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The Economics of Rebuilding, Part 1: The Foundation

March 19, 2012; Denver, CO, USA; Denver Nuggets president Josh Kroenke speaks to the media during a press conference held at the Pepsi Center. Mandatory Credit: Ron Chenoy-US PRESSWIRE
March 19, 2012; Denver, CO, USA; Denver Nuggets president Josh Kroenke speaks to the media during a press conference held at the Pepsi Center. Mandatory Credit: Ron Chenoy-US PRESSWIRE

Note: This is the first of three articles explaining why I think the Avs will go after a big free agent this season. Initially, they were intended to be run together, but that story ended up being 3500 words long and took over 10 minutes to read. So, for everyone's sanity, I decided to split it up. You're welcome.

In order to understand the economics of hockey, one first has to understand where the money comes from and how it is managed.

The NHL is a gate driven league – the majority of each team's revenue comes from people buying tickets. In 2004, a league report showed that nearly 75% of a team’s income was generated by selling tickets, corporate boxes, sponsorships, concessions and merchandise during games. Not much has changed. Even now, the average team only gets $8 million from national TV deals, which is a far cry from the NBA's $30 mil a team or the NFL's $140 mil. Revenue sharing helps, but in order for an NHL team to make money, they have to figure out a way to get people into the stands.

The easiest way to do that? Winning.

While every team has a nucleus of die-hard fans, very few teams are lucky enough to have one large enough to make the team economically viable by themselves. Most general fans are interested in wins, and if a team isn’t getting the job done, many of those fans feel much less inclined to spend possibly hundreds of dollars and 3+ hours of their life to watch a losing team. Recently, the Avs attendance numbers have been fairly pathetic, and while Forbes reports that the team still managed to make $2.3 mil in profits last year, that number has been steadily declining since our rebuild began. Basically, it appears as if our current economic strategy (keeping costs low while icing a mediocre team) is NOT viable in the long term. In order for this team to be successful, it needs to start finding a way to bring fans back into the Pepsi Center.

While that's a noble goal, the Denver sports market provides some interesting challenges. It’s no secret that the number one sport in town is definitely the Broncos. The Avs are not just an afterthought, but typically an afterthought of the afterthoughts (Nuggets and Rockies) when it comes to the attention of the sports community. There isn't a deep cultural tie to the sport in Denver - hockey is popular in our state because of the Avs, not the other way around. Even though CC, DU, the Colorado Eagles, and now the new CHL team have strengthened the hold of hockey in Colorado since the days of the Rockies, Denver has proven capable of losing an NHL team before. We aren't Winnipeg - the pure allure of having a NHL team isn't going to draw enough fans to sustain the team alone.

However, this is also the city that owns the NHL’s record for most consecutive sellouts. Denver boasts a large population of general sports fans - if a team is successful and fun to watch, they’ll show up. Perhaps this is because winning is still a bit of a novel concept to Denver fans (the town's first major professional championship came in the form of a big silver Cup in 1996), but whatever the driving factor, professional sports are the 21st century Colorado gold mine. The Kroenkes own a large number of the stakes, so why wouldn’t they want to strike it big with one that’s been proven to produce in the past?

To be entirely frank, the idea that the Kroenkes don’t care about this team is a little ridiculous. No, they may not know the difference between the third line and the blue line or have any clue what Patrick Roy uses to plug his ears, but they care about this team. They’re businessmen, and to them, the Avs are an investment. Over the course of a year, they probably put hundreds of millions of dollars towards making this club run - they’re the ones on the hook for player salaries, facilities management and maintenance, paying the front office and coaches, etc. No matter how rich you are, it’s a massive chunk of change to be tied up in one venture. Their goal is to get the largest return on their investment that they can, so even though they may have different motives than we do, they too want to see a successful team on the ice.

The Kroenkes didn’t get here by making silly investments either. Even though Stan Kroenke is now one of the heirs to the Walmart fortune, he’s still largely a self-made man. When he married into the Walton family, Wal-mart was still a very small family-owned chain. From his real-estate contributions, he’s played an active role in making Walmart what it is today, so he knows a thing or two about smart investments. He knows not only where to spend, but WHEN to spend. If he didn’t think this team could be economically viable, he would have gotten rid of it a long time ago.

Also, this team has supported a huge payroll in the past. By 2003-04, the team's player salary was $63.3 million, which is just under the current Salary Cap. Peter Forsberg alone made $11 million that year, tied for the highest income in the league. This team, this market, this owner can support that sort of payroll. They have in the past, and if the team plays its cards right, they can in the future as well.

However, neither of the Kroenkes are exactly hockey experts. Both of them grew up playing basketball in the Midwest – hockey wasn’t exactly on the radar for most of their lives. They may have learned a thing or two about it since coming into the ownership of this team, but remember that they also own a lacrosse team, a basketball team, an American football team, and two soccer teams. They have a lot to keep track of and simply don’t have time (or seemingly the desire) to learn all there is to know about the hockey world. So they keep to what they know – football and basketball – and they appear to leave most of the day-to-day management of their "hockey investment" up to the Avs front office.

While I'll agree that feeling like the red-headed stepchild of the KSE sports family grows tiresome after a while, it could be worse. At least they realize that they don't know enough to meddle in the team's affairs - they leave the major decisions up to the experts who can give this team the dedication and diligence it deserves.

That’s where Greg Sherman comes in. He too is pretty money savvy, but unlike the Kroenkes, Sherman has the time to learn more about hockey and listen to his scouts. Even though he didn’t exactly grow up with hockey either (he was born in Pennsylvania but grew up in Denver pre-Avs), he’s spent the last 15 years with the club, including 7 where he was tasked with negotiating contracts and dealing with the salary cap. Even though he seemed like a long-shot at the time, he’s the perfect GM for this club. Who better to create an economically efficient team than someone who has been involved in the money side of the sport for almost a decade? He may rely on his "hockey guys" to help him spot talent, but since he's the GM and gets the final say on personnel decisions, "The Accountant" is in the perfect position to keep this team's spending in check.

In fact, Sherman probably has more control over the finances of this team than what we typically acknowledge. Since the Kroenkes simply don’t have the time to get into the nitty-gritties of all their teams’ dealings, my bet is that as long as the general managers of their teams keep a positive economic track record, KSE isn’t going to argue too much with the moves they suggest. However, it’s still in Sherman’s best interest to keep them happy since they’re the ones paying his salary and keeping the team here, and since the Kroenke’s view this team as an investment, keeping them happy means figuring out how to maximize profit.

Unfortunately, that’s not exactly been an easy job over these past few years.

Part 2 (running tomorrow) will look at the methods Sherman chose to use to rebuild this team and why they make sense from both a talent and economic standpoint.