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Tale of two leagues: How the NHL succeeds despite itself

Pittsburgh Penguins captain Sidney Crosby raises the Stanley Cup after his team beat the Detroit Red Wings to win Game 7 of the tournament finals last June in Detroit.

Paul Sancya

By just about any business measure, the National Hockey League and its leading franchises are skating through the economic slump like Sidney Crosby in a game of shinny.

Sure, some teams are battling weaker revenue. As in all sports, sponsors are cutting back, consumers are spending less on non-essentials and corporate customers are paring costs. And the NHL brand has taken a serious beating over the bankruptcy mess in Phoenix, and the latest snub to Canadian hopes for another franchise. Ownership and financial woes at a handful of other U.S. teams don't help either.

But as the league embarks on its 92nd season, indicators point to a sport that is more than holding its own in the increasingly fierce battle for the shrinking entertainment buck.

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League revenue stands at a record high. Ticket sales are holding steady even as prices rise in some markets, and star players are drawing big crowds. The sport is enjoying a resurgence in some old hockey towns such as Chicago and Boston, while the Montreal Canadiens sold this year for a record price. Television ratings are picking up.

The NHL's surprising resilience to recession provides a golden opportunity for the league to deal with its chronic problem teams once and for all and build a lasting foundation for long-term business success. The economic tailspin has cemented the misfortunes of the southern U.S. teams, adding urgency to the league's need to face reality and declare its winners and losers, industry experts say.

"The solution is both obvious and extraordinarily difficult," says Marc Ganis, president of Chicago-based Sportscorp Ltd. "Namely, reduce the number of teams and then visit expansion later" when the league is on a sounder footing.

"In many ways, it's the best of times and it's the worst of times for the NHL," says the sports industry consultant, channelling Dickens.

Today's NHL is indeed a tale of two leagues. Despite widespread joblessness, established teams like the cup-starved but cash-rich Toronto Maple Leafs can count on their rabidly loyal fan base. Even Detroit, ravaged by waves of auto sector layoffs, remains one of the strongest franchises.

Yet at the same time, the NHL is saddled with terminally ailing U.S. franchises that lose fistfuls of money in good times and even more in bad times. Most are in the southern states, and their owners are rapidly losing interest in the sport now that their other businesses are feeling the pinch.

"The strong teams will remain strong. The weak teams will get weaker. That's what will lead to contraction or relocation," says Richard Powers, associate dean at the University of Toronto's Rotman School of Management.

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Protecting the bottom line

As the public battle over the fate of the hapless Phoenix Coyotes showed, the NHL can ill-afford to carry these weak links indefinitely, without hurting its bottom line and further tarnishing its reputation.

Over all, though, the league's finances appear sound. League revenue in fiscal 2009 reached a record $2.6-billion (U.S.). That's not far from the National Basketball Association's total of about $3.2-billion.

The sport's revival in such traditional markets as Chicago and Boston has turned games there into hot tickets again. A cadre of young stars such as Sidney Crosby and Alexander Ovechkin are drawing big audiences and driving merchandise sales here and abroad. Despite slower consumer spending, most teams have maintained or even increased prices.

Even the once sad-sack Washington Capitals are poised to turn their first profit in their history next year. And in Canada, where the NHL enjoys unchallenged supremacy as a spectator sport, team operators might well be asking: "What slump?"

Usually anemic U.S. TV ratings hit a 36-year high of eight million viewers for the deciding game in last season's Stanley Cup final. And the Internet, where the league has been building a strong following, may finally provide the global platform the NHL has long craved.

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To be sure, all pro sports tend to weather economic storms better than most businesses that rely heavily on people forking out discretionary income for non-essentials.

"They get hit like everybody else," says Baltimore investment banker John Moag, whose eponymous firm specializes in sports valuations and transactions. "But you don't see the dramatic downturns in revenues that you see in a lot of businesses."

And through it all, team values keep rising. "That's been true since the 1960s," says Mr. Moag, whose firm has studied the impact of previous recessions on the sports industry. Fans want "an entertaining distraction from the nervousness of economic doubt."

This year's sale of the Montreal Canadiens marked a milestone. The price tag, which includes the team's Bell Centre arena and a concert promotion business, was about $575-million (U.S.), by far the most ever paid for an NHL team and its assets. Subtracting the arena debt, the deal is expected to net U.S. seller George Gillett about $215-million, which translates into a 20 per cent gain on his original investment in 2001.

Elsewhere in the land where hockey is king, teams have never been more profitable, thanks in part to the stronger dollar, astute management and remarkably loyal fans willing to pay some of the NHL's highest fares.

The Vancouver Canucks have had a 98 per cent renewal rate for season tickets and still maintain a healthy waiting list. And not even years of ineptitude on the ice keep staunch fans from forking out league-high prices to watch the Toronto Maple Leafs.

"There might be some resiliency there, because we're in a business where our customers are usually committing [dollars]up front," says Tom Anselmi, chief operating officer of Maple Leaf Sports and Entertainment, which raised season-ticket prices 3.5 per cent for this season. "So there's a bit of a time lag that helps us. But we're not recession-proof. We've seen some impact."

MLSE doesn't reveal its revenue projections. "Suffice to say, we're planning on being down a bit, because we see an economy out there that's still 12 to 24 months from righting itself," Mr. Anselmi says. "And when it does right itself, we're not sure what it's going to look like. We don't believe it's going to be your typical robust exit from a recession we're used to."

Meanwhile, a dozen of the NHL's 30 franchises are likely losing money on an operating basis. Neither the league nor its teams, all of which are privately held, reveal specific numbers. And results that do occasionally make it into the public realm are not necessarily reliable.

Most of the money losers are in non-traditional hockey markets, where "the NHL as a product is one of the first things that people are going to cut out of their discretionary entertainment money," says University of Alberta professor Dan Mason, an expert on stadium economics. The few that have been successful, such as the Dallas Stars, have done it with sound management and winning records. "Losing teams do not work in those markets."

Yet Dallas owner Tom Hicks may be forced to sell the team following sharp reversals in his other investments.

And the Phoenix bankruptcy shed a revealing light on just how bad things can get for an ineptly run franchise with a poor product in an unforgiving market.

The Coyotes' losses, as shown in blunt court documents, have been staggering, even as the NHL brass was assuring the world that hockey in the desert was doing just fine.

The Coyotes were bleeding tens of millions before the year-long lockout of 2004-05 that ushered in a new salary cap system that was supposed to boost the fortunes of struggling teams. By 2007, the team's operating loss totalled a whopping $107.8-million, compared with red ink of $49.4-million in 2004. The 2008 number was $54.8-million for a franchise basically run on a shoestring.

Between August, 2008, and the team's bankruptcy filing last May, the NHL itself was financing the losses by early transfers of revenue-sharing payments and eventually by direct loans.

Now that the court has rejected both Jim Balsillie's and the NHL's competing bids for the business, the NHL is still stuck with the costs until it revises the terms of its offer to unsecured creditors or finds a buyer acceptable to the court.

Hence, the logic of simply eliminating the Coyotes and any other team with little chance of ever escaping from the terminal ward.

NHL commissioner Gary Bettman, like his colleagues in other sports, has adamantly rejected the idea of contraction. He is still convinced his expansive strategy will one day succeed, given enough time and patience.

But the league's more successful owners must surely be running out of the latter after the embarrassing Phoenix episode and the continuing drain on their wallets.

You just won't hear it from them.

"My experience in any business is you've always got challenges out there," Mr. Anselmi of MLSE says. "You've always got a division that isn't operating as well as it should be or a product line that's not working as well. If the product is good, generally a business succeeds. Right now, our product in the NHL is great."

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