In a recent issue of The Hockey News, Bill Daly defended the Arthur Levitt report by asking all critics to read it first. Perhaps Daly should've asked his boss Gary Bettman to read it first -- Bettman, in the news conference introducing the report, said, "Actually, we thought the percentage of gross revenue taken up by player salaries was 76%, he [Levitt] said 75%."
Actually, he said no such thing. Levitt said 75% of net revenue, not gross revenue, goes toward total player costs, not just salaries. These are significant differences. What the NHL calls net revenue (a measure it invented all for itself that comes closest to what everyone calls gross profit) is gross revenue net of direct costs -- except for player salaries, as direct a cost as there is for a hockey operation. Other costs, such as travel expenses, insurance, social security, and the like, make up part of the 75% Bettman incorrectly called "player salaries" -- Levitt even includes minor league salaries, which would be fine if minor league revenues were included, but they were not.
Actually, I take it back -- Levitt didn't write "gross revenue" but he did say it. When asked quite plainly during the press conference introducing his report, "Can you tell me what the gross revenues of the League actually equal," Levitt responded, "two billion". But he probably just misspoke in the heat of the Q and A.
And the very next question? "Can you tell me what comes under the universe of player costs? I assume that's more than just what they are paying in salary." Deferring to his lieutenant Lynn Turner, the response was, "salary and bonuses, benefits and other payments including pension benefits, CBA monies, those are the type of costs that are all included in the player costs." No mention of travel expenses, insurance payments for injured players, minor league salaries, NHL award payments (that's part of what he meant by "CBA monies") -- those might have prompted additional questions.
The truth is, the NHL doesn't want anyone to read the report, and doesn't expect anyone to. The whole world parrots their net revenue of $1.996 billion, player costs of $1.494 billion, and the 75% ratio between the two without understanding of what those terms mean. The NHL even created its own web site for CBA issues that quotes Daly's letter to THN challenging critics to read Levitt's report, the transcript of Bettman's introductory press conference with its misstatement about player cost ratio, the transcript of Levitt's introductory press conference with its misstatement about gross revenues, and the full report itself.
The NHL attempted to bolster its case for a salary cap by hiring former SEC chairman Levitt to audit the league's finances for 2002-03. Despite Bettman's misreading, Levitt did indeed bolster the NHL's case, reporting $273 million in operational losses, additional losses of $100 million in interest payments (a non-operational cost), and a player cost ratio he claims is out of whack with other leagues.
That's $273 million in operational losses -- not true earnings after accounting for interest, tax, depreciation, and amortization (except for the $100 million selectively reported for one type of interest) -- for hockey operations as stand-alone entities, not including the joint operations at least 22 teams enjoy with related business entities like arenas, other sports franchises, and media networks. And that's 75% of net revenue of nearly $2 billion (aka gross profit), not gross revenue, going for total player costs, not just salaries.
Net revenue is not a term you will find in any accounting glossary. The closest you'll come is net sales, allowing deduction for returns, discounts, and undeliverable merchandise from gross revenue. Gross profit, the closest accounting term to the NHL's net revenue, is net sales minus the actual cost of goods sold -- for a hockey operation, the cost of food sold by concessions, for example. The NHL goes beyond that, deducting every direct cost from gross revenue, not just cost of goods sold (to extend the concession example, the cost of labor).
Look at any financial report for any company in the world, and you will not see anything resembling what the NHL calls net revenue (you'll find reports that show net revenue in the sense of net sales). Every other company in the world wants to maximize revenue, and then account for cost, not understate revenues and overstate a single expense category, as the NHL does for public consumption (their actual books have still not been scrutinized in full by anyone, including Levitt).
No surprise, despite his so-called independence, that Levitt came within $12 million of the league's own loss declaration and within 1% of its player cost ratio. But me, I'm a diehard skeptic, especially when nearly a hundred owners each worth hundreds of millions or billions of dollars cry poverty over less than $300 million -- less than the total amount they kicked in to help themselves weather a lockout. So I read the report, in detail (even before Daly exhorted me to -- my article originally started with the sixth paragraph, the others prepended in response to Daly). And I read other documents the report refers to, such as the NBA and NFL Collective Bargaining Agreements (CBAs).
And I hate to say it, but I come away believing Levitt has performed a conscious, if completely legitimate, sleight of hand, designed first, last, and always to support the NHL's claims, not test them.
That takes us directly to the pivotal issue of independence. "The Commissioner requested that I perform an independent review of the NHL's combined Unified Report of Operations (URO) for 2002-03," writes Levitt early in his report, "[and] to advise the Commissioner and the Board of Governors whether the URO results reflect a comprehensive and accurate statement of the financial results for that season." Requested and paid for by the NHL to prepare a report for the NHL -- in one sense, that precludes by definition any claim of independence, but it may not be a material violation of the essense of independence (to use one of Levitt's favorite words, "material") if the NHL asked him for a truly honest audit that it would not attempt to influence or otherwise interfere with.
As if to demonstrate how truly independent he was in a way a lay person could understand, Levitt emphasized that he was paid his full fee of $250,000 up front, so payment could not possibly be contingent on his results. OK, sounds good. On the other hand, Levitt never questioned his assignment, never used his independence to go beyond the scope of his assignment -- payment was after all contractually tied to completing his assignment, regardless of when it was tendered. And one could argue (as some have -- including Levitt himself) that an auditor's continued employment depends on delivering the results his employer wants.
"My assignment," Levitt dutifully reported right up front, "was to make findings and reach conclusions as to whether the [URO] instructions account for relevant revenues and expenses associated with operating a professional hockey franchise in the NHL [and] whether member clubs accurately reported information requested by the UROs; whether related company income is reasonable for a professional hockey franchise [and] similar to treatment in Basketball Related Income [and] Defined Gross Revenue, as defined in the NBA and NFL collective bargaining agreement[s]; whether player costs and revenues [are] consistent with reasonable and sound business practices in this industry."
His conclusions: "It is my opinion that the instructions governing the URO adequately and appropriately account for all revenues and expenses associated with operating a professional hockey franchise in the NHL and that teams accurately reported information requested by UROs; treatment of related-party income reasonably measures revenues and expenses and is similar to measures used in the NBA in calculating related-party revenues it shares with players; player costs and revenues [are] inconsistent with reasonable and sound business practices (player costs of $1.494 billion or 75% of revenues substantially exceed the NBA and NFL as set forth in their collective bargaining agreements)."
[I've telescoped some excerpts to save space, but I haven't created any "material" differences in what Levitt wrote -- read the report for the full text.]
Levitt did not say up front (though he did later) that in getting from his assignment ("whether the instructions governing the URO account for relevant revenues and expenses") to his conclusions ("the instructions governing the URO adequately and appropriately account for all revenues and expenses") he took the 2001-02 URO and corrected deficiencies before allowing the NHL to send it out! He was not actually being deceitful in omitting the statement, "and they are in fact adequate only because I corrected inadequacies from the prior year," but he did skip a material stepping stone.
Further, even when in revealing that he made modifications ("the NHL at our request clarified and modified the 2002-03 URO instructions prior to their issuance to the teams"), he failed to provide material revelations or qualitative judgements about the 2001-02 instructions or results -- after all, that was not part of his assignment.
It was not part of his assignment -- that is ultimately the failing of this report, one that undermines any credibility one can place in his results, even if they are accurate. If he was truly independent, why stick so meticulously to his assignment? Oh, wait a minute -- I take it back. He did go beyond the scope of his assignment in correcting the deficiencies of the prior year's URO in order to make sure he would reach the desired conclusion of said assignment. But he did not go beyond its scope and share the results of those highly relevant deficiencies. Curious!
But wait! He didn't just correct deficiencies in the 2001-02 UROs for 2002-03, he also corrected inadequacies in team reports for 2002-03. "During the course of our review, modifications were made to the teams' treatment of certain revenues and expenses. These modifications are included in the $273 million operating loss reported in the combined URO." He never spelled out those modifications. And yet, despite having to modify team reports, he still concluded that teams complied with the URO instructions. In this case, he can't even make a semantic case to support his self-fulfilling prophecy, that the reports were in compliance after his modifications, as the assignment was to evaluate compliance, not to correct non-compliance.
In the final analysis, there is no escaping this, as fully disclosed in the report: the URO instructions given to him were NOT adequate, so he corrected them before sending them out, and teams did NOT comply with the instructions, so he corrected their reports. And yet he stated unequivocably right on page two, "It is my opinion that the instructions governing the URO adequately and appropriately account for all revenues and expenses associated with operating a professional hockey franchise in the NHL and that teams accurately reported information requested by UROs."
And he repeated these conclusions in his, uh, Conclusions: "The instructions governing the reporting of the financial information by the teams through the URO adequately and effectively direct the team to report all revenues and expenses associated with operating a professional hockey franchise in the NHL. The teams have, in all material respects, accurately reported the financial information requested by the UROs."
This is what the NHL holds forth as the ultimate in credibility in support of their case. This is what the NHL tells us to make sure we read before we dare criticize their case. Am I missing something, or would George Orwell and Ayn Rand have a field day with this?
Were Levitt's "modifications to the teams' treatment of certain revenues and expenses" sufficient to overcome all inadequacies in team reporting? Doubtful, because he said he "obtained and read the URO Report and audited financial statements for three teams we selected for the 2002-2003 season [and] we visited each of those three teams and discussed the preparation of the URO." Other steps were taken to verify other teams' reports, but only these three unnamed teams were verified in full.
For other teams, Levitt relied on audit reports and telephone calls to team financial personnel. "We inspected the audit workpapers of the independent auditors for four teams we selected for the 2002-2003 season," Levitt wrote -- only three teams put through a thorough verification process, and now only four more unnamed teams put through this secondary verification measure. Despite stating that "revenues and expenses reported in a team URO may be different from revenues and expenses reported in the team's audited financial statements," Levitt relied on audit reports (usually reliable, except in rare cases like Arthur Andersen's audit of Enron) for the rest of the teams.
Well, not actually the rest of the rest: "Four teams did not have audited financial statements. For each of these teams, [we] visited the team and performed on site procedures. We were not engaged to and did not perform an audit. Had we performed additional procedures, other matters might have come to our attention that would have been reported. The sufficiency of these procedures is solely the responsibility of [the teams]. Consequently, we make no representations regarding the sufficiency of the procedures." Two of the four teams were Ottawa and Buffalo, who had an excuse -- bankruptcy. The other two are curiously unnamed.
But Levitt concluded nonetheless that teams complied with the URO instructions, and we have to believe him. Right? Read the report -- it's all there in black and white.
Levitt said three unnamed teams, plus Buffalo again due to bankruptcy, failed to supply financial reports for 2001-02 (he doesn't call them audits, so we can assume audited financials were not required until Levitt asked for them in 2002-03) or supplemental information responses. The supplementary reports are key: "The League office," wrote Levitt, "periodically makes supplemental information requests of teams for data to support the URO and test teams' compliance." Three teams failed to supply these reports, putting them in non-compliance with a random test of compliance! Not all teams are tested, and at least two teams without bankruptcy issues subjected to the test failed to even comply with the test, let alone pass it.
Levitt reports: "Of the 26 team audited financial statements received, 23 were unqualified and three had 'going concern opinions'." To characterize an audit as "unqualified" is the best opinion an auditor can give. On the other hand, a "going concern opinion" means the business has serious financial problems jeopardizing its ability to continue as a going concern. Even if we overlook the possibility that the three unnamed teams with going concern opinions may be part of healthier parent companies and assume instead that they surely include troubled stand-alone operations like Pittsburgh and Edmonton, we are left with five franchises (including Ottawa and Buffalo) in trouble -- just about the amount most observers feel the NHL overexpanded by, even if those observers don't necessarily believe the NHL should contract.
But strike Buffalo and Ottawa from the list -- both, having suffered financial problems unrelated to player costs, are back on their feet with new ownership. And if indeed Pittsburgh and Edmonton are among the troubled going concerns, they too are not suffering from salary issues but from arena revenue deficit (they are among the small minority of clubs who don't operate their arena). Levitt could not make any findings or draw any conclusions in this area -- he was not asked to investigate whether teams play in or have operational control of state of the art venues, whether this is similar to NBA or NFL venue affiliation, or whether it is sound business practice within the industry to have a team play in an antiquated arena it does not own or operate.
While he wasn't assigned the task of seeing how a hockey operation fits within a larger concern that might include real estate, cable networks, arena operations, and other sports operations, Levitt was assigned the task of separating larger concerns and other related business entities out of a hockey operation -- an assignment that directed him to evaluate a specific economic model without allowing him to analyze alternative models, even those that exist in the real world of 21st century sports.
His conclusions on related party revenue allocation and player cost ratio therefore betrayed the same bias. Levitt did not divulge whether related party revenues are allocated properly by NHL teams, only that, strictly following his assignment, aggregate results were not materially different than they would've been had teams applied the NBA method or a standard method of his choosing. I say "strictly" following the terms of his assignment because he stated that he was tasked with looking at the "combined URO" not individual team UROs. Admitting readily that each team operates under differing circumstances, he nevertheless dismissed the opportunity to make sure each team reported affiliate revenue correctly and instead compared overall results to two arbitrary aggregates.
Similarly, with respect to player cost ratio, he failed to disclose serious material issues in his comparison -- that the NBA and NFL used drastically different revenue measures than the NHL (isolating player-generated revenue), making the exercise apples and orangutans (never mind apples and oranges), that revenues and player costs in the URO were not defined consistently (revenues are net of many direct costs, player costs include non-salary expenses and non-NHL players, skewing the ratio upwards to 75%), and that he never drew conclusions as to why player cost ratio is not "consistent with reasonable and sound business practices in this industry", i.e. because NHL owners and GMs failed to follow "reasonable and sound business practices" -- the single most relevant conclusion one can possibly draw in evaluating the economic problems of the NHL.
This latter issue is so "material" that it bears repeating and emphasizing, especially in the context of Levitt's putative independence: Despite the issue of "reasonable and sound business practices" having been explicitly included in his assignment, Levitt drew no conclusions on this subject whatsoever, letting his highly flawed calculation of the ratio of player costs to revenue stand alone as the primary cause of economic illness in the NHL. Just how independent was he, then, in validating the NHL's prima facie case for a salary cap on a flimsy and misleading basis without ever even attempting to analyze the NHLPA's prime explanation of salary escalation?
Compounding the matter, Levitt commented, during the press conference presenting his results (not to the board of governors, as per his assignment, but to the press and the public) that the causes for salary escalation are not even relevant. "I am reporting to you what the consequences are going to be regardless of how they get there," he said when asked whether teams were forced to overpay players. "They are on a treadmill to obscurity," he added (now famously). How in the world can one solve a problem without considering its root causes? "[If] you are asking me if they raise the ticket prices, if they close franchises," he said during the same discussion, "I am not prepared to analyze that. I can just look at what I see."
And all Levitt could see, as he repeated over and over again, is that player costs are too high -- even though he knew he overstated player costs and understated revenues. "Did you find," he was asked at his press conference, "any mechanism that forces owners to pay out 75% to players?" Levitt answered, "No, the nature of this business has been such that these salaries had been paid." So why didn't he, as per his assignment, pursue this issue? The difference between forcing a salary cap on players vs. adopting sound business practices is crucial. From this fan's point of view, it obviates the need for owners to impose a ruinius lockout (at least a lockout of players -- a lockout of GMs, of some GMs anyway, might do the trick).
Let's go into detail: The combined URO results reported by Levitt showed $1.047 billion in gate receipts net of direct taxes (like sales tax), the one allowable direct cost deduction ("gate receipts" rather than "ticket sales" means allowable deductions under the true accounting term "net sales" -- returns of unused playoff tickets and ticket discounts -- are already netted out, as they should be). And yet, when I multiply NHL attendance reports by average ticket prices reported by Team Marketing Report (TMR), I get $1.097 billion, a $50 million difference. That may not seem like a lot, but this 5% difference in gate receipts adds up to 18% of operational losses and would take player cost ratio down to 73%.
And the TMR averages do not include a gate receipt the URO does include -- the ticket value of luxury suites (the price of entry, excluding luxuries like open bar and buffet for example). No data is available to calculate this figure, but if Madison Square Garden assigned its top ticket price of $154.50 to a luxury box seat, revenue for over 1,000 such seats would add up to at least $8.5 million a season for the Rangers. Boston's 108 18-seat suites, at the average regular season club seat ticket price of $150, plus $165 for three playoff tilts, would've brought in $13 million. Vancouver, with two to three times as many suite seats as MSG, and a top ticket price of around $100 US that should be applied to 2,000 of those seats, plus another 500 with a lower stated ticket value, would've earned them at least $10 million per regular season and another $2.5 million for the 2002-03 playoffs.
That's three teams, just three teams, that would have generated $30-35 million in 2002-03 gate receipts not included in the TMR-based calculation of ticket revenue, a calculation already $50 million more than the URO without these luxury suite ticket revenues.
Look at it another way: Levitt's total gate receipts, including as they do the ticket value of luxury suites, divided by NHL attendance, suggests average ticket prices of $43.45 for the regular season and $67.08 for the playoffs. The regular season average is $1.15 less than TMR's $44.60 regular season average that doesn't include luxury suites. How can that possibly be? The playoff average is a one-third premium over TMR's regular season average price for playoff teams (based on playoff games hosted) -- a regular season average that still doesn't include luxury suite ticket value. How many of you fans out there paid less than a one-third premium of your regular season ticket price for your playoff tickets last season?
We have a problem, Houston. And that problem is that teams can assign whatever ticket value they want to a seat in a luxury suite in completing the UROs. Levitt's assignment was not to question that, just to make sure it was reported -- he had to force at least one team that controls both a team and its arena (Chicago) to report any luxury suite revenue at all. And remember, we are only dealing with the ticket value of luxury seats -- total revenue received from suites far exceeds that figure (data is not available, but the Rangers' VIP program is a good gauge -- suite-like amenities raise the price of a $154.50 seat to $550). No wonder luxury boxes are one of the first items mentioned when the NHL is accused of underreporting revenue -- and no wonder it is one of the first things mentioned when teams playing in antiquated arenas ask for new buildings.
I cannot be as precise in analyzing the combined URO result of $449 million in broadcasting and new media revenue -- league-wide TV rights fees plus publicly available local TV rights fees for 12 teams add up to $403 million (my data is not skewed toward the top end of the scale -- I have data for four top teams, but not four others, and I have four of the lowest fees too). I have no data on playoff rights fees, pay per view, satellite, radio, or internet revenue -- the UROs include them all.
My information is most assuredly gross revenue -- the URO by contrast allows direct cost deductions for talent (i.e. announcers), production, and travel, among other items. Silly me, but I thought these costs were more appropriately incurred by the production entity (the network) since they are the direct costs of producing a telecast, not producing a game. How they may be accounted for by a team not affiliated with its broadcaster is one thing -- that is spelled out in their contract and represents hard dollars. But a team affiliated with its broadcaster (Rangers, Leafs, Bruins, Flyers, Kings, Thrashers, Sabres when they entered into their contract, Avs next year), that's a different story.
Either way, these costs should not be excluded from the calculation of player cost ratio -- or else player costs should be netted out of gate receipts as a direct cost the same way announcers are netted out of broadcast revenue. In that case, the ratio would be zero! Handling these types of cost items in a contradictory (never mind inconsistent) manner simply proves that we are witnessing an exercise intended strictly to isolate and inflate the impact of player costs.
Even allowing for exclusion of direct costs, it is inconceivable that the amounts I cannot locate for local rights fees for 18 teams, plus five revenue categories for all 30 teams, add up to no more than $46 million plus the direct costs for local broadcasts of 12 teams and NHL-wide TV contracts, especially since some of the local rights fees I don't know are for big-market teams like Philly, Detroit, Colorado, Chicago, Los Angeles, and San Jose. These numbers don't add up. There is some creative accounting in place, Levitt allowing direct cost deductions to go unchallenged and unspecified -- how in the world does he expect anyone to take his numbers to the bank if are they not enumerated?
There is virtually no publicly available data on other revenue items, which the URO lists as arena revenue (advertising, premium seating net of ticket value, concessions, merchandising, parking) and other revenue (non-advertising promotion and sponsorship, governmental and league subsidies, NHL Enterprises merchandising) -- subsidies are known, and that's about it.
Some of these revenues are allocated between related entities -- with arena operators. Others are net of direct costs -- for example, publishing cost of publications; food, supplies, and labor for concessions; commissions and fees for advertising. Silly me again, thinking these costs should be bumped up against gross revenue the same way player costs are, since they are all part of a hockey operation. By deducting them before declaring revenue, the percentage of costs attributed to players is by definition overstated and biased against players. Plain as day, folks.
The combined URO report conspicuously omits line items for direct cost deductions -- so conspicuously that it makes it impossible to calculate the true value of Gary Bettman's percentage of gross revenue (a value the NHL keeps scrupulously hidden) that pays player salaries.
Player salaries -- there's a good one. Bettman said "player salaries" in referring to the magic 75% ratio, and everyone I talk to assumes the same. But Levitt is clear on this and even breaks the numbers down -- his 75% includes all player costs, not just salaries. Insurance, per diem expenses, social security, NHL trophy and playoff awards, worker's compensation, pension plan -- all player costs, yes, but routine benefits, not salaries, none negotiated between player agents and GMs. The most egregious inclusion here is per diem -- this is a form of expense reimbursal for players and should be counted as an operational cost, not a player cost. For those of you who travel for work, can you imagine if the amount you were reimbursed for travel expenses was included in your stated salary?
Here are a couple of interesting bits of accounting in the URO -- you have to read the instructions carefully to figure these out, but there they are nonetheless. NHL awards (payment for winning playoffs and trophies) are counted as player costs -- within salary, in fact, even though they are paid by the NHL, not by teams, only to winners. The amount is then deducted from team operational costs as a credit! Player costs go up by this amount, team costs go down by this amount, and the percentage of player costs to net revenue is as a result overstated by double the amount.
Similarly with insurance reimbursements for injured players -- salaries (Pavel Bure's $10 million for instance) remain in full as such, while insurance reimbursements are deducted from medical costs as a credit. Medical costs fall under "other player costs" along with player acquisition costs (foreign federation transfer fees) and moving expenses -- "other player costs" are not included in the 75% player cost ratio. So player salaries and team revenues are unchanged, but team operational costs are understated, once again skewing the player cost percentage upward.
Likewise minor league salaries -- all minor league player salaries and other subsidies made by NHL clubs to minor league affiliates are inexplicably counted as NHL player costs (net of any direct payments NHL clubs get back as part of their minor league agreements). But all other minor league operational revenues and expenses are explicitly excluded, leaving the URO with a gross expense in player costs, perhaps reduced for some teams by what should be counted as revenue. Either way, player costs are overstated once again since the URO logs a cost element without logging its corresponding revenue elements, even though there are indeed corresponding revenue elements.
Given these three examples of overstatement in player costs along with the two possibilities of underreported revenue cited earlier, and the inanity of comparing a gross figure (total player costs) to a net figure (net revenue, not even a true accounting aggregate), recalculating the percentage may not pay. Nevertheless, as a point of reference, if we were to recalculate based on the only one of these things Levitt broke down for us -- player salaries instead of total player costs -- the ratio goes from 75% to 71.6%. I think it's safe to say that if we knew the other amounts -- direct costs that should not have been netted out of gross revenue, NHL award payments, insurance payments for injured players, and minor league salaries or revenues -- the ratio would drop like Robert Plant, Jimmy Page, John Paul Jones, and John Bonham.
Beyond that, the issue of revenue allocation is one of the stickiest issues in this whole debate. How much is appropriate for one business to allocate to its sister operation? Especially when, as is common, the relationship is bilateral -- a hockey team pays rent to the entity it shares arena-wide revenue with. Really, the only sensible way to analyze this situation is in the very context that owners get into it in the first place -- by looking at the entire business proposition. But Levitt wasn't instructed to look at it that way -- he was told to do the exact opposite, to extricate the two.
Levitt's assignment was simple -- to determine if allocations as reported by NHL teams were reasonable, and whether they were consistent with those defined in the NBA and NFL CBAs (though he instantly dismissed the NFL for not having analogous related party income). Levitt made his assignment even simpler -- he chose not to test each team for reasonableness: "Individual team allocation methods vary, designed by each team based on its unique circumstances. [For] the combined URO for the NHL, such individual differences are not relevant for purposes of our assignment [my emphasis]. What is relevant is whether, on aggregate, the allocation of revenues and expenses would change significantly if they were reallocated using a standard methodology."
Levitt's concept of what is relevant -- at least, what he found relevant "for purposes of [his] assignment" -- is frankly irrelevant. That is the recurring theme of this report -- the assignment -- the only variations favoring the NHL's case, as already demonstrated with the instructions and team reports he corrected. A truly independent auditor, not concerned with the artificial constraints of an assignment that directly suggests its conclusions, might have decided that variation in circumstance demanded an individualized test of allocation methods to ensure they met reasonable standards, not an aggregate test that excused individual differences because they happened to come close this one season (though we have only Levitt's word that they were "not materially different" as he never provided data to back his conclusions and admitted that "we were not provided with the audited financial statements for the arenas of 6 of the 22 teams [Ottawa, Buffalo, and four others unnamed] that have affiliated arena entities").
He and his staff seem to have expended a bit of energy coming up with a standardized test that allocated arena-wide revenue based on paid attendance at hockey vs. non-hockey events. He made the reasonable argument with respect to advertising and promotion that each pair of eyes and ears was the proper unit to consider rather than number of events or gross receipts. For luxury box revenues, perhaps gross receipts would have been a better benchmark, since they would've been properly allocated by event value (some concerts being hotter properties than other events, including hockey).
But he does not look more closely at individual arena use to make sure his benchmark is appropriate for individual teams -- he does not consider whether non-hockey events received any allocation of arena-wide revenue at all -- if the dog show, Sesame Street on Ice, and Bruce Springsteen received no share of advertising or luxury box revenue because they paid an arena rental fee and handled the rest of their take on their own, counting their paid attendance against the hockey operation is not proper.
And even where allocations were handed out, there may have been more appropriate benchmarks than attendance -- for example, in the case of advertising, the measure used by those who advertise: Demographics. You think Budweiser buys fixed arena signage hoping to reach the audience for Sesame Street on Ice? Arthur Levitt apparently thinks so, since every three year old and his mom attending that show counts equally with every drunken hockey rowdy up in the blue seats. Demographics is so prevalent, the data so readily available, just type "advertising demographics" into Google and you get everyone's (and their uncles') demographics -- including the NHL's at NHL.com!
Levitt's assignment included looking at the NBA and NFL to see how they handle related party revenue allocations. Nothing could be more straightforward than the NBA's method: 40%. Still, Levitt was able to equivocate -- "We applied our interpretation of the NBA's BRI standards for treatment of suite, fixed signage and naming rights revenue to the NHL data in order to estimate what these NHL revenues would be by applying the BRI standards. We found the NHL's treatment of these revenues in the combined URO to be similar and the amounts reported in the combined URO not materially different from the results of our calculation."
He could've just said, "This is the amount we applied to each category as treated by the NHL," and that amount should've been 40%. But reading his contorted, ambiguous prose, one is left with no doubt that he applied the NBA standards literally -- the NBA excludes arena naming rights, for example, so he no doubt applied a 0% allocation even though the NHL requires a reasonable amount to be credited to the hockey operation; and the NBA's CBA, recognizing how difficult it is to extricate the Knicks from the combined finances of Madison Square Garden, sets their allocation equal to the Lakers', so no doubt Levitt did the same with the Rangers and Kings, even though the Rangers receive three or four times the Kings' local broadcast rights fees.
He applied the NBA's team-level standards to each NHL team, but evaluated the impact on overall URO results rather than correcting or reporting individual team aberrations. After all, his assignment directed him to only look at combined results. What this does, for one thing, is fail to take into account what Levitt reported is the case in some NHL markets, where hockey is the main operation within an affiliated arena (especially in Canadian and small American cities). It is a conscious game of taking from Peter to pay Paul (from arenas hosting mainly hockey events to arenas that don't allocate enough revenue) to make the overall results look good, without ever providing the details of how much Peter is paying Paul.
The NFL case was even worse. Levitt was correct, affiliated party relationships in the NFL are not analogous to the NHL (or the NBA). But given that he used the NBA's treatment of some items like arena naming rights fees rather than the NHL's, shouldn't he at least have considered the NFL's treatment, even if not necessarily relevant? That would've meant allocating ALL relevant revenues to the NHL operation -- the NFL's allocation percentage is 100%. So Levitt dismissed it rather than compare NHL allocations to it. You have to read the NFL's CBA to figure this out -- Levitt doesn't go into detail unless they support his case.
No measure is perfect -- that was not Levitt's shortcoming in this portion of his assignment. Where he fell down on the job was in failing to analyze on a team basis whether allocation methods were reasonable. We know he looked at them because he told us anecdotally the situation of two extreme cases -- "In one instance, a team plays in an arena owned, managed and controlled by an affiliate and because the majority of the arena's business is related to hockey, the team's URO includes a disproportionately high share of suite and fixed signage revenues when compared to an allocation done using paid attendance and a disproportionately low share of fixed building costs. Conversely, in another instance, because the arena is owned by an unaffiliated third party, the team does not own or receive certain revenues such as building naming rights and certain suite premiums. These are therefore properly excluded from the URO."
Finally, there is the all-important issue of player cost percentage. Levitt's final assignment was to determine whether the NHL ratio is consistent with "reasonable and sound business practices in the industry." While never once analyzing the reasonableness and soundness of business practices among the NHL teams that hired him, Levitt stated flatly that the NHL's percentage of gross player costs to net revenues is inconsistent with those of other sports leagues -- even though he never provided comparable percentages for other leagues (or any percentages at all), even though he was careful to say (but not too obviously) that he compared them to percentages "as those relationships are set forth in their collective bargaining agreements" -- relationships which most definitely are not player costs to net revenue.
So what are we, in the final analysis, supposed to make of all this? Bill Daly tells us to read the report before criticizing it, yet Gary Bettman misquotes the key finding in the report, which is then universally parrotted by people who clearly did not read the report. Daly tells us that at minimum the report should lay to rest the NHLPA's claim that the NHL's finances are unaudited, even though Levitt is clear in his report that not every team's finances were audited and that team audits are not likely to match the UROs, and is clear in his overall philosophy that auditors tend not to be as independent as they are supposed to be in order to ensure their future employment.
Levitt tells us at least twice, with no equivocation, per his assignment, that the URO instructions for 2002-03 were adequate and the teams complied with them, but tells us too that he corrected inadequacies in the 2001-02 URO before sending the 2002-03 URO out to the teams, and that he corrected results reported by the teams. Levitt tells us that he "would neither underwrite as a banker any of these ventures nor invest a dollar of [his] own personal money in a business which appears to be heading south."
And yet, five teams have changed hands during or since the doom and gloom season his report covers, five others have been bought since 2000 (salary escalation already well under way by then), and an eleventh team (Toronto) has had significant changes to its capital structure and controlling interest due to a major equity transaction. Daly tries to explain that away by saying, "Recent investors in NHL clubs have invested at significantly discounted (even depressed) values." In other words, they have done what smart investors always do -- buy low, hoping to one day sell high. But the former SEC chairman, stockbroker, and economic development chief, who should know about the concept of buying undervalued assets, wouldn't "invest a dollar" in this business.
It's like watching clothes spin endlessly in a dryer -- as long as no one actually stops the spin to take a cold hard look at the laundry in the harsh glare of the public eye, the truth remains safely hidden and the spinmeisters have done their job.
