Published in the USA Today
March 20, 2005

In his article, Kevin Maney credits HockeyZonePlus.com as a source.

Article below and also available on the USA Today website

Amid canceled season, NHL faces financial meltdown
By Kevin Maney, USA TODAY

In 1999, Ted Leonsis, an America Online officer worth hundreds of millions of dollars, knowingly made the stupidest investment of his life.

He put his money into the National Hockey League, buying the Washington Capitals for $85 million — "cash, because it was unfinance-able," Leonsis says. The league's business model was already so broken that Leonsis planned to lose $15 million a year for the next five years. "And we've lost more, so we're ahead of plan," he says with gallows humor.

In the postmortems to the NHL's canceled season, the story of how the NHL has come unraveled as a business has gone largely untold. Understanding that history — and avoiding the same errors — could be crucial if the NHL hopes to re-emerge as a healthy sports league.

The NHL under Commissioner Gary Bettman — in office since 1993 — provides a lesson for any business about the pitfalls of growing too fast and getting painted into a strategic corner. In short, the NHL is an 88-year-old league that wound up like a dot-com disaster.

Bettman ultimately lost the entire 2004-05 season — the equivalent of, say, United Airlines shutting down for a year to try to get its costs in line. The NHL canceled its season in February, after talks with the players' union broke down. Bettman and the owners felt it was the only way to fix the league's financial system. It's the only time in history that a major sports league has shut down a whole season.

By Ryan Remiorz, AP file Jarome Iginla of the Calgary Flames scores against the Tampa Bay Lightning in the 2004 Stanley Cup.

The league acknowledges that owners have lost $1.8 billion in the past decade. The market value of teams — the closest the NHL has to a stock price — is deteriorating. After this season was called off, one team, the Mighty Ducks of Anaheim (Calif.), was sold for a reported $75 million. Five years ago, Forbes estimated the team to be worth $118 million.

The players' union refused to renegotiate its collective-bargaining agreement once the league's finances spiraled downward. That's put the union in a position similar to what unions face at major airlines, which, like the NHL, have an unsustainable cost structure, say academics who've studied the league.

Just as airline unions eventually had to give in to wage cuts to keep the airlines alive, the NHL players' union will probably have to do the same. The union has offered a 24% rollback in existing contracts, though that's now off the table.

"On the owners' side, their economic decisions have not been solid ones," says Ralph Anzivino, sports law professor at Marquette University. At the same time, he says, the players' union "is going to ruin hockey if it continues down the path" of refusing to accept a new salary system.

There are some surprises in the business and financial reasons why the NHL wound up in turmoil. For instance, the NHL has claimed that player salaries quadrupled during Bettman's reign. In fact, the salary burden for NHL teams is even harsher. To remain competitive, top teams paid up to seven times as much in salaries in 2003 as in 1993. The gap between rich and poor teams, and between top-earning and lesser players, has widened considerably in the past 12 years. By contrast, the NFL and NBA enacted salary caps that prevented such outcomes.

Team owners, who are essentially the NHL's shareholders, don't seem to blame Bettman. "There are a lot of people who messed this thing up," says Kevin Compton, an ownership partner in the San Jose Sharks and a top Silicon Valley venture capitalist. He spreads the culpability among the NHL front office, owners and the players' union.

But others who look at the business side are less forgiving of the commissioner. "A lot of people are complicit, but Bettman is the lightning rod for everything that's wrong with the sport — as a CEO should be," says David Carter, professor of sports business at the University of Southern California. "That's what happened to (ousted Hewlett-Packard CEO) Carly Fiorina."

The NHL declined requests to interview Bettman for this story. But in news conferences, the commissioner has defended his actions and has not avoided responsibility for the health of the NHL.

"We are, on all sides of hockey, accountable for where we are," Bettman told a roomful of reporters in 2004. "The issue is going to be, do we fix it? If we don't fix this, I want you to hold me accountable."

A look back

In 1993, Bill Clinton took office in the White House, Intel made its first Pentium chip, and companies were getting excited about the "information superhighway" — a precursor to the Internet boom.

Hopes swelled in the NHL. The league had two superstars: Mario Lemieux and Wayne Gretzky. It had two new superstar owners. Walt Disney committed to create the Mighty Ducks, and Wayne Huizenga, who built Blockbuster, would launch the Florida Panthers.

That February, the NHL got a new chief executive: Bettman, who had been the No. 3 at the NBA. He wasn't a hockey guy — he was a businessman.

"If you run the business aspect well, the game will take care of itself," he told The New York Times, referring to hockey as an "entertainment product." Attendance was solid, averaging about 14,000 a game. Players made an average $467,000, and those salaries ate up about 57% of league revenue — in line with other major sports leagues. By the end of 1993, the NHL had its first national TV contract in decades, a deal with Fox for $31 million over five years. The Fox deal brought the promise of winning millions of new fans. In June 1994, Sports Illustrated ran a cover story headlined: "Why the NHL is hot and the NBA is not."

The one cloud on the NHL's otherwise-glowing horizon: The league's contract with the NHL Players Association had run out. Bettman, on behalf of the owners, had to negotiate a new one.

That didn't happen. The owners and players found themselves in a stand-off, then in a lockout. The 1994-95 season — Bettman's second full season with the NHL — was shut down for 103 days until a deal was struck. The NHL played a shortened season.

Those 103 days were a killer — a precursor to all that would go wrong in the next 10 years.

"We thought the NHL was poised for growth — nothing but upside," says Fox Sports Senior Vice President Lou D'Ermilio. "Then, right out of the chute, they had the lockout. It took all the wind out of the sails."

Once the season resumed, Fox tried to make the game look better on TV: robotic cameras, graphics, even the infamous technology that made the puck glow on screen.

While core fans apparently forgave the lockout and returned to watch games live, Fox's TV ratings were a tepid 2 that first year, or about one-fifth the rating of NFL games on CBS and Fox on Sunday afternoons.

At the end of the Fox contract, Fox's hockey ratings averaged 1.4. Since then, ratings for hockey on other networks have only worsened.

The new union contract Bettman negotiated on behalf of the owners would come to haunt him. The owners, fearing a lost season, caved on issues that would lead to runaway salary inflation — which the owners would worsen with their spending practices.

A not unexpected development

NHL players and their agents have taken heat for seeming greedy, demanding big contracts. But the players' actions were predictable and utterly typical: They sold their services for as much as possible.

NHL teams had extra money from expansion. The Ducks and Panthers each paid $50 million in expansion fees; the money was split by the existing teams. In 1998, the expansion Nashville Predators would ante up $80 million. Teams also had money from the Fox contract. On top of that, the economy was booming. Arenas were full. Ticket prices could be raised. Corporations leapt in with sponsorship fees.

Teams got a burst of cash, and because of expansion, more teams competed for star players. The contract with the union left open the door to escalating salaries, which shot skyward.

Hockey insiders point to three deals that kicked salaries to a new level. In 1997, the New York Rangers tried to lure superstar Joe Sakic from the Colorado Avalanche with a three-year deal for $21 million. Sakic would get $17 million the first year, up from his $3.1 million the year before. Colorado matched the offer.

That same year, Joe Thornton, a first-round draft pick, signed with the Boston Bruins for the union-contract rookie salary of $925,000. But loopholes allowed for performance bonuses, which boosted the potential value of his contract to $2.4 million that year.

In 1998, the Carolina Hurricanes offered Sergei Fedorov $38 million over six years — a record sum in hockey — to try to lure him from the Detroit Red Wings. The Red Wings matched it and kept Fedorov.

There was no stopping the salary train. By 2003, the Red Wings' payroll would be seven times as much as in 1993, according to the salary database on Web site HockeyZonePlus. In that same period, payroll for Colorado would rise 7.5 times; Dallas, 6.5 times; and Philadelphia, St. Louis and Toronto, 6 times.

Moreover, the payroll gap widened between teams. In 1992-93, the gap between the highest payroll team (Pittsburgh Penguins, $15.2 million) and the lowest (San Jose and Tampa Bay, each $6.9 million) was about double, HockeyZonePlus figures show. In 2003-04, the gap between the highest (Detroit, $77.8 million) and lowest (Florida, $26.4 million) was triple.

The differences sowed discord among owners.

Capitals owner Leonsis says he felt pressure to stay competitive, so he shelled out more for top-tier players, piling up losses.

Officials at teams that couldn't afford to pay more grew angry. In 2003, Edmonton Oilers General Manager Kevin Lowe fumed: "There's a bunch of lunatics out there throwing money away. I'm sick and tired of it."

The discord made it harder for Bettman to fix problems. Top-tier owners, lower-tier owners and players all had conflicting agendas. Bettman approached the union in 1999, 2001 and 2002. Each time, he suggested that the collective bargaining pact be modified because it was hurting the league. Each time, the union spurned him.

"As we got closer to the end, it got more and more difficult, because the problems got worse and worse," Bettman said at a news conference.

"The NHL never unified around a collective definition of success the way the NFL did," says Rosabeth Moss Kanter, a Harvard Business School professor and author. "When things get tough, the temptation is to call it someone else's fault. That starts a destructive downward spiral."

Things were about to get tougher.

Cash rich, for a time

At the end of the 1990s, as the economy roared, the TV deal with Fox ended, and the NHL signed a new one with ESPN for $600 million over five years. It was a fire hose of cash pumped into NHL teams. Add to that $80 million in expansion fees from the next new team, the Atlanta Thrashers. Teams used the money to drive player salaries still higher.

Something was amiss. Even though the NHL had more teams in more markets, hockey couldn't catch on with the mass market. Fox's TV ratings for hockey ended at an average 1.4. ESPN in 1999-00 averaged less than half that, at 0.6, barely a blip on the Nielson ratings. By 2003-04, ratings would slide to 0.5.

The problem, looked at through a business prism, was both the product and the marketing.

In 1999, the Dallas Stars won the Stanley Cup, hockey's championship. In 2000, the champs were the New Jersey Devils. Both teams got there by employing stifling defensive systems. By then, those systems had swept through the NHL.

The game lost the creativity and scoring of the Gretzky-Lemieux era. In 1987, the NHL averaged 7.4 goals per game; in 2003-04, the average was 5.1 goals per game. Even stars such as Brett Hull complained that the game had gotten dull. The league hasn't produced a Gretzky-type superstar with mass appeal since.

The TV networks saw other problems.

Hockey is the only major sport that has a sizable number of tie games.

"The U.S. audience doesn't buy into ties," says Mark Quenzel, ESPN senior vice president.

Beyond that, divisiveness among teams prevented ESPN from offering a consistent TV broadcast. In one team's arena, ESPN would, for instance, be allowed to put a wireless microphone on a player to pick up what he said on the ice. In another arena, the team wouldn't allow it.

"There needs to be more consistency from the league," Quenzel says. "The NHL has to look at the game and say, 'How can it be more saleable beyond our hard-core audience?' "

The league has been reluctant to tamper with the game. NHL hockey has seen few major changes under Bettman. In 1998, the league altered some of the lines on the rink and instituted two referees instead of one. The moves were intended to increase offense, but the changes had little effect on scoring.

"The NHL has to win the casual consumer — get them to try it and come back," says USC professor Carter. But that hasn't happened, he says.

Finally, a meltdown

The NHL's lines crossed in 2002.

Salaries and expenses were skyrocketing. The league was still expanding — to Columbus, Ohio, and Minnesota in 2000-01. Ticket prices kept rising. Teams built new arenas, often adding to their debt. Of 30 NHL teams, 22 have built new arenas since 1993.

Those are all things businesses do in good times: pay higher salaries, spend more, expand, raise prices. But the good times were ending.

By 2002, the Internet bubble had burst, the USA had suffered the Sept. 11 terrorist attacks, and the economy was in a funk. Struggling companies cut expenses, giving up suites and sponsorships.

TV ratings weren't improving. That meant the NHL was heading toward a huge financial blow when the ESPN contract ran out in 2004. No other network wanted to pay for the rights to the games. The league ended up with a revenue-sharing deal with NBC: The NHL and NBC would split the take from a game broadcast, but the NHL would get no money upfront.

The $120 million a year from ESPN could vanish. ESPN has an option, which expires April 15, to pick up NHL hockey for about half what it previously paid. So far, ESPN has not picked up that option.

Revenue growth — fueled by expansion, rising ticket prices and TV income — was about to hit the skids. Though the league says total revenue rose 173% in the past decade, the NHL does not provide a year-by-year breakdown. Most growth probably came before 2002.

Meanwhile, costs kept rising. Salaries ate up 70% to 75% of revenue. "In other leagues, player costs run 55% to 62% of revenue," says Marquette's Anzivino.

According to Forbes, which annually publishes figures on sports finances, the NHL went into the red in 2002, losing $8.2 million in operating income on revenue of $2.1 billion. In 2003, Forbes reports, losses widened to $123.7 million on flat revenue of $2.1 billion.

Two once-vital NHL teams — the Buffalo Sabres and Ottawa Senators — filed for bankruptcy and had to be rescued by the league.

As the Sharks' Compton points out, no one buys a sports franchise for the year-to-year profits, which are minuscule by business standards. Owners are motivated by the prestige and fun of controlling a team, and their financial bet is on the market value of the team. The owners' exit strategy is selling a team for a lot more than it cost to buy. The real crisis for owners is the falling value of their teams. Compton and his partnership paid $147 million for the Sharks in 2002. The Ottawa Senators were sold in 2003 for $92 million. The Ducks just sold for $75 million.

Limited options

Bettman was unable to adjust when the NHL was hit by losses.

"The real world closes up factories if the business is not there," says Stan Kasten, former president of the NHL's Atlanta Thrashers. "The real world cuts workers. But in the world of the NHL — no, we can't do that."

Union contracts prevent cutting the number of players on rosters. If the league shuts down a team, it risks alienating fans in the affected city.

"How do you go in and change things like you do in a business?" Compton says. "There are so many fewer knobs to turn in the NHL, and one of them (the union contract) we don't control."

The NHL had no choice but to face down the union. Mistakes had piled up over a decade: the owners' spending spree in the 1990s; Bettman's inability to manage the league for changing circumstances; the league's inability to improve its product and expand its audience. About the only way out is to get control of player salaries — the league's biggest expense, by far.

Publicly, owners are not acting like unhappy shareholders ready to unseat the CEO. On March 1, the owners met and voted unanimously in support of Bettman.

"Obviously, there's some differences of opinions on different issues," Cal Nichols, part of the Edmonton Oilers' ownership group, said after the vote. "But at the end of it all, everyone understands that we have a job to do, and we've got a person (Bettman) who is very capable of negotiating and looking after our best interests."

The NHL is betting that the man who led them into crisis will lead them out.

"I wish it had been fixed through a better process," the Sharks' Compton says. "Now, it will get fixed."