KHL President Dmitry Chernyshenko met with representatives of the media following Tuesday’s meeting of the top management, and spoke in greater detail about his and his colleagues’ concept for the League’s further development over the next seven years.
On Tuesday, the 16th of May, the KHL management gathered in Moscow to examine the provisions of a new, seven-year strategy which the League is currently preparing to adopt. Also under discussion was the playing schedule format for the forthcoming 2017-18 season. When the meeting was over, KHL President Dmitry Chernyshenko faced the press and answered questions about these latest developments.
"We must not allow professional sport to become a rich man’s playground”
“At today's meeting the management has scrutinized developments over the course of the ninth season of the Kontinental Hockey League, in the run-up to our tenth anniversary. I will not bore you with endless statistics, for example, about the numbers of matches played, but we did have a record number of players – over 1,000, and 130 of them were new arrivals to the League.
Television ratings for the regular season matched those for last year, but there was a slight drop for the playoffs. This was to be expected, as there were no Moscow clubs in the final, and we are told that the capital amounts to a significant part of our TV audience. This is despite the fact that the playoffs were broadcast on federal channels, and interest has been consistently high. Plus, the Gagarin Cup this season ended faster than we all would have liked. I expect that next year our evolutionary, underlying growth will continue.
As for today’s agenda, it consisted of four issues. The most important was to examine the main directions for the KHL’s development strategy over the next seven years, or seven seasons. We also discussed the list of possible participant clubs in the next Championship, and the schedule for the season. In total, we must accommodate 33 days for various breaks in the calendar, 16 of which, by agreement with the Russian Hockey Federation, are set aside for Olympic preparations, and there is to be a long, ten-day break before the World Championships. The rest will fall before the various stages of the Eurotour. We are a commercial organization, of course, but we are well aware that at the head of our pyramid is the success of the national team, so the schedule for next season will be a highly concentrated one. The playoffs will be quite demanding, and we will have to squeeze the same number of games into fewer days, but we will cope. We are aware of the challenges we face.
We have instructions from the President of Russia stating that professional sports should finance themselves. Efforts must be made to reduce public funding for professional sport, so that it should not become a rich man’s playground.
We also looked at suggested changes to the regulations. This is a very difficult task and it lasts the entire season. The number of changes that are requested annually runs into the hundreds, and of course, only a few can be adopted. I can say, however, that the trend we have observed in recent years has been a gradual reduction in requested changes, which means we are achieving some stability. We must comply with the provisions set down in sporting law concerning the interests of the Russian Hockey Federation, so next year the changes will be more interesting: the rules will be divided into two parts - one to accommodate the RHF, and the other will be devoted to the League’s internal activities.
Scheduled for the 24th of May is our review of the season, when we host our "hockey Oscars" to reward those who distinguished themselves during the 2016-17 Championship. We will broadcast the ceremony live on KHL TV, and have therefore placed some special demands regarding the organizational and visual part of the show. We intend to make the event more interesting and prestigious with every passing year. This will be a big hockey day for us, as it will also include a meeting of the Board of Directors and of the heads of all our member clubs. For them, as well as for us today, the most important issue is the question of our strategy for the future development of the KHL.
It is important to remember that the Board of Directors, as the League’s executive body, can only approve or reject a proposal – it cannot devise a particular strategy. For this reason, we have carefully put together a wide variety of proposals for submission to the Board. Why did we decide to discuss a new strategy? Because our previous strategy, which we viewed at the time as one of emergency measures, has been fully implemented. All the goals set before the League have been reached. The League is now in excellent financial shape and the situation continues to improve. I will not give out any specific figures before the Board meets, but I can tell you that the financial results are improving from year to year. This means the clubs receive more money, the League has rejuvenated its core activities, and we are showing a healthy net profit.
The agenda consisted of four issues. The most important was to examine the main directions for the KHL’s development strategy over the next seven years, or seven seasons. We also discussed the list of possible participant clubs in the next Championship, and the schedule for the season.
Today I will deliberately avoid naming any specific clubs and will instead stick to the general principles, the challenges we face. The previous strategy has been implemented, and the new one, covering the next seven seasons, was today put before the management. First of all, I would like to say that when devising this strategy, we used our own internal resources and also brought in consultants from outside, including some from other countries who have experience in various international leagues. In the end, we benefitted from full, detailed information on all the sporting leagues that interest us in one way or another, from the position of competitive analysis or from the standpoint of globally-observed best practices.
Based on the data we harvested, we tried to model ways of performing the tasks put before the KHL. Chief among them is finding the correct formula for improving the sporting excellence and the financial well-being of our clubs. This is in response to an order handed down by the President of Russia, stating that professional sports should finance themselves. Efforts must be made to reduce public funding for professional sport, so that it should not become a rich man’s playground.
"The League needs to be effective commercially "
At the same time, we need to solve the problem of how to raise the level of sporting excellence and to increase revenue. At first glance it might seem contradictory to try to achieve both simultaneously, but we have nonetheless put together proposals to do just that, and these will be submitted to the Board of Directors.
The main sources of income for clubs is the revenue received from sponsorship, broadcasting, the so-called “hockey days” when stadiums sell tickets, licensed products, and souvenirs. In addition, clubs which own their stadiums harvest additional income from food and drink outlets. Currently, for our clubs, such commercial activities account for only 14 percent of total income, with the remaining 86% from various external sources, depending on the club. Sometimes the source is a private investor, or a municipal or regional authority, or a state-owned enterprise.
Excluding private investors, this leaves funding from the state – be it via a state-owned enterprise or local or regional government - accounting for 52% of the revenue for the League’s member clubs. This explains the concern expressed by the Russian president regarding the funding of professional sports. We are tackling the problem of how to increase commercial revenue so that we can reduce dependence on public funds.
We are talking here about averages of revenues for the whole League. but it is also important to gain a detailed understanding of spending. Around half goes on players’ wages, and the other half is on the day-to-day running of the club, for example, renting or maintaining the stadiums, logistics, transport, and so on. Therefore, in striving to meet the challenges of reducing the burden on the state and making the League more commercially effective, there is a clear need to increase revenue and reduce costs. It seems simple, but everyone has limits to their purchasing power. We cannot put the entire burden onto the fans, saying, “Well, they’ll find the money somehow,” as is sometimes the case in the North American leagues:
State financing in one form or another accounts for 52% of all revenues for the League’s clubs. This explains why there is the concern expressed by the President of Russia regarding the funding of professional sports.
However, in comparison with the NHL, we have a big historical difference, for example, in the capacity of our arenas. The NHL average is over 19,000, whereas ours is around 8,000. Plus, the difference in ticket prices, corresponding with the purchasing power of our respective citizens. We cannot simply raise the price of tickets. We must accept that the average Russian citizen’s monthly spending on entertainment is around $34. We will speak in US dollars so we can compare with, say, the average American, who can afford to spend $260. This is reality, and it means he can spend $100 on a ticket to the arena. Perhaps we will catch up in the future, but in the short term, and in the current economic climate, even the most optimistic would not forecast an eightfold increase in purchasing power.
The situation is the same for paid content subscription or pay-per-view, which could also be an additional source of income. Unfortunately, this custom is not so widespread in our part of the world, and we must take into account the large number of major sporting content available on the federal TV channel. This is also a political decision, and we certainly do not expect any sudden or sharp changes in this respect.
Consequently, the critical question is the clubs’ dependence on funding from the state budget. A little over 30% is coming from private investors, and we do not expect this figure to change dramatically.
"While implementing our new strategy, the payroll will be reduced by 43%"
Despite this, 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.
In the regular championship, only 3% of games are “derbies,” between fierce rivals, but they yield an average audience of over half a million people per match. This is no mean figure. Incidentally, we broadcast all the derby games on the federal channel, a total of more than 80 matches. Around 58% of all games are not covered on TV, and several are not broadcast on any medium. And the audience for such games, unfortunately, has a negative effect on the overall statistics for the other clubs. Matches between the less popular teams in the League are seen by no more than 25,000 people across the entire country. In addition, the difference between the popular and unpopular teams is eightfold, compared with just twofold in the NHL. Do we need them? This is the question we will put before the KHL Board of Directors.
Obviously, it will be necessary to find some way to improve the situation. First, we will work on increasing income, ensuring the clubs earn more on the day of the match. Improving the League as a product will attract new sponsors, especially when the expansion of the League reaches areas which will arouse commercial interest, both to the east and to the west. Improving the product will increase the price of TV rights, the royalties from which will also go to the clubs, whose income will further increase from higher sales of merchandise.
Of the utmost importance are the criteria for a unified ranking of clubs, to be used next season in an integral evaluation of all teams. The main criteria, of course, will be sporting achievement, occupancy rates of the arenas, television ratings, the availability of government funding and many more
At the same time, however, we must work hard to reduce costs. While the logistical costs for the clubs has streamlined over the years, we still need to tackle players’ wages. We analyzed a large quantity of data and mathematically calculated that, at this given moment, the optimum number of clubs in the League is 24. We have realized that revising the number of member clubs and optimizing their staffing structure will enable us to solve the problem of spending cuts and also stimulate the labor market. At the moment, the highly skilled players are spread too thinly among the clubs. It follows that the quality of play will improve, and with it the entertainment value and commercial potential of the League.
At the meeting, we discussed several scenarios that will allow us to make decisions concerning the next seven years. The introduction of a rigid salary ceiling, with exceptions for one or two star players; the redistribution of funds to the most valuable players away from those who sit on the bench; many other such options were considered. Thus, the cost of the payroll for the seventh season after the implementation of our new strategy could be reduced by 43%, while the top 40 players would receive more than they do now, and we could still more or less maintain our competitive edge over the European leagues. At the moment, the average salary in the KHL is 2.6 times greater than in European leagues. Upon reaching certain targets, this ratio will decrease to 2.3, but would not leave us at risk of a mass exodus of players.
Of the utmost importance are the criteria for a unified ranking of clubs, to be used next season in an integral evaluation of all teams. The main criteria, of course, will be sporting achievement, occupancy rates of the arenas, television ratings, the availability of government funding and many more.”
"In a season or two the League might expand eastward and westward”
- Has the situation changed regarding the clubs’ financial guarantees?
“I am not satisfied with the current situation. We still have some time before the Board of Directors meet, and we must decide whether to admit clubs which have not provided all the information. There are several teams who have not done so, and I believe this is far from ideal, and I shall put this question before the Board of Directors – we continue this unhealthy practice of tolerating debts to players and shifting them from season to season. We found there to be essentially the same level of debt in the League, concerning almost the same clubs. The average period of delayed payment sometimes exceeds 100 days. It seems that some clubs take money from sponsors, pay off old debts, and then accumulate new ones. And considering the proportion of debts in respect of the budgets of certain clubs, I believe this practice is disrespectful to the players and to the League. The amounts, in my opinion, are not crippling.
We must strictly apply the rules and regulations and bar indebted clubs from the Championship. To be honest, in previous seasons we tried to be understanding and solve this through discussion with the union, clubs, and players, but some clubs did not mend their ways. We had a kind of three-way agreement on restructuring debts to players, but this is not acceptable, and I hope the Board will support me in eliminating debts, and then the clubs may compete in the Championship.
- Are there any new developments on the status of Belarusian and Kazakhstan citizens as foreign players?
“As an international League based in the Russian Federation, we are subject to the laws of the Russian Federation. There is a clear explanation from the Ministry of Sport regarding citizenship bestowed by the authorities. It is only for Russian citizens. In the event of new information, we will examine it.”
I shall put this question before the Board of Directors – we continue this unhealthy practice of tolerating debts to players and shifting them from season to season. We found there to be essentially the same level of debt in the League, concerning almost the same clubs.
- Judging by your tone regarding the next seven years, it is primarily about reducing the number of clubs in the League. What about the further expansion of the League, in Kazakhstan, China…?
“We have just signed an agreement to stage the Week of hockey Stars in Astana. A fantastic venue, great city, superb infrastructure. Kazakhstan may add to the KHL another very serious, competitive club. We will continue to evaluate this proposal and study all possible factors. We are conducting negotiations with certain clubs from various countries which are considering joining the KHL. When we have specific information on any of these clubs, we will share it with you.
I expect that in the not-too-distant future we will see the League expand eastward and westward. I mean, in a season or two. If we talk about the East, then Japan, China, and the host of the forthcoming Winter Olympics, South Korea. And in Europe there are clubs from traditional hockey countries which are showing an interest. Some of them have been frustrated by the unwillingness of their national leagues to let them join the KHL. There are also those in countries which are certainly not hockey strongholds, but are nonetheless considering applying to join the KHL. If these clubs are serious, and strong from a commercial point of view, then such an expansion will certainly benefit us. The presence of these teams would add to the entertainment value, and would also strengthen the sporting community.”
- Is there a need to enhance the image of the League among foreign players? Many of them choose the European Championships.
“From the point of view of financial conditions, in Europe they cannot compete with our wages or tax regime. But if someone does not like living in Russia, let them go where they wish. However, I think that is unlikely to cause a mass exodus. In Russia, everything is in place regarding the conditions for incoming players, certainly.”
