A Guide For Non-Hockey Fans To The Phoenix Coyotes Fiasco

If you’re reasonably perceptive but not a big hockey fan you may be wondering why this Phoenix Coyotes stuff is in the news so much.  You may be one of the thousands of people who have written me asking “Rick, like, what’s this deal with the Phoenix Coyotes and this guy trying to buy them and all that shit?”  I posted a little explanation on the straight Dope message Board and people seemed to like it, so I’ve expanded upon it here, in, as I did on the SDMB, using a rhetorical format.

What the hell is going on?

In a nutshell, the Phoenix Coyotes, an NHL team, have filed for bankruptcy.  Their owner, Jerry Moyes, agreed, in secret, to sell the team to Jim Balsillie, the billionaire co-founder of Research in Motion, the Waterloo-based company that makes BlackBerrys.  Balsillie wants to move the team to Hamilton.  The NHL is attempting to block this, and the matter is now before a bankruptcy court.

Whoa, an NHL team just went bankrupt?  Seriously?  How did this happen?

The Coyotes were originally the Winnipeg Jets and moved to Phoenix in 1996.   They have, since then, been spectacularly unsuccessful, both on the ice and in terms of financial and marketing efforts.  

How bad is the situation?

It’s very bad. The Coyotes are not presently a sustainable enterprise.  According to such sources as can be trusted their annual losses range from $30 to $40 million per year.  The NHL had to bail them out last year.

Forty million dollars a year sounds like a lot.

It is.  It’s generally assumed that the Coyotes are a financial cancer. However, the NHL’s position is that this is not necessarily an irreversible condition, and to their credit they may not be wrong about this. The Coyotes’ position isn’t great, but it should be borne in mind that the team has put atrocious teams on the ice for years and years – they’ve been one of the NHL’s most dismal losers for a long time and it’s hard to get fan support. There’s no obstruction in Phoenix to a well run team making money; the arena, while not in a great location, isn’t in as terrible a location as you may have heard, and it’s very new. The city is big and so the POTENTIAL market is there.

The league has saved several franchises from death and/or moving recently – Pittsburgh and Ottawa being the two obvious examples, and both teams are now doing very well and making money. In each case the team was in a bad financial spot but the problems were fixable; in Ottawa’s case the owners quite literally never had any money to begin with, so finding a local owner with liquid capital solved all their problems. The NHL simply helped the team survive until that owner could be found. 

A critical note here is that the Coyotes’ biggest creditor is the City of Glendale, with whom the team has a lease on their arena. The lease is valued at $700 million – far more than Balsillie or anyone else is offering. If a bankruptcy court allows the Coyotes to be sold to a buyer who intends to leave Glendale, the team’s largest creditor will be seriously screwed, and it’s entirely possible they will sue the NHL.
 

SEVEN HUNDRED MILLION DOLLARS?  You could build your own stadium for that!  Two stadiums!

Don’t look at me, I didn’t sign the lease.  I don’t get it, either, but the likely explanation is simply that the Coyotes’ ownership just didn’t have the startup capital to finance a stadium and were thus forced to agree to Glendale’s demands to get Glendale to build them an arena.  Owners who get sports franchises by leveraging credit, as opposed to actually having enough money themselves, is sort of an old story.  So Glendale’s owed a pile of money, and without the Coyotes they would have a very expensive stadium with no primary tenant.  (Phoenix’s basketball team plays in another arena.)

Okay, Glendale would be humped, but wouldn’t moving to Ontario solve the team’s problems?

Probably. Southern Ontario is an extremely under-served hockey market and could probably support 3 teams and possibly even 4. The established fact seems to be that a million Canadians can support a hockey team (as Calgary, Edmonton, and Ottawa do) and the Toronto metroplex has, depending on how you define it, between five and seven million people.

There is a legitimate question as to whether Hamilton is the right place for it; it would be like electing to put a second NFL team in the “Chicago area” and then putting it in downtown Gary. Hamilton is in and amongst millions of hockey fans but itself is not a very rich city, and the proposed location is extremely hard to get to – harder than Glendale.

So why does Balsillie want to move the team to Hamilton?  Why not north Toronto, or Mississauga, or some place like that?

Hamilton has an arena, Copps Coliseum, that with some renovations would be quite suitable for an NHL team.  Anywhere else the team would need an arena built from the ground up. 

That said, many have argued that the expansion of hockey in southern Ontario should in fact take place in Toronto, preferably the north side of the city. Others have suggested Waterloo, the city Research in Motion is based in, which is small but amongst a great many other fast-growing cities and easier to get to.

In any event, there are places you could put the team.

Okay, so why not do that?  Why is the NHL fighting this?

The NHL’s long term business plan is TV revenue. What they really want is expansion of the sport’s popularity and the resulting big dollars a US national TV contract could bring.

In order to establish the legitimacy for such a contract the league needs nationwide legitimacy in the USA. Abandoning Phoenix, a major media market, would not help that. The Canadian market is already about as lucrative is it could possibly be. Hockey is a national religion in Canada, a sport far more popular than any sport is in the USA. The NHL as a whole has nothing to gain from expanding the sport in Canada, aside from the fact that one out of 30 franchises will become profitable.

While it may seem absurd that the NHL still clings to the hope of being an America-wide league, given that it’s really, really not working out, it’s on this basis that Gary Bettman has held onto his job as commissioner.  The very legitimacy of his office and his long term plan depends on the NHL truly being on par with the other big sports leagues – the NBA, NFL and Major League Baseball.  Accepting that the NHL might just be a regional league and a smaller player is not something his employment could survive.  And SOME southern teams have worked out pretty well, like Anaheim, Dallas, and San Jose.

Yeah, but Anaheim… that’s in Los Angeles.  San Jose’s part of the San Francisco/Oakland area.  Dallas is huge.  And they’ve had good teams.  Didn’t Anaheim and Dallas win the Cup?

Sure.  But Phoenix is a very big city, too.  Metro Phoenix has over 4 million people; if Arizona joined Canada Phoenix would be the second biggest city in Canada.  This isn’t Nashville, this is a metropolis.   How do you know the team might not be a success if they can put a few playoff-bound teams on the ice?  The Chicago Blackhawks couldn’t draw flies five years ago; now they have good young players and the fans are packing the house.

The problem here is not necessarily Phoenix, no matter how Canadians like to say “Bah, they just don’t like hockey.”  San Jose and Dallas prove that is not necessarily the case,  The problem is the franchise; it’s been brutally run and financially buried in quicksand.  The real issue is can the business survive, financially, WITHOUT being bailed out by Jim Balsillie?

Okay, but what about this I hear that the Leafs don’t want them here?

The Toronto Maple Leafs and Buffalo Sabres oppose it and will likely demand compensation. The legalities of this are debateable but it’s a problem for the NHL no matter how you slice it.

A team in Hamilton would cost the Maple Leafs money, but not much.  The Leafs are preposterously rich and successful and, practically speaking, the demand for Leafs tickets far exceeds the supply.  A Hamilton team would likely not cost the Leafs a cent at the box office and would have negligible effects on their broadcasting and merchandising revenue. 

However, there is a legitimate case to be made that this could hurt the Buffalo Sabres.  The Sabres draw a not-insignificant number of fans from across the border, and a quick glance at a map will reveal that a Hamilton franchise would likely take most of those fans.  Buffalo fans are very proud and supportive of the team but the reality is that Buffalo is, by pro sports standards, a small and poor city.  There’s already talk that their NFL team will move to Toronto.  It’s not impossible that a team in Hamilton could seriously hurt the Sabres, unless they are lavishly compensated.  So this concern is quite legitimate.

And by the way, if you’re going to have a new team in southern Ontario, the existing NHL owners stand to gain far more by having an expansion team created there. Expansion teams pay expansion fees, and a team in Toronto would likely be asked to pay a truly exorbitant fee. A relocated team would not bring as much of a windfall.

Yeah, but, like, it’s this Moyes’s guy’s team.  Can’t he sell it to whomever he wants?

Well, maybe, but maybe not.  There’s two legal problems here.  The first is that there is an argument of fact as to whether Moyes owns the team.  During the 2008-2009 season Moyes agreed to borrow a great deal of money from the NHL so that the team wouldn’t just go belly up.  During the proicess of doing this he apparently signed some of his rights over to the NHL.  The NHL holds that Moyes effectively gave the team to the league (more or less.)  Moyes claims that he signed over some decision making and voting rights but not ownership, and in any event, since he has poured well over $100 million into the team, he is personally owed money by the franchise.

The second legal problem, which is a bit more abstract, is the issue of what it is Moyes owns.  the NHL argues that Moyes might have the right to sell the Coyotes as a legal entity – e,g, the corporation, offices, equipment, and all that jazz – but that he does not own the intrinsic right to have a hockey team that competes in the National Hockey League.  So, according to the NHL, Moyes could sell the team to Balsillie but that doesn’t mean the NHL has to schedule any games against Balsillie’s squad of players.

But still… if a team in Hamilton or wherever would make money and the team in Phoenix loses $40 million a year, like, that adds up.  Why is the NHL so opposed to this?

Yeah, it does add up, but there’s some personal issues here.

The CEO of RIM, Jim Balsillie, and the commissioner of the NHL, Gary Bettman, despise each other; they both deny it but it’s true. Both are stubborn. Bettman is a born asshole; Balsillie is a billionaire who, like a billionaire, feels he is entitled to buy anything he wants.

But perhaps more relevant is that Balsillie has tried to use coercion, legalities and threats to buy his way into what has always been held to be a personal club.  Aside from the legal issues above, it is fascinating to note that the other three big sports leagues went to court to support the NHL’s position. If Balsillie managed to swipe a franchise from the NHL by legal fiat, rather than by being accepted by the NHL, it creates a legal precedent the other leagues find terrifying; that they will be unable to exert control over who owns the franchises.   Teams could move willy-nilly for any reason; imagine if the owner of the Montreal Canadiens decided to extort money from the City of Montreal by moving the team to Winnipeg for a year and threatening never to come back.  The legitimacy of the league would be harmed.   Pro sports leagues, to get money from fans, must give the fans a sense of legitimacy, of permanence, if teams move around like circuses, they’d lose fans in the long run. 

Currently they control that absolutely; a ruling in favour of Balsillie undermines that. THAT, really, is why the NHL and the other leagues feel this battle has to be fought and won, even if it means bleeding money in Phoenix. $40 million a year is a small price for them to pay to prevent franchises from flying away from their control, not to mention avoiding a potentially horrible lawsuit that would undoubtedly be filed by the City of Glendale.  While every NHL team would probably be up $2 million a year by having the Coyotes move to Canada, the drawbacks of a lawsuit by Glendale, and losing the firm control they have over membership, outweigh that.

Alright, so what’s the current situation?

The Coyotes are scheduled to be sold in bankruptcy court on September 12.  The NHL had previously courted Jerry Reinsdorf to buy the team; Reinsdorf owns the Chicago White Sox and Chicago Bulls.  However, he has withdrawn his bid, and to be honest it was never clear if he was serious about it or just putting up a front to help out Gary Bettman and the NHL.  Balsillie’s bid of $212.5 million – which is vastly more money than anyone seriously believes the team could be worth in Arizona – become the only bid on the table.  The NHL is now saying that the league itself will bid to own the team.  They have not stated a dollar figure yet.

Wait, what?  The other 29 teams are going to own a 30th team?  Can you do that?

Sure.  Major League Baseball has twice done this; the Phillies in the 1940s were owned by the league, and the Expos just before they were moved to Washington.  The NHL has bailed out teams before, though never taking over ownership on a formal basis.  It LOOKS bad, looks like a conflict of interest, but there is technically no rule against it.
Who’s going to win?

I beleive the NHL will win this battle.

Balsillie’s case is based on very shaky legal ground; he really doesn’t have any case law supporting his claim that the NHL is forced to sell him a franchise. I cannot think of such a thing ever happening in North American pro sports, and leagues buying and running franchises when they’re in trouble has happened many times; the Philadelphia Phillies were league run as far back as the 1940s. Balsillie’s a nice guy in person – I’ve met him, and he’s very charismatic – but he’s been treacherous and deceitful in this mess, and sports league have always held the right to determine who can or can not be a member. Indeed, sports leagues have suspended EXISTING owners from being involved in the operation of their own teams.

Balsillie’s offer also looks impressive at first glance but it should be borne in mind that an extra $100 million in the offer doesn’t do a lot to make up for the $700 million still owed for the arena usage rights in Glendale. (Why the Coyotes agreed to such an exorbitant price – you could build two arenas of your own for that money – I do not know.) The bankruptcy judge on the case can’t just accept the $100 million extra and ignore than extra $700 million in liabilities Balsillie’s plan would create.

The fact also remains that the league’s owners are ferociously loyal to Gary Bettman, and support him to the mattresses. Bettman’s job is to make their franchises more valuable, and he has done that.

Then what happens?

Well, the NHL may win this battle, but they may lose the war in twelve months. “The NHL is facing financial armageddon in is sunbelt teams. While the league talks a good game and claims all is well, nobody – NOBODY – in the know believes it. The fact is that many of the southern franchises are in serious trouble. Phoenix is bleeding money, Nashville is bleeding money, Tampa Bay is bleeding money and has terrible, terrible ownership, Florida is financially shaky and can’t draw flies, and the Atlanta franchise is in ownership chaos. And it’s not just down south; the New York Islanders are in horrible shape as a business unit and are being kept afloat with the owner’s money.  Even the Dallas Stars are in trouble, not because of the market but because their owner’s in financial trouble.

How in God’s name did things get this bad?

What we really have here is a case of the chickens coming home to roost for decisions made 15 years ago.  The NHL was very, very aggressive in its expansion plans; it went from 21 teams to 30 in a span of just ten years, while at the same time moving four teams from northern markets to southern ones; Minnesota to Dallas, Hartford to Raleigh, Winnipeg to Phoenix, and Quebec to Colorado.

Some of the decisions have worked out great, like Colorado, San Jose, Anaheim. and, well, uh, Dallas, I guess.  But in many cases the league was simply too quick to hand franchises to anyone with a stadium deal and enough money to get things started.  The Ottawa Senators (my favourite team, so I’m not just picking on U.S. teams) were run on smoke and mirrors for a good ten years.  It’s remarkable enough that a franchise would not only be awarded to people without enough money to own an NHL team, but the league then approved the sale of the Senators to a guy who had even LESS money; their second owner, Rod Bryden, kept the team almost entirely by borrowing money and using tax dodges. 

Simply put, the league expanded too fast and too easily.

The question is whether these teams can be turned around. As pointed out, teams HAVE been turned around; Ottawa went from being unable to meet payroll to being a profitable outfit. Edmonton was saved from likely relocation. Pittsburgh was saved. But those teams played in more hockey-friendly environments; Edmonton is a hockey mecca, Pittsburgh has always been a good market and then got Sidney Crosby, and Ottawa was at the time one of the NHL’s most exciting teams. It’s not clear if the southern teams can draw on those strengths.

Furthermore, this is happening at exactly the same time we’re having an economic meltdown. The effects on 2009-2010 ticket sales will not be known until we get started but it’s safe to say they won’t be positive.

There is a very good chance Jim Balsillie’s error was in not simply waiting one more year. I think very soon there might be a LOT of teams for sale.

UPDATE SEPTEMBER 28: Since I first wrote this post a lot has happened without a whole lot happening.  Jim Balsillie has upped his offer; the NHL has continued to paint him as the next Hitler; the judge has yet to make a decision.  It’s looking increasingly likely that the NHL’s effort to buy the team themselves will be approved, though – and here’s the part that makes you want to either laugh, cry, or both – the NHL says they’ll move the team if things don’t work out in Phoenix, which of course they won’t.

But the NHL WON’T move them to Hamilton.  The likely plan will be to move the team to one of Kansas City or Las Vegas (that hockey Mecca) both of which would be absolutely certain failures, or Seattle, which might conceivably work. 

The argument is no longer about whether the Coyotes can survive in Phoenix; the NHL has conceded, in so many words, that they won’t.  Now this is purely a single legal question; Does a professional sports league have the absolute right to determine its membership?

If the answer is yes, as it likely will be, then nothing will change.  But if it’s no, I cannot understate the impact this could have on pro sports in North America.  It’ll completely changes the way pro sports organizes itself in a dozen or more ways.  So while Balsillie probably won’t get a team, if he does, hoo boy, this will be fun to watch.