The Canucks signed star goalie Roberto Luongo to a humongous 12-year, $64 million deal today. The many non-sports fans among my dear readers should keep reading, though, as there’s an interesting business angle to this story.
The NHL operates under a salary cap system. For the 2009-2010 season, teams aren’t permitted to pay their players a collective salary of less than $40.8 million (call that the ‘salary underpants’, maybe?) and no more than $56.8 million.
This system, also used in other professional sports leagues, encourages parity and fairness among the teams. Teams in big cities like New York, can’t buy a championship by waving big money under the noses a slew of star players. On the other hand, a nefarious owner can’t, for whatever reason, operate a team on minor-league salaries. The NHL cap is only four years old but, by my estimation, so far, so good.
There are lots of ways, some legitimate and some dubious, to manipulate your salary cap ‘hit’–what your salaries are counted as against the cap–throughout the year. There’s even a slangy job title for the numbers man inside your organization who pays attention to these things–he’s a ‘capologist’.
A Handy Loophole
Most hockey players hang up the skates around the age of 35 or so. So why have the Canucks signed a 12-year contract with the 30-year-old Luongo that would have him playing through his 43rd birthday?
The deal, you see, is front-loaded. Luongo will earn much more money in the first few years of his contract than the last few. In fact, in the last two years, he’s only (forgive me, but this is professional sports) earn $2 million and $1 million respectively.
However, when the league calculates how a player’s salary impacts the salary cap, they take the average per year salary. When his contract kicks in next year, despite the fact Luongo makes $7 million in the first year, the ‘cap hit’ the league counts is only $5.33 million. This gives the Canucks valuable flexibility in managing the salaries of the other 22 players on the roster.
Will Luongo play until he’s 43? Almost certainly not. He’ll retire when he’s ready, and decline however much money is left on his contract.
It’s a loophole, and one that’s being exploited by several teams at the moment. It will be closed in the next few years, but everyone expects these existing super-long contracts to be grandfathered in.
Training Camp is Just Around the Corner
With Luongo signed long term, I like how the team is shaping up this fall. They recently acquired some defencemen who should be able to fill Ohlund’s skates, and the signing of Mikael Samuelsson seems like a wise move. It would be great if Cody Hodgson or Michael Grabner could make the team, too.
Luongo’s deal makes blue-chip prospect goalie Cody Schneider a high-value, tradeable asset. I expect GM Mike Gillis to hold off until well into the season before the goalie is moved, though. Gillis will assess the team, decide what they need, and use Schneider to buy it.
What do you think? Is the Luongo super-deal a good thing?
DarrenBarefoot.com 
I’m still amazed that hockey fans inject enough money into the league to pay players that kind of money (not as amazed as I am at U.S. football and baseball salaries, however — not to mention those for F1 race car drivers).
Then again, if Jim Carrey (et. al.) can get millions of dollars to act once in a single movie, not risk much personal injury, and look forward to a decades-long career, I guess it makes a strange sort of sense.
It must be particularly frustrating for the figure skaters and biathletes of the world. They work just as hard as the highly-paid professional athletes, yet earn a tiny fraction of their salary.
Last night‘s “Mad Men,” which included a storyline on an ambitiously deluded rich promoter trying to make jai alai more popular than baseball, made me think a similar thing.
In spite of the Canucks’ 0-3 opening record, it was an good deal. Gillis intelligently used a loophole to keep the annualized cost of the contract low. Where this gets interesting is why Gillis is able to do this…
It’s because unlike most other markets in the NHL, Vancouver fans will pay top-dollar for a middle-of-the pack team. Next time you’re in Tampa, you’ll be able to get a lower-bowl hockey ticket on game-day, that includes a free beer, a hot dog and costs almost 40% less than a comparable ticket in Vancouver.
So here’s the story that no one is following. A surprising number of season-ticket holders did not renew this year. During the annual “ticket holder relocation” event, there was a sea of white notes taped to seats to indicate their availability. And unlike previous years, only a fraction of games are sold-out at this point in the season.
Gillis needs to be careful, because this very quickly becomes a death-spiral. Few season-ticket holders can attend all their games; instead, they count on scaracity to create a secondary market which allows them to quickly and economically dispose of their tickets. If liquidity in the secondary market dries up (reminiscent of last year’s economic melt-down), season ticket holders will cancel in droves in 2010. And at that point, there is no more money to support creative financial engineering or attracting new talent.
The Canucks should bring back Nonis. Gills is failing catastrophically. The symptoms haven’t fully manifested themselves, but they will.
p.s. speaking of symptoms, what happens when the H1N1 scare hits and no one wants to go to hockey games; who back-stops the season-ticket holders then?