VideoIndeed, the union goes as far as to say that the results are just bogus. They also disagree with the estimation that players get 75 percent of all hockey revenue. "It's a contrived percentage that is not fully reflective of what hockey is really making," claims Saskin.
But Levitt, who knows a thing or two about fraudulent reporting, counters that he went well beyond what the teams showed him. He visited team offices and asked tough questions about their related businesses. And, he says, he used the most conservative definitions that would maximize hockey-related revenue. "The deal was that the clubs would give us access to everything we asked for, on the condition that we didn't reveal the names of the clubs, for competitive reasons," he explains.
On Thin Ice
The credibility of the Levitt report aside, it's clear that the NHL is in precarious financial condition. Last year, two teams, the Ottawa Senators and the Buffalo Sabres, were forced into bankruptcy. In 1999, the Pittsburgh Penguins declared bankruptcy.
Independent sources confirm that the league is losing money. Andrew Zimbalist, a sports economist at Smith College, thinks the NHL is in bad shape (although he too doesn't put much stock in the details of the Levitt report). Zimbalist estimates that the league's collective losses for the 2002-03 season, properly adjusted for related-party transactions and other factors, were in the neighborhood of $150 million to $175 million. "Clearly, the economic model isn't working," he says. An independent report by Forbes magazine, which analyzes the value of sports teams each year, puts the losses for the same season at $119 million.
Even this year's Stanley Cup winner, the Tampa Bay Lightning, says it was barely profitable. The team just pushed into the black for the first time in its 12-year existence, says John O'Reilly, CFO of Palace Sports Entertainment, the holding company that owns the Lightning. Still, "you can't build a business based on winning the Stanley Cup every year," he says.
It's hard to argue that player salaries aren't at least partially to blame for the estimated losses. From 1996 to 2003, the average salary nearly doubled, from $984,500 to $1.8 million. O'Reilly, who also has a view into the finances of the Detroit Pistons basketball team — held by Palace Sports as well — says that player salaries in basketball are, on average, in the low 60s as a percentage of revenue. "That 10 to 15 point difference [compared with the NHL] makes a huge impact on how successful the teams are financially," says O'Reilly.
Unlike other professional sports leagues, the NHL can't count on big network-television contracts to offset rising salaries. "It appears that network TV has maxed out as far as being a vehicle for growth," says Sandy Lipstein, CFO of Comcast Spectacor, which owns the Philadelphia Flyers. ABC dropped hockey after ratings for the past regular season and Stanley Cup finals dipped more than 20 percent from 1999-2000 levels. The league just signed a new TV contract, with NBC, but the new deal is about 50 percent of the one at ABC, notes Lipstein. The NBC deal doesn't include any royalties — just an agreement to share advertising revenues.
Bad Timing
A compromise could be the only way to save hockey this year. Patrick Rishe, a professor of economics at Webster University who focuses on the business of sports, calls for the NHL to adopt team revenue sharing and a luxury tax (like the one Major League Baseball adopted last year, but with more teeth). Under a luxury-tax system, teams that spend over a certain total salary threshold must pay a fixed percentage of that premium to the league, which is then distributed to the teams with the lowest revenues. "The sport with the worst revenue-generating ability has no cost-containment system," comments Rishe. "That doesn't seem right." The NHL Players' Association has indicated that it could be open to a luxury tax.
But after negotiations broke off in July without much progress, and as the September 15 deadline approaches, the two sides seem no closer to reaching an agreement. Commissioner Bettman implies that the league wants to cap team payrolls at $31 million. That would amount to a 25 percent across-the-board cut in salaries from the current team average of $41 million. Players accuse the league of being unwilling to compromise. A lockout is likely, and the entire 2004-05 season may be in jeopardy.
The timing couldn't be worse. Slumping fan support and sagging TV ratings have already cut into revenues. Many experts say the NHL may not be able to survive a protracted lockout. Fans would rather see the two sides talking about rule changes to make the sport more exciting than watch rich people squabbling over money. When a strike cut Major League Baseball's season short without a World Series in 1994, baseball lost millions of fans. Ultimately they came back — but not until the 1998 season, when Mark McGwire and Sammy Sosa were vying to break the home-run record. The NHL can't count on such a draw.
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