The NHL will head to south Florida on Sunday to celebrate its 53rd annual All-Star Game, but the festive aura that surrounds the mid-winter spectacle masks a beleaguered business.
Critics say the NHL's current predicament -- while numbers vary, the majority of the league's 30 teams appear to run annual deficits -- is the result of a bet the league made on expansion. Over the last decade, new franchises helped produce short-term revenues from expansion fees and penetrated new U.S. media markets, helping the league set attendance records. But the blockbuster national television contract the league hoped for hasn't arrived, and the expansion teams, needing drawing cards to fill arenas, helped create a competitive financial environment that drove player salaries skyward.
"Expansion was mistake after mistake in poor judgment," said Howard Bloom, who publishes an online newsletter on sports business. "Hockey should have never left non-traditional hockey markets."
Some financial data supports Bloom's position. An estimate by Forbes magazine says 16 teams appear unprofitable, while some investment bankers privately estimate 26. The Ottawa Senators, one of the league's winningest teams this season, and Buffalo Sabres declared bankruptcy in recent weeks and are expected to be sold. Lack of revenue sharing creates disparity between large-market, wealthy clubs and small-market, poorer ones. Franchise values are under pressure, making it difficult for some owners to recoup their investment when they sell the team.
In Canada, where hockey is the national pastime, lack of taxpayer support and an unfavorable exchange rate punishes NHL clubs, which pay player salaries in U.S. dollars. Two teams have left for the U.S. since 1995, and at least five of the six remaining Canadian franchises have experienced financial losses in recent years.
The NHL Players Association says the problems are exaggerated, and a looming labor impasse over player salary limits could threaten the 2004-05 season. But the NHL leadership is steadfast.
"The entire economic system needs to be restructured," NHL Commissioner Gary Bettman said. "We've set four years of attendance records, and we've had phenomenal revenue growth. But salaries [over the last decade] have gone up at an unsustainable rate, with salary growth at 244 percent compared to revenue growth of 170 percent. I don't want to be the prophet of doom and gloom. I want to be a realist."
Hockey still appears strong in big, core markets where there is a substantial hockey interest, such as Toronto, New York, Boston, Detroit, Chicago and Philadelphia. And though expansion appears to be failing in some expansion cities, such as both Florida franchises, the NHL has created fan bases in new cities such as Dallas and Denver.
Bettman has tweaked the rules to shorten game times, increase scoring and encourage faster skating. He put his players in the Olympics, further spreading the game's popularity. National sponsorship revenues are way up. National television ratings are up after two years of decline, but the number of viewers is by far the lowest among major sports. Hockey still delivers a television audience that certain sponsors find desirable.
"The problem is that our player salaries are higher than they should be," Bettman said. "This is purely a labor issue. If we fix that . . . I am confident in the future of this game. If we don't fix it, we will have severe, long-term problems."
The NHL is the only major league without some control on players salaries, which have grown from an average of $463,200 a decade ago to $1.6 million per player this season. By contrast, NBA players earn an annual average salary of $4.5 million, Major League Baseball players earn $2.4 million and NFL players earn $1.1 million. Hockey player salaries consume about 73 percent of the league's $2 billion in revenues, according to the NHL. That's the highest percentage among the leagues.
"If you have the right expense model, $2 billion is more than enough to support this league and its teams so that they can all be more comfortable," Bettman said.
The current collective bargaining agreement between the league and the NHL Players Association expires Sept. 15, 2004, and people around the NHL say an extended owner lockout of players is possible unless a new contract with salary controls is in place by then. The owners can't implement salary controls without union agreement.
The NHL Players Association opposes any form of salary restraint because it believes nothing should prevent players from earning top dollar for their services.
"Players are paid what owners think players are worth," said Bob Goodenow, executive director of the NHL Players Association. "If Gary thinks his owners are wrong, then he should talk to his owners. If Gary has a proposal that he thinks would be of interest to the players, he should bring it forward. I remain optimistic we can negotiate an agreement without a problem."
The last NHL work stoppage occurred in the 1994-95 season, when the owners locked out the players for 104 days, resulting in the cancellation of the first three months of the season. The players were able to avoid a salary cap during those negotiations, but they also agreed to limit unrestricted free agency for players (which prevents a player from selling his services to the highest bidder) until the age of 31. That's the longest time among professional sports leagues in which a player is involuntarily tied to one team.
Ken Klee, 31, the union player representative and defenseman with the Washington Capitals, said he hopes there isn't a lockout, but said the union's 740 or so NHL players are united and willing to pay a price for keeping a free-market system for player salaries.
"Nobody wants to see a work stoppage in the game," said Klee, who earns $1.5 million a year. "It's not good for hockey. It's not good for us. It's not good for [the owners]. But whether you are a hockey player or no matter what you are, you don't want your boss to say, 'Sorry, you guys can't get raises this year because I'm under some kind of artificial pressure.' "
The union believes the financial picture is not so bleak.
"The league has said attendance has remained very strong and that revenues have never been higher and continue to grow," Goodenow said. "The owners are smart businessmen."
The NHL won't say how many teams are in financial difficulty, and reliable profit and loss numbers are difficult to obtain. An NHL spokesman told The Washington Post in 1999 that one of its top officials had publicly stated that 20 of 26 teams lost money in the 1997-98 season. The league has since added four franchises, and Bettman said he is committed to keeping all the teams in their current locations.
Tim Leiweke, president of the Los Angeles Kings, said his team will lose between $6 million and $7 million this year despite a sellout nearly every night, a solid local television deal, corporate sponsorship and a new arena in one of the wealthiest markets in the United States.
"It's difficult any time you are operating any business and your losses are consistent year after year, with no end in sight," Leiweke said. "It's even more frustrating for us, being in a brand new arena and still being unable to make any sense out of the NHL. The current system we have doesn't work. We have to find a system that does work, because without it, every club is going to be in trouble."
With flat attendance league-wide as well as a recession, many teams likely will face a challenge to turn a profit. Nashville and Washington said they will lose millions this year. The Florida Panthers this week filed papers with a local government, reporting a $17.5 million cash lost last year. Phoenix might have had the largest loss in the NHL last year, more than $25 million. Buffalo and Ottawa likely will not make a profit, and Pittsburgh has said it will struggle to break even. News reports say many other franchises are losing money as well.
"The commissioner probably spends a lot more time than he wants keeping the boat afloat," Baltimore investment banker John Moag said. "You have many teams that struggle on a daily basis to make ends meet."
The league's problems may have begun a decade ago when it began a nine-team expansion, including some unconventional hockey markets, in San Jose (1992), Ottawa and Tampa Bay (1993), Anaheim and Florida (1994), Nashville (1999), Atlanta (2000), Columbus and Minnesota (2001). The expansion, referred to by some as the "Sunbelt Strategy" because of the teams that went into the southern United States, earned owners of already existing teams $570 million in expansion fees. At the same time, existing franchises in Minnesota and Winnipeg moved to Dallas and Phoenix, respectively.
"Expansion was intended to improve our footprint and make us a more prominent place on the national landscape in terms of media coverage and the like," Bettman said. "It made us truly competitive. In 1990, we were in 11 U.S. markets and we were perceived to be regional, and now we're in 22 U.S. markets."
It was also designed to attract a big national television contract like the other major leagues have. Revenue from national television -- including ABC/ESPN (now in its fourth year of a five-year deal) -- earns each NHL team more than $5 million. By contrast, national television contracts earn MLB teams around $18 million each, NBA teams more than $26 million each, and NFL teams an average of $71 million apiece.
"The miscalculation of expansion was a TV contract that would be more on par with other major sports," said Jeff Citron, sports attorney in Toronto and former associate counsel to the NHL Players Association. "Chasing the pot of gold that was a national TV contract diluted the quality of the product."
Bettman said NHL television revenues went up fourfold in the last national deal with ESPN/ABC. The deal brings in about $120 million a year to the league, which is divided among the teams, and Bettman is hoping to get more in the next negotiation. This year's ESPN ratings were running at .61 as of two weeks ago, which is equal to 531,446 households. The last game of last year's Stanley Cup finals televised on ABC between Carolina and Detroit recorded a 4.2 rating, the most households for a Stanley Cup game since 1974, according to the league. That is still far behind the ratings for the NBA Finals, baseball's World Series and the NFL's Super Bowl.
Bettman also points to the development of a worldwide talent pool, which brought in some of the best hockey players from Europe and the former Soviet Union, as part of the success of expansion. Total television coverage expanded to almost 100 percent of games, while more national sponsorships were created, such as the deal the league signed a few weeks ago with Kellogg's cereal.
But one former owner, who would speak on the condition that he not be identified, said expansion also contributed to salary inflation.
"There are too many teams," the former owner said. "The strategy was to expand, each [expansion] team paid $80 million, and it went to the league and got distributed among the owners. As long as they brought in new teams, it was an easy way to get money. But it is inevitable when you have that many teams you are going to have competition for players and player salaries are going to go up."
Capitals owner Ted Leonsis parred his payroll from $56 million to about $53 million this season, sixth-highest in the league, and is expected to lose $15 million this year, according to league sources and the NHL Players Association Web site. Four Capitals players this season will collectively earn more than $25 million: Jaromir Jagr ($11 million), Peter Bondra and Robert Lang ($5 million each) and Olaf Kolzig ($6 million). The salaries of those players -- about equal to the entire payrolls of several NHL franchises -- consume nearly all the revenue the Capitals will earn from ticket sales.
Overall, however, most teams appear to be able to weather the distress.
"The NHL isn't in trouble, but several of its teams are," Citron said. "The bottom line is they have to think hard about what markets to be in and whether their sport is viable in all those markets they want to be in."
Atlanta, Nashville, Anaheim and Florida are struggling to fill three-quarters of their arenas this season. Nashville has been particularly hard hit by the current economic slowdown and corporate consolidation, resulting in the loss of financial services jobs in that city. Corporations that might have bought 20 or 30 season tickets are now buying three or four, according to the Predators, who may lose between $5 million and $10 million this season.
Disney and AOL Time Warner, which own several professional sports teams including the NHL Mighty Ducks of Anaheim (Disney) and Atlanta Thrashers (AOL Time Warner), are reported to be considering sale of their teams as part of corporate strategy to shed underperforming divisions.
The majority of the league's owners appear to be financially solid, including such moguls as John McCaw (cell phones, Vancouver Canucks), William and Nancy Laurie (Wal-Mart, St. Louis Blues), William Wirtz (real estate, banking, food concessions, Chicago Blackhawks) and Jeremy Jacobs (financial services, concessions, Boston Bruins).
Bettman said the new ownership that has been brought in has been stronger than their predecessors. The vast majority of NHL owners have had more than enough money to purchase the teams and put enough money aside (known as capitalization) to cover needed improvements and potential losses. Several owners, such as Leonsis, struggle under arena deals that deprive them of much-needed revenue from club seats and luxury suites. But Leonsis overcapitalized the Capitals when he purchased them from Washington sports entrepreneur Abe Pollin in 1999, enabling him to absorb losses for years.
However, some ownership groups under Bettman have not been so stable. Rob Bryden could not cover his obligations on the bankrupt Ottawa Senators, failing to make payroll on Jan. 1; Howard Baldwin and Roger Marino poured tens of millions into the Pittsburgh Penguins, which plays in one of the oldest arenas in professional sports, before giving up and declaring team bankruptcy in January 1998.
"If you have teams that chronically lose so much money that it outstrips the owner, it doesn't necessarily mean that the team wasn't properly capitalized. It may mean that the losses got so great that [the owner] couldn't do it," Bettman said.
In a few cases, team franchise values have suffered. In 1999, the Lauries bought the Blues and their home arena, Kiel Center, for little more than the debt on the building. The seller was Clark Enterprises -- about 19 St. Louis area companies -- which wrote off the $100 million that they had invested in the team. The Montreal Canadiens and Molson Centre (now Bell Centre) sold for only a fraction of what beer giant Molson Inc. wanted for the package deal, in part because of taxes on the arena but also because there were many NHL franchises for sale at the time. The team is now owned by a businessman who had declared bankruptcy in the early 1990s. The Senators are expected to fetch less than $100 million, and the Sabres are expected to draw less than the price of an expansion team two years ago, despite each team playing in a new building.
For buyers in search of a sports franchise in an 86-year-old institution, Bettman said the NHL is an attractive market.
"I happen to think, and a number of people that trade in NHL teams say, that we're probably the best buy right now because we have the most upside potential," Bettman said.
Researcher Julie Tate contributed to this report.