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The Lockout May Be Over, but the NHL's Business Model Is Still Broken

Jan 11, 2013
Glen Hodgson
Senior Vice-President and Chief Economist
Forecasting and Analysis

Centre for Municipal Studies

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The NHL lockout is finally over, and the many serious hockey fans across Canada and the northern United States are excited about the return of the fastest game on ice. And that's exactly the problem.

Demand for NHL hockey is regional, not spread evenly across North America. The NHL ventured into too many non-traditional markets in the southern US in the hope of growing the game (and making more money at it), but the public there does not have a passion for hockey. There was little passion for NHL hockey before the lockout, and there will be even less afterwards. The NHL's business model is still broken, even after a four month lockout and a collective compensation rollback for the players.

First, what is the NHL business model? It is not a single unitary business, where essentially the same product is offered to all consumers, and where revenues and costs can be centrally controlled. Rather, it is a franchise model where individual owners acquire the right to be part of the league and to operate an NHL team in a specific location. Each time a new franchise is added, the existing franchises share the expansion fee; hence their interest in growing the game in non-traditional markets with large populations in the South.

The league tries to control for product "quality" by having a common entry draft that makes the same young player talent pool available to all franchises. But as players enter later stages of their careers, free agency tends to erode the level playing field for talent.

The league also tries to create a more level playing field financially among the franchises, in two ways. First, the NHL now limits the share of what are called "hockey-related revenues" that goes to the players. The recent agreement between players and owners saw the players' share of revenues fall from 57 per cent to 50 per cent, a level similar to many other pro sports leagues.

And second, the NHL has a limited version of revenue-sharing among the franchises. Revenue-sharing is the one remaining area where the league could act more aggressively in order to support the existing weaker franchises. The problem with expanded revenue-sharing, however, is that the NHL has a very limited pool of collective revenues from national TV coverage that could be shared. The NHL receives national TV revenues of less than $500 million annually, as compared to the about $4 billion received annually by the National Football League. To be specific, CBS, NBC, FOX and ESPN have already agreed to pay a combined total of US$39.6 billion to broadcast all NFL games from 2014 to 2022 inclusively.

Therefore, more aggressive revenue sharing would require the richer teams—the Leafs, Rangers, Habs, Flyers, Canucks, Red Wings and perhaps a few others—to dip into their pockets and transfer their own directly-earned revenues to their poorer cousins, which these franchises are understandably reluctant to do.

Therefore, within the framework of the recent compensation agreement between owners and players, the success of each NHL franchise is determined fundamentally by the demand for hockey in each local market. If demand is solid, franchises succeed. But if consumers are generally disinterested in buying the product, no amount of wage compression for the key employees is going to make these businesses successful.

Attendance and Average Ticket Prices by NHL City, 2011–12 Season 

Going forward, there is little doubt that the NHL hurt its brand with consumers of hockey by locking out the players for four months. In northern NHL markets where passion for hockey burns bright, we fully expect the fans to come back, despite the grumbling. But in southern markets with little wide-spread passion for hockey and lots of choices for sports consumers, we do not expect a bounce-back in the attendance numbers any time soon—in places like Nashville, Florida, Dallas and Phoenix. If anything, the lockout probably made the situation worse!

The only way to "fix" the broken NHL business model is by moving franchises to other locations, since the costs of contraction, by repaying expansion fees, is just too high for the other owners. And if there is a bright spot on the horizon, it is that Quebec City should not have to wait forever. It is just a matter of time before common sense prevails, an owner (or the league collectively) gets tired of writing cheques, and a southern NHL franchise lands in the beautiful new building in Quebec!

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