Dmitry Chernyshenko on the KHL in 2017-18 and Beyond.
As the 2017-18 KHL season moves through its opening stages, league President Dmitry Chernyshenko sat down with reporters from Kommersant for a lengthy interview this past week. And I am very pleased and grateful to say that we have a translation of the entire interview, courtesy of frequent guest-poster Tomáš Vorčák. Tomáš introduced us to the KHL’s new strategic plan a couple of months ago, and that topic is much at the forefront of the Chernyshenko interview (you can read a little more about the plan here as well). Read on!
You have the KHL Strategy 2015-2018 on the table, which you described as a crisis strategy. Was the league really in a crisis?
At the beginning I would like to remind you what the function of the KHL is. Of course, the KHL has to run a championship (competition); the majority of costs are spent on it. Second, the league’s role is to make a business environment for both the clubs and the league, to be more commercially attractive. The KHL is a governing body over independent clubs. Some of them are co-founders of the league, but league’s goal, so far, is not to share all revenues with co-founders, because we have re-invested the money into the league’s development. At the moment when my team came to the KHL (2014-2015), the league’s financial results were planned to be in the red. So the league needed some kind of restart, a strategy which would route a new way of development to make the league more financially stable. The league has achieved stable financial growth for last three seasons. We can see that the league has earned more and more money every year, so our product has become more attractive. This achievement reflects the condition of our clubs. So, the situation of our clubs has become better. All goals of the Strategy 2015-2018 were achieved, so we needed to work on a new strategy. The Strategy 2015-2018 was created by the league’s emloyees only, but we had to hire external experts while working on new strategy for 2017-2023. Because a lot of information had to be analysed, we consulted with world’s best experts, including financial consultants who are auditors of big international leagues, for example the NHL. After the analysis we had statistical data, which allowed us to compare various aspects of the league’s situation like attendance, average players’ salary, sources of revenues etc.
When you addressed the new strategy at the end of last season, you mentioned 1 billion Rubles in debts of clubs. So, even with KHL’s financial progress for the last three years, is there still a crisis situation in clubs?
We understood at the time, that it is not possible to stay in such a situation like we are now. I mean increasing of clubs’ budgets, overpaying of the players. All this has led to overheating of the market, unreasonable budgets of the clubs.
And the KHL came to a conclusion that the way to solve the problem is to decrease the payroll of the clubs?
Almost half of clubs’ costs are payrolls of the players. If over 80% of the players are overpaid by at least two times, we have a problem of optimization…. but I want to point out one more time, our goal was not to underpay the players. We just wanted the clubs’ and league’s finance to come to market value, not to be governed by personal ambitions. And there is another reason, if you remember: I mean the Order of the Russian President to professional sport. The point of the Order is to decrease the level of state funding of professional sport. The result of the Order is three tasks: increasing of the league’s average sport level, increasing of commercial potential of the clubs, & decreasing of state funding of the clubs. All three tasks were a cornerstone of our new strategy, which was approved unanimously by the KHL Board of Directors and introduced to the public at the end of the last season.
People remember the big debts of the clubs. Have you succeeded in decreasing the debts before the start of the new season?
I would like to point out the following. The KHL had 29 teams. Their total revenues were approximately 50 billion Rubles, the costs approximately the same. But there was debt of the clubs at the level of 2 billion Rubles. The debts invariably flowed from one season to another. Thanks to Gennady Nikolaevich Timchenko, the KHL Board of Directors Chairman, who imposed a fine for late payments, we have almost no debts to the players.
Do you I understand it correctly? The debts of the clubs for last season are paid, even though they were over one billion Rubles?
Yes, it is a big success. Financial fines were the most effective way of dealing with the problem. Scare tactics, persuasion – they did not work… but let me talk more about our new strategy. If we want to increase the economic efficiency of the league, it is obvious that we need to increase revenues and reduce costs. No one can come up with anything new here. The revenues can be increased through the sale of tickets & various commercial activities. The costs — if we assume that the costs related to logistics have already been optimized, then we can reduce the costs only through the decreasing of payroll. But nobody says that we should touch the star players. The opposite is true, we should have more star players.
The league excluded Metallurg Novokuznetsk and Medvescak Zagreb and will go on with contraction…
We calculated that 24 teams is the ideal scenario which complies with our ambitions and our plans for growing in Europe & Asia. It will bring an increase in clubs’ revenues of 5 billion Rubles while saving 12 billion Rubles by 2021. All is dictated by this scenario.
A significant part of KHL’s revenues comes from sponsors and advertisers. How are you satisfied with league’s work on this issue? Can we expect new league partners soon?
First of all, Russia will host the FIFA World Cup next year, so it is understandable that interest is concentrated on that sport. We should not forget that soccer has big potential. But despite this, we have all ahead of us. We can see an increase of interest in our league in our traditional markets, especially European. Hand in hand, there is a rising of the KHL television rights value. Approximately 80% of the KHL’s revenues comes from sponsors and television deals. As you know, we have shared income from television rights with the clubs for the last three seasons, since I came to the KHL. The mechanism is a bit complicated; the contribution of each team to the total value of television rights is taken into account. For example, the value of KHL television rights is quite high in Finland, so Jokerit’s contribution to overall value is really big. We can see a trend of increasing value of television rights worldwide, including Russia. As for the KHL, there is a rather delicate situation in Russia. I am the Board Chairman of Gazprom Media, which buys television rights for its MatchTV channel from the KHL, so basically from me. At the end, there were tough trade negotiations, and we came to a compromise which is beneficial for both, the KHL and the MatchTV.
Is the income from selling of the KHL television rights comparable to soccer?
To reply to your question, I would have to disclose a business secret of the Russian Premier League (Russian elite soccer league), but I am not allowed to do this. I would like to point out the principle, that we share so-called TV revenues with the clubs. This has never happened before. Many people were surprised. “How will you pay us? Usually they took money from us…” For example, the Gagarin Cup Champion gets over 30 million Rubles on average. And the value of television rights has constantly grown, and it has grown because our product has become more attractive. My task is to make the KHL continue growing. All KHL clubs are conditionally divided into four groups: A, B, C and D. A is the top quarter of the clubs, etc. If two clubs from the A group meet , an arena is filled by 90% and such a match is watched by at least a half of million people on TV. Unfortunately, approximately half of the clubs drag these numbers down. Matches of those teams are not watched on TV nor do fans come to the arena. Unfortunately, approximately 17% of all matches do not give a commercial benefit either to the clubs or to the league. Revenue from such games is two or three times lower than the direct costs to organise them. There is a paradox – the more home games these clubs play, the more financial losses they have. We have to reduce the percentage of such unattractive matches (17% – editor note), and this can be done by contraction of teams, increasing of fan interest, and increasing of occupancy of the arenas.
Of course, the Chinese market is one of the most promising markets for the KHL. The league has one sponsor from China (Haier – editor note), what about new partners? Are they interested in the KHL?
Of course, the Chinese market is very promising. I have first-hand information about the market, because I am a member of the IOC Commission for the Beijing 2022 Winter Olympics. I can say that Beijing is in a high degree of readiness of the infrastructure and the Chinese will do everything possible to succeed from the sport point of view. They have approved systemic measures, including a significant increase of winter sports athletes. For example, the Chinese have a plan to build a lot of amateur and professional hockey surfaces. These are simply gigantic figures — Europeans will have hard time believing it. The Chinese President said they plan to put on skates 300 million people. Right now we can see a massive naturalisation of ethnic Chinese athletes, who lived and played hockey abroad. They carefully collect all hockey players. If I understand correctly, Kunlun Red Star will soon have more Chinese players than now. The Chinese teams recently joined the VHL. The VHL has already developed seriously under the Russian Hockey Federation’s guidance, but now the VHL’s potential is even bigger. The Russian-Chinese Memorandum was signed, which proposes development of the game of hockey in the Asian region. It means an exchange of experience, information, and the search for sponsors in Russia & Asia. A new league, The Silk Road Cup, will be created on the basis of the VHL & will consist of teams from Russia, China, Japan and South Korea. That is a really major development, and we as the KHL support the efforts because it is about development of a new hockey market. We can already see increasing interest in the KHL in China, which is reflected in our Chinese television deal. Only the NHL was broadcast in China before, now the league’s deal expects a significant increase of the revenues in the Asian market. I think that this process will go faster as soon as the recognition of the KHL product is formed in the Chinese market, like the recognition of the NBA, which has invested heavily into China. Also the NHL tried. Then the Chinese sponsors and partners will come to us.
How many Chinese fans watch the KHL?
Approximately 60 million, but this figure is not correct, because it is a number of subscribers to the channel (CCTV5+) which broadcasts the KHL in China.
Lets talk about the salary cap, which has been decreasing. Of course, it is necessary in the current financial reality. Does the league guarantee that all clubs will work within the rules? You said earlier, that the league will disclose clubs’ payroll budgets to the public.
As my good friend used to say: the music is composed, but not all money is received. You have to understand that the KHL is not a separate institution from the clubs. The league is not run only by myself as a volunteer President, but also by Gennady Nikolaevich Timchenko, the KHL Board of Directors Chairman, and the corporate organs — the Executive Board & the Board of Directors — whose members are representatives of the clubs. If the clubs decide to be open and transparent, then it will happen. Technically, there are no obstacles or risks. Because there are no complicated and incomprehensible moments, like in soccer with the imitation of the purchase of players to avoid financial fair-play rules. To come back to the KHL salary cap. If you remember, we did two things immediately after I came to the KHL. First, we decided that all salaries will be paid in Rubles. It was 2014. And all agreed, despite of the fact that Ruble’s value fell by almost half compared to the USD, even players who were paid in foreign currency. Second, we got the clubs to agree that the salary cap, which was 1.1 billion Rubles at the time, would be reduced by 50 million Rubles each season. Now we have a 900 million Rubles salary cap (2017/18) and the salary cap will be at 600 million Rubles in 2020/21 with a right to exclude two star players from the cap. It will be up the clubs to decide how much money a star will earn.
The decrease of the salary cap will not lead to the decrease of sport level?
Why do you think so? I know the salary of every player and based on this information I model the situation. In this case we do not limit the stars but mainly the worst players. We want the stars to be distributed across the league, therefore we adopted the restrictions. Even “superclubs” agreed.
So even SKA President Gennady Timchenko agreed?
First, Gennady Nikolaevich is one of the authors of the strategy. He and other sponsors and owners understand that there is no other way to go if the league wants to develop. The planned decreasing of the salary cap will not cause serious consequences. We analysed the payroll budgets. Now the payroll budget of the top KHL teams is eight-times bigger than the poorest one, while it is only twice as large in the NHL. But they, the NHL, have worked on creating parity for 100 years. How can the KHL increase interest in all matches, if the disparity among clubs is so big? The average salary of an NHL player is five times bigger than that of a KHL player. Even if we reduce salaries of the “non-star” group of players we will achieve our goal. The clubs’ budget for payrolls is divided into groups of 30 players. And over 70% of payroll money is concentrated in the lowest categories of the players. If we reduce salaries of such players, it will not mean an exodus to foreign leagues. As I said, the average salary of an NHL player is five times bigger than a KHL player’s, and with our reform it will be five and a half. The KHL’s average salary is 2.8 times bigger than in European leagues right now and will become 2.6 times bigger. So, the average KHL players will still earn 2.5 times more than the same category of the players in European leagues. The KHL Board of Directors approved less strict reduction of payroll budgets than I proposed. I was for a more aggressive approach.
But the NHL has increased the salary cap every year….
I know, but their market has grown every year. I am an optimist and expect that our consumer market will also grow. In this quarter, the Russian economy will grow by 2%, lets hope the trend will go on. Then the citizens will be able to buy more expensive tickets and the sponsors will want to be associated with a successful league and invest more into the KHL to fight for customers’ money. The most important thing is for the people to have something in their wallets. Then sponsors will look at a popular and commercially stable product. And the sponsors have come to the league already. The growth potential of the KHL depends on the growing purchasing power of Russians. But we face some limits: the quality of our arenas is not consistent. We have wonderful arenas like in Minsk or St. Petersburg. I hope the SKA will build new a 20,000-seat arena. It would be another example for the rest of the KHL clubs. The SKA is a model in various areas for other clubs.
You mean in marketing?
Yes, in marketing as well. And after becoming champion the club is a model in on-ice results too. SKA’s arena is almost sold out for every game, the arena is filled at least by 95% for every game. And we are talking about a 12 000-seat arena, the club would be able to sell out the 20,000-seat arena too. I have discussed with many regional governors. I encourage them to think about the construction of large arenas in regions where hockey is highly developed. Why reinvent the bicycle? If we predict that purchasing power will grow, the people will come to the arena & spend money on tickets, food, merchandise etc. Hockey is a very good leisure-time activity. And now everyone understands that hockey is a leisure-time activity for families. Therefore we talk about the physical capacity of arenas. For example, Yugra has an arena with 5500 seats only….
And CSKA has the same problem …
Yes, it is really not easy to comment the CSKA´s situation, because there is no logic here. I respect the CSKA management, but I can not understand how the club with such great potential works with their fans. But I think the CSKA will understand this problem soon.
But why build new arenas if current old one are not filled by 100%?
These clubs should play in another league then.
How will it be decided who is a star player?
We discussed the possibility of defining a “star player” in our rules, but at the end we came to the conclusion that each club should decide who is a star for the team. It can be a veteran player or promising prospect. You need to understand that our strategy is a goal which we would like to achieve. Right now, we do not see 48 star players (2 stars per team) in the KHL, whom it would be reasonable to exclude from the salary cap. And we hope that at the moment when the salary cap will be 600 million Rubles, we will have that many stars.
The league has 27 teams now and will have 24 next season. Does it mean that this season is critical for three clubs?
Yes, our goal is to relegate three clubs to the lower league (the VHL – editor note) after the current season. The clubs’ rating only illustrates a club’s position according to specific criteria, but the KHL Board of Directors will decide about the list of participants. Most likely, we will publish the clubs rating after the end of the regular season. The departing clubs will be known at the time. The playoffs will correct only positions at the top of the table, everything will be clear in the bottom of the table. Around six clubs are at risk right now.
I can not even imagine, how many calls from governors & sponsors of the clubs at risk you will receive, if the exclusion of only one team, Metallurg Novokuznetsk, caused such outrage.
Then we will talk and explain. All is accountable. Please, if you are better, then work. But how can you blame the league, if fans do not come to your small arena and people do not watch your games on TV? In some cases the matches are not broadcast, even by the local broadcaster.
But people say that Metallurg Novokuznetsk has a great hockey school, which has developed so many good players …
Have you asked them what the connection is between the hockey school and the club? Who finances the hockey school? Thank God, nothing has happened to the hockey school, it will keep developing the players. So, they can develop good players, but the KHL team was torturing itself. We hope, the team will become a leader in the VHL & the attendance will grow. Believe me, I sincerely expect that Metallurg Novokuznetsk will be competitive, will not lose to everyone all the time. The people stopped attending the club’s matches (in the KHL – editor note).
Since you decided to reduce number of teams to 24, does it mean there are nopotential new teams from Russia, Europe or Asia knocking on the KHL door anymore?
They are knocking.
But you will not open the door?
I would not like to disclose all information, but we have been negotiating all the time. We carefully consider the expansion plans, because it is very easy to accept a team. But the questions arise immediately: how many seasons will a new team be able to play in the league, how is it beneficial to the KHL? No doubt, we will develop in Asia and Europe. Look at our strategy, there it is written that the KHL will accept two new teams in 2019. So we have one season to decide.
Please explain. Will they be two new teams?
After the current season we will have 24 teams. We will play with them one season and will decide after the season which two teams will leave to make a space for new teams. In my opinion, the new teams might be Russian or foreign. What is a difference?
Where are more candidates from?
We have many proposals. The proposals are from Italy, Switzerland, Great Britain, Germany, Japan. Even China wants to launch a second team. But, I will repeat myself, all of them must be carefully analyzed. There is a procedure for joining the league, strict rules, conditions, documents and guarantees – financial & legal. This is a big, serious task.
This season we have two “superclubs” in the KHL – CSKA & SKA. Do you believe there will be more parity after three years? Or will superclubs stay superclubs?
If our plan is implemented, if the clubs strictly follow the rules, it is impossible to preserve the current situation. There will be more parity. The gap between top and bottom teams will not be eight times bigger but three or two.
What do you think about top players like Shipachyov, Dadonov, Bereglazov or Mironov leaving the KHL for the NHL? Even though the NHL players will not play at Winter Olympics 2018.
But at the same time we can see a serious influx of players from the NHL to the KHL – I have a list of them on my table. And the influx to the KHL is bigger. At the same time no massive exodus to the NHL happened. The most important is, thanks to effort of the FHR Board of Directors Chairman Arkady Romanovich Rotenberg, the clubs started seriously revising their approach to the development of the prospects. I think all conditions were approved to seriously decrease the number of players moving abroad.
You said that 12 billion Rubles will be saved as a result of the reform. How will you spend them?
These money will not be spent within the league. The Russian Federation as a country will decide how to use it.
Original article https://www.kommersant.ru/doc/3390721
And once again, many thanks to Tomáš Vorčák for the translation!