How to Build a Cup Contender in Atlanta, Part 3

Every clever person must figure out the best strategy to solves their particular problem. For example, a successful politician who is campaigning for votes must learn exactly how much time he needs to spend talking to each person in a room so that no feels slighted. My sister is a young stay-at-home mother with several small children and she has developed a daily strategy that revolves around doing household chores during nap times so that she can carve out some personal time at the end of the day. The same thing holds true if you are the GM of the Thrashers. You must choose a strategy that fits your particular set of obstacles if he you hope to build a Stanley Cup contender. And this brings us to today's topic: What are the obstacles that the Atlanta Thrashers face?

Professional sports is an unusual business. In most business transactions, one party sells something that another party wants. Ideally, the buyer walks away a satisfied customer and the seller walks away with a profit. This is the "win-win" situation in which both parties are better off than they were before.In professional sports there almost no "win-win" situations. Your task is beat the other team. There can only be one winner and one loser (well at least in regulation!). You want to draft better than the other teams, you want the premier free agent talent. Your win is another team's loss. Your job is beat the pants off them and take their candy. Profession sports is a hyper-competitive strategic environment.

Everyone has the same goals--win as many regular season and playoff games as possible to earn hockey immortality for themselves, their owner and their fans. But this is "win-lose" contest in which the playing field is not level. Some teams are in markets with deep roots going back 75 years while other markets are young and underdeveloped. Some teams have more money than they are allowed to spend (Detroit, Montreal, Toronto, Rangers) and other teams have less money than they are required to spend (that would be Atlanta).

Every team has the same goal, but teams do not compete on a level playing field, every team has a unique set of advantages and disadvantages. Right now the Atlanta Thrashers operate at serious disadvantage compare to many other markets. In Part 1, I discussed the long term potential of this team in this market, but at the current moment the Thrashers are struggling with attendance, struggling with money and struggling with a losing brand label.

The really scary thing is once a team enters a losing period there are "feedback loops" or "recursive arrows" which make it likely the situation will remain ugly unless creative and dramatic steps are taken to break out of this vicious cycle. A bad team like Atlanta has trouble attracting and retaining talent--which means the lose more games--which means they again struggle to attract talent at a fair price. The Florida Panthers are about to lose their top defensemen Jay Bouwmeester and the Thrashers could potentially lose Ilya Kovalchuk due to this vicious cycle. Losing teams pay a de facto "loser's tax" on the free agent market and winning teams (Detroit, Pittsburgh) see their star players willing to re-sign for less than fair market value (Zetterberg, Crosby).

The thing that most concerns me about the Thrashers is that if you listen to ownership and management they seem to talk as they the organization has simply had a string of bad luck and things are bound are turn around. That's a really poor assessment of the situation. The Thrashers are caught up in an ugly feedback loop--they are like a swimmer caught in the whirlpool who hopes the current will just stop sucking him under. If you're caught in whirlpool you must take decisive and dramatic action to save yourself, if you wait for your luck to change you'll likely be dead. Yes, the Thrashers have suffered some bad luck, but if their strategic plan is to wait for a string of good luck they might have to wait a VERY long time for that to happen. Good management doesn't rely on good luck.

The Thrashers number one problem right now is low revenue. Now I know people don't like to hear about the money problems of rich men (and women) who own professional sports teams, but the simple fact is that the Thrashers make far less money that most other NHL teams. The table shows is from secret financial data that was leaked to the Toronto Globe and Mail a few years ago, which they published. These figures rate high in terms of their accuracy since the NHLPA is allowed to audit the NHL's numbers under the CBA. If the NHL is caught fudging by the NHLPA ugly things would happen. If you look at the table you can see that the top 10 NHL clubs brought in roughly $1 million per game while the Thrashers brought in roughly half that amount. Folks, that's a very serious financial disadvantage our owners face.

If you're the Thrashers ownership you have two bad choices a) you can try and minimize your losses and hope the team wins despite spending less, or b) you can spend big and guarantee huge losses in the hope of breaking even at some point down the road. Neither of these is probably very attractive in the current economy--even if you're wealthy enough to own part of a NHL team.

I have been critical of ownership and management in the last year (I have tried to be fair in my criticism), but if it were my money I'd have a hard time losing $20 million per season in the HOPE that I might get it back someday. That sort of thinking landed Coyotes owner Jerry Moyes in bankruptcy court recently. The harsh economic reality is that the Thrashers have low income and therefore must watch their budget VERY carefully. This is the biggest strategic constraint on the franchise right now.

Here is another strong reason for the Thrashers to stay on a budget, if they spend more than the mid point of the cap, they receives less revenue sharing money from the NHL. The exact amount of revenue sharing is secret, but based on information that came out of the Phoenix Coyotes bankruptcy case, the Thrashers probably receive between $11-15 million from the NHL as a poor club (enough to cover the salary of Kovalchuk, Hainsey and White combined!). Now under the rules of the revenue sharing formula, if the Thrashers were to spend above the mid-point the NHL gives them less money. If I owned the Atlanta Thrashers I would not spend above the mid-point either--why throw away free NHL money? Spending above the mid point would increase your losses--as Mr. Spock would say "It would be Illogical."

So let's take stock of where we are now. 

1. The Thrashers sit in a market with vast unrealized potential because they have been bad for a long time.
2. The Thrashers are one of poorest teams and lose money because they are bad.
3. The Thrashers are unlikely to spend big because they would loose revenue sharing free money.
4. The Thrashers are stuck in a vicious cycle of being bad, being poor and being non-competitive.

PLEASE DON'T STOP READING, WE HAVE REACHED THE TURNING POINT OF THE SERIES!

The news is grim, very grim really. But I have still have hope and so should you. Here's why I have hope.

1. Big money doesn't win Stanley Cups (see NY Rangers), wisely spent money can win Stanley Cups.
   
2. You can build a contender on a below-average budget.
3. Below average contenders win the Stanley Cup at the same rate as above-average contenders (more on this later).
   
4. The Atlanta market has the potential to produce big revenue down the road with a good hockey product (see Dallas ranked 9th and 10th in the table above).
5. The Thrashers current ownership has been willing to invest money to build their product even when it resulted in losses.

I have a lot more to say about building a Cup contender on a budget in future posts, but I want to elaborate point #5 first. There is a widely held belief among Thrasher fans that the current ownership is "cheap" and unwilling to spend money on this team. Now there is some evidence for this "cheap ownership" position such as lack of upkeep at Philips Arena, unwillingness to pay for a new head coach in midst of the 2007-08, cutting staff positions at the top and middle levels of the organization. I'm not going to defend delayed maintenance, but I will say that if you were losing millions you might be looking to save some pennies here and there too.

But the simple truth is that the Atlanta Spirit spent money, they spent big money and took big losses in their first two years of ownership after the lockout (see the Chart below). I collected the opening night salary data from USA Today for teams prior to the lockout and from the Cap Central after the lockout. If you divide the NHL into thirds (upper class, middle class, lower class) and look at the average spending for each third you can see that under AOL/Time-Warner the Thrashers were among the cheapest of the cheap. The Thrashers spent less than the average Lower Class team each season before the lockout. The Thrashers were out spent almost 3:1 by rich clubs. The Atlanta Spirit were much bigger spenders than Time-Warner ever were as owners.

If you examine the purple line after the lockout, you can see that the Thrashers actually spent MORE than almost any other franchise in 2005-06 (in fact Bondra's bonus money put them over the cap at the end of that season), they were among the top spenders in 2006-07. After the lockout Atlanta Spirit INCREASED payroll by more than $12 million or 25%+ over what AOL/Time Warner was spending. They have held payroll flat since then, but the rest of the NHL greatly increased their spending and the team slipped from being ranked #1 in payroll to very near the bottom. I'm sure that they expected big money to produce big wins and big attendance and result in big revenue growth. But something terrible happened, the big money did not produce the big wins they hoped for.

The facts plainly show that the Spirit ownership did invest in their franchise and their hockey product. The problem wasn't that they spent too little, but that the money was spent poor. They blew big money ($4.25) on 3rd line center who play 15-16 minutes a game, when investing in a Chara (30 minutes a game) would have utterly transformed the franchise. (sorry, but I had to pause to weep for a moment after typing that.) The owners received a rather poor ROI (return on investment). I have no idea why these otherwise astute businessmen have not replaced their team management after such a poor performance--I would have. I wonder how many years the "bad luck" excuse gets you as a GM? 2 years? 4 years? 6 years?

In a hyper-competitive league poor decision making in the front office is extremely costly (as in millions of dollars costly). It is not as though competent management talent is impossible to find, see for example the Boston Bruins and Pittsburgh Penguins--two teams that have hired young and successful GMs since the lockout).

Now ownership is in a bind. They spent big in 2005-06 and 2006-07 and received very little revenue bounce after incurring millions in losses.  Meanwhile, the rest of the NHL experienced sharp revenue increases and therefore the cap has increased MUCH more quickly than anyone anticipated. In just four years they went from exceeding the cap ceiling to finishing very near the cap floor.

The Thrashers are caught in the undertow and they need to take bold decisive steps to break out of it. They need to be brutally honest is assessing the state of the franchise (aka parts 1, 2 and 3 of this series) and ruthlessly efficient in pursuing the maximum return on each dollar spent (parts 5, 6 and7 in this series). Waiting for your luck to turn is not substitute for a well thought out plan! In the next installments of this series I'll look at teams that have contended on a below average budget. I'll then outline a series of steps or practices that can enhance the Thrashers chances of contending on a below average budget.