As a dedicated ice hockey fan and equity analyst, LA Kings fan Phillip Propper was skeptical of the team's claim that it had lost millions of dollars since moving into the brand new Staples Center a few years ago. So Propper had an idea:
On a whim, Propper wrote a letter in February to Tim Leiweke, the Kings' president, volunteering to examine the team's financial statements."Mr. Leiweke, I am quite skeptical regarding this claim," Propper wrote, referring to the huge losses.
Rather than taking the conventional view - that letting an outsider, a fan no less, audit the financial guts of a privately held corporation was a form of insanity - the Kings embraced the idea, certain that even a skeptic like Propper would see what they saw: big losses.
The team would not have opened its books to any old Kings fan with a jersey and a cap and a beer-cup holder, but they were comfortable with Propper's financial background. Leiweke told Dan Beckerman, the team's chief financial officer, to cooperate with Propper.
"We wanted to set the record straight," Beckerman said. "We're not happy about losing all this money, and we're not bragging about it. But the flip side is we're also not complaining about it."
And so, Propper spent 10 hours over three days in February at Staples Center. "I went in with the bias that they were lying," Propper said.
What happened next? The Kings, much to Propper's surprise, where telling the truth. The culprit: rising players salaries that increased faster than the Kings could boost revenue.
But what was even more interesting, was Propper's conclusion as to the source of the problem:
"Why did Anschutz buy this team?" Propper said he had asked himself. "They figured that they'd build Staples, and knew what revenues would look like and thought salary growth would be about 8 to 10 percent. But salaries grew too fast. They may not have bought the team had they known this."He said the Kings had not spent enough in marketing to fill the new arena with more than an average of about 15,000 paid customers each game.
Winning a Stanley Cup, of course, has also eluded the Kings.
Propper's sharpest criticism is reserved for the National Hockey League. He said that under Commissioner Gary Bettman, the league had needlessly overexpanded to 30 teams, forcing salaries higher and creating a wide revenue gap between the most affluent and poorest teams. His proposed solutions include eliminating four to six teams through contraction and consolidation.
Which is a conclusion that plenty of fans have come to all on their own in the last several years. Player salaries increased for two reasons: first, though the league needed enough players to fill out thirty teams, the supply of players at the top of the scale didn't increase -- making the price they could demand all the more dear. Further, teams were able to spend more on salaries due to the expansion fees the league demanded of its new owners.
In the business world, when a public company enjoys a financial windfall that isn't related to its ongoing operations, they report it as a "non-recurring event", and those profits are often broken out, or even excluded from the company's calculation of earnings per share (EPS). On Wall Street, it's understood that while such events contribute to the company's overall health, they can't be attributed to the company's operation as a going concern.
In essence, the league was able to pay players more, even though the long-term fiscal health of the league hadn't improved at all. If anything, we can posit that the expansion fees paid by those new owners were essentially investments in a partnership made against future earnings. And given the current state of the league, I have to wonder out loud if any of those expansion teams ushered into the NHL since 1990 have seen one plugged nickle in profits.
