Greed, Indeed

In its expansion strategy, as in too many other matters, the NHL has shown a passion for fool's gold
October 06, 1991

These are critical times for the NHL. After achieving modest prosperity through the 1980s, the league now finds its future in jeopardy because of a host of woes—no U.S. national television contract, a nasty labor dispute, skyrocketing ticket prices, snags in expansion. And the league can thank its own greed for many of these bedevilments.

The absence of a league-wide TV deal in the U.S. is just one example of how the lords of hockey have let their lust for immediate riches blind them to the big economic picture. Three years ago, the NHL went for the bucks when it shunned ESPN and its 50 million subscribers to sign a more lucrative television deal with SportsChannel America, a fledgling cable outfit that reached only four million homes. The league figured that SCA would narrow the audience gap between itself and ESPN, but that hasn't happened. When its three-year, $51 million pact expired after last season, SCA sharply reduced the amount it was willing to pay for hockey, and other TV networks have scarcely been more forthcoming. The NHL, to its dismay, may well start the '91-92 season without a national U.S. TV contract.

The resulting diminution of TV revenue comes even as player salaries, which were up 19% last season, continue to rise. Because of the need to meet growing payrolls, ticket prices have gone up sharply, too. For instance, the New York Rangers have increased their top ticket price this season from $45 to $65. Adding uncertainty to the league's economic outlook is the newfound militancy shown by the NHL Players' Association in negotiations for a collective-bargaining agreement to replace the one that expired on Sept. 15. For the first time the NHLPA is seriously pushing for an easing of the league's notoriously stiff restrictions (five first-round draft choices for a quality free agent?) on player movement. Prospects for a quick settlement dimmed last week when players angrily walked away from the bargaining table. You can bet that when a new contract is finally signed, salaries will continue to escalate, which in turn will drive ticket prices higher still.

Obviously, NHL owners need an additional revenue source lest the cost of attending games further weaken the sport's fan base. And they've found such a source—expansion. But here, too, the owners are going for the loot with little regard for the long term. In fact, the NHL's approach to expansion is a case study in shortsightedness.

Since the absorption of four World Hockey Association clubs in 1979, the NHL has been a 21-team league. Its self-proclaimed "vision of the nineties" calls for expansion to 28 teams by the year 2000. The first of the new teams, the San Jose Sharks, begins play this season, and conditional franchises have been granted for '92-93 to Tampa and Ottawa. The addition of San Jose and Tampa is intended to move the NHL toward its goal of becoming a truly national entity in the U.S., as it already is in Canada.

Unfortunately, in executing this grand scheme, the NHL brass has been looking myopically at the horizon without first consulting the rearview mirror. Little has been learned from the past, when the NHL's growth was stunted by its eagerness to beat the WHA into virgin territory and to collect expansion fees in the process. Between 1967 and '74, the league added 12 teams, but it often awarded franchises to owners ill-equipped to run them. Worse, it didn't allow the new clubs to claim enough solid major league players in the expansion draft to achieve quick respectability.

Soon enough, franchises in Kansas City, Oakland and Atlanta had to be transferred. One of the transplanted teams, Colorado (from Kansas City), had to be moved again (to New Jersey). Another, Cleveland (from California), failed. Desperate for immediate help, new teams traded high draft choices to established clubs, causing the gap between the haves and have-nots to widen. Far too few games were competitive.

Today the NHL is making those mistakes again. Instead of giving its new clubs the means to turn into winners within, say, three or four years, the league is using them as trash heaps for unwanted players. Too many teams are being brought in too quickly. The NHL is also overcharging for the expansion clubs, increasing the possibility that they will be undercapitalized. Teams are going to owners who may not be able to afford them—and, in two instances, to those who have done poor jobs running other franchises.

George and Gordon Gund spent 12 seasons running the Minnesota North Stars into virtual ruin before they struck a deal with the NHL to sell the Stars and run the expansion club in San Jose. The Tampa team was awarded to a group headed by Phil Esposito, who as general manager of the New York Rangers from 1986 to '89 made 43 trades in 34 chaotic months without improving the club. The Ottawa franchise has named as its general manager a 36-year-old former player, Mel Bridgman, who has never run a team.

By charging $50 million per team—$18.5 million more than the NBA charged each of the four new clubs it approved in 1987—the NHL has frightened away responsible prospective owners. Instead of pricing new franchises fairly and giving them a chance to become profitable within a reasonable number of years, NHL owners have used expansion as an artificial means to inflate the worth of their own teams. Nobody is being fooled, though. The New York Islanders have had the for-sale sign up since last February, but owner John Pickett has yet to receive a worthy offer.

Jane and Lloyd Pettit, who donated the $53 million, 20,000-seat Bradley Center to the city of Milwaukee, operate a minor league team there. They decided not to pursue an NHL expansion club, based on the advice of Michael Megna of American Appraisal Associates, a Milwaukee consulting firm that valuates sports franchises. "Without a national TV contract, the NHL can't justify a price greater than $32.5 million," says Megna.

Last December five bidders made offers for the two 1992-93 expansion slots. Three of the bidders asked for a restructuring of the harsh terms—the $50 million is payable in three installments, before the team plays its first game—and they were all turned down in favor of the Tampa and Ottawa bidders, who agreed unflinchingly to pay money they apparently didn't have.

Says Peter Karmanos, whose suburban Detroit software firm, Compuware Corp., bid for a team for St. Petersburg, Fla.: "When I asked [NHL president John] Ziegler how he justified a price that was 65 percent more than the NBA charged its last four expansion teams, he shouted that it was none of our business. We should either pay or forget it.

"We offered them $29 million up front and proposed to split the profits with them [other NHL owners] over the next seven years. The other two groups [from Miami and from Hamilton, Ont.] who made offers came up with similar parameters. We were the only three that had the money, too. It was like a comic book.

"The NHL owners are perpetuating a sham. The basketball people have worked hard to build their game and the value of their franchises. Ziegler isn't anywhere near the businessman that the NBA front-office people are."

After hearing presentations from the bidders, the owners took only three hours to make their decision. "I couldn't believe how fast everybody wanted to vote," says one owner. "It was like somebody flashed the green and there was a feeding frenzy. We had all these criteria to avoid the mistakes we made in the past, and then we got impatient."

The installment timetable for the $50 million fee—$5 million down, $22.5 million last June and $22.5 million this December—has caused both successful bidders to scramble to meet the deadlines. Ottawa, which recently won zoning clearance for the construction of a new arena, put its June payment in an escrow account, and the NHL is confident it will make the final payment. But the Tampa deal continues to be shaky, in no small part because of the owners' haste in approving it.

"Esposito showed us [financial] documents that were written in Japanese," says the same owner. "We loved the market and the arena deal, but [the financing] had too many holes."

Esposito secured the franchise on the pledge from four Japanese companies to provide 50% of the entry fee in partnership with him. Shortly before the June installment was due, the Japanese investors withheld payment upon learning that Esposito had reached an agreement to sell a majority share of the team to a group based in Ireland. The deal with the Irish firm fell through, and George Steinbrenner, who has been banned from running the New York Yankees because of associations with a gambler, was recruited to help clean up Esposito's mess. "He has been brought in as a small investor and a Tampa resident to mediate the problem," says Ziegler, who would not comment on the appropriateness of allowing Steinbrenner to become an NHL owner. (Esposito, apparently, will remain as president and general manager).

Ziegler defends his league's procedures, saying that without preliminary approval, a potential franchise could not hope to attract investors, secure commitments for arena financing or collect deposits on season tickets. "These are conditional, not final, franchises," he says. Ziegler insists that if either of the franchises appears to have taken on a dangerous amount of debt, it will not gain admittance to the league. In other words, owners who have shown no restraint to this point would turn down more than $4 million each just before the checks are about to be placed in their hands. Right.

In fact, at $50 million, the chances of a franchise being a business success are ridiculously low. So are the chances of those teams being interesting to watch. Under terms of their deal with the league to abandon the North Stars in favor of the Sharks, the Gunds won the right—their final pillage of hockey in the Twin Cities—to take several of Minnesota's best prospects with them to San Jose. So the Sharks have a slight head start. But as part of the Gunds' bargain with the NHL, San Jose also had to share the picks in last May's expansion draft with Minnesota. With the league's remaining 20 teams permitted to protect 16 skaters and two goalies (each could lose only one player), the likelihood that San Jose would land useful players was slim. The Sharks had the usual options: lugs and thugs.

The protection lists when Tampa and Ottawa choose their teams next spring will consist of only 14 skaters and two goalies, but because the expansion pool will have had only one year to regenerate, the pickings will probably be even worse than they were for San Jose.

Given the NHL's niggardly approach to expansion drafts, the best way for new teams to build a foundation for success is through the amateur draft—but that requires considerable luck. That's because rule changes in 1979 and '80 lowered the minimum age for eligibility for the amateur draft from 20 to 18. Since scouts have more difficulty discerning greatness in an 18-year-old prospect than in a more developed 20-year-old, drafting mistakes have become more common.

What about free agency as a quick fix? Forget it. There was virtually no free-agent movement in the NHL in the '70s and '80s, but now, at least, there is a trickle. Bob Goodenow, the NHLPA's tough new director (he replaced the ever-compliant Alan Eagleson last year), may be able to negotiate greater leverage in the collective-bargaining agreement for teams and players trying to better themselves.

The lessons of the 1970s indicate that Tampa and San Jose will have to show fast upward mobility. Ottawa, a Canadian city, should be well-supported, but hockey has so few players who are name-recognizable in Tampa and San Jose that visiting attractions can't be counted on to put people in seats. Bobby Orr's three visits a season didn't save the Oakland Seals from their inept management. Neither will one or two appearances a year by Wayne Gretzky or Brett Hull sustain the Tampa Bay Lightning if it doesn't quickly become a winner.

The NHL already has a map of the road to ruin. All it has to do is read it. It's not too late for Ziegler to show some leadership and talk his owners into reworking the expansion plan.

The franchise fee should be cut, first to bring relief to Tampa and Ottawa and second to encourage sound businessmen to apply for future franchises with their own money, not somebody else's. The pace of expansion should be slowed to accommodate no more than one franchise every two or even three years so that the talent pool would have time to replenish itself. Expansion drafts that allow for the protection of only 10 players and one goalie would give fledgling franchises a core of solid players while they wait for draft choices to develop.

The NHL can still reach its goal of 28 teams, but first it must answer this question: Do the owners want a quick buck, or do they want a healthy, truly national sport in the U.S.? It's time they started giving a different answer than they have in the past.

ILLUSTRATIONRUSS WILLMS ILLUSTRATIONRUSS WILLMSEsposito needs a savior in Tampa. ILLUSTRATIONRUSS WILLMSThe new teams will be stuck with lugs.

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