A Frozen Pond of Red Ink?

The NHL’s 30 teams lost a collective $273 million last season and continued a financial decline that has put the league on a “treadmill to obscurity,” according to a report commissioned by the NHL and released Thursday in New York.

In an effort to back its case for reducing player costs as the labor agreement with the players’ association enters its final seven months, the league asked Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, to analyze teams’ finances. Levitt, who said he had free access to detailed data, hired an accounting firm whose personnel he said spent more than 2,000 hours on a project that began last February and ended a few weeks ago.

Their conclusions paint a grim picture for a league that has struggled to achieve mainstream popularity in an increasingly crowded sports landscape.

“The relationship I saw between league-wide player costs and league-wide revenues of about 75% were totally inconsistent with any reasonable standard business practice,” Levitt said. “As I see this, these losses are going to get higher, not lower.

“I would neither underwrite as a banker any of these ventures, nor invest one dollar of my own money in a business that appears to be heading south.”

Levitt, who said he was paid $250,000 in advance for his work, also said he was prepared to discuss his findings with “those who have an adversarial interest,” including NHLPA leaders or players. “This is as close to catastrophic as I’ve seen a business of this size go,” Levitt said. “A business of this size cannot sustain losses of this magnitude and be viable.”

The players’ association rejected Levitt’s findings as improperly framed because he based his definition of hockey-related revenues on the definition the NBA uses to define its revenues and formulate its salary cap. Ted Saskin, the NHLPA’s senior director of business affairs, characterized Levitt’s report as a “clandestine effort ... which suggests to me the intended audience was the media and the public and they’re not trying to advance anything with us.”

Levitt’s report did not change the union’s stance, Saskin said, citing an omission of a mention of the recent strength of the Canadian dollar. It was worth 63 cents U.S. a year ago and has risen to about 76 cents U.S., a change worth about $70 million because many teams receive money in Canadian dollars but pay players in U.S. dollars. He also said the report did not account for the Phoenix Coyotes’ new arena in Glendale, Ariz., which he said represented a turnaround of $20 million to $25 million in revenues.

“We continue to believe in a marketplace system in which it’s owners who decide how much to pay players,” Saskin said. “I think things are heading in a different direction [than Levitt does].”

Levitt’s report said that in the 2002-03 season the NHL had revenues of $1.996 billion, player costs of $1.494 billion (including salaries, pensions and benefits) and $775 million in other operating expenses, leaving a loss of $273 million. That loss would have been $374 million if interest and depreciation were factored in, he said.

According to Levitt, 19 teams reported operating losses and 11 reported profits; the largest profit was $14.6 million and largest loss was $40.9 million. The average profit of the 11 teams that reported a profit was $6.4 million. The average loss of the 19 teams that reported losses was $18 million. The average loss for all teams on the combined league-wide Unified Report of Operations was $9.1 million.

“From an investment point of view it’s a dumb investment,” Levitt said. “They’ve got a serious problem.”

NHL Commissioner Gary Bettman said hearing that from someone of Levitt’s stature “is very sobering.... All we’re asking for is what is a fair share for players under our economic system. We need to decide on what a fair share of the pie is and we can distribute it from there.

“This is not so much [about] who can get a leg up. From my standpoint, let’s put this behind us. We’re a business that grosses $2 billion. There’s no reason we can’t have 30 healthy franchises, no reason whatsoever.”

Dan Beckerman, executive vice president and chief financial officer of AEG, the Kings’ parent company, said Levitt’s report thoroughly examined entities related to the Kings, such as Staples Center, and accounted for revenues such as suites, concessions and broadcast rights.

“Our finances were highly scrutinized. They took a deep dive into the Kings’ financial statements but an even deeper dive into the arena’s finances,” Beckerman said. “The Kings receive a fair share of those revenues and this was proven.”

Asked if the report’s dire conclusions point an accusing finger at clubs’ mismanagement, Bettman said the problem was greater than any one owner’s folly.

“I think it points to the economic system that doesn’t work,” he said. “There’s no such thing as a free market. This marketplace is not working.”

Paul Swangard, director of the Warsaw Sports Marketing Center at the University of Oregon, agreed the league needed a new direction.

“My sense is there’s a unique facet to this now because the league’s position has momentum,” he said. “The fans are behind it and the sponsors are behind it. That’s as strong a foundation as you can get. Bettman’s legacy could be that after all that’s happened, he’s the one who fixed the economic system after it spiraled out of control for years.

“The league’s only hope for success is that they’ve got to fix it.”

Al Coates, the Mighty Ducks’ senior vice president of business operations, said Levitt’s report didn’t surprise him.

“The economic system currently in place doesn’t work for our particular club,” he said, adding that the Ducks had lost money last season despite their run to the Stanley Cup finals and will lose money again this season.

The current collective bargaining agreement was forged after a 103-day lockout that cut the 1994-95 season to 48 games. It was extended twice. “We thought it was going to work and we thought labor peace would enable us to grow the business,” Bettman said. “You should hold me accountable if we don’t fix it.”

The last formal negotiations between the NHL and the players’ association took place Oct. 1. The players proposed taking a 5% pay cut and adopting revenue sharing and a luxury tax, but the NHL said that was inadequate. Bettman said he spoke to Bob Goodenow, executive director of the NHLPA, at a game last week but no formal sessions are scheduled.

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On Thin Ice?

Operating losses and profits of NHL teams, according to the league. Numbers in millions of dollars:

TEAMS REPORTING LOSSES

*--* Amount Teams Avg. Combined Over $30 million 4 $35.5 $142.0 $20-$29.9 million 2 $23.2 $46.4 $10-$19.9 million 6 $16.9 $101.5 $5-$9.9 million 6 $8.2 $49.4 Under $5 million 1 $3.1 $3.1 Totals 19 $18.0 $342.4 TEAMS REPORTING PROFITS Amount Teams Avg. Combined Over $10 million 2 $12.7 $25.3 $5-$9.9 million 4 $8.1 $32.4 Under $5 million 5 $2.4 $12.1 Totals 11 $6.4 $69.8

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