Ted Leonsis was purchasing a cup of soup at Legal Seafood across from the Verizon Center when he was told it wouldn't cost him a penny. The general manager of the restaurant was so grateful for the amount of business Leonsis' sports franchises generated that it just didn't seem right to charge the owner of the Washington Capitals and the NBA's Wizards for lunch.
Leonsis asked if the restaurant advertised with the Capitals or owned a suite at the Verizon Center. The answer was no on both accounts.
"I don't need to," the manager said. "I just bought right across the street from you."
Leonsis tells this story during a recent phone conversation to prove a point. There are a lot of people making money off the Capitals. The bars and restaurants around the arena. Big chains with deep pockets like Fuddruckers, Starbucks and McDonalds. The landlords charging them rent.
"They don't pay us rent," he said "They don't need to advertise with us."
And then there's Washington, D.C. collecting taxes on these successful businesses. They're all making money off the Capitals.
Right now, Leonsis says he is not. A giant mortgage on the Verizon Center makes turning a profit challenging, even with the Capitals' popularity in recent years. The traditional revenue streams have a ceiling -- you can't add more seats. You can only raise ticket prices so much without a Stanley Cup before fans will object. There are only so many places to cram advertising.
"That leaves everyone trying to find new revenue streams," Leonsis said.
The franchises most successful at it will have a huge advantage in the next decade as teams learn how to conduct business within the NHL's new CBA. There's no doubt that some NHL owners weren't thrilled with the outcome of the CBA. Shortly after ratification, one small-market owner wondered in frustration just how his team would compete with the big-market teams like Toronto in a few years if league revenues continued to grow at their current pace.
The gap, he worried, is going to widen and the new revenue sharing won't be robust enough.
With a long-term CBA in place, there are no more concessions from the players to be had. The conclusion for teams now is to find creative ways to generate new revenues. Those who do it the best will be able to pour more money into the product on the ice.
"We control our own destiny," said Panthers president Michael R. Yormark. "The new CBA agreement -- that was one piece of it. It's not the end-all. It's one piece of it, not the entire answer. We in our local markets have to be strategic, we have to be efficient. We have to look for new opportunities for growth. We have to look at our brands differently."
That's exactly what Leonsis is doing with Monumental Network, a digital sports and entertainment network that could one day become its own cable television network.
Especially if it ends up broadcasting live hockey and basketball games.
There are four more years left on the Capitals' local television deal with Comcast and nine years left on the TV deal for Wizards games. The difference really complicates things considerably, especially considering a Monumental Network televising both NBA and NHL games is much more valuable than one with just hockey.
But at the very least, the new network provides leverage when it comes time to talk contract extension, because right now Leonsis doesn't believe he's getting enough from CSN Washington to televise Capitals games. Local television rights for sports have skyrocketed as networks place a premium on live content that typically isn't DVRed, which makes it more valuable to advertisers.
During the Stanley Cup finals, the LA Times reported that the Kings and Fox Sports signed a deal through 2024 worth $250 million. It's a nice deal for the Kings but still considerably less than the 20-year, $3 billion deal Time Warner (per the Times) paid to televise the Lakers locally. That gap shows there's still huge room for growth in the NHL when it comes to local television revenue, something that NHL chief operating officer John Collins has surely pointed out to the league's owners.
Rogers and Bell purchased a majority stake in the Maple Leafs and Raptors in a billion-dollar purchase last year that was a content play. They wanted to control which television networks got to show the games.
Leafs TV, owned by the team, was launched in 2001 and immediately added leverage to negotiations to televise Maple Leafs games and helped raise the value of the franchise.
"What I can tell you, the television deal prior to Leafs TV arriving and the first contract after Leafs TV -- the rights fee per game doubled," said John Shannon, who was the vice president of programming at MLSE and now an analyst for Sportsnet.
During his time running LeafsTV, Shannon said three NHL teams approached the Leafs directly about setting up their own network, much like the Leafs did with the Yankees and their YES Network.
With teams like the Leafs, Rangers and now the Capitals leading the way, it threatens to create a gap between those NHL teams adding significant revenue through television deals or their own networks and those unable to do so.
"It drives up the revenue for the league and it drives up everyone's salary cap number," Leonsis said. "So if you're not generating more revenue while the league's revenues are going up, it means you're paying more in salary without have the additional revenues. There's this real drive to try and find more revenues so that you can keep up."
Which led to the creation to the Monumental Network. The problem for teams that don't also own an NBA team or arena is that it's a little tougher to create a network that would add leverage to local television deals. The infrastructure costs alone would take a good 10 years to recoup, and a hockey team doesn't provide nearly enough content to fill a channel.
"You can't run a network off your laptop," Shannon said. "And the biggest challenge is -- what do you do in the summertime?"
It takes other solutions.
The Panthers won't be starting their own network anytime soon. They signed a 10-year deal with Fox Sports Florida that started this year. No, it's not close to the $80 million per year Forbes reported the Miami Heat's deal is worth with the station but in Yormark's words, it's a "much better deal than what we had."
It's got upside. The Panthers control their own advertising inventory, so there's motivation to improve the team and increase the ratings. But that alone won't be enough to keep up with the Bostons, Torontos and New Yorks.
The Panthers have their own advantage. They own the real estate around the BB&T Center, which was built on a 130-acre parcel of land. The actual footprint of the building accounts for 40 acres, which leaves 90 acres for development.
In July, Boyd Gaming and the Panthers' parent company, Sunrise Sports Entertainment, announced a partnership that would bring a casino development to that land.
"That's our game-changer," Yormark said.
The recession placed development plans on hold for the land, but assuming the Panthers get the anticipated cooperation from the state of Florida to expand gambling in South Florida, they could have a development in place by 2016 that would change the model of their business. If that coincides with completion of the rebuild in Florida under Dale Tallon, all the better. They're stockpiling young talent and an influx of casino money could make the Panthers big players in free agency just at the right time.
"It sets up beautifully," Yormark said.
There will still be small-market teams in the league that have a ceiling on the amount of revenue they can bring in. Nashville, for example, just signed an extension with FoxSports Tennessee that provided them with a significant increase in local television revenues, but nothing like the Kings deal. That's a good team without the leverage that Leonsis is creating in Washington, D.C. They also don't have acreage of land to develop or casinos to lure.
They're more dependent on the new revenue sharing than most franchises. But even the Predators have to continue to work hard to find untapped revenue, or else it may leave them at a huge disadvantage in the Western Conference or place more of a burden on their ownership to spend.
"You can only raise your prices so much year over year," Leonsis said. "That leaves everyone trying to find new revenues streams. Mobile, social, the Web and video and sponsorship seems to be the ways that are least developed right now. It's also where the customers are. It leaves us to have to be innovative."