Two interesting and contradictory stories today that muddy the waters when we try to understand just how profitable it is to own a hockey franchise.

First is this North Texas news story, which features an interesting (and short) audio interview with a sports economist who claims that overall league sustainability sags because of hockey in non-traditional markets. Makes sense conceptually, though he doesn’t offer up much more evidence than “Hockey country in South Florida? No.”

I don’t disagree that building a sport in a non-traditional market is challenging and requires a billionaires’ equivalent of the welfare state in the meantime, but we are talking about huge media markets with mad sports cultures. If hockey is sustainable in cities with a population base like Winnipeg’s, it’s hard to understand how it couldn’t be sustainable in a city where even a fraction of its sports consumers would equal the same number of people.

More to the point, though, is how the angle of this story continues to calculate hockey profitability on a strict hockey-related-revenue-to-hockey-related-expenses ratio. That simply doesn’t reflect the manner in which value is derived from sports franchise ownership.

(One other point made during the interview that resonantes with me more, though, is that owners are emboldened by how strong the fan support was after the last lockout, and how fans are only damaging the long-term stability of the league if they welcome their teams back with open arms. We need to vote with our dollars. End aside.)

Now look at this tellingly contradictory story from South Florida, which says precisely what I and many others have been writing about for some time: those who own their own arenas or have favorable arena deals have a number of non-hockey related events and revenues to buoy their teams. “So what?” you might ask. That’s not hockey related revenue, and so shouldn’t be included when we talk about hockey’s profitability. Except that in many cases you simply can’t get your hands on that revenue without an arena, and you can’t get your hands on an arena without a regular tenant, and that your tenant then eats up a huge amount of your fixed expenses. Simply put, a hockey team might lose money, but your investment still gains.

We start to get a picture of an overall investment strategy: You don’t necessarily want a sports team, you want a sports arena. With an arena you can inflate real estate and land prices in the area, where you can strategically invest beforehand, and/or charge for retail space, and/or derive value from businesses you own nearby. To get an arena, you need a sports team, the cheapest of which is an NHL team in a non-traditional market. Even if you don’t have the arena, get the team and you can agitate for the local government to build you one with public tax dollars.

Once you’ve got your arena and team, your direct hockey-related revenue in-out ratio might produce yearly operational losses – you probably don’t make enough on ticket sales to pay for salaries and arena expenses. But your overall portfolio, made possible by owning the team, is producing value. You may even make a short term profit when you consider revenue sharing, merchandise sales, and television revenues, much of which is not reported. And if you’re lucky, maybe your team goes on a run, wins some playoff games, and you make some bonus short term profit. Meanwhile, your franchise is increasing in value year over year. If it’s in the middle of the pack, that means a 4%-11% return on your $200MM investment every year. All you have to do is have the money to cover any operational losses in the meantime, which some owners (remember those two guys in Tampa?) have trouble doing when all of their other speculative enterprises crumble in a crashing economy.

In the meantime, you can limit your operational losses by slashing payroll and agitating for a lockout to remove player rights. In the end, this narrative of non-traditional teams dragging down the league is only accurate if we continue to look exclusively at hockey related revenue. But owning a sports team isn’t about whether or not the team makes money. It’s about whether or not all of your investments, made possible through the ownership of that team, make money. Which is why the owners’ line about how broken the economics of the game are is so disingenuous.

I don’t doubt that some owners are actually losing money, and some owners’ investment strategies haven’t panned out. (Wang on Long Island hasn’t had as much luck getting a new arena as Katz in Edmonton.) But that players and fans should repeatedly pay for the unrealized strategies of various billionaires is asinine. The reason the Coyotes don’t have potential owners crawling all over them isn’t because there’s no appetite for hockey in Arizona. It’s because a state with an economy that runs on real estate sales has crashed and is near bankrupt. No one has any money to spend on anything, so real estate speculation has flatlined. As the economy recovers, look for more potential owners to start sniffing around these supposedly doomed outfits in non-traditional markets.

All of which to say that the owners of sports franchises are looking quite villainous lately. The Senators’ owner, Eugene Melnyk, is fairly mild in comparison – though he does have a tendency to make shitty, misleading statements about relocation right before tickets go on sale, or claim that his club is the second largest employer in Ottawa, which is ridiculous. But when we see the repeated manipulation of fan sentiment to get concession from the public purse, to drive down individual rights in the form of player arbitration (from guys who I would assume are staunch anti-state-interventionist Republicans to boot), and the plainly misleading reporting of franchise values, then I don’t know how anyone can be pro-owner in all of this mess.

With this first glitter of optimism we’ve received in weeks—generated, perhaps tellingly, by meetings where the NHL Commissioner and NHLPA head were both absent—I’ve found myself thinking about the prospect of seeing hockey this year. Up until today I’d just about given up on that notion. Goes to show how even the cynical like me can be bent by a mildly positive though largely ambiguous headline.

It also speaks to how little we fans may expect from either side in terms of PR, and how little we received. I’ve never felt like either side was invested in the feelings of the fans, except to the degree they could manipulate fan sentiment as leverage in their negotiations. Such is the magnifying effect of the 24 hour news cycle. What is a group of rich people fighting over how much richer one side gets to be than the other turns into the same group of rich people biting the hand that feeds them. Given how badly this thing has been cocked up, I can’t help but think some kind of overture has to be made to the fans to get them back on side; I’ve never heard people sound as cynical as they have these past two months.

Which makes the following question both a bit compelling and also completely ludicrous: is the best thing the league can do to make amends with the fans to axe Bettman?

It would be succumbing to an unfair stereotype—Bettman answers to the owners, after all. But consider that 1) Bettman is a convenient stand-in for the greediness of the owners and the brokenness of this negotiation process; 2) There are many skilled, cut-throat former lawyers who could play the role of facilitator and administrator, and 3) maybe it’s healthy to have a little bit of turnover at the top, especially when your guy has been in his role for almost 20 years. This track record of lockouts is not synonymous with Bettman’s track record. For better or for worse, Bettman is the brand.

How many more years do you want this guy booed every time he steps up to a microphone, be it at the draft or handing out the Stanley Cup? This is supposed to be the face of ownership, the powerful mask of the league itself. Fair or not, Bettman’s as divisive a figure as you’ll find in professional sports, and after yet another lockout I can’t imagine there aren’t enough owners in that board room to do the ultimate shanking in blaming this whole fiasco on him. They could wash their hands of the whole situation and get back to the business of making money.

Unlikely to happen, of course, as Bettman has created the ultimate insiders’ club. And there’s nothing more appealing to the rich white man who has everything than membership in an exclusive club. He’s ingrained himself with the league’s identity. But we might be starting to see the beginning of a fan backlash that could be counteracted by the appearance, if certainly not the reality, of regime change.

I was trying to find an image for this post, but figured you don’t want to see another photograph of Gary Bettman making a turgid face as he strains to offer another non-answer at a press scrum…

I don’t know what it says about me that Forbes puts out some of my favorite hockey analysis, but they’ve done it again with their annual report on the value of hockey franchises. In it, they illustrate that the media’s focus on the operational losses of franchise ownership–which are themselves specious claims for owners who also own their arenas–are nothing more than the short-term price one pays for what can be staggeringly lucrative mid-term investments.

We mortals are expected to get by on the sort of paltry returns available to people playing with mere hundreds or thousands of dollars. What Forbes’ list indicates is that if you can afford to sink $200MM into a franchise, you’ll probably get the kind of increases in overall value, year over year, that make losing $5MM a year in the short term more than palatable. (Presuming you’ve got it to lose after buying the thing, admittedly.)

I won’t focus on Toronto, where all sense and logic are destroyed in the void of abject homerism. Or on New York, where they have a license to print money. ($74MM in cool cash year-over-year, zero debt.) But Melnyk’s looking at a nice little $100MM return on his $120MM investment in the Sens about a decade ago. Double your value in 10 years? Anyone who even bothers to look at their RRSPs will tell you that’s a pretty good deal.

Ottawa’s operating income was probably slim to nothing – $14.5MM before taxes, etc. But between all of the undeclared revenues that are made possibly through owning a hockey team – non-hockey events at ScotiaBank Place, television revenues, merchandise – in addition to the return when Melnyk gets around to selling the team, even a small market team like Ottawa, presents an enviable investment.

Maybe more suprising is how much debt Ottawa is carrying. At 59% of value, Ottawa is eighth overall is debt load, among the likes of the Islanders, Panthers, Hurricanes and Stars. They’re worse off than Nashville and St. Louis. This seems strange since Melnyk’s had a decade to pay off that arena. This may speak to his financial woes at Biovail. He has a profitable franchise. He just isn’t paying down his principle fast enough to be able to enjoy it.

More surprising still is that despite all this debt he’s carrying, Melnyk doesn’t seem to be a hardliner in this lockout situation. Sitting right there with him, in 10th, are the Washington Capitals, and their owner Ted Leonsis has long been suspected of being a hawk in all of this. Though he’s got a few looooooong term deals, and he might be feeling buyer’s remorse, in many ways the Caps are better off than the Sens financially.

Over on Puck Daddy they’re talking about the gap between rich and poor teams, but I don’t know if that’s really the point. Teams, even the exceedingly poor ones, can claim to be losing money operationally, but the overall value of the franchises don’t go down at the rate that most franchises go up. Only three franchises went down in value last year – St. Louis, Columbus, and Carolina. Two remained neutral – Tampa and Phoenix. (That’s right, Phoenix did not lose overall sale value despite losing more money operationally than any other this season.) And everyone else experienced at least marginal growth. The middle of the pack franchises increased in value between 4% and 11%, which ain’t a bad return in one year for your $150MM-$300MM investment. Especially considering, you know, you get to own a hockey team on top of all that.

It’s been a long, long time since I’ve written anything on this blog. In fact, the last post I wrote, on September 20th, was a petition vowing that if any games were cancelled that I wouldn’t watch any hockey for the rest of the season. Since that time I’ve had just about no desire to contemplate our situation as hockey fans, and no interest in covering the ongoing non-event that is this lockout.

The reaction to that petition was predictable and fair. Most seemed to appreciate the sentiment–that only by withholding our dollars can we actually communicate with owners and/or players–but admitted that they would eat hockey up if and when it returned. I’m missing hockey something fierce; I don’t begrudge anyone the opportunity to watch the Sens play again. But I thought it only right to follow up on whether or not my position has changed over the last month plus…

Nope. The owners have cynically positioned the fans, leveraging our passion for the sport in a fight to undermine player rights. They’ve irreparably set the sport back at least a year or two after what had been years of record growth and some of the best hockey in years. My sense is still one of deep resentment. If any other company or brand, selling me any other product, so fragrantly took me for granted in this way I would never go back to them.

Now, I’m not saying that I’m never going to watch hockey again. And I have to acknowledge that Melnyk doesn’t seem to be one of the hardliners among the ownership cadre driving this thing. But I simply can’t go back to the way things were and pretend that this level of greed is a normal and cyclical thing in the overall scheme of CBA negotiations.

So what were my plans for 2012-2013? Well, after a surprisingly competitive season last year, I planned to consume Ottawa Senators hockey to about the same degree as any fan who bothers to write about hockey on his own blog. Which is to say that I was going to watch every game at least on TV, attend between a half-dozen and dozen home games, go to as many playoff games as I can, buy some merch, and drink a shit-ton of $11 beers at Scotiabank Place. I don’t spend like a madman when it comes to hockey. But I’m part of the gristle that makes hockey profitable in this city. If I was a die-hard with season tickets and a version of every jersey, then peeling back a little doesn’t make that much difference; I’d still be spending like mad. Instead, I’m the kind of consumer who had built hockey into my routine. What any lockout demonstrates to the consumer like me is that I don’t need hockey in my life that badly.

When there are this many companies willing to bend over backward for my entertainment buck I can’t go back to hockey spending. I won’t be going to any home games if and when hockey is back, not even playoff games. I won’t buy any merch, like jerseys or t-shirts. (Not even that Ottawa Senators Dream Capture Kit.) I won’t spend any money on arena food or beer.

So, why would I punish our small market team? Well, I’m on record (here and here) thinking that Melnyk has a habit of stretching the truth when it comes to describing the challenges of breaking even. And I can’t ignore that Daniel Alfredsson is re-considering his plans to play another year, and that we’re losing a year of Erik Karlsson and Jason Spezza in their prime. Hockey, and Ottawa Senators hockey specifically, is damaged because of this lockout. If we never break out of this habit of flocking back to hockey because we’ve missed it so badly, then we’ll only have ourselves to blame when all of this happens again in 6-7 years.

ESPN’s crack team of NHL analysts

It’s only natural that the hockey community’s perspective on ESPN’s amazing/contentious idea, their “Ultimate Standings,” would focus on the Leafs being dead last among all sports franchises. For even such a flawed methodology as one that basically asks a frustrated group of fans what they think, those results deserve a little bit of commentary. But there might also be a few things we can learn from what amounts to marketing data made public.

(Aside: what is with this trend? Pitchfork did something similar with their People’s List, which was treated around the internet as if it wasn’t just free market research. They even broke down all the demographics. Sports has always been a little bit more comfortable with its commercial nature, but indie music? It’s a weird contradiction to me to have so many indie fans happy to share their consumer habits in a public way.)

ESPN’s methodology is a combination of the standard—weighted averages across eight key categories, designed to smooth outliers and exemptions, economic analysis—and counterproductive—polling fans by phone and online. I say it’s counterproductive because if the goal is to collect reliable data and drop the extreme deviations, then you’d also need to account for the fact that sports fans tend to harbor hyperbolic attitudes towards their favorite and least favorite franchises. You can’t just ask sports fans for the objective truth. A real “Ultimate List” would measure fans actions over time, as opposed to opinions. (That’s an interesting discussion in itself: what counts? Just attendance at events and watching on TV, or blogging, and shopping, and Tweeting, etc.?) It’s not unusual for a sports fan to put one thing in extremely strong terms and do another thing altogether.

It’s also difficult to understand how a fan in one city might render judgment of another city’s “fan experience.” How would an Ottawa Senators fan answer the question of fan experience about the Leafs? I’ve been to a Leafs game and thought the atmosphere was amazing, especially considering they were already out of the playoffs and they were playing the Blues. Can I be trusted, as a rival fan, to say that in a poll? Even just looking at Title Track: “Championships already won or expected in the lifetime of current fans.” Pretty sure we know how Leafs fans feel about the latter part of that sentence, but they won quite a few Cups back when the sport was played in a tanning factory in Depression Era New England. How does a Leafs fan answer that question v. a Sens fan?

A good deal of the factors are economic—in other words, value for money—which is often tied directly to how poor the team is. The Coyotes are listed as the best NHL team on the strength of coaching, loyalty to players, and how cheap everything is. Depending on solid coaching, loyal players, and cheap tickets is just the sort of thing a team this close to folding has to do.

Therein is the contradiction for fans to consider when in the middle of CBA negotiation designed to increase the prosperity of teams. If the Toronto Maple Leafs, the most profitable team in the league, are the worst at delivering a good product at a good price, and the Coyotes, a total financial mess, are the best, is there an inverse relationship between a team’s profitability and fan enjoyment? Makes sense to me. You will derive more value buying products that are not in high demand. The OHL team in Ottawa, the 67s, delivers an amazing product for about $20 a pop. That’s much more value than the Senators, but we can’t pretend that the OHL is the NHL anymore than we can pretend that the Coyotes are as valuable to the league as the Leafs.

It calls into question the way the ratings are weighted. Title track is weighted much less than, say, coaching or affordability. But I can imagine quite a few Leafs fans who would think that all of the expensive tickets and years of poor coaching would be worth it if they could have that one, cathartic championship win. More importantly, I can think of a few Leafs fans who would spend all of their money on anything Leafs related if the Leafs won a cup. But it’s still a valid question: would you rather have a cheap and still reasonably fun hockey experience or a contender?

A lot of the NHL teams near the top of list are either teams that are forced to sell cheap tickets due to poor economic performance, or are in non-traditional hockey markets—Tampa Bay, New Jersey, Nashville, St. Louis. Some of the most profitable teams in hockey are near or at the bottom—the New York Rangers are in the middle at 63, the Canucks are 92, Montreal is 111, and of course Toronto is last at 122. I’m left to wonder, relying only on the results of ESPN’s flawed algorithm, if the fan who intersects with the game on very tangible levels—how much do tickets cost and does the team win?—will be better off without greater economic and performance parity. It seems to me that the better the team is in both of these categories, the more the fan is bled for their bucks.

It’s something to consider as players and league officials try to win the hearts and minds of fans during a lockout. Bettman has promised lower ticket prices before, and he probably learned enough of a lesson not to do that again. But when asked what they want out of this whole mess, fans may do well to remember that the owners have no intention of making their product more affordable if they get the kind of concessions they’re seeking from the players.

For Sens fans, Ottawa finds itself at a respectable 42. They do particularly well in fan relations (32), ownership (25 – which also includes community involvement, which Ottawa has a great history of. Glad to see it recognized here) and, interestingly, coaching and on-field leadership (21). You’ve got Jack Adams nominee Paul MacLean, and Alfredsson as one of the longest serving captains in the league, but last year they were rated 117 in that category. Quite an improvement for one year. Similarly, ownership improved by 25 spots and fan relations by 20 spots. The players’ ‘effort and likeability’ also improved an incredible 47 spots, which sounds about right considering the team doesn’t employ Alex Kovalev anymore.

I don’t know if the team’s community outreach was really that much better last season than the season before, but that’s fan perception for you: if a team outperforms dismal expectations, every single aspect of your team is perceived more favorably. It will be interesting to see where Ottawa figures on this list next year now that the Hockey News has picked them to be a playoff team. In the meantime, we’re left to wonder if the next six or seven year CBA will create a landscape in which owners will make much more profit and pass along their good fortune to us in the form of price hikes.

Plenty of interesting interpretations of Kyle Turris’ new deal out there. Maybe predictably, Sens blogs and fans think it’s a steal because the assumption is that he will progress towards the expectations of a third overall pick. If that happens, then the team bought some of Turris’ prime years at what might be a discounted rate. Others take a more measured (read: pessimistic) stance, assume Turris is getting a lot of money and term for not a lot of production, and wonder if Ottawa just threw $17.5MM at a nebulous concept.

Both of these perspectives are valid, of course, and both represent risk for the organization. If you lock him up ahead of time, you hope for value down the road at the risk of the player not reaching their projected performance. If you don’t, you sidestep the risk of an anchor contract, but at the risk that you may have to pay more if the player performs. What I find interesting in all of this is that fans would internalize these two scenarios equally.

I think I’ve said before on this blog that if the Sens are not spending to the cap–even a cap rolled back in the CBA negotiations–then I don’t particularly care if Eugene Melnyk is getting great value for his money. A goal is no more enjoyable if the player scoring it is being paid less for doing so. At least not for me. The only scenario in which I care if an owner is getting value for his money is one in which he intends to spend as much as he is allowed, and the value of his contracts will help the team compete against other cap spenders. But this team, so laden as it is with over-performing rookies, entry-level contracts, and players like Michalek, Karlsson, Alfredsson and Anderson over-delivering value on their contracts, then it I certainly can’t get motivated to anger if a player gets paid because management didn’t have the foresight to predict his performance. If Turris ends up being worth, say $5MM, why would I, as a fan, care that the team has to spend that?

When we talk about the fan experience of watching a hockey game, one factor–money–is abstract, and doesn’t really impact how entertaining the game is. The other–term–isn’t abstract because we watch these players for the years of their contract. It seems logical to me that we should have a greater investment in the quality of the product on the ice than in the owner getting value for his money. These things are related, of course, but less so when you have a team spending so little in any case.

What should terrify fans more is term. If this 23 year old incurs an injury or mental block or simply fails to perform without the motivation of needing a contract for five more years, then it affects me as a fan. Simply put, I’m stunned that this management was willing to give out a contract of that length after such a short audition. Erik Karlsson only got two more years than Turris.

Listen to Melnyk’s interviews and you don’t get the sense that this team is going through a temporary period of low-spending during a rebuild, to be followed, inevitably, by more spending to the cap. Something’s changed. Spending so much money only to have last year’s cheap-o team make the playoffs seems to have really gotten to Melnyk. Now, when he speaks about the team, he talks about it as if it inhabits a permanent state of small market spending, restraint, and patient prospect development. None of this is strange to me. What’s confusing is the attitude of fans (or at least those fans whose opinions I read online) who take some personal pride out of defending this billionaire’s cash. I’m not trying to troll here, Melnyk saved our team from bankruptcy after all. I’m trying to get at the tendency of armchair analysts like myself to look at every deal in terms of value for investment, even when the owner is openly saying he will spend less than he can on payroll and the league is in a bar room brawl over revenue sharing.

I like Turris (though I’ve been rough on the deal that brought him here), and he seems like a good depth player on a team that has a number of quality prospects coming up. And I hope that the team is seeing something in his off-season development that makes five years less of a risk than a one year, wait-and-see deal. But as of now, consider me perplexed.