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Back in the Black

Monday, January 21, 2008

Despite poor TV ratings, the National Hockey League has set itself on a course for financial success, writes JORDAN FABIAN.

National Hockey LeagueThe National Hockey League may be failing to win new fans and attract television ratings, but over the past three years it has transformed itself from a business in peril into a moneymaking machine. To understand what professional hockey finally did right, it’s worth revisiting the many things it first did wrong. 

In September 2004, NHL owners announced they would lock out the players until the two parties could reach a labor agreement. The labor spat eventually erased the entire 2004-2005 season, a first in the history of North American sports. Yet even before the lockout and the lost season, pro hockey was suffering from poor management and waning popularity. 

By expanding into the Sunbelt, the NHL had hoped to bring the game to a wider, more geographically diverse audience. “It was important to continually grow the game and have healthy, stable franchises,” Commissioner Gary Bettman told Hockey Digest in 2003. “One of the reasons that expansion in the ’90s was so important to us was because we didn’t have a truly national footprint.” But the results of expansion failed to meet expectations. Some expansion teams, such as the Tampa Bay Lighting, have had success both on the ice and at the gate. But most have struggled to attract fans. 

Some hockey experts reckon the league overexpanded—that it tried to grow out of its traditional markets on too large a scale in too short a time. Overexpansion certainly diluted the talent pool, contributing to a poorer quality of play. Teams that lacked offensive firepower embraced defensive strategies to stay competitive. In the late 1990s and early 2000s, even avid hockey fans found the slow, grind-it-out, low-scoring style of play often unwatchable. 

Expansion also had an adverse effect on teams playing in traditional markets. Before the lockout, the Boston Bruins, Chicago Blackhawks, and Buffalo Sabres routinely played to crowds at 80 percent capacity or less. In newer markets, the attendance figures tended to be even worse. Yet without a rich national television contract, owners depended on arena attendance to drive team revenues. Many found it difficult to cover their myriad expenses, including player salaries, operating costs, and (for some teams) arena leases. In short, the NHL’s business model had imploded. 

In 2003, the league hired former Securities and Exchange Commission chairman Arthur Levitt to conduct a study of its finances. Levitt found that NHL teams lost a combined $273 million during the 2003-2004 season. When interest and depreciation were factored in, the losses surged to $374 million. “The results are as catastrophic as I’ve seen in any enterprise of this size,” Levitt told USA Today. “They are on a treadmill to obscurity. That’s the way the league is going. So, something has got to change.” 

The first thing that needed to change was the player salary structure. Out of the $1.996 billion that NHL teams collected during the 2003-2004 season,$1.494 billion of it, or about 75 percent, went toward player costs. The remaining 25 percent, about $500 million, was left to pay for all other expenditures, such as employee and management salaries, arena leases, equipment, and travel expenses. On average, each team had roughly $16.667 million to cover these expenses. 

Before the lockout, NHL owners realized they had to mend the league’s economic structure or face extinction. They proposed a salary cap and pushed for revenue sharing.

Compared to the Big Three of American sports—the National Football League, National Basketball Association, and Major League Baseball—the NHL suffered from a profound dearth of revenue sources. Because it had limited exposure on national television, successful NHL teams relied on attendance, local TV contracts, and lucrative arena properties to earn profits. Attendance was the most integral revenue stream, but prior to the lockout it had declined. 

The owners had to mend the NHL’s economic structure or face extinction. In many ways, hockey had always been one step behind the curve. Before the 2004-2005 lockout, the league had no salary cap or revenue sharing scheme, two bulwarks of modern pro sports. Without these controls, the richest teams could keep all their revenue and spend as much as they wanted on star players, which led to salary inflation and put the poorer franchises at a severe disadvantage. 

(Remember: pro sports is not a normal industry. Each league has a vested interest in ensuring relative financial parity among its teams. The teams are “franchises” of the same “company.” The league needs them all to maintain a certain level of economic performance in order to exist as a successful enterprise.) 

In 2004, NHL owners sought to make sweeping changes. They proposed a salary cap that would be tied to league-wide revenue collection and would limit the portion of revenue spent on salaries to 55 percent. The salary cap provision also stipulated that no player could earn more than 20 percent of a team’s salary cap, which would prevent any Alex Rodriguez-style mega contracts. The owners also proposed that teams adopt revenue sharing, a system in which the top ten teams contributed a portion of their revenues to small-market teams and teams split up extra playoff revenues. 

Such drastic changes to the league’s economic model caused a huge rift between the NHL Players’ Association (the players’ union) and the owners. The players strongly opposed a salary cap and alleged that the owners were simply making a money grab. Because their conflict could not be resolved, the 2004-2005 season was never played. 

The lockout ended with concessions from both sides. But both the salary cap and revenue sharing plans were adopted. When league returned in October 2005, many predicted it would remain mired in economic turmoil. Instead, the NHL’s 2006 year-end reports painted a much rosier picture. The salary cap and revenue sharing had paid instant dividends. According to Forbes magazine’s 2006 report on the business of the NHL, the salary cap had stabilized player salaries at 54 percent of overall revenue. The fixed nature of the player costs guaranteed that they would allow more room for profit making, meaning that potential owners will pay more to buy a team. 

In addition, revenue sharing has ensured that small-market teams do, in fact, receive extra cash. Forbes reported that during the 2005-2006 season, “The only reason why the Buffalo Sabres, Pittsburgh Penguins, San Jose Sharks, and Washington Capitals posted profits…was because of the money they received from revenue sharing.” 

According to Forbes, NHL teams have increased in value by an average of 23 percent since the lockout ended, and the league has turned a $96 million operating loss into a $96 million profit. The average value of an NHL franchise is now approximately $200 million. During the 2003-2004 season, the most valuable team in the league, the New York Rangers, was worth some $282 million. 

So the league’s economic recovery has been quite impressive. All but three teams increased in total value during the 2006-2007 season, and 17 out of the 30 NHL franchises turned a profit. Even teams in non-traditional markets, such as the Dallas Stars (5th in total value) and the Anaheim Ducks (12th in total value), have built profitable ventures through substantial financial backing, shrewd marketing designed to increase attendance, and savvy real estate investment. 

Even though the NHL is heading in the right direction, plenty of challenges remain. Pro hockey struggles to receive positive media attention and interest from the broader sports community. Broadcast and print journalists seldom refer to hockey as one of the “major American sports,” and some newspapers don’t even have beat reporters to follow their local NHL teams on the road. 

One big problem is the league’s abysmal TV contract. While NBC broadcasts some games, the league currently has a contract with the Versus network (formerly the Outdoor Life Network), which is available to 20 million less subscribers than ESPN (although Comcast recently made Versus more widely available by moving it to basic cable). The ratings have been pitiful. One Stanley Cup Finals game in 2006 garnered lower ratings than a baseball game that had been rained out. If television ratings are a measure of mass appeal, the NHL is still in bad shape. 

The recent NHL Winter Classic, an outdoor game played between the Buffalo Sabres and Pittsburgh Penguins at Buffalo’s Ralph Wilson Stadium, drew a 2.6 overnight rating and a 5 share on NBC, the best ratings for a regular season game since 1996. Yet the significance of the outdoor spectacle should not be overstated. As Toronto-based hockey writer Damien Cox recently wrote, “In such a large country with such varying regions, what appeals in Buffalo may have nothing to do with what the folks in Seattle or Jacksonville want. I think the Winter Classic garnered lots of attention, but I have my doubts as to whether it won over a single new fan for the NHL.” 

That gets to the real question for league officials: will the hockey continue to exist as a niche sport, or will it become a national game? The NHL has recovered financially. But widespread popularity remains elusive. 

Jordan Fabian, a former intern at THE AMERICAN, is an avid hockey fan and a junior at Cornell University. He is co-editor-in-chief of The Cornell Review.

Image by Getty.

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