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INDEPTH:
NHL LABOUR STRIFE > FEATURES
On the hot seat Arthur
Levitt defends his report on the state of the NHL's finances
CBC Sports Online | Last updated Feb. 24, 2004
Arthur Levitt: "I think
you'll see more clubs failing, filing for bankruptcy and going
under within five years." (AP Photo/Jennifer Szymaszek) |
With the playoff race headed into overdrive, the man at the centre
of attention in the NHL is a not a general manager trying to make
a big trade, or an all-star forward on a scoring tear.
Instead it's someone who, by his own admission, doesn't even consider
himself a big hockey fan.
Last week Arthur Levitt, the longest-serving chairman of the U.S.
Securities & Exchange Commission, released his study on the state
of the NHL's finances that supports commissioner Gary Bettman's long-standing
claim that the league is hemorrhaging big money.
His report stated the league had a combined operating loss of $273
million US for the 2002-03 season and found that 19 teams averaged
losses of $18 million last season, putting the average loss among
all 30 teams at $9.1 million.
Since its release, the National Hockey League Players' Association
has slammed the report, calling it "another league public relations
initiative."
"To suggest the report is in any way independent is misleading,"
the players' union said in statement.
But Levitt, who is also a former chair of the American Stock Exchange,
has stood firm behind his report, dogmatically defending the integrity
and certainty of his findings.
In an interview with CBC Sports Online
Friday, Levitt paints a bleak picture of the NHL's future and says
the league must curtail "rising labour costs" in order to ensure its
long-term survival.
Levitt also warns that the union should not argue its case on the
merits of a free-market system in future collective bargaining agreement
negotiations with the NHL.
"You shouldn't negotiate on that principle but on the actual
numbers; otherwise the league stands a real chance of eventually going
under," explained Levitt.
Sports Online: At last week's
news conference where you first presented your report, you said the
NHL is on a "treadmill to obscurity." What does that mean exactly?
What do you think the league will look like in five years if the status
quo continues?
Levitt: I think you'll see
more clubs failing, filing for bankruptcy and going under within five
years -- from the report's perspective, it boils down to a matter
of either addressing rising player costs or losing economic viability.
Pro sports leagues like the NBA and NFL do not pay out 75 per cent
of their revenue in player salaries and they have a hard cap in place
and are successful. The NHL cannot continue to pay out such a large
percentage of its revenue on labour costs and expect to flourish.
It simply can't
Sports Online: In general,
how is the financial health of the NHL's Canadian teams? How do they
compare to the rest of the league?
Levitt: The Canadian teams
are pretty much like the rest of the league in terms of some of them
are making money and some of them are losing a good deal of money.
The passion for hockey in Canada is the greatest of any place in the
world and Canada should be the ideal market for hockey, but the economics
is not significantly different in Canada than it is in the United
States. I don't know of any business entities that can afford to pay
out 75 cents of every dollar on labour costs. The only way to address
the league's financial problems is either to reduce those costs or
build a market five or six times than what the present market is to
diminish the impact. But that's not terribly likely in this environment.
Sports Online: In your assessment,
how many of the six Canadian teams will survive if a new system is
not put in place?
Levitt: I would not conjecture
which teams would survive, and which would not. All I would say is
that the business structure of the league has to change.
Sports Online: What's the single
biggest reason behind the NHL's mounting losses?
Levitt: Well, they're simply paying out too much in salaries.
Sports Online: Is it as simple
as that, though? Are there not other factors involved?
Levitt: Well, sure. If you
are able to negotiate a new television deal, that would be a major
source of revenue. If attendance was higher at games, that would help
because the NHL is a revenue-driven league. But the single biggest
reason for the mounting losses is due to the high labour costs.
Sports Online: But isn't the
fact that the NHL is so dependent on gate revenue a sign that the
league needs to change its business model? Doesn't the league have
to better market the game in order to develop other potential revenue
sources?
Levitt: Yes, keep in mind that
when 75 per cent of revenue goes to labour costs, it leaves very little
left to aggressively market the game and allow owners to turn a profit.
Sports Online: Your report
has said the league is a bad investment. If the NHL were able to slow
escalating salaries would it suddenly become a good investment, or
are there other problems in hockey's business model?
Levitt: I think it would. Maybe
not immediately, but over time. One thing I know for sure is that
I would not invest any of my money because at the moment I don't think
it would be a wise investment. But I think the report gives some kind
of hope for the future as far as clearly outlaying what has to be
done to address the league's problems.
One thing that hockey can boast about is the level of participation
in the game in recent years. If that level of participation carries
over at the gate, I think the investment would be a very good one.
Sports Online: The NHLPA has
questioned the legitimacy of your study because the league commissioned
it? What do you say to that?
Levitt: With regards to the
union's concerns, I would say if they have any questions about any
aspects of the report that I could meet with them and respond to the
ways that they have been critical of the numbers supplied by the league
for some years now. We spent a great deal of time on responding to
this concern in the report. In other words, one criticism involved
was the suggestion that owners were not reporting revenue from affiliated
arenas or television outlets that were owned by the same parties.
We looked at those very carefully and we audited a number of them,
and I can say unequivocally that all of those dollars have been reflected
in our study.
I simply have not seen any allegation made by the union about the
reliability of the study that I can respond to. The criticism has
been general, but I would certainly be willing to respond to questions
of the report. I think it's kind of tragic that with all of the issues
that divide management and players, the focus has been placed on the
origin of the report and not its substance.
Sports Online: Is it safe to
assume from your answer then that you haven't talked to the union
since releasing your report?
Levitt: Yes, that is correct.
Sports Online: The NHL is going
to use your report to bolster its demands for salary concessions from
the union in future negotiations. But do your findings not also pose
problems for troubled clubs that are trying to conduct business, or
find new owners or line up financing from banks next year?
Levitt: Oh, sure it does. Absolutely.
A bank is going to be a lot less likely to give teams a line of credit,
and new potential owners are likely to think twice about investing
their own money, especially if they can't be assured of a return on
their investment. And again, this comes back to get labour costs properly
in line with revenue.
I certainly wouldn't buy a club, personally, or as banker I wouldn't
lend money unless I knew what the interest costs were and factored
in the cost of depreciation.
Sports Online: Your report
paints a dire picture of the league's finances and links the NHL's
problems to the escalation of player salaries. But isn't your report
also an indictment of team owners and their business practices?
Levitt: The thing you have to remember
is that club owners are operating under a different set of circumstances
than other businesses in that the competitive nature of pro sports
puts the market out of whack and bidding wars over players often
ensue. Owners are also hemmed in, to a degree, by a strong collective
bargaining agreement. But regardless of how it got to this point,
the focus should be on fixing the problem and not assessing blame.
It does little good to say one side is more responsible than the
other. Making an argument on the principle of a free-market system
is misguided because the numbers tell a very troubling story of
the status of the league. You shouldn't negotiate on that principle
but on the actual numbers; otherwise the league stands a real chance
of eventually going under.
Sports Online: You've been critical
in the past of how companies play 'the numbers game' by employing
creative accounting and bookkeeping practices. Some feel that's
exactly what the NHL is doing here. How do you feel about that assertion?
Levitt: We went to great lengths to
ensure that wasn't the case by putting together a team that had
no connection or affiliation with any of the clubs or their owners.
I'm as sure about the numbers we uncovered as anything I've come
across. My former chief account, Lynn Turner, had access to the
work papers of the major accounting firms that did the audits on
the 30 clubs and we did a thorough and exhaustive examination. So
knowing this, do I really believe a report that substantiates the
numbers is flawed or that we've been duped by some shifty bookkeeping?
I don't. I've seen some chicanery in my time, and some pretty crafty
accounting, but that isn't the case here. I'm certain of that.
Sports Online: Does Gary Bettman not
bear some of the responsibility, though? Is your report not a poor
reflection of the NHL's leadership under Gary Bettman?
Levitt: No. Like I said, the league's
financial problems don't occur in a vacuum. It occurs in the midst
of a collective bargaining agreement, which has considerable strength.
Gary Bettman doesn't have the authority to direct owners on what
they have to pay their players. I mean, what would you have him
do? He is working within the confines of a collective bargaining
agreement. I'm sure he might have spoken with owners in the past
and warned them about rising labour costs, but he has no direct
authority over them. He can't mandate what owners pay out their
players. I'm sure that some owners have overpaid their players,
but that isn't Gary Bettman's fault.
Sports Online: Are you continuing to
work with the NHL?
Levitt: No. I was retained by the NHL
to complete this project and my work is done, but like I've said,
I will make myself available to talk to the union to address their
concerns.
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