The debate over Major League Rugby’s salary cap continues to rage amongst both league insiders and Twitter warriors. Its time for the later to lay down their arms.
After salary cap issues led to LA and Austin being dropped from last season’s playoffs, the salary cap has become an offseason focal point. While a few sides have pushed for the cap to shoot up, the long term play from the league office is to keep the cap low in the short term with the goal of increasing it down the road.
For most of us, our opinions lack the level of information to be warranted.
While the league claims its purposes are to develop Eagles and grow the game in the USA, neither are truly possible without a profitable league. The general sense is that the league’s teams continue to operate at a loss. Increasing labor expense could be a catalyst for growth or a driver into the ground.
A bit of an accounting and finance lesson. Expenses are used to drive revenue. Increasing expenses are not inherently bad so long as they increase revenue by a larger amount. Of course, most businesses go through several years of losses before turning profitable. From a business perspective, MLR remains a start up. Operating losses are expected. During that particular period, firms should be pushing cash towards investments and pulling cash from external sources (either via debt or owner contributions).
So, here are the questions:
- Will increasing labor expenses increase revenue at an equal or greater rate?
- If labor expenses are increased, how are they financed?
Let’s break down both of those.
For the first question, we have no idea. We expect the league to be operating at a loss, but we aren’t privy to internal financial documents. MLR is not a publicly traded company. They have no obligation to disclose financial standing to the general public. However, we have no idea how the income statement looks. We don’t know what’s coming in. We don’t know the cost of other expenses.
Its also important to view increased labor expense more like an investment. Would doubling the salary cap (assuming it would be viable) be the best way to deploy that capital? Would it lead to more revenue than increasing the number of FS1 games? Is it better than upgrading facilities? Is it better than investing in broadcasting capacity? What about the general marketing budget? Even if there is cash to spare, reasonable minds can differ over how that cash would be best spent.
For the second question, the answer gets even more complex. Assuming there aren’t any retained earnings, (losses don’t magically become profits,) either debt or more owner contributions would be necessary to cover the added cost. A debt deal would add interest expense to the equation. With rates increasing that gets less appealing, and we have no idea what the league’s credit profile is anyway.
Owner’s capital might be the biggest variable. For certain owners, plowing more capital into the business to accelerate growth is a real possibility. For others, that just isn’t an option. Just as we aren’t privy to league/team finances, we don’t know anything about owners’ finances either. (Even an owner that portrays themself as wealthy and business savvy can lose that status.) Unless there’s a group of owners willing to subsidize the other teams’ wage bills for a moderate length of time, it becomes a less than practical solution. On top of that, the league never wants to see the cap contract. Unless the capital is expected to be there for years to come, its unlikely the league would encourage teams to tap further into owner’s pockets.
The passion from fans over player pay is admirable and should be part of the conversation. However, for us average joes, we lack the financial information necessary to have an informed opinion.