Tuesday, 2 August 2011

Membership Dues

With the recent move of the Atlanta Thrashers to Winnipeg where they became the Jets, there was a significant monetary charge that the NHL applied to the relocation with the "relocation fee" costing True North Sports and Entertainment a total of $60 million. While I understand that there are costs associated with running a franchise in any professional sports league, it seems that the "fees" associated with moving or founding a pro sports franchise are a little ludicrous. After all, the NHL already made some impressive coin off the founding of the Thrashers-Jets franchise when they set up shop in Atlanta, so why is there another fee being charged on the same franchise to move the organization to a place where they are already turning a profit without having even played a game? Some would say this is "double-dipping", so we need to look at why the outrageous fees are even being charged in the first place.

ESPN's Darren Rovell took a look at the expansion fees paid by the NHL's newest teams since 1991, and it seems that the NHL's valuations of the expansion fees are based on the valuations assigned to the teams regarding the amount of profits they will have to share when the new NHL team begins play. I get how this works as each added team to the league results in a smaller piece of the pie for the rest of the teams. But I also see a brand-new fanbase pumping all sorts of untapped money into the new team and into the league through ticket sales and merchandise sales, so at what point is the expansion fee too high?

Former NHL President Gil Stein weighed in on Mr. Rovell's piece in 2002, and I personally believe that his view on the matter is skewed. "Franchise fees are really supply-and-demand," said Stein. "If the fee is too high, then you will get no one willing to pay. But if you get someone willing to pay, how can you say that the fee is too high?"

The problem is that no owner has ever come to the NHL and stated that he or she would be willing to pay $80 million for an expansion franchise. So the "supply-and-demand" argument runs weak because of the definition of supply-and-demand: it is "an economic model of price determination in a market", not a random number tossed out by a league who feels that they can bolster their pockets with some extra greenbacks. Expansion and relocated teams bring in a ton of money for the league outside of the exorbitant fees charged, so the supply-demand argument is nothing but garbage.

There are four basic laws when it comes to supply-and-demand. They are:

  1. If demand increases and supply remains unchanged, then it leads to higher equilibrium price and quantity.
  2. If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and quantity.
  3. If supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity.
  4. If supply decreases and demand remains unchanged, then it leads to higher price and lower quantity.
We'll start with the first law that states that "[i]f demand increases and supply remains unchanged, then it leads to higher equilibrium price and quantity". This one goes directly to the relocation idea because the supply of teams will remain at 30 for the foreseeable future in the NHL. Demand for NHL hockey has remained strong in several markets: Winnipeg, Quebec City, and Kansas City for example. But with Winnipeg now off the market, only two cities are hoping the NHL will return, so the demand is diminishing. Therefore, in theory, equilibrium price should fall, meaning that the $60 million relocation fee paid by True North shouldn't be as high for the next city chosen to receive a relocated franchise.

Moving to the second law that states "[i]f demand decreases and supply remains unchanged, then it leads to lower equilibrium price and quantity", we should see a lower relocation fee charged to Quebec City or Kansas City if they are chosen. Demand for an NHL franchise has been reduced by a third with Winnipeg getting the Thrashers, so the price to move a franchise should fall... in theory.

We know that the NHL isn't going to move the price, though, because precedent has been set. Someone paid a ridiculous amount of money for a team, so it must work, right? If you're a current NHL owner, it's like manna from heaven - money that you didn't even have to work for that shows up in your pocket because you agreed to take a smaller sliver of pie. How great is that? Money for nothing and cheques for free, I guess.

The third law is really where the NHL needs to find some explanation for raising the expansion fees in the mid-1990s. The third law states "[i]f supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity". San Jose, Tampa Bay, Ottawa, Anaheim, and Florida all paid $50 million before the NHL strike in 1995, and there was clearly some loss of fan interest in the game once the NHL returned from the strike. Who enjoys missing 36 games of hockey in any season?

The NHL, though, identified four more cities as expansion sites - Nashville, Atlanta, Columbus, and Minnesota - and proceeded to charge those owners $80 million, $30 million more than their expansion brethren! If supply was increasing (the NHL wanted to expand, and cities were willing to listen) but demand for NHL action remained, at best, unchanged until the new millenium thanks to the NHL strike, why was the NHL jacking up their expansion fees for these four franchises?

Doing the math, the nine expansion teams brought in a total of $570 million - more than a HALF-BILLION DOLLARS - over nine years! Again, this isn't revenue generated through sales or marketing, it's simply the cost to join the NHL's membership for those who want in.

Essentially, True North's purchase of the Atlanta Thrashers was for the cost of $10 million. Sure, they paid $150 million for the franchise, but that included $60 million to the NHL for the "relocation fee" and the other $90 million to Atlanta Spirit Group. Taking in the $80 million deficit that the NHL put on the Thrashers before they even hit the ice for just joining the club, the total cost to buy the Thrashers could be expressed as $10 million if you pay off the $80 million expansion fee. As for the Thrashers franchise, the NHL walked away with $140 million through expansion and relocation of the Thrashers, and, to me, that's actually quite disgusting from a fan's perspective.

Mr. Rovell does try to put a positive spin on things at the end of his article when he writes,
"While the NHL has been accused in the past of expanding to pad owner's pockets, the NHL has the lowest franchise fee among the four leagues. The NBA charged Vancouver and Toronto $125 million each in 1995 and Arizona and Tampa Bay paid $130 million each to Major League Baseball. Last year, Robert McNair paid 8.7 times more for his Houston NFL franchise ($700 million) than the owners of the Columbus and Minnesota teams pay the NHL."
The problem? We're not comparing sports leagues in this examination. It's simply a look at the NHL and what they spent $570 million on in the 1990s that they did little to earn before selling one piece of merchandise for the newest nine NHL teams.

Let's jump back to 1967 when six teams joined the NHL at once. The Oakland Seals, Los Angeles Kings, Pittsburgh Penguins, Philadelphia Flyers, Minnesota North Stars, and St. Louis Blues all paid $2 million apiece to join the NHL. At the time, $2 million was a lot of money, but it was still affordable. The only team that is no longer in existence is the Oakland Seals, but it's not like the $2 million hole they started in buried them before they hit the ice.

In 1970, the Vancouver Canucks and Buffalo Sabres paid $6 million apiece to join the NHL. In three years, the expansion fees jumped 300% for interested parties, but the $6 million price tag was still affordable for most owners. It didn't take a conglomerate of business people to own a team, and the majority of the NHL teams at this time had individual owners.

The Atlanta Flames and New York Islanders joined the NHL in 1972, and they both paid $6 million in expansion fees. The Islanders also gave the New York Rangers an additional $4 million due to "territory invasion". Again, the $6 million price tag was still affordable, and neither team started in a hole that resembled a gravesite.

In fact, the price tag for expansion through the 1970s didn't change from that $6 million bill. The NHL added the Kansas City Scouts, Washington Capitals, Edmonton Oilers, Hartford Whalers, Quebec Nordiques, and Winnipeg Jets before the calendar changed to 1980, and all six of those teams paid $6 million apiece, bringing the total of expansion fees earned by the NHL from 1967-1979 to a whopping $60 million.

In relocation news, the California Golden Seals moved to Cleveland in 1976. The Kansas City Scouts moved to Denver in 1976. And in 1980, the Atlanta Flames moved to Calgary. Total relocation fees collected by the NHL? Nada. Zilch. Zip. Zero.

Let me put this straight. The NHL added 16 teams over thirteen years, and they only brought in $60 million? And they allowed three teams to move in four years, and that netted a total of $0.00? Something funny is going on here. Let's keep digging.

Since the original NHL expansion in 1967, only two expansion teams - the 1979-80 Edmonton Oilers and Hartford Whalers - have managed to make the Stanley Cup Playoffs in their first years of play in the NHL, and none have posted a record above .500. That's two teams in nineteen expansion attempts that saw the expansion team earn playoff revenue in its first season. While it's to be expected that these teams won't be President's Trophy contenders in their first years, it's far easier to build a profitable team by having them compete for a playoff spot to generate fan interest. By digging an $80 million hole for these expansion teams before they take the ice, a number of them are doomed from the very beginning since they won't be earning playoff revenues for a long time.

So why did the NHL jack up the price from $6 million to $50 million over 12 years before settling on the current value of $80 million in 1998? Besides the make-believe "supply-and-demand" argument, what possible reason can be given for an 833% increase between 1979 and 1991?

Honestly, it's a question that needs an answer, and I cannot find one. I'm sure the NHL will continue to beat the supply-demand drum, but it's simply not the case. If there was a major demand for more NHL teams and locations as the NHL would have us believe, additional expansion would have happened already. After all, the idea of an "NHL Europe" has been around since the 1960s, and it still hasn't happened despite the presence of several major European leagues.

So why the increase? And why did the NHL make $140 million alone off the expansion into Atlanta in 1999 and then the move of the franchise to Winnipeg in 2011? Where are these amounts for fees generated from, and who sets the value of the fee? I'm no business major, and I really believe that the fees the NHL charges are outrageous.

If anyone has any answers, I'm all ears. Personally, putting an NHL team into an $80 million hole only makes climbing out of that hole a lot more difficult, and it's an additional pressure that the new franchise really doesn't need in my opinion. If the NHL charged, say, $20 million to join the club, they could potentially attract a lot more potential owners, and allow these new teams to be more competitive from Day One.

A competitive team: that's how you rally the fans, and that's how you build interest in a brand-new entity. Does this seem too elementary to anyone?

Until next time, keep your sticks on the ice!

1 comment:

Mike Engle said...

Hey Teebz,
Congrats on the most thought-provoking article I've ever read on HBIC. Maybe it isn't Edward R. Murrow-esque, but nonetheless, you have a great criticism against a ridiculous tenet.
There are other reasons why the NHL can't claim "supply and demand" as a reason (or maybe you covered them and I missed them):
**Even as demand (aka popular opinion and public sentiment) for a 7th Canadian team escalated, Winnipeg was surely aided by external intervention against Hamilton. No matter how much money Jim Balsille could offer to buy a team and improve the Capps Coliseum, the NHL would not have granted the franchise. Blame Bettman's giant air-inflated ego and the inevitable Maple Leafs
**On a practical level, supply alternates between "zero" and "non-zero." The NHL will not have a 31st team without a 32nd, because conferences and divisions have to remain balanced. (As long as the NHL has 30 teams, the supply will likely be "zero" for a long long time, as you indicated.) So no matter how much money Balsille can offer for a Hamilton expansion, his money is worthless until a 32nd buyer emerges somewhere. And then the logistical headaches ensue.
**Continuing with economics, I wonder what impact the new Jets have on Hockey NIGHT in Canada. Obviously, Manitoba will get the Jets on Saturday nights on CBC, but this also means that at least one team has lost TV territory that was once theirs as recently as last season. More Canadian teams + no increase in regular season games = something has to give, right?
Anyway, Teebz, thanks for the article, and congrats on earning a new devoted everyday reader in me. If you're ever in Montreal, we should crash a pub and watch a Habs game while drinking beer.