NHL Loses in Balsillie Verdict

I promise this is the last Phoenix Coyotes-Jim Balsillie focused blog, but with the verdict in and Balsillie’s bid rejected, I’m curious what the NHL and its owners achieved. Keeping Balsillie out was a major victory for owners across all major sports, since it maintains the cartel type control within each league, however the NHL is not one of the major sports leagues at this point.

When the NBA, NFL, and MLB each have media deals over $1B in value, and the NHL is doing revenue share with no rights fee on NBC, and allowing the network to reschedule games in favor of horse racing the league is not in the same category as the others. That said the NHL needs to move away from preserving status quo and focus on resurrecting the business, which could mean drastic changes.

A modern day businessman with a passion for hockey, like Balsillie, would bring innovation, vigor, and be willing to challenge the status quo. Without having personally met him, or knowing his full agenda, he’s they type of businessman I would want on my side if I’m the NHL – not to mention his deep pockets. He wants to move a failing team out of a dreadful hockey market, a novel concept, yet the league wants none of it. He wants to infuse capital into the team, pay for arena upgrades, and was willing to pay off ownership to an extent, but since he’s not part of the “old boy’s club” of owners, forget it.

Put the team relocation debate aside because most people agree that it makes no sense to have hockey teams in Florida, Arizona, and Tennessee, and that the NHL already has too many teams. I was curious to see Balsillie’s approach to marketing and ticket sales, given his work with building the Blackberry product, or how he’d integrate technology into the sports arena experience through mobile devices and new media. Maybe he could have concocted a new type of sports business partnership to develop new revenue for hockey teams. At the very least, he would have spent money to build a competitive team with first-rate facilities, and created a positive fan experience, and that’s something this league desperately needs more of.

Balsillie has reserved himself to the fact that he will never own a hockey team – at least for now. Meanwhile, the NHL is stuck with a franchise that dragged through the mud this off-season and sold few, if any tickets this offseason, thus the league will need to subsidize it again. Further, it faces a labor dispute, media problems (Versus-DirecTV dispute), turmoil within the NHLPA, and weak ticket sales in perennially good hockey markets, yet the league has made changes to counteract or mitigate these issues. No matter where you rank hockey on the American sports landscape, its falling fast.

Activist Owners Good For Sports

You can go both ways on Jim Balsillie’s pursuit to own the Coyotes – he doesn’t deserve to own a team because of his brash antics and the fact the other owners don’t necessarily want him, or that he would be good for the league, infuse money, and good business sense. The more this carries on, the more I lean toward the latter. His motive seems to be that he really wants to own an NHL franchise – not build an arena, or make a business play. He is passionate about hockey, and that’s a good thing.

Owners with deep pockets and a passion for the sport increase the value of the entire league, and usually field successful teams, financially and competitively. People may mock what Stephen Ross is doing in Miami, from the short-term naming rights deal to the groundswell of celebrity figurehead owners, but the bottom line is he’s trying, he’s active, and he’s doing it for the fans. He came into Miami, hired the best people around to run the team, now he’s bringing in the best people available to create a fan experience and connect the team with the community. Ross is building an all-encompassing entertainment product that will generate sustainable revenue, while giving his football people the resources they need to make the team an annual playoff contender. If you’re a fan, what else can you ask for. Plus, his actions have generated positive brand awareness nationally, and he has successfully extended the Dolphins brand into new target markets with the ownership and partnerships.

Mark Cuban turned a moribund Dallas franchise, and like it or not, helped catapult the NBA from its post-strike, post-Jordan malaise. He managed his team in first-class, created an environment that players wanted to play in and fans wanted to be part of. His antics certainly crossed the line at times, but his antics have certainly had a positive impact on the sport. Look at George Steinbrenner in NY and the Celtics ownership team. Owners that come from successful business backgrounds that buy teams because they have a passion for sports and plan to stay involved with managing the business of the team usually succeed, which benefits everyone around them.

Back to Balsillie, the NHL needs his deep pockets in the league. One less team to worry about making payroll, or to worry about surviving, is a good thing for a league struggling to find stable ground. One more owner that will pour money into marketing the sport, who will focus on putting a good team on the ice, and creating a positive fan experience, will benefit all the other owners and the league as a whole. His style may rub people the wrong way, and rightfully so as he has mishandled many issues. However, in the end, if they embrace him as an owner, Balsillie may eventually yield a payoff for the entire league, if his comparables in other sports are any indication. He certainly has the pedigree with his success at RIM.

Who Loses More With Sales of NJ Nets: Ratner or Team?

To no surprise, at least in this camp, reports surfaced late in the week that Bruce Ratner plans to sell the New Jersey Nets. Though the team indicates ownership is “as committed to ever” on moving to Brooklyn, that’s a tough statement to make when you don’t know who exactly ownership is. Brooklyn is Ratner’s project, without it he has no interest in the Nets, without the Nets he’ll probably pull the plug on the project since he’ll lose most of his upside. It appears the Nets face an uncertain future – Brooklyn, Newark, new ownership, possible move out of the area, free agent players or dumping more salary. These questions always lingered now they are reality. Across town the Islanders and owner Charles Wang face a similar predicament. Before criticizing the owner, and rightfully so, is it possible the owners end up losing more than the team and its fans?

For anyone who ever doubted Ratner’s intentions with buying the Nets, here is a statement directly from Forest City Ratner’s most recent 10-K, right up front in the business description:

“The purchase of the interest in The Nets was the first step in the Company’s efforts to pursue development projects, which include a new entertainment arena complex and adjacent urban developments combining housing, offices, shops and public open space. The Nets segment is primarily comprised of and reports on the sports operations of the basketball team.”

A few other tidbits from the 10-K analysis. The company views this project as the top business risk it faces given the economy and other uncertainties. Further, media coverage has focused on the $42mm loss Forest City suffered on the Nets investment. In fact, Nets Sports & Entertainment incurred a $77mm loss in fiscal 2009, the same as the previous year, and only slightly more than 2007. However, as a partial owner with less than 50% ownership, Forest City assumes a percentage of the loss. Due to its investment in the Brooklyn project and the financing it needed to make those investments, which it listed under the Nets subsidiary, Forest City recognized a larger portion of the teams loss on its financial statements. Without further analysis of the Annual Report it’s difficult to accurately uncover the entire financial situation, but it appears revenue dropped slightly, as did player expenses, though neither enough to create a financial disaster, and Operations remained a stable loss as I mentioned. The difference this year, Ratner was unable to use as much debt to finance the losses. His company had another poor financial year, and is already financing much of its losses, leaving highly overlevered. Forbes team valuations report the Nets have by far the highest Debt/Value ratio in the NBA. My thought is Ratner can no longer fund this project as expenses mount and revenue gets pushed further into the future, so needs to pull the plug and regain some liquidity. In fact, he probably held on too long.

Again, this requires further analysis, but Net fans can take some solace, since Ratner has pushed his entire company into poor financial condition partially thanks to this project. Where was the league as this situation developed? I’m sure Stern had his staff monitoring the situation and league consultants reviewing the Nets financial situation, but how did they allow it to go this far. These leagues either have control or the don’t. The owners either flex muscle, run the show or they should stay out of everything. The NHL wants to dictate the Phoenix situation, the NBA did something similar with Seattle, they rescue clubs failing to meet payroll, yet nothing once on the Nets situation. Leagues should show more consistency, and remain transparent on what they can and can’t involve themselves in.

Now, what’s to come of the Nets. It’s guaranteed that out of town suitors will come calling, its possible the Devils ownership can rescue them from the Meadowlands and put them in Newark, and its almost a guarantee that no owner is stupid enough to buy the team and leave them in the Izod Center. With this uncertainty, are they even a player in the 2010 free agent market. Better yet, do fans have any reason to support the team?

The NHL has shown at least some interest in the situation with the Islanders and Charles Wang, which differs from the Nets since Wang seems genuinely interested in owning the team and his other investments are not linked to the team nor suffering as much as Ratner’s. But the lesson is that leagues need to step in, and when owners welcome a new member it needs to be for the right reasons. Sometimes less money for a good fit creates a better long term fit.

Another Word on Franchise Ownership – Beware the Real Estate Mogul

Building off yesterday’s discussion of the Phoenix Coyotes ownership mess, the problem is actually rooted in Jerry Moyes’ original purchase. He partnered with Steve Ellman, who’s sole purpose was to build a development near the arena. Another one of these grandiose retail areas that real estate developers sell the public on how it will infuse the local economy, however usually only benefits the developer.

Fast-forward a few years, Ellman builds his development, sells his share to Moyes, and eventually we’re left with Moyes unable to fund the losses the team sustained. It’s hard to know the original intentions of the owners in 2001, but this deal smells of real estate motives. The goal was to build and arena and retail development – not run a hockey franchise. And that’s how its played out. Maybe Moyes had better intentions, but without he was not equipped to run the team or finance its losses, at least without Ellman. Look at the Islanders, taking just as big a hit in the pocket, however Charles Wang is not running into bankruptcy court and causing controversy.

With so much power over who joins the ownership ranks, the NHL and every other sports league should evaluate the motives of the potential owner and the commissioner’s office should consider contractual obligations that allow the league to mettle in team business if a franchise is not meeting certain performance expectations. On the second point, it’s no different than operating a company, the board of directors are accountable to shareholders. In this case, the shareholders are the other owners and the league office represents them. A poorly run team diminishes the value of the entire league, while a well run team improves the economics of the league at large.

The first point specifically targets owners who try to use sports teams as pawns in a real estate project. Bruce Ratner is playing out this same game with the New Jersey Nets. He bought the team with the sole purpose of creating a mammoth development in Brooklyn with an arena, apartment buildings, and retail. The focus has been on his project, not the team for the past 5 years, as he has battled court cases, had his staff strike landmark sponsorship deals, hired and then fired a well-known architect, and for better or worse stirred controversy. Meanwhile, the team was forced to cut expenses and trade its best players, and is losing over $40 million a year. Admittedly, they probably needed to make the trades and start over from a player development perspective, but the franchise is in a holding pattern. Everything centers around “when the Nets move to Brooklyn” – the free agents will come, fans will come, profits will come.

The deal may never happen. Ratner reportedly wants to sell, another indication it will never happen. If that’s the case, they are stuck in the Meadowlands losing boat loads of money and have basically lost the last 5 years when they could have addressed the situation because Ratner was trying to leverage the team for a project to benefit his business.

Owners with real estate motives destroy franchises, then leave the problem to the next person. The franchise suffers, the league suffers, the fans suffer, and the players probably suffer. Given their control over the situation, leagues should recognize this type of deal and either prevent it or put stipulations in that prevent an owner from leveraging a franchise for real estate, ruining the team in the process, then walking out on it. The leagues should blame themselves – and do something about it.

NHL Acting More Spiteful Than Smart in Phoenix Situation

The Phoenix Coyotes ownership situation has turned into more of an ego battle than an effort to fix a problem. It’s become a fight over legalities and control instead of trying to better the sport.

Former owner Jerry Moyes claimed over $100 million in losses when filed for bankruptcy protection. Last season the team lost $30 million, they have never turned a profit, and have continued to move further away from break-even in recent years. The NHL has admittedly loaned money to the franchise to meet payroll and loan payments. Unless Gary Bettman wants to follow the US government down the TARP rode, this is not a business model he should be defending.

Throw in the fact Phoenix had a payroll near the minimum, they have a relatively new arena with a naming rights deal, and have the most iconic figure in hockey working for them in a visible role. At some point, you need to look at the business and admit it makes no sense investing in and pull the plug. Did I mention the local cable ratings and attendance in the bottom 5 of the league?

Given the current economy and the shift in professional sports ownership methods away from just being for fun where its OK to take significant losses and towards developing more sustainable businesses, it makes no sense for anyone to invest in a Phoenix based hockey team. It’s a losing proposition. Even the appreciation argument falls apart, as team value according to Forbes has barely appreciated with inflation since Moyes bought in 2001, not nearly enough to keep up with his losses.

Back to Bettman and the NHL’s stance. It’s easy to understand why they don’t want Balsillie to swoop in and move the team under his own terms. Plus, Balsillie has done everything he can to develop enemies with the way he conducts himself. However, begging Jerry Reinsdorf to buy the team and keep it in Phoenix is not the answer. Phoenix will not suddenly become a hockey town, it will not magically start winning and turning profits, and in the end, the NHL will eventually need to continue to bail it out. Is that acting in the best interest of your shareholders – the other league owners?

Not to continue to beat down on Phoenix, but look at the support the Diamondbacks and Arizona Cardinals receive – or lack thereof. Outside of a few spurts of success, it’s a difficult market to sell tickets. The Suns even played in front of half-empty arenas this season after making the playoffs for a number of years and still putting an entertaining, star-filled group on the floor. Bettman needs to come to grips with the fact his grand plan to bring hockey into the South is failing. He needs to admit that and fix it before it starts to compromise his sport.

The NHL’s argument that it’s too late to move a team before next season has already been proven wrong. Apparently it’s only too late when they are not in favor, but if it’s Quebec to Colorado and they want to see it happen, then its fine – but that’s how true cartels work. It leaves a few options. If they insist on not moving it before the season starts, the league can either run the franchise themselves (a la the Expos) or try to sell to the Reinsdorf group. However, the NHL should put ramifications in place that allow the team to move if business conditions don’t improve. Set season attendance goals and profitability conditions. If Phoenix fails to meet them, and the franchise shows no signs of changing, the league should have no regrets in moving them immediately. And don’t bring the lame-duck franchise argument because the fans have treated this team like a lame-duck the past few years.

Another option is to allow it to auction the team to a group that would move it to Canada. If they prefer the team not move to Hamilton for some reason, then pick an owner that will move it where the league sees fit. However, find a way to control the terms of the move and conduct it in a way that excludes Balsillie from the process, if that’s the sole intent.

Moving the Coyotes back to Canada makes the franchise more valuable, thus the league becomes more valuable and all the owners benefit. It also takes a financial burden off the league front office, and shifts the discussion from negative publicity to stories about sell outs and new rivalries. Bettman is acting spiteful right now by trying to keep this team in Phoenix. It hurts the entire league. He needs to admit the mistake of moving them, realize Phoenix does not support any of its teams, least of which is hockey, and make a sound business decision that will earn long-term applause.