Since the NHL announced that it was seriously entertaining options for expansion within the next few years, there seems to be the sentiment out there that such a move is going to have a great effect on the NHL Salary Cap, making it rise at a greater rate than it has been.

Well if my math is correct, that is a mistaken assumption. I am not an economist so some of my logic might be off, but it doesn't make sense to me that expansion will have this great effect on raising the cap.

The salary cap for this coming season is set at $71.4M, a rise of $2.4M (or 3.5%) from the previous year. The rise is also not due to the increased revenues, but moreso the NHLPA triggering part of their right in the CBA to escalate the cap by up to 5%. They didn't do the full 5% because of escrow concerns, but that is another story.

But let's say that is the number it should have been without the escalator clause. I don't know what the exact number is for Hockey-Related Revenue (HRR) this past seaon, but it is somewhere in that neighborhood.

So with a $74.1M cap, the midpoint between the cap and floor is $62.1M. That midpoint is the number that the 50/50 share is based on, so that means the average revenue per team is about $124M (rounded for simplicity).

Lets assume for a second that the current 30 teams have an equal revenue to what they had last year, and 2 new teams were entering the league this fall, to illustrate the effect of expansion on the cap.

For the Cap to increase by just $1M per team, the revenues would have to be increased by $2M per team (50/50 split), or $64M in total (with the 2 new teams). So for the expansion teams alone to have a league-wide effect on the cap of just $1M, they would have to average $156M in revenues ($124M to keep the average + $32M each to raise cap by $1M per team).

In the Forbes NHL report published last fall, there were just 5 teams that had revenues in excess of $154M - New York Rangers, Toronto, Montreal, Chicago and Boston (from the 2013-14 season). (NOTE: I am not sure that the revenue Forbes reports is actual HRR, but it is probably in the ballpark)

It is a bit much to expect an expansion team to join the ranks of 5 of the original 6 teams and immediately become huge revenue generators and approach that level. In fact, there were only 10 teams that had revenues in excess of the average ($124M), and the higher-revenue teams really drove the increase in the cap at the expense of the lower-revenue teams to bring the average up.

There is the matter of the entry fee that the new teams will pay to get a franchise. The expansion fees, whatever they end up being ($500M is the suggested entry fee as of now) are NOT included in HRR, so they will go right into the pockets of the present owners. $1B divided by 30 teams is $33M per team, but will have absolutely no effect on the cap. It will certainly help the owners, especially from the low-revenue teams that are still having trouble even with the Salary Cap in place.

So the salary cap will continue to rise, whether by actual revenue increases in most markets or artificially by way of the NHLPA triggering the escalator clause each year. The $33M each owner receives from expansion will go a long way to covering those increases for many teams for a while, but it won't last forever.

But expansion alone will not be the reason the Cap increases, and if anything it will help to slow down the escalation because the average revenues of the new teams are more likely to be below the average rather than above it, or the league would have been in those markets a long time ago. These are cities that can survive, but won't be among the higher-earning teams.

So why would they expand then? Overall revenue increases, while the Cap escalation gets slowed down, which benefits more teams than it hinders. And the players don't mind because that is about 50 more jobs available at the NHL level plus the 50 or so minor league jobs it opens up. And there will be more star players will be getting paid, because the new teams will have to spend to the floor right away, and there will be more competition for their services than before.

But that is also why teams have to be careful about spending superstar money on just borderline star players right now, because they can't assume the Cap is going to continue to rise at the same level it has been. A saturation point will come, and it might be sooner rather than later, in terms of revenue streams. There will also come a time, and again it is closer than you might think, where the current group of players don't want to put so much money into escrow to support the raising of the Salary Cap. That thinking made the cap rise less than it could have this season, and it is likely reaching a point where it is not worth it to the players, because they are each going to end up losing more and more of their own personal money in the process. What good is negotiating a contract for $7.5M per year if you are going to lose 10 or 15% of it to escrow? (NOTE: After reading conflicting articles, signing bonuses are subject to escrow).

So for teams like Ottawa, who have cap space and contracts coming off the books in the next couple of years, they need to be careful about going out and signing players for any more than two or three years, because the players they have coming due will need to get paid substantial raises if they continue to trend forward, and if the cap remains relatively stagnant then they would put themselves in cap trouble, which is probably worse than not spending enough, or at least as much as you would like, now. With the O'Reilly, Tarasenko and Saad contracts this week, what Turris, Karlsson and Stone for example, can expect on their next deals will be pretty substantial. I know they are 3 or 4 years away, but the Cap isn't going where many expect it will go, and those three alone might eat up the cap space on their own, let alone any other raises that are due in the meantime.


I know this was very "mathy" but you can only talk about new logos so much!

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