, so the number then goes down to $16.1 million

Assuming these games were played with half the number of fans, and assuming that the arena would have gone from being exactly 100% full to exactly 50% full (which is not necessarily the case), and that people went to the game and spent at exactly the same frequency on hot dogs and jerseys, these four teams would have lost a combined $8 million dollars in potential revenue if they did not postpone games.

Call it what you would like but this is not a small amount of money. Eight million dollars is one sixth of the Flames’ total gate revenue for the entire season, and over a third of the same for the Senators. These numbers impact teams’ bottom lines who have already been hit over the last few years due to the pandemic. There is yet another big impact.

The low down on escrow

Escrow: The difference in the revenue sharing model between the league and the players. The basic idea is that the overall hockey-related revenue (gate revenue, concessions, tv rights etc.) are to be split 50/50 between both parties. The players earn a salary from their teams, and if the combination of their share of the revenue and their salaries is greater than the 50/50 split, the players then owe money back to the owners. These numbers help determine the salary cap so as to keep costs controlled and money relatively even.

Some easy math to explain this. Let’s say the total hockey-related revenue (HRR) is $4 million dollars, the players and the league would each get $2 million dollars. If the total value of all the contracts was $3 million dollars, the players would have to send $1 million dollars to the league in order to make up the difference ($2 million is revenue sharing subtract $3 million is contracts = -$1 million to be paid back).

Escrow is taken right out of a players’ salary at a fixed percentage every year. Because of the pandemic, players agreed to take a pay deferral, money that is to be paid back down the road, but with the decreased revenue due to the pandemic, there is a good chance that they will owe more than that deferred income when it would come time to have it paid back. This does not bode well for the players.

This provides additional context as to why postponing games due to capacity limitations makes sense for both the players and owners. For owners, the answer is abundantly clear: less money in their pockets for their businesses that have struggled through the pandemic.

But for the players, as there is less revenue coming into the league, there is more coming out of their paycheques to cover the escrow. This means less money in their pockets after taxes and other fees to cover their lifestyle costs and savings for when they are not playing hockey anymore. These things matter a lot.

It isn’t fun not having hockey to watch—especially not being able to go to games. With the pandemic dragging on with seemingly no end in sight, it would be great for our collective mental well-being if there were games happening.

It is often overlooked in daily discussions that hockey is first and foremost a business, and if this business becomes unprofitable, it just cannot operate. And while that fact is hard to reconcile with the collective love of the game, it feels as if we will be waiting a little longer to have in-person hockey in Canada again.

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