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Why Should I Frakkin' Care?


radoran

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It's the product in utterly stupid places--Columbus is another fantastic example--and it has had ugly consequences vis-a-vis salary bloating. You haven't commented on this "theory," by the way. Since you obviously have some experience with GL's, business planning , etc., I'd be interested in your thoughts.

Most interesting. It's occured to me and their are several routes to take in reaching a conclusion. I'll write about it here tomorrow. Little short on time tonight to do it justice...

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You don't make or lose money on a stock until you choose to sell it... Same with gold. Same with hockey franchises. You can double your investment but lose money every year.

I don't understand this analogy. If I buy a commodity and there is a cost to the acquisition of that commodity (broker fees), that is one thing- yet the value is the value. I guess you can sort of liken that to an annual operating cost, but it seems a stretch to me.

LA lost 2M last year. Lets pretend for argument sake that they have lost 2m every year since they were purchased (17 years ago). That is a sum of 34M that they have lost since the owner acquired them. Yet the net of their valuation from the point of purchase until now is 119M. Write off the 34M in loses and that is a 80M profit in 17 years (initial purchase price of 113m). Almost double the money. I won't get into the creative accounting that can go on and taxes for stated loses. I again will say that show me another business where you can lose money operationally, yet still nearly double your investment?

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I would be curious why you think Columbus is a bad expansion location??

NHL hockey just doesn't do well in Ohio. The Cleveland Barons, now the Blue Jackets (by the way, I don't care what anyone says, but "Blue Jackets" is simply a retarded name for a team). They have a population large enough there that it should do okay, but it's OHIO. I'm sorry, but NHL hockey is simply not going to do well there. For similar reasons as Atlanta. They like them some college football and some NFL and some MLB when they do well, but they're just not going to flood to NHL hockey. It was predictable when they awarded the franchise (I predicted it, by the way). I know ownership there has been a cluster so it's hard to build an argument based on attendance (it was fairly decent pre-lockout and for a year or so after), but I just don't think it works there.

I'd kill Columbus, Nashville, Tampa, Miami, and Phoenix just for starters. I know they just moved to Brooklyn, so we'll see, but I think the Islanders are one too many teams in the NY metro area. It's tough to swallow given that they do have some history, but eh...wait and see how Brooklyn plays out (if they ever get around to playing hockey again).

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I'd kill Columbus, Nashville, Tampa, Miami, and Phoenix just for starters. I know they just moved to Brooklyn, so we'll see, but I think the Islanders are one too many teams in the NY metro area. It's tough to swallow given that they do have some history, but eh...wait and see how Brooklyn plays out (if they ever get around to playing hockey again).

Miami, Phoenix and Columbus I'm on board with.

I do think that there are actual fanbases being created - or were being created - in Tampa and Nashville.

As has been point out (Van?) the NHL attendance-wise draws better than the NBA for a large number of teams. Simply looking at things from a strict geographical level isn't enough (and discounts just how great hockey is when it's not being destroyed by millionaires squabbling with billionaires).

But I do think Columbus was well-researched. What Ohio didn't need is another moribund franchise that can't compete: Reds, Bengals, Indians, Browns, Cavs, Blue Jackets. If the Blue Jackets had early success instead of one first-round playoff sweep, the story might have been different.

And Brooklyn - if the Coney Islanders sell out - will still be in the 20s for total attendance.

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I don't understand this analogy. If I buy a commodity and there is a cost to the acquisition of that commodity (broker fees), that is one thing- yet the value is the value. I guess you can sort of liken that to an annual operating cost, but it seems a stretch to me.

LA lost 2M last year. Lets pretend for argument sake that they have lost 2m every year since they were purchased (17 years ago). That is a sum of 34M that they have lost since the owner acquired them. Yet the net of their valuation from the point of purchase until now is 119M. Write off the 34M in loses and that is a 80M profit in 17 years (initial purchase price of 113m). Almost double the money. I won't get into the creative accounting that can go on and taxes for stated loses. I again will say that show me another business where you can lose money operationally, yet still nearly double your investment?

I don't understand this analogy. If I buy a commodity and there is a cost to the acquisition of that commodity (broker fees), that is one thing- yet the value is the value. I guess you can sort of liken that to an annual operating cost, but it seems a stretch to me.

LA lost 2M last year. Lets pretend for argument sake that they have lost 2m every year since they were purchased (17 years ago). That is a sum of 34M that they have lost since the owner acquired them. Yet the net of their valuation from the point of purchase until now is 119M. Write off the 34M in loses and that is a 80M profit in 17 years (initial purchase price of 113m). Almost double the money. I won't get into the creative accounting that can go on and taxes for stated loses. I again will say that show me another business where you can lose money operationally, yet still nearly double your investment?

OK, once again... You can buy a stock and it can double every year for 10 years straight. You don't have any access to that money until you decide to sell it. You can't go buy a new car by just saying "hey, look at my portfolio"... The car dealer is gonna say nice but tell you to sell your stock and write me a check before you get the car.

So, for a owner lets say their team doubles in value. Sweet, good for them. But it's an investment gain that is theoretical until you sell it. Now, hang with me here... When the owner (if ever) decides to sell that team they are no longer owners so the "doubled money" isn't going into the team. The owner is walking away with that money to go invest in his/her next project. Meanwhile, the NEW owner had to pay double what the old debt load was to get the team (hence the original owners huge payday he walked away with).

So, if a team was struggling when they had (easy numbers here) 50 million the original owners paid, then over a decade the team doubles it's valuation and now the new owner had to purchase it for 100 million, then I pose the question, will the team be better off? No... The on ice product hasn't changed. Ticket sales likely didn't change. The most you can hope for is that the new ownership group has extra money to invest in some big players, keep ticket prices where they are and pay off the debt incurred over the 10 years of losses (which would likely have been factored into the purchase price making the new owners having to cough up even more money for the team).

Your team can double or triple in valuation but lose money every year. The good thing about the valuation is you MIGHT be able to get loans based on the value to keep the team afloat. However, that in essence is like taking a 2nd loan on your house then you wait 5 years and use what ever equity you have accumulated to take out a third and leverage yourself to death. Hence the main issue with why the NHL needs certain guarantees on cost structure because you can't stay viable for ever. Once you reach a tipping point is when I suspect that original owners makes the decision to bail, sells his team for double what he paid or started it for and walks away with all the money. The 50 million he makes isn't going back into the team unless he decides for whatever whacked out reason to invest as a minority owner/investor.

Another note, teams in this situation will likely WANT to show a loss for tax purposes because if they show a slight profit it does nothing for them. Once again, 2 million loss by LA. Hmmm, seems narrow to me for a company that size.

Look to what the owners are asking for in salary reduction and your likely to find that it covers all the teams losses in the NHL. That puts them on a solid footing, sans bad business decisions (ala Columbus). With it being a 50/50 split and not a hard number and the NHL back to growing in a couple years the revenues will grow big time. This means the players will be getting 50% of a MUCH larger pie. (pls see next post on make whole) In 3 years they will be making more money than they did last year. But it can only happen if each team is on solid financial footings, cost and contract guarantees, enough money to VERY aggresively market (hence growth), focus on growing the product instead of fighting the next CBA battle and access to financial loans if when they need for all sorts of things. The Islanders can't get a new stadium built. Neither can the Oilers. Do I even need to say anything about Phoenix? (they are still looking for more investors and guess what, still can't find enough, atleast thats the last I heard). Columbus can't win to save their lives nor afford or retain star players. How could you blame them to not want to be around that mess.

Touching on Rux's point last night about Columbus and Phoenix, among others, and how they are affecting contracts I must admit I'm still working on that. It seems to me better examples may be Minnesota and Nashville. Both teams, for their own reasons were forced into extremely costly contracts last year that almost certainly will have bad consequences down the road. They simply paid players that they really can't afford long term. Sure, they WILL actually pay them but at what cost to icing the rest of the team and signing bonus money comes right out of the owners pocket before a single ticket has been sold. That seriously limits all sorts of operations later on because that money was spent on the player rather than a stadium remodel, advertising, top notch staff ect...

As far a Columbus goes, it's not really a geographical issue in that Ohio is a northern state with lots of cold weather. It's a big city, relatively speaking. I have been there 3-4 times. Ohio is into the college and other sports. Now, had we seen 10 years of good drafting and hockey ops who knows what could have been but that is a "could-woulda-shoulda" scenerio and becomes nearly impossible to debate. One thing is for sure, with the Weber, Suter and Parise signings, it almost completly prices your Phoenix, Islander, Devil. and Columbus like teams out of the market.

On the flip side, simply spending a new owners money doesn't always work either. Look at Pegulla (sp?) and the Sabres! They are a facinating study themselves and when a team pays Ville "frickin'" Leino 4.5 million you gotta start asking tough questions. That has a detremental effect on the rest of the league, hence the need for comprehensive contractual restructuring for all 30 NHL teams.

Then the NHL has, as well argued already, put 2nd teams in bad market areas. Miami ! Anaheim ! If New York City can barely handle 3 teams then can south Florida. Can Phoenix handle even 1? I think the only geographical area that could handle 3 teams is the Buffalo-Toronto-Hamilton area....

Back to my main point to wrap this up: It's clear some teams simply can't afford to ice a competative team. The owners have but 2 choices, relocate/fold 4-6 teams (NHLPA is against that) or get cost certainty for the teams so they can function competativly (= salary reduction, NHLPA is against that). And walla, we are back to the original problem: the CBA and the lockout.... The owners want to fix it and the PA won't let them. I long ago stopped caring about who to blame but for the next negotiating session they should agree to a 50/50 split, not of the money, but for the blame.

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A note on make whole: The teams said they are willing to cover all existing contracts but want to defer it through escrow over the life of the contract. This is very important I believe. This allows the team this year and next to pay out at the 50% level rather than the 57% level. Then, they have the cushion once revenues have increased to spread the remaining original 7% missed by the players out over a bit more time. All the players get all their money but gives the teams a chance to restructure their operations, contracts and such, build in cost certainty and gives them that up front relief the really bad teams need as well as give both players and teams time to work under new logical and responsible bargaining/contracting rules that will be in place going foward...

Sorry for the run on sentence....

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Yes, they are. But not because they are paying players too much. It's because they put hockey in the desert. Seriously. If you try to sell ice at the North Pole, what you're paying your cashier is of very little relevance. Your product just makes absolutely no sense.

Your lack of profit selling Bibles in Tehran probably has nothing whatsoever to do with your manager's health plan. Selling clothes in a nudist colony....you get the point.

It's the product in utterly stupid places--Columbus is another fantastic example--and it has had ugly consequences vis-a-vis salary bloating. You haven't commented on this "theory," by the way. Since you obviously have some experience with GL's, business planning , etc., I'd be interested in your thoughts.

I responded to Van on a few issues but touched on the Columbus thing... I'd be willing to TRY and sell some clothes at the nudist colony but I'm afraid it would all be senior citizens (or worse)....

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What Ohio didn't need is another moribund franchise that can't compete: Reds, Bengals, Indians, Browns, Cavs, Blue Jackets

It's my contention that they are moribund BECAUSE they are in Ohio. I think there's a straight line correlation between moribund and Ohio.

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It's my contention that they are moribund BECAUSE they are in Ohio. I think there's a straight line correlation between moribund and Ohio.

LOL! I could agree with that. It's actually a pretty state if you stay out of Cleveland and Toledo....

I'm working on another "valuation" example post, just for the hell of it...

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Another fun way to look at valuation is to look at a mortgage scenerio:

Years ago you were young and housing was cheap. You buy a nice house for 75k on a 30 yr mortgage. 20 years later things have boomed. The house is now worth 220k and you still owe just 20k. Because your house is worth 200k more than you owe does not mean you have yet made that 200k. You have not received a single dime monthly or yearly because your house has gone up in value. In all actuality the only thing thus far received is a bigger property tax bill. (Assumining you have not dipped into the equity for a 2nd mortgage).

Now you decide to sell and walla, you get the 220k for the house. Now here are a few fun ways to decide how much money you actually made (forget taxes right now): 1st, you could say that you sold for 220k and owed 20k so you just made 200k. Nice! And certainly a real life way of looking at that. I mean afterall, it's been 20 years. But... : 2nd, did you really make 200k? You spent 75k afterall to get the place and paid way more than that on the 20yrs of interest you also paid. Lets say 40k in interest. So, now you in affect paid 55k in principle, the 20k you had not yet paid out but have to so the loan is gone and 40k in interest or overall 115k over the 20 yrs, leaving you with 105k. Still not bad. Ooops, forgot about capital gains so tear off 50% plus other taxes and fees. You got maybe 25% of what looks like at first blush to have been a 200K windfall...

So now just up scale the same basic concept for whatever business you are talking about. My point is, the owner who paid 50 mil for a franchise that is now worth 100 mil won't see 50 mil in profits when he sells the team... Not that that really helps the day to day ops much anyway... Just the same way that because your house went way up in value it didn't help you pay the electric bill for the past 20 yrs...

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Hi @idahophilly

I liked your post to @Vanflyer. It made some sense.

Just want to touch on my point again about too many teams, because I follow your logic about Minnesota and Nashville, but the things you're referencing regarding them are almost the problem after the problem I'm referring to. Because their "sins" as strategic planners and projecting ROI come as a result of the underlying problem of too many teams.

I think it's easy to point at the top money makers and the teams who shell out the huge contracts and say "that's driving up costs to absurd levels!" That's true, actually. But my contention is that the driver of this problem is too many grunts making "average" to "good" player money. Without pointing to any particular team but just talking theoretically, say you have 20 players on the roster and you're lucky enough to have one or two grade A signings. So they sign these players to absurd contracts. But in the meantime they also have 18 other players being individually paid probably 20% more than they are each worth due to mediocrity being compared to the mediocrity of someone else that got a big pay day.

So mediocre Player A on team X who has been perennially a $750K player suddenly scores 20 goals and has a +8. He goes to negotiations and then to arbitration claiming that Player B on team Y had similar numbers in his contract year and got $2.5M. So team X either bargains to $2M or looses arbitration and is stuck at the $2.5M. Nevermind that the contract year was the ONLY year either Player A or Player B had those numbers. So now, assuming the club might have given Player A a time-served increase (and a built in "well done for the 20 goals) to $1.25M range, they are now overpaying that player by anywhere from 60%-100%.

And it then trickles up, because other players can point to that and say "Player A and B got $2.5M and my numbers are clearly better, So I should get $4, $5, $6M." So you have owners full of below average to average to good and even better than good individually making a high percentage more than they should be. So that when you get into the free agent signings with people with above average skill, they can say (and owners end up justifying the claim) that if these people are making $6-$7-$8M that certainly they should be making $10. And you and I both know that Parise, in particular, is an average "star" that took advantage of being a free agent in a weak pool. Now, without a new CBA, someone with actual skill and who deserves it will say "well, Parise got $11M or whatever and I'm clearly better. I should get $13M." And so forth.

But the root of the problem is not from the top down under this scenario. It's actually from the bottom up.

They have more teams and more positions than what can be substantiated by the ACTUAL NHL-level talent pool. Look around the league, and even on the Flyers, you could come up with at least one, if not several, player(s) very quickly who is making $1-$2M who would not even be in the NHL if there were 100 fewer positions. But it is these very players--take Jody Shelley, for example--who provide the comparative fodder for others to say "he's making $2M and I'm clearly better!"

Not all expansion cities were bad ideas, necessarily, but the number of expansion cities out-stripped the available qualified talent and has become the motor for escalating salaries overtaking revenue.

The best, but certainly not easiest, way to address this is to downsize teams. Even car companies or other manufacturing companies come to realize that shutting down a plant or two and reorganizing in a more efficient way can help both the bottom line AND the top line if done correctly.

I don't know how easy this would be in practice. How does the league arbitrarily say to a team owner "we're closing you down. There's too many teams and you didn't make the cut." Any owner who is worth his salt could find some criteria upon which to say, "you're closing me? I'm doing better than so-and-so on this metrix!"

But I do think this would rectify quite a bit of the issue at hand. Especially if you then couple it with "meet me 50% reduced from 57% by 1% per year for 7 years." I bet that by the end of those seven years revenue will have recovered enough (as per the point in your post) that the players won't see one dollar of difference, even accounting for inflation.

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LOL! I could agree with that. It's actually a pretty state if you stay out of Cleveland and Toledo....

I'm working on another "valuation" example post, just for the hell of it...

Ohio is pretty in many areas. Yeah, Cleveland and Toledo certainly would not be included in that. But just like Georgia, if it's not high school or college, it just is not bound to work. I don't know why that is, exactly, but it just is.

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@idahophilly

By the way, I didn't really finish my thought on the 18 players on the roster overpaid by 20%. I think it's more than 20% actually, but to be conservative, if the owners left after the reduction of teams were able to correct their salary by 20%, we're talking $10M on a $50M payroll, they'd be jumping for joy.

You couldn't do this without a simultaneous roll back of current salaries (unless you somehow temporarily stopped arbitration--not a great idea). But once this was done, you might be able to avoid these work stoppage issues for some time.

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@ruxpin

Facinating thought process. Normally I'd say if the market can bare the salaries, even to the most marginal of players, then so be it. However, it seems the market can't. In your example Ville Leino is a perfect fit. One good year and then his numbers were based on what he might do as well as other similar contracts. The result was way over paying. These things don't necessarily hurt an individual team with money to blow but kills the next team with a small margin because they will likely wind up overpaying there players based on the Leino contract...

I know this won't win me any union fans but that is another clear reason for salaries to be adjusted.

As far as retraction, I just can't see it happening as a CHOICE. I could easily see a couple teams going belly up because of the lockout and or down the road because of a bad CBA negotiation outcome. The only viable option is to make it work through MASSIVE contract changes and a salary roll back, atleast on contracts after this point in time. It will give certainty going foward.

Or the PA can just kill the sport!!!! I'm ok with it either way because in some way shape or form hockey at the elite level will be back. But the players are not gonna like it if they have a problem with this situation!

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@ruxpin

As far as retraction, I just can't see it happening as a CHOICE. I could easily see a couple teams going belly up because of the lockout and or down the road because of a bad CBA negotiation outcome.

Reality says you are right.

The only viable option is to make it work through MASSIVE contract changes and a salary roll back, at least on contracts after this point in time. It will give certainty going forward.

I agree to a great extent. The problem is that massive contract changes by themselves will only be a temporary fix unless there are system changes as well (my answer or at some speed bumps put in place to harness a group of owners who can't seem to help themselves). I believe that if they simply roll back salaries, say 20% for sake of throwing a random number out there, within several years (unless they change the manner of doing business in some real way) they will be exactly where they are because the Flyers, Rangers, Red Wings, etc. just won't be able to help themselves and other teams will have to follow suit or become a second tier.

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Reality says you are right.

I agree to a great extent. The problem is that massive contract changes by themselves will only be a temporary fix unless there are system changes as well (my answer or at some speed bumps put in place to harness a group of owners who can't seem to help themselves). I believe that if they simply roll back salaries, say 20% for sake of throwing a random number out there, within several years (unless they change the manner of doing business in some real way) they will be exactly where they are because the Flyers, Rangers, Red Wings, etc. just won't be able to help themselves and other teams will have to follow suit or become a second tier.

Well, that's what I meant by massive contract changes. The system has to be changed. I think thats the premise of the owners stance here. If the owners get their way the PA says its the owners fault and they got screwed and if the owners don't get their way and things really go sour the PA will say it's the owners fault and they got screwed... Fix it this time and do it right is what I'm saying....

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That's why Eklund drives me up a wall. He wants a nice happy compromise in the middle that PO's the NHLPA and leaves the owners not getting what they need to make this work long term. I know it sounds radical to say "not much compromise" but that is the reality of the situation if you really want it fixed and possibly an even better product to watch for a decade or more. I'd be OK even if the players win overwhelmingly because at least then it would fall apart and die fast rather than a meet in the middle thing where it continues to slowly wither on the vine for another 5 years.

I know we fans just want hockey back but this season is tainted anyway. Who's gonna get excited if Giroux was on pace for a record year if there had been 82 games but there's only 50 games. I don't want to win the Stanley cup this way. There will always be the asterik by it. And who gives a rats arse about the trade deadline and draft later if the system is still broke? Lets fix it or completly break it. One or the other....

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@ruxpin

I get what you are saying about Ohio- but kind of don't get it. They have immediate rivalries with Detroit, Chicago, St Louis and Pittsburgh. I would have thought hockey would code well in a college town. I think with allot of these teams, corporate sponsorship plays a large roll in the ability to be sustainable. I mean Tampa generate on average 18.4k in attendance (13th in the league). Yet they still lost 8.5M dollars. That tells me that revenue outside of attendance is not being generated and / or additional income is not being realized.

The islanders situation will be interesting. I actually think they will be more viable than NJD. While you can take the train right to Prudential Plaza, Newark is just a crappy place to go to. There are certainly parts of Brooklyn that are crappy (dangerous) as well, but I would think it would have more appeal to go see a hockey game there versus Newark.

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@Vanflyer. I'm not completely sure I get the Ohio thing either. But it seems like the land where pro-sports go to die.

Actually, they don't die. They just kind of live on and on but people rarely seem to care. In the case of the Blue Jackets, it really might help if ownership wasn't such a cluster.

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So mediocre Player A on team X who has been perennially a $750K player suddenly scores 20 goals and has a +8. He goes to negotiations and then to arbitration claiming that Player B on team Y had similar numbers in his contract year and got $2.5M. So team X either bargains to $2M or looses arbitration and is stuck at the $2.5M. Nevermind that the contract year was the ONLY year either Player A or Player B had those numbers. So now, assuming the club might have given Player A a time-served increase (and a built in "well done for the 20 goals) to $1.25M range, they are now overpaying that player by anywhere from 60%-100%.

One way you could solve that is to not have guaranteed contracts (ala NFL). If player signs that 2.0 to 2.5m contract and then returns to the 750k performance level, release him and sign another grunt on the sidelines for 750k.

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Actually, they don't die. They just kind of live on and on but people rarely seem to care. In the case of the Blue Jackets, it really might help if ownership wasn't such a cluster.

My family holds their extended family re-union at a place called lake side on lake erie in Ohio. The first time I went there (8 or 9 years old) I felt like I walked in a time machine and jumped back 10 years. Every subsequent time, I feel the same way. Its like going to Fargo (and I have been there too).

Edited by Vanflyer
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As far a Columbus goes, it's not really a geographical issue in that Ohio is a northern state with lots of cold weather. It's a big city, relatively speaking. I have been there 3-4 times. Ohio is into the college and other sports. Now, had we seen 10 years of good drafting and hockey ops who knows what could have been but that is a "could-woulda-shoulda" scenerio and becomes nearly impossible to debate. One thing is for sure, with the Weber, Suter and Parise signings, it almost completly prices your Phoenix, Islander, Devil. and Columbus like teams out of the market.

On the flip side, simply spending a new owners money doesn't always work either. Look at Pegulla (sp?) and the Sabres! They are a facinating study themselves and when a team pays Ville "frickin'" Leino 4.5 million you gotta start asking tough questions. That has a detremental effect on the rest of the league, hence the need for comprehensive contractual restructuring for all 30 NHL teams.

The more that I look at this, I think it is the teams that are in big metropolis areas that are successful. Here is the list of teams that operated in the black last year:

1) Toronto

2) NYR

3) Montreal

4) Detroit

5) Boston

6) Chicago

7) Vancouver

8) Philly

St Louis, Dallas and LA are the other cities you could site as comparable size. I think there are three factors:

1) Operational expense (including players salaries)

2) Attendance / draw

3) Ticket prices

For example, let us compare St. Louis and Florida.

St. Louis

1) Operating Income / Expense: St Louis had an operating income of 78M (off set by 43M in player salaries). So players salaries consumed 55% of their income. Their net operating revenue was -2.7M.

2) Attendance / Draw: St Louis was 9th in the league and garnered 300M in gate receipts (18809 per game).

3) St Louis average ticket price was $39 per ticket.

Florida

1) Operating Income / Expense: Florida had an operating income of 81M (3M higher than St. Louis). Players salaries were 50M (7M more than St Louis). So players salaries consumed 61% of their income. There operating revenue was -7M (-4.3M less than St. Louis).

2) Attendance / Draw: Florida was 21st in the league and garnered 250M in gate receipts (16628 per game).

3) St Louis average ticket price was $37 per ticket.

So, while St Louis,as the 9th highest attended team in the NHL, generated 50M more in gate receipts than Florida, there overall revenue was less than Florida's while St. Louis also spent 7M less in player salary than Florida?

The numbers don't add up. Granted, I don't know about building debt and all that, but just on the surface, the argument that Florida should not be a team starts to fade away a tad when they are fiscally more viable than the 9th highest attended team in the NHL.

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