Contradictory messages on hockey economics

Two interesting and contradictory stories today that muddy the waters when we try to understand just how profitable it is to own a hockey franchise.

First is this North Texas news story, which features an interesting (and short) audio interview with a sports economist who claims that overall league sustainability sags because of hockey in non-traditional markets. Makes sense conceptually, though he doesn’t offer up much more evidence than “Hockey country in South Florida? No.”

I don’t disagree that building a sport in a non-traditional market is challenging and requires a billionaires’ equivalent of the welfare state in the meantime, but we are talking about huge media markets with mad sports cultures. If hockey is sustainable in cities with a population base like Winnipeg’s, it’s hard to understand how it couldn’t be sustainable in a city where even a fraction of its sports consumers would equal the same number of people.

More to the point, though, is how the angle of this story continues to calculate hockey profitability on a strict hockey-related-revenue-to-hockey-related-expenses ratio. That simply doesn’t reflect the manner in which value is derived from sports franchise ownership.

(One other point made during the interview that resonantes with me more, though, is that owners are emboldened by how strong the fan support was after the last lockout, and how fans are only damaging the long-term stability of the league if they welcome their teams back with open arms. We need to vote with our dollars. End aside.)

Now look at this tellingly contradictory story from South Florida, which says precisely what I and many others have been writing about for some time: those who own their own arenas or have favorable arena deals have a number of non-hockey related events and revenues to buoy their teams. “So what?” you might ask. That’s not hockey related revenue, and so shouldn’t be included when we talk about hockey’s profitability. Except that in many cases you simply can’t get your hands on that revenue without an arena, and you can’t get your hands on an arena without a regular tenant, and that your tenant then eats up a huge amount of your fixed expenses. Simply put, a hockey team might lose money, but your investment still gains.

We start to get a picture of an overall investment strategy: You don’t necessarily want a sports team, you want a sports arena. With an arena you can inflate real estate and land prices in the area, where you can strategically invest beforehand, and/or charge for retail space, and/or derive value from businesses you own nearby. To get an arena, you need a sports team, the cheapest of which is an NHL team in a non-traditional market. Even if you don’t have the arena, get the team and you can agitate for the local government to build you one with public tax dollars.

Once you’ve got your arena and team, your direct hockey-related revenue in-out ratio might produce yearly operational losses – you probably don’t make enough on ticket sales to pay for salaries and arena expenses. But your overall portfolio, made possible by owning the team, is producing value. You may even make a short term profit when you consider revenue sharing, merchandise sales, and television revenues, much of which is not reported. And if you’re lucky, maybe your team goes on a run, wins some playoff games, and you make some bonus short term profit. Meanwhile, your franchise is increasing in value year over year. If it’s in the middle of the pack, that means a 4%-11% return on your $200MM investment every year. All you have to do is have the money to cover any operational losses in the meantime, which some owners (remember those two guys in Tampa?) have trouble doing when all of their other speculative enterprises crumble in a crashing economy.

In the meantime, you can limit your operational losses by slashing payroll and agitating for a lockout to remove player rights. In the end, this narrative of non-traditional teams dragging down the league is only accurate if we continue to look exclusively at hockey related revenue. But owning a sports team isn’t about whether or not the team makes money. It’s about whether or not all of your investments, made possible through the ownership of that team, make money. Which is why the owners’ line about how broken the economics of the game are is so disingenuous.

I don’t doubt that some owners are actually losing money, and some owners’ investment strategies haven’t panned out. (Wang on Long Island hasn’t had as much luck getting a new arena as Katz in Edmonton.) But that players and fans should repeatedly pay for the unrealized strategies of various billionaires is asinine. The reason the Coyotes don’t have potential owners crawling all over them isn’t because there’s no appetite for hockey in Arizona. It’s because a state with an economy that runs on real estate sales has crashed and is near bankrupt. No one has any money to spend on anything, so real estate speculation has flatlined. As the economy recovers, look for more potential owners to start sniffing around these supposedly doomed outfits in non-traditional markets.

All of which to say that the owners of sports franchises are looking quite villainous lately. The Senators’ owner, Eugene Melnyk, is fairly mild in comparison – though he does have a tendency to make shitty, misleading statements about relocation right before tickets go on sale, or claim that his club is the second largest employer in Ottawa, which is ridiculous. But when we see the repeated manipulation of fan sentiment to get concession from the public purse, to drive down individual rights in the form of player arbitration (from guys who I would assume are staunch anti-state-interventionist Republicans to boot), and the plainly misleading reporting of franchise values, then I don’t know how anyone can be pro-owner in all of this mess.

5 thoughts on “Contradictory messages on hockey economics

  1. Pingback: Senators News: December 11th | eyeonthesens

  2. Great read.

    I’m pro-owner because it’s much harder to get a new Eugene MElnyk than it is a Jason Spezza, especially with hundreds of players entering NHL systems each year. Someone needs to pay for these arenas, shoulder these salaries and in general get things done. The players? Come and go and basically just show up for their shifts and off with ‘em. Something world-changing would need to happen for me to ever support players (or employees in general, given I’ve been on the management side in business forever).

  3. Interesting…

    I’ve been pro-owner since the very beginning, because, like it or not, these owners are the bigger risk takers. They are also harder to find than the next 50-100 NHLers that come into the league each and every year. They are the employers, who have to deal with a thousand different angles to run their franchises as best as possible. Compare that to the average hockey player, who has (and, from a very young age, likely has had) only one thing on his mind, and since about the age of 16, all he does is eat, sleep and play hockey. Once in the NHL, there is nothing else for him to worry about, except hockey – plus a very nice paycheck at the end of the day. Players in the NHL today are taken care of better than ever before; with just one contract, they can make more money than most people do in a lifetime.

    For the owners, it’s not the same. Never mind their individual business approach, their suspect business antics or their “misleading reporting of franchise values.” These guys may be shady, but they bring a product to their local market that very few can afford to do. And it’s a damn good product, if I am not mistaken. The owners are relied upon financially and are expected to shoulder all expenses and all losses.

    Because of the on-going risk to the owners, because of the fact that I myself am an employee and not the employer, and because I like my job too much to flick my bosses’ noses over more of their money, I side with the owners and not the ridiculous stance of the players, who have received better than average treatment and pay with each passing year.

    As a side note, I laugh at the feeble attempts by some fans who say they will boycott the league once hockey is back. The demand is far greater than the supply, especially in the northern regions of the US, and obviously most definitely in Canada. The business model – as flawed as it may be (in some ways, due to certain people not making as many millions of dollars as they’d like to) – is working. The NHL and the PA both know this, and that’s why it is so much harder for them to give up the extra piece of the pie. I mean really, if there was any concern for them to lose the average fan, they would have had an actual sense of urgency to get this solved, and quick.

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