Eugene Melnyk Accepts Honorary Degree from Chicago School of Economics

I’ll say this for the Euge: he never leaves us wanting for something to write about.

This latest interview (excerpts from a larger Citizen interview entitled “Senators poised for financial turnaround”) sees everyone’s favorite pharmaceutical magnate provide some revealing insight into his expectations for the season before the Sens went and surprised everyone. That in itself is worth the short read. It’s satisfying the way most behind-the-scenes documentaries tend to be.

But of course, given the title, the interview also allows Melnyk to revisit some of his favorite tropes about the economic sustainability of franchise ownership. Frankly, I can’t blame him for hammering this notion into the ground – that the Senators are constantly on flimsy financial ground, that they once needed to make it to the second round of the playoffs just to break even, and so on – because part of his responsibility as an owner is to maximize team support. But to see the hockey media in this town trot out these ideas again and again without any rigor or interrogation is starting to rankle.

I’ve written on this blog before about the cognitive dissonance between the assumption that the league is structured to make profit for its franchises and Melnyk’s statements that it is not. He maintains that Ottawa, as a mid-sized market who spent to the cap, couldn’t make it work financially. There’s not much beyond that quote that we know for sure.

We do know that Ottawa is right around the league average in ticket prices and in the top ten in attendance. The profits it receives due to television revenues and sales of merchandise are not public, but I’m making an assumption that as a Canadian market they are, at the very least, average. We know that merchandise sales outside of arena stores are shared around the league. So my confusion remains: if an average club making average revenue can’t break even without consistently being among the best eight teams in the league in terms of performance, how does the NHL even stay in business? Every year NHL revenues are increasing, profit is way up, and yet billionaire owners continue to cry poor about the state of the affairs.

Let’s look at some choice quotes:

On what making the playoffs means from a business perspective: Up until this year, we had to make two rounds of playoffs just to break even. Now we are doing well enough that we break even, pretty much, just finishing off the season and everything else kind of gets bonused out. We still have some hangovers from previous contracts that we’re still obligated to fulfill, at least in payment, but once those are all cleaned up in the next couple of years, things can all come together where the business of hockey actually pays. The cheques start going, hopefully, the other way.

Nothing new here, really. The basic assumption is that this club barely ekes out a living after salaries and hockey related expenses. He says this every time there’s about to be a ticket drive, either for seasons or playoff tickets. What Melnyk doesn’t clarify – and what the Citizen of course doesn’t bother to ask – is how much money Melnyk receives as a byproduct of franchise ownership but that is not hockey related – his overall net profit, in other words. One of the reasons clubs like Phoenix and Atlanta have had so much trouble making money is not only that people don’t go or watch the games on TV. It’s also that the owners don’t or didn’t own the building. If hockey teams eat up a large chunk of operating expenses, that leaves all other events – concerts, family events, whatever – as almost pure profit. Phoenix, on the other hand, pays rent. When you factor in television, merchandise, and tax breaks, it’s hard to believe that Melnyk doesn’t make any profit whatsoever from owning the Ottawa Senators. Forbes noted in 2010 that the club was carrying about $130MM worth of debt, which it’s financing, though I’m assuming this was debt taken on to purchase the team and will return to Melnyk when he sells. I’d still like clarification of if this ‘break-even’ point is actually the point at which hockey revenue, i.e. ticket sales, equals hockey expenses. Because otherwise the whole league is a house of cards.

Finally, not sure if he’s referring to the approximately $2.5MM worth of buy-outs Ottawa is carrying from Emery, Cheechoo and Alfredsson (from when Alfie’s contract was renewed), which are coming off the books this year, or Heatley’s bonus, which was already paid out. Curious that he says, “once those are cleaned up in the next couple of years,” which maybe implies a player currently under contract, but I can’t imagine who that would be. (Gonchar?) In any case, I love that he refers to them as hangovers.

On the Ontario government considering removing a business tax break on sports tickets: It did (take him by surprise), and I think it was very foolish to even attempt something like that, you know because at this point, that would have kind of pushed us over the edge. Forget about deep pockets, it has to survive on its own. And the one way, if you’re going to continue having a franchise within a city, especially what I call a mid-market city like Ottawa, is to be able to be smart in everything you do. And the stupidest thing you could do is something like try to do a tax grab of some sort…

I’m not sure what to say here except that as a person who works in health care in Ontario, who sees what the government’s budget and debt look like and knowing we’re all going to have to tighten our belts due to austerity measures, calling this “stupid” and a “tax grab” is a bit insensitive. It’s certainly tone deaf to the tenor of the political discussion today and the popular notion that everyone should have to give back. You have doctors offering to pay more income tax, and this billionaire sports franchise owner wants to talk about survival? Classy, Euge. Really classy.

As James says, it’s easy to have a soft spot for Euge because he saved the team from bankruptcy (real bankruptcy, under a pre-cap, pre-revenue-sharing ownership without assets). But sometimes he says something that reminds you that he’s a billionaire pharmaceuticals owner. Rexall is doing the same shit in Edmonton by forcing the taxpayers to pay for a new arena. These guys didn’t become rich by accident, and during these moments there’s not much more to say than “go fuck yourself.”

On the economic contribution of the team, versus the cost of the tax credit: If you look at the math of what we contributed (around the All-Star Game), it’s a $150 million we contributed. You look at the world juniors, the other events, the two drafts we brought, the All-Star Game that we brought the (Bell Capital Cup) that we have every year. What the Sens foundation does…

No idea what he’s talking about here. Either he means “contributed” in terms of tax revenue, or in stimulus to the local economy. I assume the latter, given he’s referencing events in Ottawa, but this is where he’s starting to contradict himself. Should we support him as an owner because the team is barely surviving, or because of some half-baked trickle-down theory about how professional sports spurs local economies? (A theory debunked about fifteen ways from Sunday.

It’s a fair argument. I just think if we’re going to “look at the math,” then by all means: let’s look at the math. What are the total revenues, not just direct revenues, as a result of franchise and arena ownership? How much does Melnyk stand to make when he sells the franchise?

On fan initiatives planned for the playoffs: First things first, I don’t want to jinx it, James. We want to get into the playoffs. If we’re in the playoffs and we need fans to come out for those last three games, and scream and make our players believe they are playing at home, we’ve got to start with that. We get sold out anyways. We need them to come out and cheer them on. If we do, yeah, it’s the same thing all over again. It’s playoff fever. Luckily, I was fortunate enough, and you were too, that ’07 playoff fever was rampant and we got to Round 4 and nobody’s ever seen anything like it. Jeez, we were so close, and it’s going to be the same thing all over. I’m sure that Cyril has planned a whole slew of party events, events for kids and things that are going to get this city rocking again (mentions he will be in town Saturday for a skate for underprivileged children).

This I’m including not only because Melnyk affirms that, yes, this team gets “sold out anyway,” (which, again, if you’re a Canadian team selling out every game, how are you struggling?), but also because I want to be fair. It’s such a likeable quote. Ultimately the Senators are a huge part of the community. I grew up in Ottawa, and the ’07 Cup run was one of the proudest moments for the community that I can remember. Melnyk’s right that we’d never seen anything like it. It’s a reminder of just why we care about sports so much: they are, in the end, declarations of our affinity for one another as members of a shared community, be that community a regional entity or a clumsily arranged group of yahoos clustered around a brand, a likeable Swedish guy, and a cartoon gladiator.

Interviews like this remind us that sports may render all of us community members equal. It’s just that some of us are more equal than others.

5 thoughts on “Eugene Melnyk Accepts Honorary Degree from Chicago School of Economics

  1. I’m going to focus on the tax break companies get for buying Sens tickets, and link to what is actually a pretty good blog post by Randall Denley outlining how a small business spending $1000 on Senators tickets would receive a discount of less than eight per cent of that amount because of the current system–$77.50. [1]

    I don’t think I’m in favour of cancelling the entertainment tax write-off, because a) it’s actually a pretty valid business expense, and b) it’s an insignificant part of the provincial budget. But when a billionaire like Eugene Melnyk and his employees cry out at the first mention of this thing being cancelled suggesting that it’s going to bankrupt the team, it really grinds my gears.

    [1] “Sports tax break facts” http://blogs.ottawacitizen.com/2012/03/02/sports-tax-break-facts/

    • I didn’t finish my point, I guess: The bottom line is that businesses that treat Senators tickets as tools to promote their business won’t likely let less than eight per cent disincentivize them from buying those tickets, but even if they did the Senators would simply have to reduce ticket prices by eight per cent in order to off-set the tax break–it would reduce a small portion of ticket revenue for the Senators by up to eight per cent, but that’s not likely to bankrupt the team.

      • That’s a great point, and thanks for the links. It also speaks to my underlying skepticism, which is that Ottawa is so reliant on ticket revenue that even the smallest dent will endanger their survival.

  2. Pingback: How the 2012 lockout affects the way I interact with hockey |

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