Guest Post: The KHL’s Strategic Plan

I am once again very happy to welcome Tomáš Vorčák (@vorkywh24 on Twitter) back to the blog for today’s post.  He has previously written here on the subjects of youth hockey in Russia, and on the relationship between the KHL and the Champions Hockey League.  Today, Tomáš has a detailed look at the KHL’s new development plan for the next few seasons, which was unveiled this past week and which represents a significant change of philosophy from the way the league used to operate.  Read on!

The KHL Board of Directors has made one of the most important decisions in the league’s history at the end of May 2017. The reforms have been planning for the best Eurasian ice hockey league.

The league worked on the principles of a new development plan through the 2016-2017 season (link is a PDF, in Russian). They analysed the KHL´s status quo, comparing the league to its rivals in Europe (the SHL, the Liiga, the NLA, the DEL or the CHL) and the NHL. Russian and international consulting companies were involved in the process. The KHL Board of Directors approved the principles of the new development strategy, and the league´s management has been tasked with producing a finalized strategy ready for implementation by the end of November.

Let us start with the KHL´s main problems, which need to be solved in near future. The first issue is the widening gap between the top teams in the league and the bottom-feeders. That results in a relatively significant portion of unattractive hockey matches for the fans and the sponsors.  Another problem is the fact that some (Russian) sides are not worthy enough for the league, they do not have economic potential for the future. Last but not least, there is a big dependence on direct and indirect funding from the state. According to the order of the President of the Russian Federation there will be a reduction of the state funding of the professional sport organisations. The KHL as a professional league has to implement the Order.

KHL President Dmitry Chernyshenko. (Image Source)

The league counted revenues and expenses of all clubs for the 2016-2017 campaign. The total revenues were 50 billion rubles and they came from sponsorship agreements between a club and a municipal or regional authority, or a state-owned enterprise (26 billion rubles, 52% of all revenues), sponsorship agreements between a club and a commercial (private) investor (17 billion rubles, 34%) and finally commercial income of the clubs (7 billion rubles, 14%). By the commercial income I mean revenues from broadcasting and the so-called “hockey days” (tickets, merchandising). Total costs of the clubs in the 2016-2017 season were 52 billion rubles and were divided between the players’ wages (23 billion rubles, 45%) and the day-to-day running of the club (29 billion rubles, 55%) like renting the arena, accommodation, and logistics or transport. The league plans to achieve a balance between revenues and costs at the level of 43 billion rubles (less than status quo) by 2023. The commercial income should reach 12 billion rubles (28%) and other sources of income should be 31 billion rubles (72%). The point is that clubs’ dependence on the state funding will decrease and the commercial revenues will go up. The payrolls will decrease from 23 billion rubles to 18 billion rubles. Take into account that the total number of the teams will decrease from 29 to 24, and it is logical that the total budget (of all clubs combined) for players’ wages will go down, but the share (%) will be similar to the 2016-2017.

It is important to know what is the share of elite and average (or worse) players in a club’s payroll budget. Top-30 players’ share was only 17% of all payrolls  and average players (151+) got 49% share in the 2016-2017 season. As we can see the average Russian players have been overpaid. The league’s aim is to distribute more money to the elite 30 players (29% by 2023) and not to overpay average players anymore (151+ group to decrease to 36%). Furthermore, with a reform of the salary cap mechanism, top-30 players should be distributed to more teams, not to one or two anymore, which would bring more parity and a more competitive environment in the league. The KHL had a soft salary cap  at the level of 950 million rubles per team, with a 20% luxury tax if a club exceeded it, in the 2016/2017 season. The league plans to introduce a strict salary cap with the salary ceiling down to 600 million rubles and exception of two stars by 2021. The result of a such changes should decrease a gap between teams on one hand, but also to give to the clubs a right to sign star players with an unlimited ceiling for their contract. That is important for the KHL to be able to challenge the NHL. According to the KHL, the average NHL salary is five times bigger than the KHL’s now; after changes in the KHL, the gap will increase by 0,5 to be 5,5 times. At the same time the KHL will stay as a leading league in Europe — the KHL´s average salary is 2,8 times bigger than in European championships at the moment and will decrease by 0,2.

It is not a secret that some Russian teams have not been attractive since the league’s establishment in 2008.  “We have clubs in the league which receive funding from public sources, yet do not compete successfully in the championship and continue to languish in the lower reaches of the standings, doing little to attract interest in the league. Spending on these clubs amounts to several billion rubles, without any economic effect. There are clubs that gather a large number of spectators and have high ratings for broadcast games, and others that drag down the financial efficiency of the KHL and do not even pay their way in the tournament. Often the matches involving these clubs do not break even,” said Dmitry Chernyshenko to the official website of the league. So this group of teams has brought no economic benefits for the league and there is no hope for a change in the forthcoming future. The league divided the teams into four pots (A, B, C, D) according to the standings in the 2016-2017 season. According to the analysis, 58% of the regular season matches (total 870 games) are unattractive, meaning their attendance figures are lower than 74% of the capacity of the arena and fewer than 100 000 people watching the game in a television. Several matches were not broadcast on any medium. So, the league´s ultimate goal is to reduce the number of unattractive matches to the minimum possible. It can be done only if the league excludes unattractive sides. “I think few would argue that the weaker Russian clubs do not add to our entertainment value, and should be replaced with strong teams from other nations,” said Dmitry Chernyshenko to the official website of the league.

Kunlun Red Star Beijing players listen to the anthems prior to a 2016-17 KHL game.  (Image Source)

The KHL had 22 Russian and 7 foreign teams in the 2016-2017 season. As mentioned earlier, there is a deficit of good-enough Russian players for so many Russian teams. So, the average level on ice has been decreasing and average Russian players are continuing to be overpaid, because there are so many jobs for them.  “With so many Russian clubs the top-class players are spread too thin, and the current policy of limiting foreign players (five per team) means we cannot raise the quality by attracting more players from overseas,” said Chernyshenko. This problem can be solved by expansion to Europe or Asia, because these new teams would be composed of non-Russians as Kunlun Red Star Beijing and Jokerit Helsinki and others have showed. There are so many good Europeans or Americans and Canadians in the AHL and the NHL who can be signed by new international-based KHL sides. The KHL´s analysis declares that an optimal size of the KHL is 24 clubs, 15 of them from Russia. The KHL Board of Directors approved a plan of contraction of the teams for next couple of years. This plan is public which is very important because we as fans have not known the criteria and the plan for the expansion in the past. The KHL has announced that there will be an annual evaluation of the teams and the clubs’ rating will be made (and should be public as Chernyshenko promised) according to eight criteria for the last three seasons (see below).  The three or two clubs which merited the lowest ratings will leave the league. There were members of the KHL Board of Directors who wanted to start cutting the teams after the 2017-2018 season, but a majority of the members decided to start it right now.

According to the plan, the KHL will have 27 teams in the 2017-2018 season. Medveščak Zagreb and Metallurg Novokuznetsk were cut. The Zagreb club failed to submit the documentation required for admittance into the championship (KHL), because earlier Medveščak decided to come back to the Austrian-based EBEL. Metallurg Novokuznetsk was the lowest in the club rating after the season. In 2018 three more clubs (the lowest in the rating) will leave the KHL, so the league will have 24 clubs. Two more teams to go before the puck drops for the 2019/2020 season, but two new foreign clubs will replace them, so the league’s size remains at 24. The same will happen before the 2020/2021 season. Of course it is just a plan right now, but the league has been in contact with potential candidates. “There are several possible candidates, but I will not name them yet. We are conducting a comprehensive analysis of all the relevant information presented to us. But I will say that there are clubs from traditional (European) hockey countries, and others from countries where the game does not have deep roots. We are attracting keen interest from Asia. The KHL is an international league and it is important for international development, but we are confident the Russian clubs will remain in the majority” Chernyshenko said to the league´s website. All current KHL clubs are in danger of exclusion, including foreign sides, but it is generally expected that mainly the Russian teams will leave the league. They will end up in the VHL, second tier hockey in Russia.

As mentioned, there are eight criteria for clubs rating, they are as follows:

• Sport results – the clubs with higher standings history are in better position in the club rating
• Budget for players’ wages – if your club pays more to the players, the better for the team and its future in the league
• TV ratings – more TV consumers, better for the club
• State funding – the clubs with smaller share of state funding are in better position
• Attendance figures (%) – attendance in percent of capacity of the arena is taken into account
• Debt level – if a club pays on time and does not have debts to players, the club will not be in danger
• Arena capacity – bigger arena, better chances to stay in the KHL. Construction of new arenas (as Novosibirsk plans), which should be bigger than 12 000 seats, is taken into account.
• Economic potential of a local market – if there is potential to develop the hockey business in the city/region, it is good news for the club.

Source: khl.ru, championat.com, rsport.ru

Notes:

All citations of Chernyshenko are from those two articles:

http://en.khl.ru/news/2017/05/25/347812.html & http://en.khl.ru/news/2017/05/17/347292.html