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Operating in the Era of a Falling Salary Cap

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06-21-2009, 11:48 AM
  #1
piston
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Operating in the Era of a Falling Salary Cap

Now that word has apparently leaked about the salary cap the next two years ($54-$56 mm in 2009-2010 and $48-$50 mm in 2010-2011 according to Jeff Solomon), what implications does this have for the way teams are operated. I believe this to be hugely significant with the potential of changing the entire paradigm on how Cups are won. There are three main implications that I see.

1) The falling cap - teams that have relied on free agency to build their core, NYR, Philadelphia and Boston come to mind, and others that have spent a lot of money to keep their core together, Detroit, Pittsburgh, San Jose and Washington among others, are in real trouble. These teams have loaded up on big contracts assuming they could fit players in as long as the cap stayed the same or continued to rise. Now, the only way that can continue to afford a roster of 22 to 23 players is to cut loose a high priced player or two or three. The problem is that there are not enough teams with the cap space to absorb them (see #2). You can send players to the minors, but some of them have no movement clauses and filling your minor league team with unhappy veterans is a recipe for disaster long term. I suspect the answer will be to package players along with draft picks and prospects to entice teams to take salary off their hands.

2) The falling floor - since the salary floor is based on the cap, it will fall as well. Teams that are losing a lot of money, Nashville, Phoenix, Tampa, Florida and Atlanta, now are going to be able to spend less on salary and lose less. The idea that these teams will now spend to the cap is a fallacy. They are affected by the economy just as everyone else and are looking to survive. The ability to cuts costs might just save them.

3) Locker room dynamics - Superstars like Kovalchuk and Nash will still get paid. But then there is the second tier of players to consider. Do you really want o pay Mike Cammalleri 12.5% of of your 2011 cap? Do you really want the Sedin twins to tie up 22% of your cap space? Guys like Briere, Drury and Gomez hit the jackpot by becoming UFAs at a time of a rising cap. Other players of equal or even superior ability are not going to be paid as much. That will set up some interesting situations that coaches are going to have to deal with.

At the end of the day, I still believe contraction is the only way to deal with the significant financial issues the NHL is dealing with, but as long as this is not addressed, salary structure is going to remain a significant part of competitiveness.

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06-21-2009, 12:00 PM
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Projecting the cap to be 48-50 mil in 2 years is a negotiating tactic. Period.

They want the players to believe this so they can sign them for cheaper. This is a business after all and Lombardi reminds us at every turn.

If the cap was projected at 65 million in 2 years do you think the NHL GM's would leak that???? That answer is a big hell no, because the players would sign shorter deals and wait for the cap to go up.

The playoffs are coming off of the best ratings in awhile. Ticket prices are going up around the league...so even if a couple less people go...they are still making more or at least breaking even.

So when you see GM's talk about the cap falling...just remember they are just trying to give themselves the advantage at the negotiating table.

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06-21-2009, 12:06 PM
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06-21-2009, 12:13 PM
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Quote:
Originally Posted by DeeMeck View Post
Projecting the cap to be 48-50 mil in 2 years is a negotiating tactic. Period.

They want the players to believe this so they can sign them for cheaper. This is a business after all and Lombardi reminds us at every turn.

If the cap was projected at 65 million in 2 years do you think the NHL GM's would leak that???? That answer is a big hell no, because the players would sign shorter deals and wait for the cap to go up.

The playoffs are coming off of the best ratings in awhile. Ticket prices are going up around the league...so even if a couple less people go...they are still making more or at least breaking even.

So when you see GM's talk about the cap falling...just remember they are just trying to give themselves the advantage at the negotiating table.
Higher ratings mean nothing without a TV contract.

Corporate sponsorships are way down.

Care to wager?

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06-21-2009, 12:29 PM
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I agree. Contract back to 24 teams. Take your lumps in the media and have all of the teams be relatively healthy financially. The NHLPA will hate it, but it needs to be done.

The original $39M cap was no joke. Teams should have realized that the revenue spike and the accompanying cap increase was too much too fast and couldn't be sustained. This is what the lockout was all about though. The cap is going to save some teams that otherwise would have went BK just like Phoenix.

As far as the timing goes, this is happening at the right time for the Kings and any other team with cap space. Of course fans in Philadelphia will tell you that they are willing to bury half their team in the AHL, but I'm not buying it.

I sure as hell hope this limits the number of NMCs and NTCs in the future.

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06-21-2009, 12:48 PM
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Originally Posted by piston View Post
Now that word has apparently leaked about the salary cap the next two years ($54-$56 mm in 2009-2010 and $48-$50 mm in 2010-2011 according to Jeff Solomon), what implications does this have for the way teams are operated.
Did you go to the state of the franchise meeting and if so, did Solomon actually say they're projecting the cap at $48-50 million?

Just asking, because from reading CBGB's quotes from the meeting, it sounds to me like Solomon was projecting the low end of estimates and they wanted to be ready in case that happens ("Could be a cap of 48-50 mil" and "If the cap comes down to 48-50").

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06-21-2009, 01:31 PM
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Quote:
Originally Posted by piston View Post
Higher ratings mean nothing without a TV contract.

Corporate sponsorships are way down.

Care to wager?
Higher ratings should translate to a better TV contract - wasn't that supposed to be Bettman's strong point?

I really don't understand how certain teams can be losing so much money. The whole point of the lockout and resultant salary cap was cost certainty by making the cap a fixed percentage (around 54-56%) of the league average hockey related revenue. The cap was supposed to assure that this never happened.

Looking at the Kings, the biggest difference I see with their hockey operations compared to a few years ago is the proliferation of highly paid upper management jobs.

Re: contraction - With the current economic conditions, how would having 24 teams instead of 30 teams directly benefit the remaining teams with a salary cap still in place? I don't think that fans would be willing to pay substantially more (i.e. 20% more) to see slightly better competition. There aren't many sources of shared revenue, so there wouldn't be much more coming in there - where would the benefit come from?

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06-21-2009, 01:37 PM
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Quote:
Originally Posted by PSP View Post
Higher ratings should translate to a better TV contract - wasn't that supposed to be Bettman's strong point?

I really don't understand how certain teams can be losing so much money. The whole point of the lockout and resultant salary cap was cost certainty by making the cap a fixed percentage (around 54-56%) of the league average hockey related revenue. The cap was supposed to assure that this never happened.

Looking at the Kings, the biggest difference I see with their hockey operations compared to a few years ago is the proliferation of highly paid upper management jobs.

Re: contraction - With the current economic conditions, how would having 24 teams instead of 30 teams directly benefit the remaining teams with a salary cap still in place? I don't think that fans would be willing to pay substantially more (i.e. 20% more) to see slightly better competition. There aren't many sources of shared revenue, so there wouldn't be much more coming in there - where would the benefit come from?
I think the NHL would expand before they contract. That expansion revenue coming from Hamilton and/or Vegas would help out a lot of teams. There's a reason the NHL awards were held in Vegas this year.

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06-21-2009, 01:50 PM
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Originally Posted by Tikkanen View Post
I think the NHL would expand before they contract. That expansion revenue coming from Hamilton and/or Vegas would help out a lot of teams. There's a reason the NHL awards were held in Vegas this year.
and i thought it was because hockey players love hookers...

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06-21-2009, 02:28 PM
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Quote:
Originally Posted by PSP View Post
Higher ratings should translate to a better TV contract - wasn't that supposed to be Bettman's strong point?

I really don't understand how certain teams can be losing so much money. The whole point of the lockout and resultant salary cap was cost certainty by making the cap a fixed percentage (around 54-56%) of the league average hockey related revenue. The cap was supposed to assure that this never happened.

Looking at the Kings, the biggest difference I see with their hockey operations compared to a few years ago is the proliferation of highly paid upper management jobs.

Re: contraction - With the current economic conditions, how would having 24 teams instead of 30 teams directly benefit the remaining teams with a salary cap still in place? I don't think that fans would be willing to pay substantially more (i.e. 20% more) to see slightly better competition. There aren't many sources of shared revenue, so there wouldn't be much more coming in there - where would the benefit come from?
Pat, you are a good guy, but your cynicism gets the better of you. The answers to your questions are self evident if you look at how league revenues are structured.

In Atlanta and Tampa, the way they sell season tickets is buy 2 get 4. Phoenix is bankrupt. Buffalo and Pittsburgh have been. The salary cap did nothing to fix the main problem which is revenue disparity between markets. The Cap is determined by total revenues. Those revenues are generated disproportionately in NY, Toronto, Boston, Detroit and Philadelphia. In addition, look how much the Canadian dollar has appreciated against the U.S. dollar. This further inflated league revenues and caused the cap to increase. Yet, the Atlantas and Nashvilles of the world have not seen their revenues increase, but their costs go up as both the CAP and the FLOOR increase because things are good in Toronto and Chicago.

If you eliminate 4-6 teams, the pool of shared revenues (TV, NHL sponsorships) is split between fewer teams which may put some teams on the margin into the black. More importantly, you no longer have to pick the pockets of the successful franchises to subsidize the operations of teams that are 'not ongoing concerns' to quote the Levitt report. Contraction is inevitable if you want to permanently address this issue. The ONLY other solution is to take 100% of hockey revenues, put them in a pot and split them equally 1/30 to each team. Good luck getting Toronto and Montreal to agree to this. Everything is just a band aid designed to keep nonviable franchises afloat in a sport that, sad to say, is primarily regional.

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06-21-2009, 02:58 PM
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Quote:
Originally Posted by piston View Post
If you eliminate 4-6 teams, the pool of shared revenues (TV, NHL sponsorships) is split between fewer teams which may put some teams on the margin into the black.
Last year, the NHL TV contract with Versus was $72.5 mil divided among 30 teams, or $2,417,000 each. If the NHL contracted to 24 teams, that share would increase to $3,021,000 per team for a difference of a little over $600,000 per team.

For comparison, each NFL team gets approximately $63 mil per season from their TV contract

IMO, this is just not a significant factor

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06-21-2009, 03:47 PM
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Quote:
Originally Posted by PSP View Post
Last year, the NHL TV contract with Versus was $72.5 mil divided among 30 teams, or $2,417,000 each. If the NHL contracted to 24 teams, that share would increase to $3,021,000 per team for a difference of a little over $600,000 per team.

For comparison, each NFL team gets approximately $63 mil per season from their TV contract

IMO, this is just not a significant factor
You are forgetting all the companies that sponsor the NHL in order to get to use the logo. And the CBC contract. By my estimate, shared revenues are about 20% of the total.

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06-21-2009, 03:54 PM
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Eliminating markets isn't going to help the NHL's revenue stream. It may seem that simple logistically, but networks expect to be in certain markets, and that can dictate how lucrative of a TV contract the NHL lands. Contraction isn't going to happen and isn't an option.

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06-21-2009, 04:10 PM
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Originally Posted by piston View Post
You are forgetting all the companies that sponsor the NHL in order to get to use the logo. And the CBC contract. By my estimate, shared revenues are about 20% of the total.
The CBC contract is approximately C$100mil split between 30 teams also, or $3.3 mil each.

If the salary cap is 54-56% of average revenue and the cap is at about $54 mil, that means that the average revenue is around $100 mil per team - so you think each team gets $20 mil per season in shared revenue? If the TV portion is not even $6 mil each, where is the rest of that money coming from? You're talking about a shared pool of $600 million dollars

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06-21-2009, 04:26 PM
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Quote:
Originally Posted by PSP View Post
Last year, the NHL TV contract with Versus was $72.5 mil divided among 30 teams, or $2,417,000 each. If the NHL contracted to 24 teams, that share would increase to $3,021,000 per team for a difference of a little over $600,000 per team.

For comparison, each NFL team gets approximately $63 mil per season from their TV contract

IMO, this is just not a significant factor
Islanders local cable deal paid $20m last yr.It rises slightly each yr.According to the NY Times,it'll pay $36m in the final yr,2031.

Good luck convincing Wang to contract his team,unless he's being paid the value of his local cable deal.

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06-21-2009, 05:02 PM
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i dont think the cap will go down to 48 million.. that wold screw a bunch of teams..

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06-21-2009, 05:13 PM
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Originally Posted by piston View Post
Now that word has apparently leaked about the salary cap the next two years ($54-$56 mm in 2009-2010 and $48-$50 mm in 2010-2011 according to Jeff Solomon), what implications does this have for the way teams are operated.
LOL! Where was the 2010-2011 salaray cap "leaked"? Link? For that matter, where was this coming season's salary cap leaked?

The salary cap is adjusted every year and there's no way anyone can possibly know what will happen next off season. If you meant to say someone (Solomon or whoever) SPECULATED what it would be, fine. That's one hell of a lot different than leaked information.

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06-21-2009, 05:38 PM
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LOL! Where was the 2010-2011 salaray cap "leaked"? Link? For that matter, where was this coming season's salary cap leaked?

The salary cap is adjusted every year and there's no way anyone can possibly know what will happen next off season. If you meant to say someone (Solomon or whoever) SPECULATED what it would be, fine. That's one hell of a lot different than leaked information.
It officially has to be released in 9 days. It's obstinate to think management has zero insight by now...

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06-21-2009, 05:44 PM
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Originally Posted by Kevin19 View Post
LOL! Where was the 2010-2011 salaray cap "leaked"? Link? For that matter, where was this coming season's salary cap leaked?

The salary cap is adjusted every year and there's no way anyone can possibly know what will happen next off season. If you meant to say someone (Solomon or whoever) SPECULATED what it would be, fine. That's one hell of a lot different than leaked information.
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It officially has to be released in 9 days. It's obstinate to think management has zero insight by now...
That, and its funny that some people are so insistent that everything Kings management says is a lie that they act as if Solomon is the first to predict a dramatic fall in the cap in 2010-2011.

Its not like a group of people get together and decide on a whim what the cap will be. It is tied directly to revenues and if people couldn't predict future revenues there wouldn't be a enormous amount of business dedicated specifically for that purpose.

You'll be hard pressed to find someone who predicts that in the next two years the average joe is going to be spending a lot more on recreational activities, and few expect people's disposable cash to increase over that period. If people aren't spending money, advertisers aren't either, everything goes down, and most likely to cap will follow.

Its not a conspiracy, its not a whim, its not JUST a guess, it's the reality of the greater financial world.

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06-21-2009, 06:47 PM
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Originally Posted by sweatypickle View Post
It officially has to be released in 9 days. It's obstinate to think management has zero insight by now...
Actually, the 2009/10 salary cap will be announced in a few days. The 2010/11 salary cap is based on the revenue figures for the 2009/10 season - which hasn't happened yet. Management might have some insight so that they can speculate what it might be, but ....

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06-21-2009, 06:56 PM
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Actually, the 2009/10 salary cap will be announced in a few days. The 2010/11 salary cap is based on the revenue figures for the 2009/10 season - which hasn't happened yet. Management might have some insight so that they can speculate what it might be, but ....
I meant within 9 days... by the CBA it has to be released by June 30th...

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06-21-2009, 07:20 PM
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I meant within 9 days... by the CBA it has to be released by June 30th...
That's the 2009/10 cap figure. The 2010/11 cap figure must be released by June 30, 2010

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06-21-2009, 07:34 PM
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I believe the salary cap could drop....but as has been stated in this thread it is directly related to league wide revenues....which have yet to be determined.

Does anyone know how many people in San Jose are going to renew their season seats yet?

How about in Atlanta?

This is all speculation based upon the economic climate....but there is really no way to make such a bold proclamation about how much the salary cap will drop.....yet.

As for contraction of the league......The cap was set up to give every team in the league the ability to be successful and make a profit...but the problem is that some teams do not follow the economic advice given by the NHL....if a team created a payroll that was 55% of their own revenue they would be able to at least break even....the problem is that most of the teams exceed their own 55% limit and by pushing the league set cap usually end up pushing 60-65% of their revnues go to fund their player salaries.

If the owners and GM's cannot keep their internal budgets within reason it is their own fault....not that of the league.

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06-21-2009, 08:03 PM
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I posted this in the Breakfast with the GM thread, But it seems more appropriate here.


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Quote:
Originally Posted by piston
Excellent questions, let me try and answer.

We don't 'know' where the cap is going. We do know a) the economy sucks and the massive appreciation of the Canadian dollar are over (this was the main driver of the previous increases) 2) Jeff Solomon said yesterday there are no serious negotiations going on until teams know where the cap is and 3) Solomon, who gets paid to track this, thinks it will be flat to slightly down this season and down significantly next season. This is not a negotiating tactic as some have suggested as very few contracts are going to be signed before both the teams and the players know what the cap is going to be giving neither an edge.

As to your next question, look at Dany Heatley and Rick Nash. At today's cap, Heatley eats up 13.2% of Ottawa's cap. Now, say Nash wants the same deal (he may want more) but the cap drops to Solomon's worst case projection of $48 mm. Now, Nash will be eating up 15.6% of Columbus's space making it more difficult for the Blue Jackets to surround him with talent. Now Nash is probably worth it and will still get paid. But is Chris Drury worth 14.7% of the reduced cap? Are the Sedins worth 22.1%? Spending big bucks on the wrong players can really hurt you, and with these long term deals, it will hurt for a long time. Thus, the very top players will likely be paid, but that level just below elite will see significant downward pressure on salary levels as you just can't afford to make a mistake here. There is not too much the NHLPA can do about this.

Far more interesting, however, is how teams will likely react. Philadelphia, Boston and NYR all have to clear space very soon or be over next year's cap (if it goes down like we are assuming for the sake of this discussion). But who is going to take on these salaries. Just as Philly made a mistake overpaying Briere and the Rangers did with Drury and Gomez why would another team take on that mistake? As i said above, if you have one or more of these contracts that suck up a high percentage of your cap without a commensurate return in performance, you will really be handicapped. In addition, the teams that are hemorrhaging cash are going to spend even LESS on salaries as the floor goes down as well. So, there will only be a small handful of teams with both cap space AND the ability to spend up to the cap, the Kings presumably among them. The GMs in Philly, NYR and Boston all know this and will be making some very interesting offers. For example, I would not offer more than a 7th for Briere and insist on a first coming my way as well (assuming Briere fits). If Philly says F/U, I say good luck getting under the cap bro and walk.

Hope that answers your questions.
Thanks piston. I understand your answers but still have questions. I guess someone could, a la Jeff Solomon/Dean Lombardi figure out exactly what each team has committed for each of the next two years, and then calculate the total league wide commitments on salary and see if it is possible for the league to fit that amount of existing salary commitment within the league wide total of allowed cap expenditure. I assume that as of right now, with several teams well below the cap, (Montreal being the most obvious) there is enough cap space league wide to satisfy the existing contracts for 2010-2011, but by the time this year's crop of UFA's and RFA's are signed, and assuming a worst case scenario of a 48MM cap in 2010-2011, there might not be.

If not, then what happens? A team's star players have to be sent to the AHL (where I understand a player's cap hit no longer counts against the team)? Someone suggested that in the breakfast. What if Philly and New York have NO TAKERS in their attempts to unload salary and literally can not fill their roster without going over the cap? Then what? I have trouble believing the league will nullify their games or not provide them some relief if they cant ice a team without going over the cap.

Beyond that, it seems logical and possible that at some not too distant point salaries, existing and those to come, will necessarily exceed a cap that continues to drop and that, as a result, some mid level players will be forced out of the NHL because teams simply will not be allowed to pay them close to what they are worth, and then those players may seek employment in other leagues. I think there are going to be adjustments made in practice by the NHL when the presumed cap hell materializes.

Bringing this full circle, it is assuming alot to pin your team's hopes of acquiring key pieces of the puzzle on the presumed ability of stealing players away from other teams who have cap problems. Reading that part of the DL interview reminded me of DL's "make my day"sound bite" last year about teams offering offer sheets to our RFA's. If the league offers respite to cap plagued teams because of a precipitous drop in the cap, we will have been waiting for nothing.


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Originally Posted by Stupid Sexy Flanders
I predict that, if the cap falls sharply, teams like PIT will raise holy hell and Bettman will devise some weaselly hardship clause or some other amendment to the CBA.
Quote:
Originally Posted by Ziggy Stardust
Similar to what the MLS has, I could see the NHL implementing a "franchise player" exemption rule where one player on the roster would be deemed exempt from the cap, but there are certain rules as to how long a "franchise" labeled player must remain with the team and the minimum/maximum length and wage of the franchise players' contract.
At this point, any adjustment by the league will significantly impact the stated strategy of DL and Co in using cap space limitations of other teams to poach a valuable player for minimal amounts. I am concerned that this strategy might not bear the fruit anticipated, and then the waiting and planning for next year will only result in one more year of suck with no significant improvement, unless you consider moving down a few spots in the draft an improvement.

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06-21-2009, 08:44 PM
  #25
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Quote:
Originally Posted by Captain Ron View Post
I believe the salary cap could drop....but as has been stated in this thread it is directly related to league wide revenues....which have yet to be determined.

Does anyone know how many people in San Jose are going to renew their season seats yet?

How about in Atlanta?

This is all speculation based upon the economic climate....but there is really no way to make such a bold proclamation about how much the salary cap will drop.....yet.

As for contraction of the league......The cap was set up to give every team in the league the ability to be successful and make a profit...but the problem is that some teams do not follow the economic advice given by the NHL....if a team created a payroll that was 55% of their own revenue they would be able to at least break even....the problem is that most of the teams exceed their own 55% limit and by pushing the league set cap usually end up pushing 60-65% of their revnues go to fund their player salaries.

If the owners and GM's cannot keep their internal budgets within reason it is their own fault....not that of the league.
The league knows they are losing lucrative sponsorships for next season. This is a significant part of revenues and is directly tied to the poor economy. That is why there is concern of a precipitous drop in the cap.

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