| Networking
By Patryk Fournier June 21st, 2004 |
 |
Lost in the hype and excitement of the Stanley Cup Finals was the NHL's announcement of a new national TV contract that replaces the previous U.S. national TV deal that subsequently ended when the Lightning hoisted the cup. The new deal with NBC has afforded the NHL with a network home south of the border for another two years, although this new home ranks as a far cry from the previous friendly confines of a five-year $600M deal with ABC the NHL has just completed. The NBC deal is built on an interesting model; it involves no money up-front and relies completely on the use of revenue sharing between the league and network. Basically the NHL only gets their money after NBC has recouped all their costs for production and after that, advertising revenue is shared between the network and the league. Essentially the relationship between the NHL and NBC mirrors that of a relationship between a restaurant and a food server. The food server really doesn't enjoy the benefits of revenue until the restaurant is full of customers. NBC is simply covering their butts in case no customers show up. So why is having a well-negotiated TV network deal so important for a sports league's viability? The simplest answer to this question is to examine the Tyra Banks or model sports TV contract, the one that the NFL holds. Before I delve into the NFL's deal you must understand that encouraging and building parity is the one retaining and unwavering premise that the league is built upon. NFL parity defined: setting up a structure that gives teams of different market sizes and metropolitan areas an equal chance to attain players through trade, draft and on the free market. Of course this whole balance is kept so by the NFL's salary, which is set at $80,582,000 USD for the upcoming 2004 season. The NFL's structure allows a team like the Green Bay Packers (pop. 102,000) to compete on an equal plane with the New York Giants (pop. 8,000,000). The NFL is in the midst of a 7-yr $17.6B deal with an assortment of TV networks: FOX, CBS, ABC and ESPN and because the league follows the principle of parity the TV revenue is split up equally amongst all 32 teams, which ends up working out to be approximately $68.75M annually for each team. So a team that's maxed out at the salary cap is still in strong economic shape because they have 85% of their most expensive cost of business already accounted for with the league's TV revenue. Obviously the NFL is in a class of their own when it comes to national TV contracts. It's not reasonable to think that another league can draw that much revenue from a national network which begs the next question: Why won't a model based on having a collection of locally negotiated TV contracts in each city's market work as a strategy? A model of regional TV contracts would work but only for teams based in largely populated metropolitan cities i.e. New York, Toronto, Chicago, Boston, and Los Angeles. For those other teams that are based in smaller regions like Ottawa, Calgary, Minneapolis and Nashville, locally negotiated deals wouldn't even come close to sufficing the revenue needs of an organization.
LeafsTV is a 3-yr old venture from Maple Leafs Sports and Entertainment (MLSE) who owns the Toronto Maple Leafs and Raptors, as well as the Air Canada Centre. LeafsTV is available to Digital TV subscribers for a cost of $2.49 per month. The network has approximately 100,000 subscribers and plans on broadcasting 12 Leafs' games for the 2004-2005 season (that is if there is a season). If you average out the subscriber fees over the 6 months which a NHL season is played, it works out to be an additional $1.49M for the Leafs' organization. But LeafsTV barely even makes a dent in the revenue statement if you compare it to the New York Yankees regional TV venture the YES network. Started in March 2002, the network is featuring 130 Yankees games this season and follows the same format of LeafsTV in terms of charging subscribers a monthly fee ($2.00 USD). Because the Yankees own YES network all the revenue generated essentially funnels back to the team. YES network bought the local cable rights to broadcast Yankees games for $52M USD but when you consider the network as a whole will generate close to $200M USD this season in revenue the Yankees appear much richer than the revenue statements they have to disclose to MLB. In 1993 commissioner Bud Selig instituted revenue sharing to close the gap between those teams making money and those not as fortunate. Part of Selig's revenue sharing model includes sharing a small portion (approximately 20%) of locally negotiated cable revenue with the other clubs in the league. So by having teams start up their own regional network rather than selling the rights to broadcast games to privately owned regional networks the team can enjoy all revenue generated by the network and only be forced to report the revenue generated from sold cable rights. Really what this means is that teams are able to hide money so they don't have to divide amongst the other teams through revenue sharing. It's such smart business that a dozen ball clubs either own their own regional networks or are planning on doing so.
So where does all this leave the NHL? The NHL's deal with NBC is very comparable to the one that the Arena Football League (AFL) signed with the same network two years ago. Although, shouldn't this flag some major concern that an established league like the NHL, a league that was once pushing the NBA as the third biggest U.S. sports league, is now settling for the same contract that a fledgling indoor football league has signed for? You can understand the AFL's motivation for a no-money upfront deal with NBC because it was their best chance to receive national TV exposure and grow interest in the league. Lumping the NHL with a league like the AFL just shows that this new deal is a litmus test of how far down the professional sports league scale the NHL has fallen. The NHL no longer commands deals like the recently completed ABC deal because the sagging ratings clearly show the demand is not there for the league to belong in the spotlight. Even if you use the recently expired ABC deal as a measurement the NHL still lags far behind the other major sports leagues. If you compare the nationally negotiated TV contracts by the NFL, NBA, MLB and the NHL and divide the revenue generated per year amongst all the teams you arrive at a strength of revenue sharing comparison point for the four leagues. Just remember that the NHL numbers used are when the league had negotiated a strong TV deal. It's painful to think how little money teams will be getting from this NBC deal.
Unfortunately this cycle of poor ratings and reduced revenue from network deals will continue for the NHL because the deals negotiated in the U.S. are not conducive to building stronger ratings. The NBC deal calls for the network to broadcast seven regular season games, six playoff games and games 3-7 of the Stanley Cup Finals. The first regular season broadcast will not be until January 2005, which means the general U.S. public will have to wait until the mid-way point of the season before they can catch a game not broadcast on cable television. If you really want to build demand and drive the ratings of the NHL in the U.S., networks would be wise to start broadcasting games right from the onset of the regular season thus allowing viewers to follow teams and watch storylines unfold rather than being expected to get excited about the season half-way through it. You wouldn't pay full admission to walk into a theatre only to catch the second half of the movie so why expect the NHL to prosper under the same conditions.
|
Let me know what you thought about this commentary.