Is Signing Jeff Skinner a Wise Financial Move for the Buffalo Sabres?
The talk of Buffalo, NY for the past month plus has been what is going to happen with Jeff Skinner. He was the most prolific goal scorer that the city has seen since Thomas Vanek in his prime. However, the overall team performance was poor once again and fans have been left wondering if the team should pay Skinner a significant amount of money. Our contract projection has Skinner signing a deal worth around $60M over seven years. However, if the Sabres want to prevent Skinner from listening to other teams, they likely will have to pay between $70M and $72M over eight years.
There are some Sabre fans who wonder if this would be a wise investment. Some of this fear is over ghosts of contracts past, while others worry about being committed to a player into his mid-thirties who has had moments of inconsistency throughout his career. It is also fair to wonder if the team could plug any player next to Jack Eichel and have them produce near the level of Skinner at a significantly cheaper cost. My goal in this post is to dive into the financial impact of a potential Skinner contract and see if the team can justify giving Skinner a $72M contract.
Assessing Monetary Worth to a Team
Hockey contracts are negotiated and signed almost exclusively based on a player’s past performance. This is the reason many teams end up with “poison contracts” on their payroll. When players earn their unrestricted free agency (UFA), they are often in their late twenties, which is often times around their peak performance. Once they sign their UFA contract, they are usually on the decline of their career. This does not mean they will automatically be poor players the instance they sign, but they will probably have a gradual decline in performance from season to season. Jeff Skinner is unique as he is set to become an UFA younger than many other players because he started playing in the NHL at age 18. Therefore, Skinner may not start his decline for another year or two.
Regardless of when Skinner starts to decline, the Sabres (or any other team) should be looking to pay him what he is worth to them in future years. My goal is to do my best to determine what that value is. To do so, I will borrow a concept that was first introduced in baseball by Vince Gennaro in his book Diamond Dollars. This concept is the use of a team’s win-curve to project the monetary value Skinner will provide in the years he is under contract. Before we get to Skinner, we need to understand the concept of the win curve and how I went about constructing one for the Sabres.
A win-curve is intended to measure how responsive fans are to additional wins and overall on-ice success. Once we establish that, we can then take the fans’ responsiveness and translate it to a monetary amount. We need to look no further than this year’s Carolina Hurricanes as evidence that winning can provide a monetary boost in the NHL. However, the Sabres are not the Hurricanes. No one would blame Sabre fans if they chose to spend their hard-earned dollars elsewhere. Through the ups and downs, the team has enjoyed pretty consistent support, which makes it more difficult to conclude that additional wins will dramatically impact the team’s attendance. However, there is a definitely a positive relationship between the Sabres’ wins and attendance. Let’s take a look.
I should make a few notes of how I constructed the above win curve. First, I collected wins and attendance numbers from the 2000-2001 season to the 2018-2019 season. I excluded the lockout shortened 2012 season as well as the 2013-2014 and 2014-2015 seasons where the Sabres were fielding a team that was not designed to win. However, fans were more engaged than ever because they were hoping the losing would result in Connor McDavid or Jack Eichel. Those two seasons do not represent the fans’ responsiveness to winning. Finally, the Sabres’ arena capacity changed during my sample. To account for this, I translated all attendance numbers into the current arena capacity. I then plotted the data and fit a linear regression where the x-variable is wins and the y-variable is attendance.
It is too early to know what the Sabres’ opening lineup will look like for the 2019 season. I am going to make an assumption and say the Sabres’ without Skinner will be around a 35-win team. Using our win-curve formula displayed on the graph above, I am going to assume a 35-win season would see the team draw around 734,719 fans. The multi-million-dollar questions is how much revenue would be expected from this number of fans.
Without access to the team’s private financial numbers (if anyone wants to slide into my dms, they’re open 😉), I will do my best to estimate revenue. I have used the Sabres’ fan cost index to attempt to calculate the team’s revenue directly related to attendance. In simple terms, the fan cost index looks at the cost of a family of four to attend a game. This includes tickets as well as food, drinks, merchandise, and parking. Unfortunately, the most recent season I could find was the 2014 season, which had a cost of $291 for a family of four. I divided this number by four to get the average cost for one person. I then employed an inflation rate of 10% for each season. This means I estimated the revenue from one person attending a Sabres’ game to be $107. Based on the team’s attendance, I estimated the Sabres would have made $78,206,094 from attendance in 2018. In the table below, I estimate approximately how much additional revenue the Sabres may generate with an additional win in the next eight seasons. This does not take into account “corporate money,” which could include sponsorships and television advertising since Pegula Sports and Entertainment runs their own broadcast network.
The big money really comes from the sponsorships and advertising, which are excluded from the table above. As I’ve previously stated, the Sabres have benefited from tremendous fan loyalty so there is only so much they can add in attendance and subsequent revenue. We now need to turn our attention to the impact of Jeff Skinner on the team’s wins as well as the impact of winning on sponsorships and advertising.
The Impact of Jeff Skinner
There have been many attempts at creating models that capture how many wins a player is responsible for in hockey. One such model is from @EvolvingWild. Their calculations have Jeff Skinner as a player who provided three additional wins in the 2018-2019 season. All of their work is housed on their website, https://evolving-hockey.com/. Although I respect the work they have done in this regard, I think using just three wins as Skinner’s impact is a little low. Let’s look at it this way. Skinner himself provides three wins. Additionally, his presence in the lineup allows other players to play different roles as well.
Let’s assume Skinner plays on the top line with Eichel. If Skinner were not there, the Sabres would have to play Conor Sheary there instead. Now Conor Sheary is not available to play on the second-line so Evan Rodrigues would need to play that role, instead of centering the third-line. Now the Sabres have to use Johan Larsson or Vladimir Sobotka as their third-line and fourth line centers instead of only having one of them in the lineup and the other off the roster. How many wins is this impact worth? I do not have a good answer so I estimated the impact to be another three wins. Therefore, I think Skinner’s presence in the Sabres’ lineup helped the Sabres earn approximately six additional wins. I want to be clear, this estimate is not based in any sort of math or statistics. Below I have provided a table showing what my estimates are for the Sabres’ win totals for the next eight seasons, with and without Skinner. Again, these estimates are not based on any sort of model.
I then took these numbers and translated them into a monetary amount, using the revenue from additional win table. The results of this exercise can be found in the table below.
At this point, it looks like signing Skinner would not be a wise financial move for the team. However, we still haven’t accounted for the additional sponsorship and advertising revenue the additional wins could generate for the team. Below are what I think could be the revenue generated from sponsorship and advertising for an additional win for the next eight seasons.
Let’s now take a look at the updated difference when taking the sponsorship and advertising revenue into account.
My revenue projections do not seem to justify paying Skinner what he is likely to sign for. Since my revenue and win projections, are based in some fact but are ultimately estimates, they should be taken with a grain of salt. I assumed there would be no impact on sponsorship and advertising revenue by having Skinner be a player that has a negative impact in his final season.
One factor that could come into play that my calculations do not capture is if the Sabres’ fans finally say enough losing and dysfunction is enough and stop showing the same level of loyalty. If Jeff Skinner walks and the team fails to make any other major additions, things certainly could hit that level. Now we are not just discussing the additional revenue Skinner’s performance and presence will likely provide, but also a loss of revenue without Skinner. Taking this into account, could make the revenue difference close to what Skinner could be paid. Below I have assumed the Sabres lose half of what they would make if they were to retain Skinner in the next three seasons. That would also have a compounding effect as they likely wouldn’t be able to start inflating their revenues until 2023. Below I show two tables. The first is how revenues could be impacted in this situation, the second shows the difference with and without Skinner.
Now the numbers start to tip towards the side of signing Skinner being a financially wise move. To wrap this section up, I will look at the revenue and expense of Skinner’s contract in net present value (5% discount rate), to assess whether this contract would be a worthy investment. Although it would be extremely unlikely, I assumed Skinner receives his $72M in equal payments of $9M a season. I am also working off the assumption that this happens in a vacuum. The Sabres would likely spend some or all of that money on other pieces. They would obviously provide some value but it is impossible to predict what level of impact they could have.
Based off of my assessment, I do not see the financial value of signing Skinner being there. My assessment should not be taken as the end all, be all but there should definitely be some internal discussions in Buffalo. From a hockey standpoint, the team needs to retain Skinner so the question is how do they make it work?
How do the Sabres’ Justify Signing Skinner
I see two ways the team can justify signing Skinner even if his contract results a financial deficit. First, the team can supplement the roster with underpaid talent. The easiest way to accomplish this is with players on their Entry-Level Contracts (ELCs). However, value can also be found with restricted free agents and even UFAs if done properly. Going into next season, the Sabres will have Dahlin, Reinhart, Mittelstadt, and Montour who should fall into this category along with any other prospects that play significant minutes. Over the life of Skinner’s contract, it will be critical for the Sabres to wisely manage their young assets as well as draft and develop well as many of the afore mentioned players will be in line for significant raises soon.
The second way the Sabres’ justify this financial commitment is by going through the exact exercise I have with their internal data. Predicting future win totals is difficult, regardless of the level of data you have access to. Predicting attendance and revenue is much less difficult to do internally. The Sabres or any team looking to make a big free agent signing should be going through the exact process I have. Having a salary cap and revenue sharing structure makes the NHL different from MLB but not drastically different where teams should not be employing many of the same valuation methods. The amount of data available to teams has grown exponentially and will hopefully take a massive step forward next season with the addition of tracking data. The time is now for teams to transition from paying players based on past performance to paying based on the future value they will provide and using data to support those contracts.
Image via BuffaloNews.
KYLE STICH is the Director of AFP Analytics. In addition, Mr. Stich is a tax specialist and Director of Operations at AFP Consulting LLC, whose clientele include professional athletes performing services on three separate continents. Mr. Stich earned his Master of Science in Sport Management with a Concentration in Sport Analytics from Columbia University in 2017. He earned his undergraduate degrees in Accounting and Sport Management from St. John Fisher College in 2015, where he has served as an adjunct professor teaching Sport Finance and Baseball Analytics.