Drew White 1750 Danny Gamache

Drew White 1750

Danny Gamache

Microeconomics

National Hockey League Financial Realities

How financially solid is the National Hockey League (NHL)? There are indications that while some NHL franchises are profitable, several other franchises -- perhaps as many as five of the thirty -- are sinking like a stone. There are financial studies that suggest the NHL should "contract" (shut down one or more of their franchises). This paper supports that idea, based on the review and analysis of the league's fiscal stability. While the positive aspects of the NHL will be presented, particular attention will be focused on those NHL franchises that are struggling mightily, including some that are deeply in arrears.

Forbes magazine came out with it's annual financial report on the NHL in November, 2009, and the news is very good for the league as a whole. Indeed the NHL in its 2008-09 season posted "an average operating profit of $6.1 million"

(Badenhausen, et al., 2009).That is the highest figure in the dozen years Forbes has been keeping track of fiscal matters in the NHL. The authors point out that the profits alluded to are earnings "before interest, taxes, depreciation and amortization." But nevertheless, aggregate revenue (which includes money owners receive from non-hockey events they hold in their stadiums) increased by $70 million when compared with revenue from 2008-09. The total revenue last season climbed to $2.82 billion; that brings the average value of an NHL franchise up to $223, or about $3 million more than in the previous season.

How did the league manage to prosper so healthily in a time when the economies of Canada and the United States had gone into the tank? Badenhausen of Forbes notes that the big hockey markets -- Chicago, Pittsburgh, and Washington -- did very well financially in 2008-09. The Blackhawks in Chicago profited by having local television coverage of their games; the Pittsburgh Penguins enjoyed huge ticket sales based on them winning a Stanley Cup; and Washington fans came out in droves to see their superstar Alexander Ovechkin.

Also the NHL's new sponsors -- Bell Canada, Cisco, Visa, Honda, Energizer and McDonald's -- helped the finances a great deal by raising sponsorship revenue by 1.5% to a reported $1.19 billion, Forbes reports. Add to that the fact that the Chicago, Detroit and Toronto franchises all signed big lucrative television contracts that boosted overall local media revenues for the league by an impressive 15% -- to $356 million.

Moreover, the ratings of NHL games on NBC and vs. were up 11% and 24% respectively -- and the Stanley Cup playoffs in 2009 were the most watched playoffs in the NHL since 2002, Badenhausen points out. For the final game 7 between the Penguins and the Detroit Red Wings more viewers tuned in (7.9 million fans) than for any NHL game since the Stanley Cup Finals in 1973 -- between the Black Hawks and Montreal. Badenhausen writes that because of the newly crafted collective bargaining agreement (CBA) -- hammered out after the bitter lock-out in 2004-05 -- players were to receive 56.7 of "hockey-related revenue last season." And because player salaries "exceeded that level last season" $207.6 million "reverted back to the owners"; in other words, NHL owners received a bonus.

That is the good news. There is also news that isn't so warm and fuzzy for the NHL. Presently there is a huge gap between the profitable NHL franchises and those not doing so well. Indeed, Buffalo is one of six NHL markets that "face the most imposing barriers to long-term financial success" according to Street & Smith's SportsBusiness Daily (SBD). In fact according to a financial study by G. Scott Thomas of "Business First of Buffalo" the other six struggling franchises in the NHL are Phoenix, Miami, Nashville, Atlanta and Carolina. As to Phoenix, that franchise is in the "worst shape of any hockey market, failing eight of the study's 10 indicators" (SBD). Miami and Nashville are "almost as badly off" because they both fall short "in seven categories," the SportsBusiness Daily reports (June 24, 2009). Buffalo, Atlanta and Raleigh (Carolina) showed "six danger signs apiece" in the Business First of Buffalo financial report.

How was the study done? It reportedly used demographic and financial information from "several sources" and through that data "quantified the challenges facing the NHL's 27 markets" (SBD). The "six danger signs" that Buffalo face, according to the report, are: low population, low personal income, low franchise value, small growth in value, loss in operating income and nearby hockey competition." Those problems notwithstanding, the Buffalo NHL franchise did draw 18,532 fans per game last season, which is 99.2% of capacity at HSBC Arena, according to SportsBusiness Daily's review of the Business First of Buffalo fiscal data.

The Buffalo report was put together by financial planner Ted Rechtshaffen conducted his own independent analysis of the fiscal health of the NHL, and he found that the Coyotes, Blues, Ducks, Hurricanes, Sabres, Islanders and Predators "are having the shakiest futures" (SBD). Said Rechtshaffen: "As a business, I think the NHL needs to contract. But if the possibility remains of moving teams and generating money, the NHL would obviously prefer to move them" (SBD from Business First of Buffalo). As for Rechtshaffen G. Scott Thomas quotes him in the Buffalo Business Journal: Before conducting the study, "Just putting in my two cents -- I would have said it has been a disaster" to place NHL teams in the Sun Belt (Phoenix, et al.)"

(Thomas, 2009). "Now, after doing a study, putting the numbers together, I can say it has been a disaster," Rechtshaffen continued (Thomas).

Speaking of the Phoenix Coyotes, they spent several months under bankruptcy protection and were recently purchased "for around $140 million by the league," Badenhausen explains. The problems in Phoenix -- beside the fact that Sun Belt teams rarely do as well as teams in the north where there is snow and cold, more like the hockey tradition -- is that "prior ownership was more concerned with real estate development near the arena than producing a winning hockey team," Badenhausen continues. The Forbes reporter claims that the Atlanta Thrashers "have spent more time fighting with each other than their hockey team has with its opponents." The Thrashers have been forced to "give bundles of tickets away to fill seats," Badenhausen asserts; and both the Nashville Predators and Florida Panthers "are also bleeding money and are reportedly for sale, or at least looking for more investors" (Badenhausen).

Jeff Z. Klein of The New York Times writes that the NHL has other problems beyond finances, including the league's refusal to institute rules against "head shots…checks to the head"

(Klein, 2009). Klein quotes Maple Leafs' general manager Brian Burke -- after an NHL general managers meeting failed to address the head checks -- "Hitting is a critical part of our game; it's distinctive to North American Hockey." However, Klein reports that 759 NHL players have sustained concussions from 1997 to 2008; he cites that data from the National Academy of Neuropsychology. Meantime as to the woes of the Phoenix Coyotes -- that lost $72.1 million in 2008 -- Klein says the team "cast a pall on the NHL's summer" because of the many potential buyers who "walked away from the team."

Looking more closely at the Coyotes' financial difficulties, Forbes reports that the team lost 3% of its value in 2008; its player salaries were $39 million and gate receipts were just $18 million. The debt for the Coyotes is 101% of its value ($130 million); and Phoenix lost $18.5 million in operating expenses albeit total revenue reached $66 million, according to Forbes. "The Coyotes have been plagued by big losses and high debt since moving into their arena six years ago"

(Forbes). Creditors are owed over $90 million and one of the financial burdens place on the team is the fact that it pays over $4 million a season in rent to the city of Glendale (Forbes). Again, the Coyotes have been purchased by the league because they want the franchise to stay in Arizona and are looking for interested buyers who would keep it there.

As an example of the poor interest by local fans in the Phoenix Coyotes, Forbes reports that "local revenue per fan" was $11. Compare that to other teams that are reportedly struggling, like the Carolina Hurricanes (local revenue is $42 per fan

); Tampa Bay (local revenue is $24 per fan

); and the Nashville Predators (local revenue is $33 per fan). The Predators lost 5% of their franchise value in 2008-09, Forbes reports, and now Nashville's franchise is worth $156 million. The team's debt is 54% of its value, which is not a good sign when it comes to stability. Predator player salaries were $45 but they only brought in $23 in gate receipts. "The Predators have suffered from ownership issues (like investors in the franchise not having as much money as they said they did), embarrassing play on the ice and low attendance"