Canada’s Team: The Phoenix Coyotes?

The way the NHL’s southern expansion strategy is structured means Canadian taxpayers are bank-rolling struggling U.S. hockey teams. Can the NHL’s new NBC deal save hockey in America?

CB Staff 0

 The Phoenix Coyotes wave to the fans after being defeated by the Detroit Red Wings in Game Four of the Western Conference Quarterfinals  Are Canadian taxpayers the real bankrollers of the team? (Christian Petersen/Getty Images)

When Hockey Night in Canada airs its first game of the regular season on October 6 it will officially mark the iconic sports series’ 60th year on air. A lot has changed since the CBC broadcast the first Canadian hockey game in 1952. In that era there were only six teams and, crucially, the network didn’t have to pay the NHL to show its games. Today, multiple Canadian networks pay millions of dollars to broadcast games, with the CBC paying a reported $100 million to air matches on its flagship sports program. Some say it’s those de facto taxpayer dollars keeping the U.S. end of the league afloat—and Canada’s not getting its due for it.

When the league had a handful of clubs, and players made peanuts for salaries, no one much cared about television contracts. But, these days, many NHL teams—especially the struggling American ones—need national network contracts to help keep them afloat. These revenues are evenly split amongst the league’s 30 teams, which means that, technically, the CBC—and Canadian taxpayer money—has been helping prop up a number of U.S.-based franchises.

Tony Keller, a Canadian journalist and author of “The New Economics of the NHL,” a report published last April by Toronto’s Mowat Centre for Policy Innovation, says in his report that of the estimated $100 million paid by the CBC to the NHL, only $20 million is allocated to Canadian teams; the other $80 million is distributed to the U.S. “The bottom-line is that two-thirds of the NHL’s national TV revenues are earned in Canada and distributed across all of the NHL’s—primarily American—franchises,” he writes.

But the flow of Canadian taxpayer money to the U.S. doesn’t end there, says Keller. The league has an arrangement where the better performing teams pay a portion of their revenues to the struggling franchises. So a lot of the money Canadian teams do get from the CBC, and other channels like TSN or RDS, inevitably find their way back into American hands. Keller estimates that $40 million a year is paid into the revenue sharing pool by Canadian teams. While it’s not clear what percentage of TV revenues end up in the pool, Keller says, “the actual percentage of Canadian national TV revenue going to American teams is perhaps as high as 90%.”

Take the struggling Phoenix Coyotes, for instance. In 2008-09 the Coyotes expected to receive US$14 million from revenue share and US$9.3 million from TV and other league revenues, Keller explains. Net ticket sales for the season were budgeted at US$16 million—which means about two-thirds of team revenue came by way of NHL subsidy. With every Canadian NHL club making money—the six Canadian teams had higher ticket revenues per game than 23 American ones in 2007-08, the last time this information was made public—it’s highly plausible that most of the cash the Coyotes received came from Canadian clubs. “Revenue generated by the large Canadian viewership of professional hockey is being used to subsidize unprofitable American businesses,” writes Keller.

However, the league’s television dynamics have changed since Keller’s April paper when the NHL in April signed a reported 10-year US$2-billion deal with NBC. While the contract isn’t NFL calibre—that league recently signed a decade long deal with ESPN for US$15.2 billion—some believe the NHL has finally landed the U.S. TV contract it has tried so hard to get. Doug Perlman, a former NHL executive and now CEO of Connecticut-based Sports Media Advisors, says it’s a terrific deal for the league. “A lot more money is flowing to clubs,” he says. “While it’s not the ultimate driver as it is in the NFL, the national broadcast dollars are significant.”

With the NBC deal, all 30 teams are now making more money in revenues from the NHL’s U.S. contract. But, says Keller, the majority of the cash the CBC pays for broadcast rights still ends up in American hands. If you divide total TV revenues of about $340 million ($100 million from CBC, $40 million from TSN and US$200 million from NBC) among the 30 teams, each gets approximately $11.3 million. “Even with the [U.S.] contract almost 50% of TV revenues are coming from Canada,” says Keller. “It’s still a case where Canadian television is a large supporter of [U.S. teams].”

The percentage of dollars Canadian networks send to the U.S. will likely rise once the CBC’s contract with the NHL is up in 2014. With more sports networks chomping at the bit for the coveted Saturday night hockey slot, rights to broadcast games will only go up. Jeffrey Orridge, CBC’s executive director of sports properties, expects there will be a heated bidding war in three years. “We fully expect other broadcasters, most notably Rogers and Bell, to try and secure those rights,” he says. There could be some sort of arrangement where a broadcasting consortium, as with the Vancouver Olympics, pays for national rights, says Orridge, but either way, Canadian networks will have to cough up significantly more dough in a few years.

Of course, Orridge doesn’t agree with Keller’s view that the CBC is supporting weak NHL teams. The network isn’t responsible for how the NHL distributes its revenues, he says. But however it uses the funds, he thinks it’s working. “The league is healthier than it’s ever been,” he says.

Others disagree with Keller’s assessment, too. “It’s misinformed,” says Jean-Patrice Martel, a Montreal-based executive vice-president with the Society for International Hockey Research. He contends that because HNIC is a profitable show, the CBC makes back what it pays and then redistributes those revenues within the network. Plus, you could take issue with how taxpayer money is being spent on any part of the program. “I sometimes can’t believe my taxes are going to pay Don Cherry,” Martel quips. “But he’s on there and he’s helping the show make a profit.”

While Orridge won’t reveal how much of CBC’s revenues come from HNIC, he does say that out of all the stand-alone operations, which includes news, the show generates more of its own revenues than other programs. If anything hurts Canadian taxpayers it’s when Canadian NHL teams don’t make the playoffs. The network’s advertising rate card jumps the closer a Canadian teams gets to winning a Stanley Cup. The show assuredly generated more revenue—though Orridge won’t say how much—during Vancouver’s playoff run last year. The only scenario that would make the network even more money, he says, would be if the Leafs made the post-season.

A new NHL team in the Great White North, such as the Winnipeg Jets, doesn’t change CBC’s arrangement with the NHL, and Orridge says it doesn’t necessarily mean the network’s rate card will increase. But if the Jets do well and succeed in the playoffs, the CBC will be able to charge advertisers more. So, another Canadian NHL team could, at some point, bring in additional revenue for the network.

Richard Powers, a professor of business law at Toronto’s Rotman School of Management, says that while it’s “absolutely true” that taxpayer money is helping U.S. teams, there’s no other way of doing it. For the NHL to succeed the way Commissioner Gary Bettman wants it to, it needs television revenues north and south of the border.  “It’s a viable argument, but I would suggest that you have to go with the greater good,” says Powers. “For the NHL to work it needs TV.” He credits Bettman for finally landing a big U.S. deal and says the NBC contract will help Canadian franchises as well. If the NHL can raise its profile in the U.S., Canadian clubs may sell more merchandise, while more Americans will fill the now empty seats in weak markets, boosting league revenues. Other marketing and revenue generating opportunities that benefit the whole league could present themselves, too. The hope, says Powers, is that all of the league’s teams will see their revenues rise from increasing American demand for hockey.

Whether you like it or not, for the next decade we’ll likely see about half of the money garnered from national Canadian television contracts wind up with U.S. teams. But there are three developments that could dramatically change that.

The first is if the U.S. economy worsens and American teams are sold to Canadian buyers, and then moved north. In mid-September the Dallas Stars declared bankruptcy after its owners defaulted on a loan—partly due to the recession—back in 2009. A Vancouver-based businessman bought the team, but has said he’s keeping it in Dallas. Keller however, thinks Canada has massive demand for more NHL teams and it’s likely we’ll see more Canadian white knights willing to pay cash-strapped U.S. owners big bucks for a hockey team. The goal for most team owners, after all, is to buy a team and sell it at a profit.

The situation could also change when NBC’s contract is up. If Americans ultimately, take to the league and the network’s viewership increases, the NHL could land a deal worth far more than it’s getting now. And third, if NBC’s foray into the NHL is a bust, the league may never again be able to land a lucrative American contract. Perlman doesn’t think the poor economic conditions will affect the deal, but if there is a long-term economic decline stateside, and advertisers instead choose to spend more money on, say, the NFL, the arrangement could run into problems.

“The deal will either end up like NFL’s ESPN relationship, where the network attempts to build an NHL franchise, or it could end up like [the NHL's] own ESPN deal did—[the NHL] lost its TV contract with them,” says Keller. Until then, the more success Canadian teams have, the more money American ones get. “There will always be a certain amount of money from the Leafs and Canucks that flows out,” says Keller. “And it will be that way as long as Canadian teams are doing well and American teams are struggling.”

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