Look up the word quagmire in the dictionary and there you will find a picture of NHL finances. Or rather, you'll find a blank picture -- the actual finances are a well-kept secret NHL teams guard carefully. So how are we to determine for ourselves the veracity of Gary Bettman's claims that teams lost a collective $273 million during the 2002-2003 season, or Forbes Magazine's slightly lower estimates of a collective loss of $120 million? It is this claim on which the necessity of a lockout hinges.
The answer is, we can't, we may not want to, we may not even have to. I've already gone into a big part of why we might not want to in the first article of this series -- for the folks reporting these losses, this is mere chump change, the equivalent to a billionaire of what an ordinary fan might be willing to invest in being a fan. The other reason why we might not want to, and the full reason for why we may not even have to, will be the subject of the third installment in the series -- the folks reporting these losses are not really concerned with operational profit or loss, they are wholly consumed with franchise value.
What this article is concerned with is why we can't ever really know what to make of any declaration of operational profit or loss, even on that is not meant to be fraudulent or deceitful. So let's take a look at the various components included and excluded from operating income and how NHL teams fit into the structure of their parent organizations (most often as one of several entities). Some case studies are provided afterward to put the ideas within the context of reality.
Issue 1 -- Operating Income
You don't have to be a businessman to understand the meaning of the term "bottom line." That's what's left over after all calculations have been made, what's on the very last line after there are no items left to add or deduct. On the ice, it's wins, losses, and ties, it's goals, assists, and other stats, it's the final standings and who wins the Stanley Cup -- a bottom line as black and white as they come, as any Ranger fan can tell you. The estimates Bettman and Forbes provide are of operating income -- you do have to have some experience in business finance to know that operating income (or loss) is not the bottom line, that it is in fact pretty far above it.
When I was running a software company, I never bothered even looking at operating income, coming as it did slightly above the halfway point in the financial statement. Not included in my operating income, for example, was the cost of buying the computers we used develop and operate our software -- these are capital costs that must be depreciated, depreciation being one of the major items "below the line" of operational revenue and expenses. Some companies even depreciate the salaries of software developers as a capital cost rather than expense them when incurred, a huge reduction in operating expenses that are instead spread out over a number of years. The idea is a sound one -- R&D cost can thus be matched up against revenue it ultimately generates at the time the revenue is realized.
The same thing can (and often has to) be done with revenue -- a customer may pay up front in one big chunk, but revenue must be booked when goods or services are delivered (deferred revenue) or vice versa if you deliver the product up front but don't get paid until later (accrued revenue). The timing of accounting items is not necessarily linked to the timing of cash outlay, as it is for individual tax payers who are on a cash basis. This is important in analyzing the profitability of a hockey operation -- some forms of revenue (arena naming rights, other promotional sponsorships, or luxury box sales, for example) and expeditures (e.g. signing bonuses, broadcast rights fees) may or may not be amortized or accrued, in whole or in part, in the same manner by every team.
Another item not included in operating income is interest. That would include the interest a team earns from holding the funds you pay in advance for playoff tickets, interest payments they keep even if they have to refund all or part of your money for playoff games not played (by my estimates, using conservative interest rates, this would add up to around $1 million for a team that can sell playoff tickets in advance). Below the line interest works the other way too -- it also includes interest payments teams make on loans they take out (for example, loans to build arenas), cash outlays that have to me made that are not reflected in operational income.
Taxes are another important item not included in operating income. A lot of accounting games are played simply to minimize tax liability, which is only natural and highly practical. In my firm, an S Corporation where owners were also employees, profits had to be distributed in the form of salary, a non-taxable expense to the company ultimately taxed as personal income, rather than retained by the company or distributed as dividends (both of which would result in double taxation, first at the corporate level then as personal income). I could not unearth any salary data for NHL executives, but a number of owners are employed by their teams and presumably are paid salaries, so part of their return from their ownership could very well contribute directly to the very operational losses they report (Chicago's Bill Wirtz, Florida's Alan Cohen, Detroit's Christopher and Denise Ilitch, and Minnesota's Jac Sperling are all listed as President, Vice President, and/or CEO of their respective teams, certainly salaried positions, and many others bear the title of Chairman and/or Governor, which may or may not be salaried positions).
NHL teams throw a lot of other items below the operating income line as well -- indeed, all the hype about the Enrons of the world aside, there is enormous flexibility in the way companies determine their accounting practices. This is especially true of privately-held companies, which is what most NHL teams are, where the only legal challenges against accounting practices would come from taxing authorities (and these only to determine the accounting for tax purposes, not for shareholders, employees, or customers), or from equity holders (and as I learned firsthand, courts are loathe to get involved in partnership disputes of privately-held companies).
Even the IRS, the one scrutizing body that can, if it chooses, look into the books of even the most closely-held private compamies (in the U.S. at least), recognizes the complexity of these issues, as written in its audit guidelines for sports franchises: "Even among franchises in the same league, financial statements are generally unique. There are often significant differences in the accounting policies for major items such as player contracts and contingencies. The amortization of player contracts is almost always a material audit issue. Player contracts are typically structured to include signing bonuses and deferred compensation arrangements. For most franchises, ticket revenues and broadcasting rights constitute the majority of revenue. Many teams also have favorable lease arrangements in which the team receives revenue from parking, concessions, and stadium naming rights. Advance sales of upcoming season tickets are typically reflected as deferred revenue on the balance sheet. Generally accepted accounting principles (GAAP) require that gate revenues be recorded in the period in which the fans attend the games so that they are matched against period costs. As with other industries, the GAAP timing of income and expenses for sports franchises often differs from that for tax purposes."
"It is important to understand different types of revenue," Christina Vogel wrote in "Valuation of a Sports Franchise" for Wake Forest. "Franchise revenues may include venue revenue (suites, concession, parking and advertising), ticket revenue, venue naming rights, team merchandising and television fees. Owners generally exclude venue naming rights, advertising, luxury suites and team merchandise revenues, which is why some are able to cry poor. Although these revenues are not as big a piece of the revenue pie as ticket sales or broadcast fees, they can be very profitable."
All of which makes this game a lot different than the one played on the ice. Imagine if you had the ability, in a game you were winning by a wide margin, to accrue some of those goals for future games, where you could apply them as needed against goals against. Or where you could accrue wins from prior seasons and apply them in future seasons as you need them. Imagine a game where, if you were Comcast Spectacor for example, you could decide if a win or a loss would be credited to the Flyers or Sixers. It wouldn't work in a sports league, but that's how it works in business, as long as you can come up with an acceptable rationalization for a scrutinizing body -- if it were ever even scrutinized (most firms audit themselves and are rarely questioned, except by legal or criminal challenges, and this is true even of publicly-held companies, though they have much larger public reporting requirements than private companies, which have virtually none beyond some nominal protections for minority shareholders).
Gary Bettman insists that the NHL's bookkeeping is transparent, even though the IRS teaches its auditors to expect the exact opposite! Is there any wonder the NHL Players' Association has difficulty trusting the aggregate numbers the owners provide them with? The NHLPA doesn't get to see closely guarded team finances, only a combined report called the Unified Report of Operations (URO). The NHLPA isn't even allowed in general to compare one team's apples to another team's oranges (they say they were given access to four franchises and found major discrepancies, but have not documented them publicly) -- they have to make do with the fruit salad of a URO the NHL gives them.
Working off a set of incomplete information, I have come up with some examples to illustrate these issues. They are, however, tied into similar issues having to do with NHL clubs being part of multi-tiered organizations, so I will provide examples that combine both sets of issues, since they are often inextricably related.
Issue 2 -- Multiple Entities
It's no coincidence Pittsburgh and Edmonton are the two franchises that are truly in financial trouble. I do believe they are among the very few that are stand-alone entities, their owners lacking the flexibility of allocating revenues and costs among related businesses. There are others as well (Columbus is the only other one I can think of, the Islanders too if you want to exclude their sister franchise in the Arena Football League), but they are backed by wealthy ownership groups interested in keeping them viable in their current locations. Just about every other team is part of a larger organization that at the very least includes operational control (if not outright ownership) of the arena the team plays in and/or ownership or co-ownership of other franchises that play in the same building, and in some cases even the regional cable outlets that carry the team's games.
Some franchises, as we have already seen, are directly owned by corporations, just about all of them media conglomerates for whom the team is not necessarily meant to be a profit center in itself but is content meant to drive the profits of other vertically integrated corporate units. It's should therefore come as no surprise that the so-called richest teams in the NHL, the ones who spend the most, usually fall into this category -- the Leafs, Rangers, and Flyers chief among them. And it's no surprise either that these teams play in some of the largest hockey markets -- that's what made them so interesting in the first place to their media parents as content to drive their nationwide media outlets.
How this plays into the accounting process is what interests us here, since we are trying to understand, without having direct access, what makes up the losses the NHL claims to have and Forbes supports at least in part. IRS audit guidelines again warn about the often unique arrangements to be found in the sports franchise industry. "There are varying levels of vertical business integration. Financial statements often reflect significant related party transactions which are common for most sports franchises. Many teams also have favorable lease arrangements in which the team receives revenue from parking, concessions, and stadium naming rights."
Take the Rangers for example. The Rangers pay rent to play in Madison Square Garden, and they collect local broadcast rights fees from the Madison Square Garden Network -- both entities also owned and operated by the same parent company, Cablevision. Madison Square Garden sells luxury boxes, club seats, and some season subcriptions by the year, not by team (back when there was a long waiting list for season tickets, first preference was given to subscribers willing to buy all Knicks and Rangers home games, plus ten- or twelve-event packages that included the dog show, cat show, horse show, and Ice Capades -- no jokes please about the Rangers now being the Ice Capades). How revenue from all these non-team-specific sources is divided can be, and often is, arbitrary (in a well-reported extreme, Chicago doesn't attribute any luxury box revenue to the Blackhawks at all, even though it all flows through to the same parent company, the Wirtz Company).
It's tempting to dismiss these other entities when evaluating the current NHL labor dispute, to argue that the only thing that matters is whether a hockey franchise is profitable as a stand-alone entity. But when it's not in fact a stand-alone entity and was never meant to be a stand-alone entity, then there is nothing to be realistically learned from treating it as a stand-alone entity. To use an example from real life, I just took out a mortgage on a country house for one reason and one reason alone -- the interest rate was so low, I can take the principal from the mortgage and invest it elsewhere for higher return. I pay x% on the mortgage, earn y%, and gain the difference. It would make no sense whatsoever for me to turn around and complain that I have a mortgage that is bleeding me to the tune of x%, would it? Same with a hockey operation that is meant to drive arena profitability or regional cable networks, even if it is a money loser in and of itself.
Either way, it may prove impossible to evaluate it hockey operations on their own merits -- certainly, the different ways different teams account for themselves in these situations immediately suggests that one team's apples is another's oranges, and everyone know you can't compare apples and oranges. When teams operate under different philosophies of accounting and synergy, irreconcilabilities arise that have nothing to do with labor issues -- how can an operationally oriented team like Pittsburgh, which doesn't have its own building, cable network, or franchise partner, ever hope to compete against media conglomerates that treat their franchise as loss leaders to drive profitability in other areas? The Rangers are again a good example -- and no jokes about being a loss leader! -- Cablevision having made it well known that they feel they need expensive star power to drive MSG and MSGN revenue regardless of the bottom line impact on the Rangers' team operation, which according to Forbes is a big money loser, if you can believe that.
Then too, a team's goals may change over time, causing it to try to paint a different picture with its books. Right now, with a CBA war looming, a franchise possessing the luxury of being paired with other entities may find it favorable to account for themselves in a way that makes the hockey operation show a loss. In the future, when this is all behind us and owners are looking to cash out their investments, as in the recent past when the league was actively harvesting expansion fees, those structures may change in order to enhance franchise values. I'm not suggesting that this is an unscrupulous thing for ownership to do -- on the contrary, that is what owners are supposed to do for themselves and their stockholders, to maximize the value of their investment under varying economic conditions. But I am suggesting that without full access to all the facts, we need to look beyond qualified declarations of loss and examine all the possibilities.
(Although, since I brought up the concept of scruples, it might be worth reminding people that, other than Billy Tibbetts, the worst thing any player has done is get into a tragic car accident, get into a tussle off the ice, get too involved with drugs or alcohol, commit indecent exposure, or the like. NHL ownership on the other hand includes Jim Norris, who went to jail for antitrust violations, and the Wirtz family, which acted as his Chicago beard for so many years and who paid off Illinois lawmakers to pass legislation that gave them liquor distribution monopolies, laws that were struck down as unconstitutional; Bruce McNall, a Kings' owner who went to jail for fraud, and Philip Anschutz, another Kings' owner who has so far escaped the criminal charges that four of his executives have been unable to avoid for the well-publicized accounting fraud at his company Qwest, but has not been able to escape civil charges; the Rigas family, who will go to jail for fraud when all is said and done, Harold Ballard, who among many notorious attributes that included racism and sexism, went to jail on 48 counts of fraud, one of them misappropriating funds from his Toronto franchise to renovate his home, and John Spano, who went to jail for defrauding the NHL itself; Alan Cohen, who made his fortune infringing patents but survived patent infringement suits brought upon him by rival drug companies like Eugene Melnyk's Biovail, which itself has survived patent infringement suits and is currently being sued for accounting irregularities; Peter Pocklington, who criminally sold off one of the best teams ever assembled for the benefit of his personal finances; George Gillett, who went bankrupt after making a billion in junk bonds; Cablevision and Time Warner, a pair of cable operators who have both been involved in multiple high-profile legal battles, often with each other, in which they held customers' programming hostage, sometimes even for years, and who are both currently troubled by allegations of accounting irregularities [CVC - TWX]; and Ted Leonsis, who got into a tussle off the ice. And I won't even get into the ethics of people who made hundreds of millions or billions in leveraged buy-outs, venture capital, liquor distributorship, parking garages, airport restaurants, commercial real estate, billboard advertising, and other such savory industries.)
There are huge amounts of dollars involved when it comes to divvying up revenue among multiple entities. The biggest sources of revenue for an NHL team are gate receipts, broadcast rights, and promotional deals. Secondary sources, which vary in size between teams depending on how they are organized, are parking, concessions, and merchandising (the latter is a minor source of revenue once the NHL and NHLPA collect their share). There are also a few true below the line items like interest, taxes (e.g. the Alberta player tax and the Alberta Lottery Fund that benefit Edmonton and Calgary), and the NHL's currency equalization program.
Consider some the issues involved in these areas: Ticket sales are black and white, but how are luxury box revenues allocated in multiple-use buildings? National league-wide broadcast rights are evenly divided among teams, but each team negotiates its own local rights deals -- how does an owner that owns multiple teams allocate these rights fees between the teams (for example, Detroit's ownership sold radio broadcast rights to the Tigers and Wings in one deal for $50 million over six years, an awful lot of money for a relatively minor item like radio broadcasting -- how do they allocate the fees between the two teams)? Promotional deals include arena naming rights and sponsorships that result in arena and broadcast advertising that are not event-specific -- how are these allocated when such deals cover more than one team (in Washington, New York, and L.A., three or more different pro teams use the same building)? Parking and concessions can be a minor or a major item depending on who provides this service and how it is accounted for -- if the provider is owned by the same parent company, how are revenues split, and if you want to evaluate a hockey operation, why would you even want to allow for a revenue split instead of a straight event-based accounting?
I don't have many answers here -- the only thing I know for sure is that the L.A. Kings get 25% of luxury box revenue in the Staples Center, that they negotiated a split of building-wide advertising and promotion that contributes to $7 million in revenue annually, and that their concession revenue is minimal because the service is contracted out to a independent service provider. But you can see that different teams can account for these things in different ways in meeting different philosophies, and even the same team can account for these things in different ways over time to meet changing philosophies.
Examples:
The NHL's books are as closed as the doors to its arenas will be next season. Still, there is enough information available through various internet sources to take a stab at seeing how NHL revenue numbers stack up. Fortunately, there are two cases that present close to a complete picture of what a team's finances are like -- the report of an L.A. Kings fan granted access to their books to validate claims of cash losses, and a financial plan for a new arena in Pittsburgh.
The only revenue and loss figures available to the public by team are those published by Forbes Magazine alongside their annual valuation of NHL franchises. Teams have disputed these numbers (Toronto and St. Louis have publicly aired objections), arguing that they are closely-held private companies, their books unavailable even to the nosy-bodies at Forbes. But Forbes's revenue estimates add up to Gary Bettman's well-publicized $2 billion, so let's see what we can do with them.
"Gate, broadcasting, and sponsorships make up 95% of total team revenues," Kings fan Philip Propper wrote in his report on the team's finances. The IRS concurs: "For most franchises, ticket revenues and broadcasting rights constitute the majority of revenue." [The links to Propper's article on LetsGoKings.com no longer work -- they were operational when I researched this work.]
Let's start with a simple, perplexing case: The Stanley Cup Champion Devils. The Devils averaged $68.80 per ticket in the regular season in 2002-2003. Their total regular season attendance was 609,218. They hosted 13 playoff games, serving the most patrons, over 235,000, of any playoff team, despite not selling out all their games. Their share of league-wide broadcast contracts was $7.5 million. Forbes estimated that they lost $9.4 million on $73 million of revenue. If we assume conservatively that playoff ticket prices sold at a 50% premium, the Devils' $73 million revenue is more than accounted for -- and that doesn't even include their FoxSports New York cable rights fee (probably in the neighborhood of the $12 million the Islanders get from the same network, maybe more considering their success), advertising fees, and their share of luxury suites, parking, concessions, and merchandise, all of which would easily reverse the operational loss Forbes estimated and turn it into a gain. How could Forbes miss all that if I can get it off the internet?
[All average ticket prices, which do not factor in luxury suites and club seats, and family cost index figures come from Team Marketing Report's Fan Cost Index, regular season attendance figures from ESPN.com, and playoff attendance from me adding them up. The assumption of playoff ticket mark-ups is based, in the absence of actual price data for specific teams, on actual price data for Dallas, Detroit, and Vancouver, and a 2002 Globe and Mail article by Bruce Little. All figures are $US.]
Vancouver's numbers tell the same story. Gate receipts were over $50 million (marking up playoff tickets by 50% even though the least expensive playoff ticket was roughly equal in price to the regular season average), and their combined local and national broadcast rights earned them over $20 million. That alone adds up to far more than Forbes's $66 million revenue estimate, before sponsorships and other revenue items (plus several million from the NHL's currency equalization program and a million or two more from the BC lottery) are added in. Ottawa is a third team where gate receipts and national broadcast fees alone add up to more than Forbes's $59 million revenue estimate. Add in regional broadcast fees (said to be between Calgary's $3-4 million and Vancouver's $12-15 million) and Forbes's estimate of a $2 million operating losses is more than reversed, without yet considering advertising and other revenue sources.
Calgary itself, with no playoff revenue and one of the smallest TV rights deals in the NHL, nonetheless comes close to Forbes's revenue estimate when you add in its share of the Alberta players' tax, the Alberta lottery, and the NHL currency equalization program, and that does not yet include luxury suites, ads, concessions, parking, etc. (they also benefit separately from operating their provincially-funded arena). Edmonton, with one playoff round and the same three external subsidies, exceeds its Forbes estimate once you add its regional TV deal, which is slightly higher than Calgary's -- and still has ad and other revenue to account for.
[Canadian regional rights deals, as well a few US deals, were found in an article in Sports Business News, which is available only by subscription, so a link to it would not work for non-subscribers. The article has been posted elsewhere, but I don't know how long that link will remain active.]
Something doesn't figure. What these teams have in common (except Calgary and Edmonton) is they all went deep into the playoffs. I suspect (but don't know for sure) that these teams and some (maybe even all) others book playoff revenue below the line of operating income (perhaps treating it as an exrtaordinary one-time event rather than an operational certainty). Propper seems to say the Kings do so when he writes, "Below the operating line, the Kings also receive and pay out cash for various financing requirements. The Playoffs are a significant source of free cash flow, generating approximately $4 million in revenues and $2 million in expenses per round." But his wording is too ambiguous to be sure that he really meant to lump playoff revenue with other below the line receipts. And the NHL's Levitt report includes playoff revenue in its calculations.
Now let's look at another big ticket item -- local broadcast rights fees. Much has been made about how small the NHL's national broadcast deal is (though myopic American-based observers tend to forget that there is more than the ESPN-ABC U.S. deal, there are two national broadcast networks in Canada, TSN and CBC, a French language broadcast deal, and the NHL Center Ice package). But the truth is, these deals combined are a drop in the bucket ($7.5 million per team) compared to the regional television, cable, and radio deals NHL teams negotiate for themselves -- and keep for themselves. If there is one prevailing reason for economic disparity in the league, this is it.
Compare two Northeast Division teams that realized little or no playoff revenue last season. Boston has an edge in gate receipts thanks to higher attendance (1,300 fans per game), higher average ticket prices ($20 per seat, though that may be because the teams account for premium and luxury seats in different ways), and having played one playoff round. And surely Boston realizes higher levels of sponsorship and advertising (though I am not privy to those numbers). But the vast majority of the $34 million difference in revenue between the two teams comes from local broadcasting deals -- the Bruins get nearly $20 million more from NESN than the Sabres get from Empire ($25 million to $6.5 million -- Detroit, via its share of the Tigers' and Wings' rich radio deal, probably gets nearly as much as Buffalo from radio alone, and Detroit probably gets upwards of the same $25 million Boston gets in TV rights to boot).
It pays to be an Original Six team -- Montreal gets $16 million, Toronto gets $23.5 million for 52 games, the Rangers get the same $25 million the Bruins get. I don't know how much Chicago gets, but they don't allow home games to be broadcast locally, no doubt costing them broadcast fees. Comcast SportsNet recently outbidding Fox SportsNet for Chicago broadcast rights will probably make up some for that. But it's Dallas that beats the band with a local broadcast deal worth more than $35 million per year.
Montreal, despite missing the playoffs and therefore not reaping any pure-profit playoff revenue, gets close to its Forbes revenue figure of $71 million just through regular season ticket sales and broadcast rights ($60 million total). Advertising and other revenue items certainly take the Habs up to $71 million. They nevertheless are pegged with a loss in excess of $5 million by Forbes. In another anomaly, their $48 million payroll, despite being the tenth highest in the NHL last season and despite being well above the salary cap level the NHL is believed to want, is only two-thirds of revenue, very close to what the NHL says other major sports leagues average, even with their much more lucrative league-wide broadcast deals, not the three-quarters the NHL claims is its league-wide average.
With a local TV deal with FoxSports that is worth $12 million a year, combined with regular season and playoff gate receipts and their share of the NHL's national broadcast deals, the New York Islanders' revenue adds up to more than the $56 million estimate on which they lost more than $10 million, according to Forbes. Add in the usual list of other revenue sources, and that loss would be completely wiped out with ease, Alexei Yashin's contract notwithstanding. Forbes clearly has a better understanding of how these revenues and costs have been spread out over time for them to have come up with different results than the raw numbers made public here and there.
Even with broadcast rights, we don't really know how much is added into operating income -- the IRS makes important distinctions between the allocation of fees for general property rights vs. individual games, between game telecasts and other shows, and between other related forms of revenue: "Sports teams usually enter into broadcasting agreements with both local television and radio stations for the sale of broadcasting rights to the games played at the home stadium. Additionally, the agreements may include other special programs; for example, a coach's show, pre-game show, post-game show, etc. Local agreements may also include team sponsorship; for example, an official team station. Generally, these contracts require a substantial payment upon contract execution, as well as periodic payments (normally annual) through the contract term." Again, we find ourselves trying to sort out different forms of payment for different forms of goods or services, probably treated differently from team to team.
Complicating the matter is the potential relationship between the local sports network and the team it carries. Buffalo's right fees may be as small as they are because they were negotiatied with the company that owned the team at the time, Adelphia Communications. Adelphia essentially negotiated with itself how much of its broadcasting revenue to attribute to the franchise and how much to the network. And we all know where Adelphia is now thanks to its fraudulent ownership. The Levitt report says that it tested rights deals between related entities for reasonableness, based on a complicated formula that took ratings and other things into account, but Buffalo was no longer related to is former parent during the report period, so its deal may not have been put through the test.
The Rangers have a direct relationship with its regional sports network, Madison Square Garden Network, as well, as do the other teams that play in MSG (Knicks and Liberty). The Rangers receive a little over $300,000 per game from MSGN, a pittance compared to what Toronto gets from its media parent ($450,000) and not much more than what Vancouver gets ($250,000). Meanwhile, MSGN makes approximately ten times as much in advertising fees per game (if a Sports Business News report placing the cost of a regular season 30-second commercial at upwards of $35,000 is to be believed). On top of that, MSGN gets a fee per subscriber from cable networks that carry it -- currently reaching 12 to 15 million households, worth another $20 to 30 million (though that is for more than just Ranger broadcasts). This may meet the Levitt report reasonableness test, but is that test, based at it is on the average of the top ten markets, truly reasonable for a franchise that is in the single largest market and has a nationwide presence unparalleled in the US?
And what about playoff games? I have not found any publicly available online source that helps me get an understanding of whether a team gets additional rights fees for playoff games, or whether they are included in the overall deal, or whether this varies from deal to deal.
Being a public company, Cablevision has more extensive reporting obligations than most other NHL team owners. Though they do not break their reporting down by team, they do break out MSG from other Cablevision units -- MSG includes the three sports franchises, the arena, the network, and Radio City. During the nine months that made up the 2002-2003 season, a season in which Forbes estimates the Rangers suffered a $7 million operational loss on $113 million in revenue, the MSG unit as a whole reported $8.5 million in operational profits on over $650 million in revenue -- and it would have reported a $12 million profit if it not declare a one-time $3.6 million expense for "restructuring" (i.e. buying out contracts of fired executives, which quite unforunately did not include any Ranger executives).
Now, I don't have any other numbers to back me up, but even with the exhorbitant payroll the Rangers incurred just to miss the playoffs again, I don't see how the Knicks and Liberty, the arena and Radio City, and the network could have made nearly $20 million in profits while the Rangers lost $7 million, considering the Knicks were in the same dire straits with high payroll and poor results, MSG and MSGN suffered from both teams missing the playoffs, MSGN suffered even further from the loss of the Yankees, and Radio City continued to suffer from the post-9/11 decline in tourism. Something is amiss, and when you look at the disparity between Ranger broadcast rights fee and how much MSGN reaps directly from those broadcasts, you can see exactly where the problem lies. Lies being the operative word.
[Numbers for the MSG and the Rangers were culled from various quarterly and annual reports that can be obtained at Hoover's Online.]
Boston, with 85% of its Forbes revenue estimate of $84 million covered by regular season ticket receipts, one playoff round, and broadcast rights, is another team sure to reach or exceed Forbes revenue once you figure in advertising and the lesser revenue sources, revenue than generates a modest operational profit. Its below-average payroll of $37 million is less than 45% of revenues -- not even taking into account how much Jeremy Jacobs and Delaware North make off the Bruins from their Fleet Center lease, from arena services, and from his share of NESN broadcasts, three income sources derived directly from Bruins games. Given these numbers, it is more than clear that Jacobs, one of the most outspoken of hawks among owners, wants a new CBA to give him a better chance at earning high-margin playoff revenue from his already profitable 45% (or lower) payroll rate -- nothing more, nothing less.
The highly publicized examination of the Kings' books by Phil Propper turned up a surprise for the fan who thought the Kings were juggling their books -- he discovered that the Kings were actually losing money, and lots of it. Section III of his published results contain his "indisputable" set of facts about the Kings' economic picture, and it paints one of the most complete pictures of an NHL team that we have. Unfortunately, despite an unprecedented level of access, Propper omits too many numbers for us to verify his findings -- most significantly, he says the Kings' rights fees are in the "high seven figures" but doesn't tell us the actual figure. He says the Kings' payroll was inflated by injuries (having to call up players and pay them at NHL rates), and he says the Kings received insurance against injuries, but he doesn't tell us how much exactly was offset (presumably, injured NHL players covered by insurance and replaced by cheaper AHL players would lead to lower payroll, not higher). He tells us how much the Kings pay for radio broadcasts but not how much they make from the advertising they sell, and he tells us how much the Kings get from their AHL franchise but not how much they spend on it.
Worst of all, Propper flips the accounting paradigm on its head and looks at things strictly on a cash basis -- what the Kings pay out vs. what they take in. That would be great if that was how things were done all along and by everyone. Then we'd be comparing apples to apples. But he counts a few high-ticket items -- debt service (by both the team and the Staples Center) and deferred payroll, for example -- that were already accounted for by the prior owners or in prior years, counting as a loss items that were already counted as losses before (counted in a way, debt assumption, that was factored into the price paid for the team by its current owners).
Perhaps the biggest weakness of the analysis reflects back on the very reason he asked to do it in the first place -- "These numbers are indisputable unless someone can prove criminal malfeasance on the part of the team and its management and auditors." He went in believing the team misled the public about team losses and then took on faith all documents they showed him. I make no accusations here, but considering the history of the current ownership group, healthy skepticism is at least as warranted as blind faith. Kings' owner Phil Anschutz faces civil actions and some of his executives face criminal charges stemming from the very thing Propper takes on faith -- Qwest's accounting procedures. In his defense, Anschutz sent a phalanx of lawyers to the California Supreme Court to argue shamlessly that he has no financial ties within the state of California. How can you just take this man's word for anything?
Propper even dutifully reports, face completely straight, what should have stuck out as a glaring red flag -- that Kings' fans spend only $6.50 each on average per game on concessions. That just doesn't stand up against Team Marketing Report's Fan Cost Index estimate of a $22 cost per person for a family of four purchasing two small beers, four small sodas, four regular hot dogs, parking, two programs, and two caps while attending a Kings game. Sure, many people go to games and buy nothing, especially season ticket holders who know better, but what does $6.50 get you at a hockey game these days?
Perhaps the best look we can possibly get at the economics of a hockey franchise (a small franchise at that, one that has no related entities to fudge things up with) is the study done by the Allegheny Institute for Public Policy on behalf of the Sports and Exhibition Authority (SEA) in response to a request by the Pittsburgh Penguins for a private financing plan for a new arena to replace the antiquated Mellon Arena. This study examines nothing more or less than the profitability of the hockey operation as a stand-alone entity, leaving no doubt that NHL teams understate revenue and profit streams, and that modern arenas are the salvation for struggling teams, not payroll caps.
The finance plan projects a likely and a conservative scenario. In both plans, revenues are split between the Penguins as arena operator and prime tenant, and the SEA as owner of the arena looking to recoup its investment in financing construction. The likely scenario projects annual revenues of $82 million for the Penguins, $17 million for the SEA. Of these, $16 million would be reaped from non-hockey events, but since the Penguins would operate the arena during those events, revenues would be theirs to keep (if you think they ought to be excluded from a hockey operation, you haven't learned the lesson of Jim Norris, who controlled the Rangers via ownership of Madison Square Garden, to the benefit of his boxing circuit and his ownership of the Red Wings). The conservative projection estimates annual revenues of $62 million for the Pens.
Add in $10 million the Pens receive annually for their cable rights and $7.5 million from the NHL broadcast package, and the Pens would approach $100 million in likely revenue each year, $80 million in the conservative case. That is 40 to 75% more than their current revenue, according to Forbes -- nearly half again as much revenue in the conservative case, nearly twice as much in the likely scenario. Just from having a building much like most of the others around the league, and running it the way many other teams run their arenas -- Nashville, Ottawa, Minnesota, and Tampa are four recent expansion teams in small markets that all reap the full benefit of their arena operations.
And the plan even pays for itself in terms of arena operating costs -- the plan is based on a conservative number of non-hockey events (100), but the profits from an additional 30 events each year (matching the number of non-hockey events currently held at Mellon) would pay for the entire arena operation. That would leave the Pens with relatively low operational costs, plus player salaries -- if they had a hard cap of $32 to 39 million on their player payroll, they would reap annual profits of a roughly equal amount. And this doesn't even count in the $14 to 17 million the SEA would reap in revenue -- revenue the team would get if it found a way to finance the building itself (or if it got a publicly subsidized arena like so many other U.S.-based teams).
Consider that this is a plan devised not by a hockey franchise or its parent organization, but by a quasi-governmental organization looking simply to build an arena and re-coup its costs from its share of revenue generated by the building. The SEA has no intention of subsidizing the arena on behalf of the Pens, and would not consider such a plan if it did not have confidence in getting the return it wants on its investment. This is what you would see if you were to see the true finances of almost all NHL franchises -- the only exceptions being the handful of teams that do not yet have the kind of arena and arena operation rights that this plan envisions for the Penguins, which as far as I can tell includes only Edmonton and perhaps the Islanders.
One good look at this plan, and all of Phil Propper's work with the Kings flies out the window. L.A.'s concession deal with Aramark, worth 20% of the Penguins' projections, is clearly too favorably skewed toward Aramark (and they don't get credit for the 50% of the net proceeds that go to the Staples Center, owned by the same parent company, or for any non-hockey revenue). The Kings' 25% share of premium seating and building-level sponsors likewise pales, especially since the remainder goes to other entities in the overall operation that are owned in whole or in part by the same parent company. It goes on and on -- lease payments to the company that owns you, debt service to the parent company for cash outlays to (in part) itself, parking, etc.
This is why billionaires and near-billionaires have invested in sports franchises, including NHL teams. Phil Anschutz wasn't after a mere hockey operation in L.A. Neither was Steve Ellman -- Ellman bought the centerpiece of an extremely ambitious real estate development that will never be credited to the Coyotes (and if it goes bust, it will not be because of a couple of million either way in operational gain or loss by the Coyotes). The Dolans weren't after a hockey operation when they got the Rangers -- they wanted a regional sports network and the content it fed to their cable systems, content monopolizing non-NFL sports in the New York market before the Yanks defected. Jeremy Jacobs, used to selling food for many multiples of its true value in airports, amusement parks, arenas, and the like, wasn't after a hockey operation, he wanted a captive audience willing to double, triple, quadruple his profit margin on food sales (among other things). The oil barons who own the Flames and let their front man cry poverty aren't angry that they can't get a deal like the one the SEA proposed on behalf of the Penguins -- they're just livid their local, national, and provincial governments refuse to hand it to them on a platter, free of charge, even though they're already being subsidized by the NHL, the lottery, and a tax on visiting players.
The perception that these guys are financial geniuses who suddenly suffered brain lock when they bought a sports franchise is pure bunk (except maybe in the case of Ted Leonsis) -- they know exactly what they're doing. And this isn't even that half of it -- as we'll see in the next installment to the series, the real goal is franchise value and capital gains. Even Ted Leonsis is hip to that!