December 24, 2012 at 7:10 pm

Gregg Krupa

NHL lockout's true cost is staggering

On Friday, a financial ratings firm, Fitch Ratings, said it would likely assign a “negative outlook” to all NHL arenas, if the season is canceled. (Associated Press)

The year before the 2004-05 season was canceled because of a lockout, the NHL was a money-losing enterprise.

According to a league audit, it lost $232 million during the 2003-04 season.

While no audit was made public for 2011-12, the league is known to be in better financial shape than eight years ago, with record revenues of $3.3 billion driven by the increasing popularity of the game.

During the lost season, commissioner Gary Bettman and the owners harbored few worries about killing a golden goose, as they demanded and eventually received the first salary cap in the history of the sport.

This time, the goose may not be exactly golden, but it is more valuable. And the risks are higher.

On Friday, a financial ratings firm, Fitch Ratings, said it would likely assign a "negative outlook" to all NHL arenas, if the season is canceled. The move could affect the cost of borrowing for new construction, including for an arena Mike and Marian Ilitch intend to build in Detroit.

"Professional sports work stoppages risk alienating sports fans, corporate sponsorship and advertising partners in the short-term and may lead to increased revenue volatility," Fitch said in a news release.

As players, owners and Bettman whittle down the time left for tactical maneuvers to the last two weeks, if a 48-game season is to begin in mid-January, both sides will consider whether the cost of losing a season is greater than the cost of making a deal. Saving the season may depend on whether the price tag of not doing so is greater than any financial advantage gained by more bargaining.

Simple arithmetic suggests the NHL will lose an additional $2.75 billion in revenue if it cancels the full season and the Stanley Cup playoffs.

That sum includes $2.2 billion based on the economic performance of the NHL last year.

The league also would lose $330 million in additional revenue due the owners, now that the players have essentially agreed to a 50-50 split of the pot.

TV deal has huge impact

A considerable source of revenue is the lucrative, record-breaking television contract with NBC. A 10-year, $2 billion deal, now in its second year, helps finance the owners through the lockout, because it requires NBC to pay $200 million annually, regardless of a work stoppage.

But, if the season is canceled, the NHL must provide an additional season at the end of the contract, for free. Considering that the 2022-23 season is scheduled to be the first year of a next broadcasting agreement, the NHL likely risks losing even more than $200 million.

The value of sponsorships also is at risk during a lockout and ever more so if the season is canceled.

Sponsors can not be happy with the second lockout in eight years, but none has announced plans to abandon the NHL.

Molson-Coors, the largest sponsor, did announce last month that its sales have suffered without hockey, and Kraft announced the cancellation of its participation in Kraft Hockeyville — a major portion of the advertising campaign it ties to its sponsorship.

The lockout is currently costing the NHL about 25-30 percent of its sponsorship revenue, experts say. The league will have to write some checks to make sponsors whole. But if the full season is canceled, the dollar amount will increase considerably.

It took the NHL two years to recover sponsorship spending levels after the lost season, observers say.

A second lost season in eight years could have an even greater impact.

"There's a compounding effect to this. Fool me once, fool me twice and all that," said Bruno Delorme, a sports-marketing expert at Concordia University, according to The Globe and Mail in Toronto. "The longer the NHL is out of action, that trust breaks down a little bit more."

Are fans less forgiving?

Another potential cost is the further alienation of fans. While many say they are angry now, they said the same thing last time — only to return to arenas, broadcasts and souvenir shops in such large numbers that it drove record revenues.

Early in the lockout, Bettman said he was not concerned about losing fans. "We recovered well last time because we have the world's greatest fans," he said.

But there are some signs they will be less forgiving this time.

Level5 Strategy Group in Toronto, which specializes in building the brands of businesses, said it surveyed 1,066 Canadians and determined that there has been a long-term drop in the proportion of fans who feel "passionate" about the NHL and, among men, increasing interest in both the NFL and CFL.

The firm also said it discerned emotions associated with the NHL that are more negative than those the firm found with BP during the gulf oil spill.

"Hate to say it, but we could end up like bowling," Red Wings coach Mike Babcock told last week. It was a veiled reference to the decline in viewership and attendance the NHL suffered after the lost season, when television ratings were about the same as bowling, before they eventually spiked.

The cost of the lockout to the players has been clear from the start. While the owners reap the revenue from broadcasting rights, the players miss paychecks.

But they are negotiating make-whole arrangements with the NHL, which likely would be lost, along with all of their salaries, if the season is canceled. That is an average of $2.4 million per player, and in the case of some of the highest paid, it is $10 million, and more. And the players' losses could be even more catastrophic.

In a suit pending in U.S. District Court in Manhattan, in which the NHL seeks to block any impact from a prospective move to disband the NHLPA, the league argues that if the union no longer exists, the court should declare that "all existing contracts between NHL players and NHL teams would be void and unenforceable."

In other words, every contract earned by every NHL player would be erased and subject to renegotiation.

Whether all of the costs on both sides drives them toward an agreement in the coming two weeks remains to be seen. But the costs are both evident, and large.