SBJ/September 30 - October 6, 2002/Special Report

Players and league face off over role of salaries

To other owners, New York Rangers’ signing
of Bobby Holik (left) symbolizes the league’s
unbridled salary growth.

Thirty NHL teams speak with one somewhat-muffled voice when it comes to the economics of hockey. Although strictly prohibited from talking about the league's labor situation, team presidents and owners say payroll expenses have gotten out of control, and that they need a new system when the current collective-bargaining agreement expires in 2004.

And they appear ready to fight for it. All teams have set aside $10 million as a contingency fund in the event of a strike or work stoppage, and they must deposit that money in a league-controlled account by April 15. Most hockey insiders think there will be a long work stoppage that cuts into the 2004-05 season.

But as doomsday comes closer and each side begins to posture for the negotiating edge, player agents and the union are questioning the league's take on the economics of the game. While few dispute that a good number of teams are losing money, they say that payroll expenses often are not the primary cause.

Issues specific to individual teams — such as local revenue and attendance, arena leases and, for six teams, Canadian taxes and currency — are as much a cause of red ink as player costs, said several members of the players camp.

A Street & Smith's SportsBusiness Journal analysis found that of 18 NHL teams that are widely believed to have lost money last season, a dozen had local revenue well below the league average, played in a badly outdated arena or were located in Canada. And of the six exceptions, three had payrolls that were more than 40 percent above the league average. Only three teams that said they lost money, the Buffalo Sabres, Los Angeles Kings and San Jose Sharks, did so without being tripped up by a massive payroll or one of the other factors.

In other words, of the teams that play in new arenas in the United States and are near the league average in paid attendance and payroll, almost all make money.

"There's a template for how a franchise should be put together and constructed," said NHL Players' Association executive director Bob Goodenow. When a franchise doesn't conform to that template, either by not having an adequate facility or struggling with attendance, no one should be surprised when that team loses money, he said. "None of those issues is related to payroll," Goodenow said.

Mounting debt and interest payments are another cause of some teams' shaky economics. Forbes estimates that NHL teams collectively have a debt-to-equity ratio of 46 percent. That's compared with 38 percent for Major League Baseball, 34 percent for the NBA and 26 percent for the NFL.

The Ottawa Senators and their home arena owe about $260 million. In a recent securities filing, the team and arena's primary creditor, the Covanta Corp., said it expects to take a $140 million write-down on Senators-related debt when the team and arena are sold to the highest bidder, meaning the Senators and Corel Centre rang up debt $140 million greater than their total market value.

"I think by attributing everyone's problems to payroll, it's an oversimplification of the true economics," said agent Mike Gillis. "You can't just look to one thing and say, 'Boy if we fix that, then we've fixed everything.' And it has to be determined if it needs to be fixed."

It might not come as a surprise that Goodenow, Gillis and other agents like the status quo. Gillis negotiated a five-year, $45 million contract with the New York Rangers for unrestricted free agent Bobby Holik, who has been a second- to fourth-line player for most of his career. When Holik was signed, the chorus from teams calling for a new system was louder than ever before.

Through last season, salaries have increased 124 percent since 1995, when the current agreement went into affect. League and team executives say the economic problems they face can almost all be traced back to that salary escalation, and poor attendance, as one example, is a direct result of teams not being able to keep up from a competitive standpoint with the big-spending clubs.

"We firmly believe the game would sell in those markets that are having trouble drawing fans if fans believe those teams have a chance to win the Stanley Cup," said Bill Daly, the NHL's executive vice president and likely point man on future labor negotiations. "The biggest element comes back to the collective-bargaining agreement, and back to what your expenses are."

Canadian franchises say they can't win any public support for tax breaks or help with the Canadian currency differential until the league takes up salary control and other inequities in its system.

"I think our owners would say if we don't change the rules after 2004, they're not interested in going forward," said Patrick LaForge, the Edmonton Oilers' team president. "The current world is not a world our owners are interested in pursuing."

Without a salary cap, or what NHL Commissioner Gary Bettman refers to as a system with "cost certainty," those pointing to payroll escalation say rising salaries will likely more than offset any new revenue sources.

The Washington Capitals are one of the biggest money losers in the league, despite increasing attendance during the last two seasons and upping ticket prices for four straight years. One reason is debt on the MCI Center and the structure of the team's lease. Another is that ticket prices remain below the league average.

But the main reason the Capitals lose money is because their payroll has grown from $32 million three years ago to $52 million last season. The Capitals say they have lost $20 million a year since 1999.

"If we do this year's plan, we will have doubled revenue since I bought the team," said owner Ted Leonsis. "Essentially, every dollar [in increased revenue] we have given to the players."

The Capitals are an extreme case because few teams have experienced the same sort of revenue and salary growth, and fewer are boxed out of club-seat and luxury-suite revenue, but in many ways the team's plight is emblematic of the league as a whole.

From a revenue standpoint, NHL hockey is arguably one of the great business success stories in sports, generating about $1.9 billion last year, according to league officials and other sources. The NBA, which has double the national television ratings and nearly three times as many viewers for its championship series, brought in only about 30 percent more revenue.

Times would be good, except teams get hit with an annual salary bill that, on average, eats up 70 percent of revenue, Daly said.

The average salary last season was just under $1.65 million per roster player, which comes to $37.7 million per team. That would mean salaries represented 59.5 percent of revenue. But that does not include salaries paid to injured players, minor leaguers or players whose salaries have been bought out. League officials say the real average payroll is more like $45.5 million.

"Payrolls cause teams to operate with very little flexibility," said Sal Galatioto, head of the sports lending practice at Lehman Brothers. Echoing Daly's sentiments, he said: "Payroll is the central issue. Is it the only issue? No, but it is the core one."

But not lost on players, their agents and the union is that teams at various ends of the payroll spectrum have found ways to make money, even without going to the playoffs, where hockey teams earn much of their annual profit.

The Dallas Stars earned a profit last season, according to owner Tom Hicks, despite missing the playoffs and spending more than $57 million on salaries. That's because they had the highest revenue of any team at $120 million, according to the team.

Looking a few pegs down in the revenue standings, the Pittsburgh Penguins, who play in the league's oldest building and were below the league attendance average by more than 1,000 fans per game last season, actually eked out a small profit, said team President Tom Rooney.

That's partially thanks to player owner Mario Lemieux, who is paid just at $5 million per season. Lemieux missed most of the season with injuries and the team missed the playoffs, yet it still did not lose money. Rooney said revenue was about $62 million. Payroll was $31.2 million.

Goodenow makes the point that it's owners, and no one else, who set the salary scale where it is today.

"There are very smart businessmen who pay these dollars," he said. "One should think they're smart in how they hire talent for their hockey teams."

Bettman has publicly called for negotiations to begin now. Goodenow said if the league has a proposal that would be worth the players' consideration, he'll bring it to them, but until then there's nothing to talk about.

But the league and the players association are actually talking about the economics of the game on an official basis, several sources said. They're not actually addressing the next collective-bargaining agreement, but the NHL is conducting a study of its own finances and working in conjunction with the union to do so, with plans to share some of the results.

"We've been very forthcoming to date, and continue to want to be forthcoming," said Daly. "We think the problems are apparent and have no interest in hiding anything. They [the players] are very aware of what the situation is."

Neither the league nor the union would comment further.

With such a large gap in how the league and the players association view NHL finances, perhaps a dialogue on that issue alone is a crucial first step.

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