Lockout Postmortem – What Was the NHL Thinking?

Leigh Ramsden January 8, 2013 4

It’s been a while since I’ve written about the NHL.  I’ve been silent during this lockout because, frankly, my rage prevented me from writing given how ridiculous this entire scenario has been – I didn’t even want to justify it with any words.  To see “Canada’s Game” run through the mud – AGAIN – on Gary Bettman’s watch is enough to turn my stomach. I have had my opinions and anyone following me on twitter has seen these come out from time to time, but I’ve been unable to put them together in any coherent fashion.

One thing I’ve noticed in the 48 hours since the new CBA was verbally agreed to on behalf of many fans and most of the media, however, is an almost automatic return to “business as usual”.  I don’t believe it should be.  I was very angry about this work stoppage, and remain so.  It easy to get caught up in all the “hockey” stories that are now front and centre on the two networks and in the papers; but I don’t want to forget what has happened here.  I think all fans should know exactly what “problems” the NHL was trying to solve with this lockout.  As you will see, there are no problems created or based in Canada.

That said, given my background is in corporate finance, so I thought I’d approach looking at this lockout from a business perspective.  In order to do so, I used the figures provided by Forbes Magazine as part of their NHL Team Values 2012 article.  As a caveat: I have no idea where they gathered these numbers from and since the teams are all private corporations, it is admittedly difficult for Forbes (or anyone else) to collate financial information with any degree of certainty.  That said, this source provides the best overall picture of revenues and profits that I was able to find, and I’m assuming they gather data in a similar fashion from similar sources for each team.  Therefore, it’s my assumption that any errors or biases in these figures would be consistent across the board – and hence, any conclusions drawn on a team-by-team basis about revenues and profitability will remain valid even without a guarantee as to the complete accuracy of the figures.  Put another way – the numbers may be incorrect, but they should indicate the overall trends and buckets.  Also, some of what I state below is also stated in their story, but I believe it’s worth repeating.

Finally, I’ll say this:  fightingforstanley.ca is primarily geared towards fans of the Canadian teams.  In some of my analysis, I call out stats and factors specific to those Canadian teams and specifically, their fans.  That said, I believe there are a number of great U.S. hockey markets as well that add to the overall value of the NHL, even if they aren’t as profitable, or have the same tradition as those in Canada.  These markets are important, however, I believe that the NHL really needs to remember where their bread is buttered.

INSIDE THE FORBES’ FINANCIAL NUMBERS

I will spare you the details of all the analyses I did using these figures, but instead will point out a few of what I felt were the most relevant points:

  1. The top 12 teams, measured by operating profit, account for overall profit of $359 million.  The bottom 18 teams account for an overall loss of $109 million.  This means that the top 12 profitable franchises account for a shocking 144% of league-wide profit.
  2. Those top 12 teams include all seven Canadian franchises (Vancouver, Calgary, Edmonton, Winnipeg, Toronto, Ottawa, and Montreal), the four U.S. Original Six franchises (New York Rangers, Boston, Detroit, and Chicago), with the last team being the Philadelphia Flyers.
  3. Of the bottom 18 teams, only five turned an operating profit.  Those teams were Pittsburgh, Colorado, Dallas, New Jersey, and the L.A. Kings.
  4. Of the remaining 13 unprofitable franchises, I would classify six of them as at least “decent” hockey markets (San Jose, Washington, Nashville, Minnesota, St. Louis, and Buffalo).  Those teams combined for operating losses of only $30 million ($20 million of which was in St. Louis and Buffalo).
  5. The remaining seven teams (Carolina, Anaheim, Florida, Tampa Bay, New York Islanders, Columbus, and Phoenix) combined for losses amounting to a whopping $101 million.

As can be seen, this really stratifies the league into three classes:  profitable, break-even(ish), and unprofitable. 

The “profitable” category is dominated by the Canadian and other Original Six teams.

The break-even(ish) category is comprised of a number of second-tier U.S. markets, typically those that have been in the league a number of years.

The unprofitable group – what I’ll loosely refer to as “the losers” – is basically comprised of most of the sun-belt teams, with a couple other sad-sack, mismanaged franchises thrown in for good measure.

One final item of note for all us Canadian hockey fans:  our Canadian teams are a huge part of this league’s finances.  The combined profit of those 7 teams (23% of teams) accounts for 88% of the total league-wide profit ($219 million out of $250 million).  The revenues of those teams account for 30% of league-wide revenues ($1,001 million out of $3,374 million).  Both of these figures are huge disparities, especially considering the relative small size of our Canadian markets with the larger U.S. compatriots.

One conclusion that can be drawn here is obvious:  Canadian NHL fans pay WAY more than their fair share of revenues on a league-wide basis, and also are responsible for a horribly disproportionate amount of league-wide profit. And us Canadian fans – the ones that pay the freight – were sadly forgotten and mistreated throughout this entire lockout.

CLARITY ON WHAT IS “BROKEN” IN THE MINDS OF NHL OWNERSHIP

This analysis provided some clarity, for me, on what exactly is, and is not, viewed as “broken” by the NHL head office.

It’s really become obvious that this lockout was less about the owners vs. the players, as opposed to the well-off franchises vs. the worse-off franchises – the winners vs. the losers.  The goal here was to force upon the players a system that would level that playing field.

In my opinion, it’s Gary Bettman’s dream to have the NHL achieve NFL-style success:  complete parity amongst all teams; the notion that any team can win on “any given Sunday” so to speak; both of which lead ideally to immense nationwide interest and a large and lucrative national TV contract.  Aside from the financial aspect, there is much evidence of this desire, for example:  the “three-point games” which artificially equalize teams in the standings; the suspect officiating that tends to equalize teams on a game by game basis through dubious penalty calls against a team leading a game; and the overall dumbing-down of rules enforcement like most of last season, where it was a return to the old-style clutch and grab obstruction that enables a team with minimal talent to compete with a team stacked with skill and flair.

There is little argument that this “parity” approach has worked in the NFL, where each team’s share of the national TV contract provides more revenue to each team than its salary cap.  In the NFL, this leaves all other revenues – gate receipts, concession revenues, merchandise sales, etc. – left to cover all non-player costs, as well as providing ownership with an extremely healthy profit on top.  All of this affords the the NFL the luxury of an extremely high level of revenue sharing, as all national TV revenues are split equally, and as that number is higher than the player salary expenses, they can further afford to split gate receipts between the two teams (I believe this is 60/40 in favour of the home team).

Unfortunately the NHL is much different.  There is almost no funding provided by a national TV contract – conversely, most teams’ revenues are directly correlated with gate receipts and with rights to local television contracts.  As can be easily imagined, it’s highly unlikely that an owner of a high-revenue team – let’s use the Toronto Maple Leafs as the most shining example – would want to willingly share that revenue with less-affluent franchises, because the competitiveness of other teams around the league just does NOT impact TML’s revenues.  Also, the sharing of gate-receipts is a non-starter.  NHL fans in these established markets go primarily to see their home team, so why would any owner give those dollars to the visiting team?  The Leafs could play a team of IKEA monkeys and the ACC would be sold out.

This resulted in a system under the last CBA where many teams were more than willing to spend to the salary cap, because even by doing so, they were still guaranteed healthy profits.  However, for many other teams (remember, 13 teams made losses), spending to the cap (or even in some cases, to the floor) resulted in financial losses, many of them steep.

Those are the teams that this lockout was about.  It wasn’t about how much the Torontos, Vancouvers, the New York Rangers, or Chicagos wanted to pay their players – they were more than happy to spend to the cap or beyond.  Rather, it was about a (misguided) notion from Bettman and the other powers that be that a level financial playing field will help lead to uber-competitiveness on the ice.  That competitiveness, in theory, will make the overall NHL product “better” – and “better” in turn means more money for all owners.  And instead of looking within themselves to self-police on contracting, budgeting, and the like, within the confines of a system that seemed to work on an overall, league-wide basis – they were hell-bent on finding an idiot-proof system, where even the worst-run, idiotic franchises who have no fans, can compete. And they wanted to achieve this all on the backs of the NHLPA. 

Unfortunately for all of us (and the players), they were pretty much able to meet their goals, but not without burning 40% of the season and a LOT of goodwill with its existing fan base.  Don Fehr did a good job of stemming the NHLPA losses, as the cap is projected to return to its current level of approximately $70 million by 2014-2015.

WHERE DOES THIS LEAVE YOU – THE PAYING FAN?

Check back tomorrow when I will discuss where this leaves you – the paying fan of the NHL.