Yesterday morning, on the “Morning Mojo,” a triangle area sports talk show, the co-hosts, Joe Ovious and Morgan Patrick were gabbing about hockey. There’s a lot of buzz about pucks in this area, owing to the success of the Carolina Hurricanes, who’ve reached the conference finals. In a broader discussion of the game, Ovious and Patrick agreed that though the owners were “still losing money,” they weren’t losing as much as they were before the lockout that wiped out the 2004-05 season and the salary cap that was a result of the impasse.
The main event of labor disputes is always the major league baseball players’ association and the baseball owners. The collective bargaining agreement is set to expire this December, and since it would be wishful thinking to assume that negotiations for a new agreement will go smoothly, we are soon likely to be subjected to a steady stream of analysis about how much money the players make and why the owners need to constrain costs (plus, the usual stuff about the Yankees’ out-of-control payroll and competitive balance). So, as a warm-up, I thought it was worth using Ovious and Patrick’s off-hand remarks as a jumping off point for understanding why sports owners claims about losing money obscure how profitable it is, in general, to own a major league sports franchise.
The material below was originally reported on in Forbes magazine (I can't find a link to the article - it's from November 2004), which does yeoman’s work scrutinizing the real state of major league sports franchises' finances. Unlike most sports journalists, they know better than to take any sports commissioner, including the NHL’s, at its word on the league’s profit and loss statements. Focusing on the season before the lockout, Forbes found that the NHL’s losses were less than half of the league’s claim of $224 million in 2003-4. One reason for this is that NHL owners often hide revenues. For example, the Chicago Blackhawks are owned by William Wirtz. Wirtz also owns half of the United Center, where the Black Hawks and Bulls play, whose 212 luxury suites pulled in fifteen million dollars in 2003-04. None of this was reported as revenue for the Blackhawks, though presumably they make some money off of luxury suites in the building in which they play and in which their owner has a fifty percent stake. Unless Wirtz can argue that not a single dime from the 212 luxury suites was spent on Blackhawks’ games, or sold because people are interested in watching the Blackhawks (hockey is very popular in Chicago), he’s just not coming clean about his hockey revenues. Forbes notes, “While the United Center is a separate corporate entity from the Blackhawks, the building and team are part of one equation for Wirtz.”
Other examples of understated revenue that Forbes dug up include the Islanders’ cable television revenues. The league declared only half of the $17 million the New York Islanders got in 2003-04 for their cable broadcasts. Forbes points out, “for Islanders owner Charles Wang, who paid $188 million for the team and its cable deal in April 2000, the economic value of owning the team certainly includes the entire cable deal.”
Forbes also highlights the importance of assessing the increased value of owning a property – a key reason why owners invest in a property in the first place. For example, the Gunds, George and Gordon, paid a fifty million dollar expansion fee for the San Jose Sharks in 1990. In 2002, they sold the Sharks for 147 million dollars. Is that 100 million dollar windfall accounted for in the owners’ claims that they’re losing money? The Thrashers, Wild, Blue Jackets and Predators went for eighty million each during hockey’s last expansion in 1997. They’re now each worth about $130 million. Even accepting the league’s disputed numbers – that they lost $224 million last year, the appreciation of four franchises regarded as small market was $7 million per year over the last seven years, equal to the average loss per team in 2003-4, according to the league.
Forbes explained that Billionaire Philip Anschutz has been especially adept at turning a hockey franchise into a huge payday. He bought the Los Angeles Kings for $113 million in 1995. The Kings lost $5.3 million in 2003-04. However, Anschutz parlayed that franchise into agreen lightfrom the city of Los Angeles to build Staples Center in downtown Los Angeles; the arena was completed in 1999 for $400 million.
Anschutz also bought a stake in the Los Angeles Lakers in 1998 and rents out Staples enter to the Clippers and Arena football’s Los Angeles Avengers. Forbes noted that when you add in tennis, gymnastics, concerts and other events, the arena is busy almost every day or night during the year. Forbes observed that “premium seats for corporate fat cats are cross-marketed for other teams and events. Documents related to a bond offering on the building show that bankers estimated Staples Center would generate operating income of $50 million last year, only a fraction of which shows up on the Kings' P&L statement.”
According to Forbes, Anschutz has also been planning on building a $1 billion, 26-acre project around Staples Center that would include a 7,000-seat theater, a 1,200- room hotel, restaurants, offices and luxury condos. Just to square this circle, Forbes concluded that in a reference to the development around Staples Center, a senior executive for the holding company that owns the Kings was quoted in the Downtown News in 2000 as saying, "If it wasn't for the Kings, none of this would have happened."
Owners and commissioners spend a lot of time complaining about the fact that these wildcat reports are based on incomplete information and are therefore “irresponsible journalism.” Of course, what they leave out is that the incomplete information results from the owners reluctance to give a full accounting of their finances. Neither league officials nor former SEC chairman Arthur Leavitt, who oversaw the NHL’s financial reporting, would speak with Forbes when it compiled its report.
As I mentioned at the outset, this is really just a warm-up for the main event: the coming battle between the MLBPA and the owners. In 2001-02, Commissioner Selig subjected the public to an endless stream of dishonest arguments, from claims about the lack of competitive balance, to his insistence that few teams had “hope and faith” at the start of every season, to his argument that player salaries drove ticket prices. Some of these arguments will be a bit more difficult to make this time around, given that, since the 2002 CBA baseball is in the midst of a highly competitive period characterized by having had six different World Series champions in the past six seasons, while enjoying record years at the gate.
Larry Brooks, the New York Post hockey writer who did such a good job of covering the issues during the 2004-05 lockout, pointed out repeatedly that what Bettman and the owners wanted is that which exists in no other business in America – risk-free profits regardless of the incompetence of the individual franchises. This is subsumed under the appealing sounding phrase “cost certainty.” Bettman’s repeated dishonesty about the league’s financial position was premised upon this peculiar form of entitlement and derives in significant part from an obfuscation of the difference between a stand-alone business, and a revenue stream that is a subsidiary of a larger corporation. The latter characterizes most major sports franchises these days, but league commissioners continue to speak as if their teams are mom-and-pop businesses just trying to survive. This obfuscation, and the failure of most media, sports and otherwise, to grasp its implications, is one of the significant obstacles to a better public understanding of how large businesses operate within a highly politicized economic environment. Baseball owners possess vastly more valuable properties than do hockey’s owners, and make much more money. But none of this will stop them from finding new ways to prevaricate about how much money one makes from owning a pro sports team. It’s a losing battle to persuade people that they should sympathize with pro athletes who make millions of dollars a year. But, there should be, at the least, a fuller understanding of just what it means to own a team. Because whatever they tell you about their losses, rest assured: life is good.