BUSINESS

WHY THE LEAFS STINK

April 14 2008
BUSINESS

WHY THE LEAFS STINK

April 14 2008

WHY THE LEAFS STINK

It would be comforting to believe that the Toronto Maple Leafs are cursed. After 41 years of failure, supernatural explanations start to seem pretty attractive, especially when hard facts are just too painful to face.

It’s not like there’s any shortage of evidence for those inclined to see paranormal forces at work. These are the Leafs, where one can’tmiss prospect after another disappears into minor-league obscurity. Remember Drake Berehowsky, Brandon Convery, Scott Pearson, Luca Cereda, Peter Ing, and Jeff Ware? They all, at one time or another, represented a future that never arrived. What about poor Jason Blake? A 40-goal scorer who gets diagnosed with cancer just months after his celebrated

arrival in town. Then there’s Mats Sundin. One of the game’s true stars, he played 13 years surrounded by one of the best-paid supporting casts in the NHL, never once making the Stanley Cup finals, let alone winning it.

The list of disappointments could fill volumes, and now this. For the first time in Leafs’ history, eliminated from the playoffs for a third consecutive season. It’d be tempting to say the team has hit rock bottom, but it’s not clear they’re done digging.

God hates the blue and white—it’s that belief which binds together all those who call themselves citizens of Leafs Nation. On talk radio, in chat rooms, and in sports bars across the country (but mainly in southern Ontario) they share the misery of loving a team that

does not give back. Not ever. Their bond is galvanized by the common struggle against forces beyond their control, and by the knowledge that they are hated (vehemently) by fans in Montreal, Calgary, Vancouver and beyond. It’s that sense of grievance and isolation that, in the absence of anything real to celebrate, holds them all together.

The only problem with all this talk of curses is that there are perfectly logical reasons for the Leafs’ legacy of failure. The fact that the Toronto Maple Leafs are a bad hockey club is the inevitable by-product of the laws of economics. Their mediocrity is a design flaw, and it comes down to this: for any business to thrive, it must be obsessively focused on victory. Success must yield powerful benefits

BUSINESS

God, how long must we suffer?

$5 million for Kubina? Are you kidding me?

I’m so glad my boss paid for these tickets!

and failure must unleash harsh consequences. In the world’s greatest market for pro hockey, that cost/benefit equation doesn’t exist. A gusher of wealth, regardless of performance, has begat 40 years of infighting, a culture of laxity, and a refusal to admit the problem. The Leafs are a monopoly business that has been corrupted by its own market power. It’s not a curse. It’s far, far worse.

In 2002, just a few years before he died, the world-renowned economist Peter Drucker was asked what he thought of the U.S. government’s obsession with breaking up monopoly businesses (in all industries except sports). Drucker saw no sense in it. Like the dinosaurs, he said, monopolies were

all marked for extinction anyway. “I am not afraid of monopolies because they eventually collapse,” he said. “Thucydides wrote years ago that hegemony kills itself. A power that has hegemony always becomes arrogant. Always becomes overweened... It becomes defensive, arrogant, and a defender of yesterday. It destroys itself.”

Arrogant, overweened, defensive, obsessed with history, and doomed. Could there be a better description of the Maple Leafs?

To be precise, however, the Leafs wield what economists call “monopolistic market power”—not quite the same as being a monopoly, but similar. Colin Jones, professor emeritus at the University of Victoria, has spent much of his career studying the economics of pro hockey. “Pretty much any study you look at, you’ll find a very strong correlation between attendance and winning.” But the Leafs, he says, are different. “They can do whatever the hell they like and the attendance and merchandise sales go up, and TV and radio contracts hold up. In terms of competitive performance, this monopolistic power is a very bad thing.”

But just why it is a “bad thing” is the corn-

plicated question that underlies 40 years of failure. Thousands of disgruntled observers will tell you the Leafs don’t try very hard because, no matter how bad the team is, the arena is full and the team makes a profit. But while there may be some truth to that, it fails to convey just how profoundly monopolistic power corrupts the ability to compete. It’s not that the Leafs organization isn’t trying. The problem is, no matter how hard they try, their efforts are undercut by the dynamics of their dominant market position. And in the NHL, that is completely unique.

“For most teams, winning is urgent,” says Neil Longley, a professor of sports management at the University of Massachusetts, who studies the incentive structures affecting pro

sports, including pro hockey. “Even winning doesn’t guarantee [financial] success for a lot of teams, but losing pretty much guarantees their failure.” Even in a city like Detroit, with a strong hockey tradition, managers know they must always ice a winner to fill an aging rink in an economically depressed area. In New Jersey, not even a perennial Cup contender can fill the arena. Dallas, Denver, Anaheim—all succeed on the ice, and all face an annual fight to turn a profit.

Toronto’s problems are, in fact, the exact opposite of most struggling sports teams. There’s no miserly owner cutting corners. There’s no lack of fan support. And it’s not a pressure-cooker environment that stunts the development of young players. (For all the references to the city’s rabid media corps, the team is, in fact, treated with kid gloves and feted at any sign of improvement.) No, the rot that is destroying the Leafs comes from having too much, too easily.

This year, Forbes magazine ranked the Leafs (again) as the most valuable franchise in the NHL, by far. It estimates the team to be worth $413 million, up 24 per cent in one year, on revenue of about $138 million, and operat-

ing profit just north of $52 million. Consider also that the Leafs are just the biggest part of Maple Leaf Sports and Entertainment Ltd., which also owns the Toronto Raptors of the NBA, the minor league Toronto Marlies, the Air Canada Centre, and the Toronto FC pro soccer team. All in all, the whole enterprise is valued around US$1.5 billion—three times its estimated price tag of nine years ago, when Richard Peddie took over as CEO. Even at that, Peddie maintains Forbes’ valuation is way low. “Let’s just say none of our owners would consider selling for that price.” Despite the utter lack of on-ice success, the team has been able to wring ever more revenue from its beleaguered fans year after year. Team Marketing Report issues an annual study

of pro sports prices, and this year the Leafs ranked (again) as the most expensive ticket in hockey. The Fan Cost Index estimates the cost of bringing a family to a game—four average-priced seats; two beers; four small soft drinks and hot dogs; parking; a couple of programs and two ball caps. At a Leafs game, that’ll cost $476, up 4-8 per cent from last year and way ahead of second-place Montreal at $388.

Economists say that kind of pricing power is typical of a monopolistic business. Remember the days when calling long-distance was a special occasion, because the monopoly phone companies charged a fortune for overseas calls?

With their ownership of four of Toronto’s major teams, MLSE has an firm grip on the southern Ontario sports market, and the cost of being an Ontario sports fan reflects that.

There is a dark side to that kind of power, however, and it is often reflected in an inability to innovate, and to develop internally. Big monopoly companies generally compensate for their stunted creativity by acquiring smaller firms. Microsoft built a notorious monopoly on its Windows operating system, got extremely rich, but then fell behind more innovative rivals. When Google came along and started dominating the market for online advertising, Bill Gates spent US$6 billion to buy a company called aQuantive to catch up. When it fell behind Mapquest and Google Maps, Microsoft bought Vexcel and GeoTango to try to close the gap. When none of that worked, it paid US$45 billion to buy Yahoo!

The Leafs have relied on the pro sports equivalent: signing veteran free agents to compensate for their woeful record in drafting and developing players. Over the past 20 years, the Leafs have drafted just two players—Tomas Kaberle and Felix Potvin—who went on to play in the NHL all-star game. Over the same period, Montreal drafted eight future all-stars. Currently, 17 of the Habs’ 25 players, including virtually all of its nucleus of young talent—Carey Price, Andrei Markov, Andrei Kostitsyn, Tomas Plekanec, Chris Higgins—were acquired through the draft.

This is due in part to the fact that the Habs have been subject to a healthy boom/bust cycle common to most teams. When the team falters, it uses high draft picks and a strong development system to rebuild. The Leafs organization, behaving like a true monopoly, has opted to use its money for a series of short-term fixes—Ed Belfour, Owen Nolan, Brian Leetch, Jason Blake to name a few. These moves keep the team suspended in a kind of permanent stasis. Not good enough to fight for the Cup, not bad enough to effect-

ively rebuild.

Even that dubious strategy, however, has been stymied over the past few years, as the introduction of a salary cap has severely limited the ability of rich teams like the Leafs to spend their way out of bad management decisions. “Pre-salary cap, one of the strategies of the Leafs and other large market teams is to basically outspend your competitor,” Longley says. “They no longer have that option. Now the challenge is not a [financial] race to the top, but it’s a competition of who can use their money more wisely. Finding the most talent per dollar is going to drive success.”

And that suggests, as badly as the team has performed, the real problem exists in the executive suite, not on the ice.

Richard Peddie is sitting at a small conference table in his office at the Air Canada Centre. Laying face down on the table in front of him is a paperback copy of Barack Obama’s political memoir The Audacity of Hope. Perfect for the CEO of a team about to set a new standard for futility, but that’s not the point. The point will be revealed later. For now, Peddie would just like you to know that he enjoys reading books.

Like many people in marketing, Peddie has a ready supply of anodyne insights that come out as perfectly formed sound bytes. You can almost see the quotation marks as the words come out of his mouth.

—“We have an expression around here: you have to win on the ice and off the ice.”

—“Luck occurs when preparation meets opportunity.”

—“Like that old cliché says, coming close is only good in hand grenades, it’s no good in this business.”

—“Eve always said ‘winning is good business.’ I came up with a new phrase a couple of weeks ago: ‘winning is good business. Championships are even better business.’ ”

—“My joke is ‘at Pillsbury, nobody phoned me to complain about my crescent rolls, here they do.’ ”

But sloganeering isn’t Peddie’s only talent. He also has the politician’s gift of simultaneously taking both sides of an argument, and doing it so convincingly that you’re hardpressed to notice the contradictions. A few weeks ago, he told the Toronto Sun that it was a mistake to hire John Ferguson Jr. as the team’s last general manager. Today, he recants. “I still think John was a good hire. With his

résumé, he was the best candidate at the time. But it didn’t work out.” And then, a few minutes later, a subtle shot at Ferguson’s inexperience. “Gone are the days of hiring a rookie for either the Leafs or the Raptors.”

Ask about decades of on-ice futility, he points to two trips to the league semifinals under Pat Quinn. “We had a good run when Pat was here. We didn’t win the Stanley Cup, but those years weren’t bleak at all.” Later in the same conversation he confesses: “I didn’t come away from those years we made it to the conference finals feeling like we had a great year. Not once.”

Ask about his own performance and he rhymes off a long list of financial accomplishments, but later says he will consider his job incomplete until the Leafs win the Cup.

None of this is to suggest Peddie is disingenuous. He’s just good at his job. This is what it takes to survive atop an organization steeped in four decades of backstabbing, factionalism, alliances and betrayal. In the absence of any urgent need to compete against the rest of the league, the power brokers behind the Maple Leafs have honed their combat skills on each another.

It’s survival of the slickest, and that is an inescapable part of the malaise that now defines the Leafs organization. It’s a problem that has plagued dozens of powerful corporations over the years—Boeing, Coca-Cola, and Disney come quickly to mind. General Electric was famously obsessed for more than a year with the internal rivalry among three top executives to succeed Jack Welch as CEO, and its performance naturally suffered.

The Maple Leafs’ history of toxic boardroom politics can be traced back to the late 1960s, when Harold Ballard began his Machiavellian climb from director and minority shareholder to absolutist overlord of Maple Leaf Gardens. In 1971, already facing fraud charges over his misuse of team money, Ballard managed to force his former partner John Bassett out of the ownership group, then gained full control just weeks later, when his erstwhile ally Stafford Smythe died. Under

Ballard’s often bizarre stewardship, the Leafs were in a constant state of disarray. In the 20 years between 1970 and Ballard’s death in 1990, the Leafs changed head coaches 15 times, and a succession of star players, including Dave Keon, Bernie Parent, Lanny McDonald and Darryl Sittler, finally left the increasingly abysmal team.

When Ballard died in 1990, he made Steve Stavro and Don Giffen executors of his will, setting the stage for another power struggle. Stavro eventually won out, but not before Giffen installed Cliff Fletcher as GM. When Stavro completed his takeover, he nudged Fletcher into retirement and brought in Ken Dryden as team president and GM. Accord-

TAKING THE FAMILY TO A LEAF GAME COSTS $476 ON AVERAGE

ing to Leafs executives who were there at the time, the Dryden years were characterized by a whole new round of dissension, as he feuded with his assistant, Mike Smith. Pat Quinn was brought in as coach in 1998, and took over as GM in 1999, but by then, he and Dryden were hardly speaking either.

Stavro orchestrated the merger with the Toronto Raptors and the creation of MLSE in 1996, but that did nothing to calm the internal upheaval. He was eventually squeezed out of the company in 2003. He gave up the chair-

manship of MLSE to construction magnate Larry Tanenbaum, sold his controlling stake to the Ontario Teachers’ Pension Plan, and died a few years later. It was also in 2003 that the Leafs decided to replace Quinn as GM while keeping him on as coach, setting in motion yet another infamous round of internal hostility.

Peddie formed a three-person hiring committee with Quinn and Dryden (two men who both thought they could do the job perfectly well). According to people familiar with the situation, Quinn wanted one candidate, Dryden another, and neither man would budge. Ferguson—a 36-year-old who’d never been an NHL general manager—was finally hired as a compromise candidate, backed by

Peddie and Tanenbaum. In other words, nobody really thought Ferguson was the best man for the job, he was merely the one person everybody could live with. That’s neither a ringing endorsement nor a recipe for success, but that’s how arrogant and fractious organizations often do business.

Dryden soon moved on to federal politics, but the atmosphere at MLSE never warmed. One former NHL executive who knows both men says the dynamic between Quinn and Ferguson was doomed from the start. “They

thought he’d learn on the job, but learn from who? Pat hardly spoke to the guy.”

Ferguson finally fired Quinn in 2006. And this year, after a string of failed signings and dismal trades, Ferguson got the axe too. But there are many in and around the league who believe the real problem remains in the boardroom. The most outspoken critic may be Bill Watters, a former assistant GM under Quinn who is now a sports radio show host and television commentator. “The state of the organization is best exemplified by the interference provided by Peddie and Tanenbaum. That is the essence of the rot,” he says. “I would sooner put up with Harold Ballard and all his quirks than with Peddie and Tanenbaum. They have no idea what they’re doing. At least Harold was a sportsman.”

In Leafs vernacular, that is pretty much the ultimate condemnation. Comparing the MLSE boys unfavourably to Harold Ballard is like saying Italy was better off under Mussolini. But Tanenbaum dismisses Watters as a disgruntled former employee, levelling “personal attacks to increase his on-air ratings.”

As for rumours that Peddie and Tanenbaum have renewed the Leafs tradition of infighting and interference, both men deny it—and that’s where Barack Obama comes in. “There’s this meddling rumour right? They talk about dysfunction and meddling,” Peddie says, picking up his copy of The Audacity of Hope. He points to a highlighted passage in which Obama laments how facts get distorted and then re-reported ad nauseam in the Internet age. This is a sore point. “I’ve never once influenced a trade, a free agent, a draft choice. Never once. Yet, if you polled the people they’d say ‘Peddie meddles.’ Once these things get out there, it takes on a life of its own.”

Tuesday, March 11 in Toronto, and the home team is still on life support. Fading hopes to make the playoffs are on the line against the Philadelphia Flyers. Early in the third period, the expense-account crowd hasn’t even made it back to their platinum seats when the Flyers pull ahead 3-0. A dejected calm falls over the ACC.

Then, a goal from Sundín with 15 minutes left changes the game. Pavel Kubina buries a slapshot with just under seven minutes to play. And, with 3:41 on the clock, the equalizer goes in. With a minute left in overtime, a fluky little flip-shot from behind the net hits a Flyer defenceman and bounces into the net. The Leafs win and the ACC crowd, nearly silent just 30 minutes ago, goes absolutely freaking nuts.

Over the next few days, the winning streak stretches on—another victory on the road in Philadelphia, then one in New York and another in Buffalo. Then, sweetest of all,

Ottawa. Even an injury to Sundín doesn’t slow the momentum, and the papers are full of hopeful stories lauding the team’s courageous, improbable run for the playoffs.

Alas, just as quickly as it began, it’s over. Back-to-back losses to the Boston Bruins and the Leafs are back to a sad, familiar place. Don’t the Leafs want to win?

Of course they do. Listen to Peddie talk about getting booed on the street when he goes for lunch. His frustration is real, but it is largely beside the point. “The team makes too much money. It’s too easy,” explains one former NHL general manager. “There’s just no burning incentive to put a good team on the ice. And it’s been that way since long before any of these current people were involved.” The players want to win too. But, as that

former executive points out, in February when the Leafs asked five veteran players if they would agree to be traded to Cup contenders, all five refused, preferring to stay in Toronto despite the team’s woeful record. Few in the hockey world were even surprised. “They need a cultural change. Everybody’s just too comfortable.”

Easy to say. Hard to do. Peddie promises that over the coming months, MLSE will hire “a proven winner” to run the club. That per-

son will be paid more than any other executive in the league, will be given absolute autonomy to run the team, and a mandate to win the Stanley Cup. But Longley points out that the Leafs have been through dozens of coaches, hundreds of players, three dis-

tinet ownership structures, and yet the results remain astonishingly consistent.

Peddie rejects the notion that the Leafs are structurally ill-equipped to compete. “What the economists don’t understand is the emotion of it,” he says. “We’re executives but we’re also fans. We want to win.”

But that’s just it. Fans are the ones who celebrate every goal, every hit, and every fleeting win streak. Fans can be convinced that a last-minute dash toward the playoffs (in a 30-team league, in which more than half of the teams make the cut) is an achievement worth celebrating. Fans wish for success. Leaders make it happen, because they can’t live with the alternative. Fans perpetuate the status quo. For 41 years, the Leafs have had too many fans, and not enough leaders.

The distinction is perhaps best illustrated by a story from 27 years ago. One night in 1981, the Winnipeg Jets—then the league’s worst team—came into Maple Leaf Gardens and laid a humiliating pounding on the home team. During a stoppage, an older gentleman approached the boards, took off his Leafs jersey, threw it onto the ice and walked out of the rink in disgust. “He must have been close to his seventies, and all these people clapped,” one witness laughs. “But you know, I bet that guy came back the next night.”

Of course he did. That’s what makes the Leafs monopolistic. And that’s the problem. M

SOME SAY PEDDIE AND TANENBAUM ‘ARE THE ESSENCE OF THE ROT'