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.

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Rangers Become MLB’s Version of Citi and BofA

Multiple sources report that Tom Hicks has borrowed at least $15mm from MLB to cover operational expenses this year. Though Hicks has tried to position it as essentially short-term revolving credit, given the dreary state of Hicks’ personal finances, plus the amount he has tied up in illiquid assets (mainly other sports franchises), this loan is unlikely to be enough. Sound familiar? Think Phoenix Coyotes and the NHL – though the NHL mangled the ownership situation, which magnified that problem. Better yet, it’s not too dissimilar from the US government funding large banks to keep them solvent and protect the industry from the ramifications of bankruptcy – obviously at a much smaller, and less critical scale.

Similar to how the government began imposing restriction on salaries, bonuses, and operations of banks that it took equity in, MLB now has a say in business matters for the Texas Rangers. The team made no substantial trades at the deadline to boost their playoff chances and failed to sign its first round draft pick. This creates a conundrum – on one hand the team obviously does not have the resources to increase expenses so MLB is right in not letting them spend. On the other not investing in the team, especially with increased fan interest from the pennant race, punishes the fan base and could lead to lower revenue (decreased ticket sales, merchandise, etc.), effectively increasing financial losses.

Hicks dug his own hole – starting with the egregious A-Rod and Chan Ho Park contracts, right through the enormous investment in EPL soccer. Other MLB owners should not have to cover Hicks’ mistakes. If so, it would incentivize teams to spend beyond their means and assume good old MLB will make everything better. Clearly, not feasible. The consequences of letting it fail come from many angles – how to find 50 new jobs to appease the MLBPA, stadium lease issues, a deserted fan base, a full minor league system of players and affiliates, and that’s without even getting to the legal bankruptcy issues.

The situation has no right answer to appease all parties. MLB’s best protection against this is to prevent it in the first place. Teams should be required to show evidence of liquid funds in excess of opening day payroll before the season starts. Further, when major free agent contracts players are added during the season, the team should again post evidence it can afford the payments. If MLB intends to operate as a financial support system, financial reporting must become more transparent. Maybe it already is within the closely held MLB offices, but this situation should never arise in season unless substantiating circumstances occur. Baseball should not allow owners to field a team without funding lined up to make payroll for the entire season. If they can’t, auction the team, or force new equity partners upon them. However, unlike the NHL, put regulations around the process to prevent the Coyotes situation.

This topic probably warrants a full-length report, but the short summary is that MLB (and all pro leagues) need to prevent teams from reaching this situation in mid-season. Whether that means approving each contract above a certain value, or providing proof of finances to fund payroll, it needs to happen. Akin to applying for a mortgage or apartment rental – the buyer needs to show proof of income to get the keys. Baseball needs to require proof for teams to get the players.

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.

Ripe for Financial Trouble, NBA and Other Leagues Must Step In

One year ago, Utah was the team ready to take the next step in the NBA Western Conference after a deep playoff run. Now, it will likely lose arguably its best player in Carlos Boozer, have ticket sales trending down almost 10%, and need a bank loan to prevent losing a second starter. To say fortunes have changed is an under statement. You can point to the economy, the free agent landscape, the impact of a disappointing season – or all of the above.

The most troubling piece is the need to take a loan to fund a matching 4-year, $32mm offer sheet for Paul Millsap. This on the heels of rumors that the Texas Rangers missed payroll recently, the Phoenix Coyotes required all sorts of help from the NHL to get through the season, and even some NBA teams may have need a boost to finish up the season.

Admittedly, I don’t have all the figures, since most teams hold financial data privately. Let’s look at the logic here though, a debtor must receive approval for a loan based on credit worthiness, which includes payment history, current debt ratios, projected revenues, riskiness – essentially your history in paying back and debt and the likelihood you will pay back in the future. Utah is already over the cap, thus will owe the league luxury tax above the salary expenses, and announced off-season ticket revenue is tracking 10% lower year over year. Given that, its likely the teams top revenue source will decrease for the full season, while expenses will increase with more salary and the tax. I don’t see any substantial new revenue sources available for Utah, considering they have lost a top player making the team less marketable, and are unlikely to make a deep, profitable postseason run since the team is not appreciably better.

To summarize, less revenue, higher expenses, not enough liquidity to make a contract offer – this seems like a high risk credit offering. In this case, its less of a lender problem and more of a league problem. Utah has signs of financial instability and these decisions can lead to franchise failures, most of which the league keeps behind closed doors and must sink central funds to keep the franchise running. The NBA and other major leagues should step in before this happens. Many smart people work at the league, with access to more financial detail than we will ever see, so we’d assume they consider this, but then why are leagues swooping in to help franchises meet payroll more and more.

A loan for Lebron or Wade is one thing, since those players can directly impact revenues. Paul Millsap will not have much, if any effect, in fact there is no guarantee he will make the team better. How many mid-tier players fall off the map? Is he worth this contract? Perhaps. Is Paul Millsap worth a team stretching itself financially? Not the Millsap I’ve seen.

The leagues need to institute better financial oversight, similar to what the government is doing to financial companies, except in the sports landscape of cartels, private ownership, and striving to serve the best interests of the league, less conflict of interest exists than in the case of GM. Think rationally, is Paul Millsap worth financial risk?

Islanders Blackberry Deal Makes For Strange Bedfellows

Last week the revenue starved New York Islanders reached a one-year wireless deal with Blackberry to sponsor the chance to text its prized top draft pick John Tavares. On the surface, it sounds like a good integrated sponsorship deal that adds value for both sides – good marketing for the team, promoting its new star and providing a platform to connect him with fans, while Blackberry gives an exclusive to owners of the device and another channel to promote its product to a key target audience in the ever-competitive smart phone market.

Digging slightly deeper, it’s a deal between an owner indirectly threatening the league to move his team due to mounting financial losses and an inability to get approval to build a stadium, and a CEO currently battling the league in court over the future of another financially doomed NHL team. Though it’s tough to question the deal, which also includes some Blackberry promotions linked to on ice performance and ticket giveaways at retail outlets, however its at least somewhat ironic that these two particular businessmen linked up on deal.

From a pure sports sponsorship perspective, the deal should actually be lauded and held as an example of good product integration into sports. It’s a strategic business partnership between two partners who have aligned goals. Balsillie could make things even more interesting than they already are by signing a slew of deals with NHL teams, smattering his company all over the league then using it as a mini-platform to continue to get his message out.

Would be interesting, just saying…

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.