I’ve been quiet so far on the Alexander Ovechkin deal but there’s been a lot of good commentary on it - both Mirtle and Tom Benjamin have posts that are well worth a look. Ted Leonsis didn’t really alter his usual rate of Ovechkin related posting - there were about 15 posts in a three day span last week - but his site has a number of interesting posts on the deal that are worth checking out as well. I’m going to comment on one of those and then get into the deal itself. Per Leonsis:
Mainstream media is clueless. NHL teams aren’t worth what Forbes reports; they are worth MUCH, MUCH more. We would have to be idiots to do deals with players that are worth more than the team and we aren’t idiots. I am constantly amazed at how silly this cycle is: someone reports badly; someone comments on the bad reporting; there are now two sources out there; it must be true; so now it is fact.
I suspect that this is the first time, outside of negotiations with potential team buyers, that an NHL executive has said that Forves doesn’t give them enough credit for their financial strength. Something to remember when Bill Daly is poormouthing Forbes’ numbers during the next labour spat - the story of people related to the NHL about the reliability of Forbes numbers seems to change, depending on the story that’s needed.
Anyway, Leonsis also endorsed the CP version of events as being an accurate one. Here are the key parts:
The two sides were nearing completion of a six-year agreement earlier this week before Caps owner Ted Leonsis and GM George McPhee sat down and evaluated the deal. Did they want Ovechkin to become an unrestricted free agent at 27 years old, just at the moment he’s hitting his prime?
“If Alex is coming into his best performance at 27, what will he command in the free-agent market then and what will the salary cap be then?” Leonsis said in an interview with The Canadian Press on Friday, recalling his conversation with McPhee.
“So let’s accept the front part of the offer (six years, $54 million), but before we sign the contract, let’s say, ‘We accept this, this is a good place for us, but let’s negotiate your (unrestricted) free-agent years.”
The Caps examined the unrestricted deals signed last summer, such as the long-term contracts signed by Daniel Briere and Scott Gomez.
“So the question was, would you sign Alex Ovechkin for seven years for $10 million a year six years from now? And the answer is yes,” explained Leonsis. “So that’s how we came to six years at $9 million and seven years at $10 million. That was the thought process.”
Essentially, it’s two contracts wrapped up into one.
When Ovechkin and his parents walked into the Capitals’ offices Thursday, they fully expected to polish off a six-year deal. Then the Caps unveiled the second part of the deal and found a willing partner. Add up six years at $9 million per season and seven years at $10 million per season and you get $124 million.
“How I looked at it is, we have him until he’s 35 years old, we’ll have him through his best statistical years and his statistics are pretty good right now,” said Leonsis. “And who else would you want as the face of your franchise?”
Now, there are some problems that I see with this. By my math, a six year deal would take Ovechkin to through his age 28 season - he’s a late September birth. When the Caps bought his last seven years, what they were buying was his age 29 through age 35 season.
I should say - I don’t buy the argument that this makes sense to avoid the risk of an RFA offer sheet. The Caps were obviously willing to give him anything he wanted. I have a hard time thinking that he was going to pul an offer sheet for more. If he’s not going to do any better as an RFA, why not wait and see if you can cut a deal on price? Presumably, it’s because you think he’s a good bet to be elite 10 years from now. I’m not sure that I believe this.
I wanted to dig into this a bit, so I looked at the careers of players through the age of 35. Obviously, this limits me to players who were born in 1971 and earlier - that’s something to keep in mind. I’ve also broken their careers into five parts: ages 20-22, 23-25, 26-28, 29-31 and 32-35, for reasons that will become obvious as I go through. I’ve limited my focus to post-war players and I’m presenting their stats both raw and adjusted for scoring context and season length. I’m only looking at the careers of the top 28 forwards in terms of scoring between the ages of 20-22. 28 may seem like an odd number but Oilers fans will figure out why I chose it. On to the numbers.
First up: the 20-22 span. These are the seasons on which Washington has to base their analysis of Ovechkin. Historically, he shapes up very well - I’ve pro-rated his numbers for this season and he’s in a virtual tie with Bryan Trottier for the third most points during that stage of a player’s career. Wayne Gretzky is off in a league by hmself, followed by Mario in another league by himself and then Trottier and Ovechkin carve out their own little niche. In my view, Leonsis accurately pegged Ovechkin as an all-time great offensive player through this stage of his career and, assuming that the market puts a fair price on him, paying him as an elite player is a defensible decision. The question is for how long…
I’ve added a column for the last four charts: rank. This is where the players rank in my sample. The sample includes defencemen, whom I’ve cut from this analysis, so keep in mind that their rank would be higher if only forwards were considered. I chose this three year span for a simple reason: if you buy a player out when he’s 25, you’re only on the hook for 1/3 of his salary. By going the 13 year route instead of the 6 year route, the Caps upped the price of getting out from $9MM over six years to about $31.3MM over 14 years. That’s a pretty big hit, depending on what you think inflation is going to do.
Most of the guys who were dominant through age 22 were similarly dominant through age 25 - the ones who fell off were, by and large, the ones who suffered injuries that cost them a bunch of time. Barry Pederson, Pavel Bure, Pierre Larouche and Rob Brown all stand out here. Rob Brown is an absolutely terrible comparable, who doesn’t really belong in my sample; the other three misssed an awful lot of games and suffered some serious injuries during this span.
It starts to get a little blurrier between the ages of 26-28. A lot of guys who were dominant between the ages of 20-22 played relatively full slates of games (246 is the games max under the adjusted heading) without producing enough offence to climb the charts. These aren’t scrubs - these are guys like Bryan Trottier, Dale Hawerchuk and Jeremey Roenick who, while not quite as offensively dominant as Ovechkin, were great players when they were young - they weren’t far off Ovechkin as young guys but they weren’t dominant offensive players by the time they hit this cycle. Rob Brown (not a good comp, I know) was basically out of hockey. Only five of the top ten offensive players between the ages of 20-22 managed to crack the top ten between the ages of 26-28. The risk grows.
I don’t see that what a player does between the ages of 20-22 tells you a hell of a lot about what he’ll do between 32-35. Wayne Gretzky is a freak, obviously. The rest of them are all over the map. Only three of the top 28 at ages 20-22 are still in the top ten between 32-35. You can make the point, I suppose, that for many of them its freak things but nobody can say what freak things that Ovechkin will encounter.
I don’t know that you can draw a lot of conclusions from this other than to say that it’s damned tough to say that just because a guy is a star at 22, it doesn’t mean that he’ll be playing hockey at 32, let alone being amongst the best players of all time in that age group. There are a lot of things that can happen to sap a player’s value in that time. It bears further mention as well that points rates fall off over time - 23-25 was the peak but by the team players hit that 32-35 age group, the scoring rates fall considerably.
Would I have signed Ovechkin to this contract? Well, a lot of it depends on how salaries increase over time but given the slight difference between elite and good and the sheer size of the contract, I don’t think that I would. I’ve said it before but winning in the NHL with a salary cap is an efficiency contest in which one needs to make smart bets. My gut feel, without sinking a ton more time into this, is that the odds of Ovechkin being worth his contract, even allowing for a dimunition in the value of $10MM annually, aren’t enough to make it a smart bet. When it comes to the amount of cash that the Caps have tied up in him, I’d be inclined to make more conservative bets - it’s one thing to sign a couple veteran defencemen to $750K contracts in the hopes that someone still has some gas in the tank; failure won’t sink you. If Ovechkin turns into Pavel Bure or Mike Bossy or just isn’t as elite in the future as he has been in the past - keeping in mind that success at 20-22 is no guarantee of success later on, there are serious problems for the Capitals. I’m not much of a gambler but I recall reading that you never bet more than you can afford to lose. Ted Leonsis can afford to lose a lot more than I can; I question whether the Capitals, as distinct from him, could afford the cap and salary hit if he isn’t the player in the future that he’s been to this point in time.
I have been following a lot of the Ovechkin commentary as well and one ‘interesting’ thing came to mind - how much better defensively (EV outscoring) will Ovechkin get as he ages?
Not to take away from the ‘risk’ aspect of your post (which is bang on btw) but Vic has a nice post on carrying the mail and I had to wonder - maybe his points go down but his effectiveness goes up?
Stan Mikita baby!
At first glance I have to say that I’m a little worried about your ranking. When you have Mike Bossy trumping Bryan Trottier age 26-28 then I’m a little uneasy about the yardstick you’re using.
Ovechkin’s not a pure sniper and imo he has a chance to be more of a Trottier difference maker than a Bossy “sniper”. I don’t know how you put that into this graph, I just know you need to.
Why is any of this a surprise? Aren’t the Caps the same team which signed Jagr to an $11M deal for seven years? In Jagr’s (and Leonsis’)defense, he did score 54 goals at age 33.
This move is more PR than anything else. Although I think it’s unlikely that AO is going to bomb, considering that he’s produced as much as he has without much help - now without Nylander again (Let’s see the Edmonton Media spin that into more Lowe-Love) it’s much easier to get UFAs interested if AO is playing in Washington. If he does get injured I guess you hope it’s career-ending - is Ulf Samuelsson thinking of a comeback?
Interesting stuff, MC. One question: who was #1 in adjusted scoring for both the 26-28 and 29-31 brackets? Obviously someone (or some two) who didn’t make much of an impact before age 22.
Bruce: “who was #1 in adjusted scoring for both the 26-28 and 29-31 brackets?”
I wondered the same thing - I think it’s Jagr and Esposito, judging by their career stats.
In Leonsis’ defense, he probably has a much better grasp on the value of a $10M salary ten years from now than he does on the career points projection for Ovechkin. If salaries grow at the rate they have over the last ten years (they might not grow at that rate, but then again they might triple), then the final five years of Ovechkin’s deal will look pretty similar to Mike Ribeiro’s five year deal. Ovechkin may not be a top 10 postwar-era scorer by then, but he’s not going to be paid like one either.
The consensus pendulum has already started to swing the other way regarding DiPietro’s contract. Also, comparing the quality of Ovechkin’s teammates to those of Trottier and Bossy, Ovechkin is a solid standalone #3 on the 20-22 list. I think this is a good bet for Leonsis.
Haven’t you heard, Tyler?
There is no salary cap, according to Brian Burke.
There is only the willingness of an owner to park a big salary an unproductive player in the minors.
You can park a salary, but you still have the 50 contract limit to prevent GMs from doing just that. Also, waivers.
One of my all-time favorite quotes was MacT on Burke, ‘listening to him talk is like trying to drink from a fire hose’.
50 contract limit. Get real. That includes 20 jersey fillers for even the best franchises.
And if paying a guy’s full salary to toil in the AHL isn’t a burden, why would paying half his salary to play with the Rangers be bothersome? So waivers aren’t an issue, either.
But inflation is. At 5%, the cap would be $95 million in 13 year. That’s assuming no organic growth in revenue streams whatsoever. None.
So OV’s cap hit goes from about 20% of team payroll to about 10%. Like JeffJ said above, he’ll be making Mike Ribiero money.
Leonsis got over. OV’s parents saw the bag of gold and they grabbed it. Welcome to Amerika, comrades.
50 contract limit. Get real. That includes 20 jersey fillers for even the best franchises.
Jeez, I wish you could have drilled that into Lowe’s head, because it sure seems to be a crutch for us.
“I’ve said it before but winning in the NHL with a salary cap is an efficiency contest in which one needs to make smart bets.”
I think Leonsis is betting that his government is going to continue printing money like mad. Consider:
1) Money supply is no longer limited as it was in the depression era when dollars were tied to gold. The Fed will not allow deflation to sewer the economy as it did in the early 1930’s.
2) America’s governments, corporations, and citizens are financed to the hilt. They can choose to default on their loans and turn control of their assets over to their foreign creditors, or they can devalue their currency and pay back their loans with dollars that aren’t worth as much as the dollars that were originally borrowed. Because foreign creditors don’t get to vote in elections, I’m betting on the second option.
3) $100/barrel oil. $800/oz gold. And a loonie at par with the greenback are signs that the Americans are already well underway on the process of devaluing their currency. More is yet to come.
4) Something like 60% of the workforce in the Western world is made up of members of the baby-boom generation. These folks all want to retire at about the same time. The economies of these Western Nations cannot support that many retirees with no one in place to take their jobs (and pay their taxes). Remember economics 101 and that “invisible hand” of the marketplace? Well that invisible hand is about to bitch-slap a whole generation of folks into abondoning their retirement plans. “Freedom 85″ will be the new dream.
My point–$10 million USD ain’t going to go as far in 2013, nevermind 2020.
cambo- For everyone’s sake, I hope inflation doesn’t get to 5%, let alone staying there for 10 years.
Americans are already well underway on the process of devaluing their currency. More is yet to come.
I guess the secret is to ask for your salary to be paid in Dubloons.
When the Ruble is worth double the USD will the RSL be signing North American players like the NHL currently does Europeans?
Get to 5%? Woah. It’s way over 5%. I know you guys don’t take the MSM seriously on hockey matters. I suggest extending that skepticism to anything printed on the non-Sports pages, particularly if it’s a story centred on data provided by government flunkies.
Good sites for economic info include dailyreckoning.com and financialsense.com.
Or read Smyth94’s comment again.
And yes, when the Ruble buys more Porsches and McMansions in Vladivostok than it does in Pittsburgh, elite talent will migrate to the Russian league.
cambo- I can accept that the US measure of core inflation is a little bit screwy, but I do not agree that inflation is over 5% in the US. I don’t want to get into an economics debate, but going back to a gold standard is retarded. It’s the hip thing to talk about (Ron Paul and so forth) but it’s a dumb idea. You’re probably pissed at me at this point for making a statement and not backing it up, but I wouldn’t argue with creationists either. That said, in my opinion your sources are correct to assume oil is going WAY higher (in USD) in the next 5 years.
But inflation is. At 5%, the cap would be $95 million in 13 year. That’s assuming no organic growth in revenue streams whatsoever. None.
So OV’s cap hit goes from about 20% of team payroll to about 10%. Like JeffJ said above, he’ll be making Mike Ribiero money.
This is, absolutely, the argument in favour of doing this. The thing is as well, at this point he’s a brand. If Todd Bertuzzi is worth $4MM these days, you’d have to think that AO could get the inflation adjusted equivalent in 2045 or whatever.
Really, it’s all about risk. The risk is the catastrophic injury. This was a bet the franchise type move, which is my real objection to it. It’s like if you can buy a ticket in a lottery. The ticket costs $200,000.00 and you have a 10% chance of winning $10,000,000.00. Buying that ticket makes sense, from an expected outcome position. Of course, if it would take all of your assets to buy the ticket and you have no way of replacing them…the risk is too much. That’s really my question about this.
The point about playing tougher minutes is well made as well. That said, I don’t know how you can substantiate it - I don’t think it’s been done yet, even by VF, although I may have missed something.
I’m also curious how much improvement in medical, nutritional and workout practices will effect player longevity at the top. Chelios is a freak, but there is no reason to think that a larger percentage of players will be able to play at a high level longer than before - barring injuries. The injury/trauma caveat is a massive one in hockey though as people have mentioned before. I’m not entirely sure a cross-generational comp will be able to account for improved nutritional, medical and workout practices yet. I’d be interested to be proved wrong of course.
Only three of the top 28 at ages 20-22 are still in the top ten between 32-35.
Isn’t that a pretty disingenuous comparison? Only ten of the top 28 were in the top ten between the ages of 20-22; that doesn’t sound good.
What’s more relevant is that seven of the top 28 were still in the top 28 after thirteen years, and two more just missed the cut (Perreault and Sundin). 1/4 (1/3 if you count the latter two) is still not a fantastic success rate, but it’s not exactly the 1/9 that your original statement implies.
The fact that five of those Top 28 were no longer playing by age 32 (seven if you toss in Larouch eand Lysiak, who didn’t play a full season’s worth of games after 32) is perhaps the more troubling number. That’s an 18-25% fall-off-the-face-of-the-earth rate, versus a 25-32% position-maintenance rate, depending on how you count them. With the numbers that close, I’d be wondering just how much money Leonsis really saves, especially since I can’t imagine the cap going up $3-5M/yr in perpetuity.
(All this tosses aside the Yzerman argument, regarding changing roles, though really, was Yzerman worth $10M under any salary structure after, being less than conservative, 2002?)
I would imagine that it was Ovechkin that was driving for this long term deal, especially in light of the Richards signing. And with the way that Leonsis had identified his franchise with Ovechkin, he wasn’t in a position of power here.
From the point of view of the team’s risk, Leonsis can insure this contract if he wishes, this is why underwriters exist.
From the point of view of the player’s risk, if Ovechkin signs a short term contract, the risk of injury affecting income doesn’t disappear imo, it merely moves to the player. If he suffers a catastrophic injury next month he is out tens of millions (unless he has insured his own career, which is not uncommon).
My point: The risk is always there, it won’t go away, just a matter of who carries it. I’m surprised that you instinctively are drawn to the owner’s perspective.
Leonsis’ point on Forbes’ reports is valid IMO, they have no inside information, they are estimating like the rest of us, often with lesser qualifications, and frequently with less time and passion for the subject.
Of course nobody in their right mind is taking shots at the Levitt report after the fact, as it has shown itself to be bulletproof.
Tyler, you hit the nail on the head on risk. For a franchise that’s doing poorly financially, this is the best sort of risk. If it doesn’t pan out, then it’s Chapter 7 and you shed all contracts. No harm, no foul.
I don’t think you’d see Detroit doing a similar deal because the present value of their franchise is quite high, and they have something to lose. WAS has less risk in this transaction. If you don’t think that you’ll be in business in five years, where’s the harm? (See DiPietro, NYI…)
Now from Ovechkin’s side, I’d kind of want a high credit guarantor, being uninterested in owning the Capitals (see Lemieux, Mario), but he’s fairly compensated for the first few years, and the rest will be what it is.
From the point of view of the team’s risk, Leonsis can insure this contract if he wishes, this is why underwriters exist.
Can he? My understanding is that it gets increasingly difficult to insure contracts as they get further into the future. The DiPietro contract, to pick an example is apparently only insured for six years out.
Leonsis’ point on Forbes’ reports is valid IMO, they have no inside information, they are estimating like the rest of us, often with lesser qualifications, and frequently with less time and passion for the subject.
Funny. Nichols has a quote in today’s Journal saying that Forbes’ numbers are wrong too. I don’t quite know what to make of it - I like to think of the best of people and these same guys were saying that Forbes was far too rosy three years back. Unless Forbes has completely changed their methodology…I don’t get it.
(Unless of course, the accounting used by the owners has a decreased hocus pocus quotient now that they have to disclose to the PA)
The owner’s accounting practices are immaterial, Forbes has no access to that information. Though you seem to be implying that there is fraudulent activity occurring, are you referring to something specific, or is this just your gut feel?
And I’m sure that you know that you should take whatever Cal Nichol’s has said with a grain of salt, whether his statements came before or after the lockout.
Forbe’s estimates of revenues and costs aside, the valuation of an NHL franchise is a tricky business, though it is surely much better under the new CBA because of the certainty provided by salary/HRR linkage. Still, many other factors come into play, such as the leverage a franchise may provide for real estate development in the local market, and in any case the value of any franchise is the price that the highest bidder is willing to pay.
Levitt calculated the HRR of the NHL to be a shade under $2 billion for the 02/03 season. Four years later, 06/07, the HRR of the NHL was a shade under $2.3 billion, no? This doesn’t seem outrageous to me, in fact it seems downright reasonable.
IIRC the percentage of revenues generated by gate receipts seems to be about the same overall percentage as well (regular season gate receipts equaling about 44% of the overall revenue), going by the information published by the Globe & Mail last season, that meshes with the Levitt report almost exactly.
IIRC about 40% of HRR came from in-arena revenues (signage, concessions, parking, prgrams, etc) and local broadcast rights. And with some back-of-a-cigarette pack math, it would seem to be clipping in at a slightly higher percentage now. Bear in mind that this revenue is essentially profit, as it is less direct costs.
Local TV revenue (and it’s effect on dasherboard advertising and other sponsorship rates) is the main thing that separates the haves from the have-nots IMO. Though I’ve never bothered to do the math. So though San Jose and Edmonton would look to have remarkably similar revenue streams … the Sharks average about 25,000 TVs for locally broadcast games, which is fairly close to the breakeven point I would think. The advertising cost, per person impacted, is extremely high for NHL hockey. So the Oilers surely make a killing at this, as do about a dozen other teams.
Obviously the LR was misrepresented to one degree or another by Bettman and the NHL, but that’s not the question. Have you discovered anything inaccurate or intentionally misleading in the Levitt Report, Tyler?