The Economics of the NHL: Collector's Edition

It was the Winter of '69. Canadians were still smarting from the refusal of the National Hockey League to grant expansion franchises to Vancouver and Quebec City. Attempts were made to prosecute the NHL under the Combines Act for anticompetitive behaviour. The NHL owners claimed they were motivated by "the love of the game". But in Canadian Journal of Economics, J.C.H. Jones argued the owners were maximizing profits.

Professional sports are unlike other industries. Some degree of collusion between producers is inevitable - the owners of the Leafs and the Canadiens must agree on the rules of the game, schedules, sharing of game-day revenues, and so on.

Moreover, in professional sports - unlike, say, personal computing - complete dominance is undesirable even for the owners. Fans will not watch a game unless there is some uncertainty about the outcome. Hence owners have an interest in maintaining parity between franchises.

In hockey, parity is (partially) maintained through the amateur draft, that gives bottom-ranked teams the first choice of new players. But the history of the draft is as much about monopsony power - how a single employer (or group of employers) can cooperate to drive down wages - as parity. According to Jones' 1969 article:

The introduction of the amateur draft arose out of the Shock incident. In the early sixties Boston was consistently last in the league. To try to rectify the situation Boston attempted to buy the best Junior prospect in Ontario and Quebec. This involved Boston in a price war with other NHL clubs over Ron Shock. Boston apparently won out with a bonus of $10,000 and signified their willingness to repeat the process with other juniors. Such financial competition was averted when the clubs agreed to establish the universal amateur draft whereby weaker teams could draft two players from their competitors' sponsored teams at a fixed price ($3,000).

Forty years ago, owners' power of players was such that, according to Jones, "The player cannot break the contract by refusing to sign and still continue to play hockey, and although provision is made for compulsory arbitration, it turns out that the arbitrator is the league president." Players had no choice but to play for the team that drafted them.

Jones' explanation of why the 1966 expansion granted franchises to Los Angeles, San Francisco, Philadelphia, Pittsburgh, Minneapolis, and St. Louis, ignoring Canadian cities, is even more fascinating (in the history of the NHL, there have only ever been two expansion franchises awarded to Canadian cities - to Vancouver and Ottawa).

Adding more Canadian teams would not have increased Canadian TV revenues substantially - Hockey Night in Canada was already being broadcast across the land. It would just have diluted each team's share of CBC revenues. The holy grail that the owners were chasing was a US network contract. In the words of Jones - and remember, he was writing in 1969.

US national network TV does pay the most money for televising sport. Thus, if a team is playing to capacity crowds and is already utilizing closed circuit television, a national TV contract appears very profitable. But the prerequisite for a national contract is a national market. The expansion placed teams in the remaining major US television markets (excluding the south). The NHL did obtain a national TV contract from CBS (Jones, CJE, 1969).

What Jones couldn't know is that the NHL would lose that contract, and gain another one and lose it and....

The pursuit of a US network contract has been driving NHL expansion policy for over 40 years. The only hope for disgruntled hockey fans in Saskatoon, Winnipeg, Quebec and Southern Ontario is that new technology may soon render network television obsolete, and stop the NHL's futile pursuit.

You may be wondering why, given the resistance of the Canadian teams to expansion, did the NHL ever accept the World Hockey Association teams (Edmonton, Winnipeg, Quebec and Hartford) into the fold?  I cannot vouch for the accuracy of Wikpedia, but this is the story told there. Originally, the NHL/WHA merger had not gone through, because Montreal and Vancouver were opposed. However:

Vancouver was won over by the promise of a balanced schedule, with each team playing the others twice at home and twice on the road. Meanwhile, a massive boycott of Molson products across Canada but especially in Edmonton, Quebec City and Winnipeg had seriously hurt the sales of the Canadiens' owners (Molson Breweries).   Also, the three Canadian teams all came to agreements that saw Molson become the exclusive supplier of beer to their arenas - it is probable that this concession was made in exchange for the Canadiens' vote.

Jones ends his article with a call for policy intervention "Nevertheless, what is clear is that a complete reappraisal of the Combines Act vis-a-vis professional sport should be undertaken." The reappraisal didn't happen, and isn't likely to happen any time soon, given the Canadian Competition Bureau's limited ability to influence the structure of US-based sports leagues.  But it's interesting to speculate -what would a truly competitive hockey league look like? Would competition make for better hockey?

Note: I don't want to violate CJE's copyright by posting a copy of the Jones article here, but it's reprinted here.

 

Comments

[Declan]

I'm not sure what it means to ask what kind of league it would be if there was no league - i.e. if the owners were not in league with one another.

Obviously there are many different league arrangements possible, and something like the multi-tiered soccer approach might make for lower initial barriers to entry, for example (although in practice this seems to make little difference), but without more concrete details on what would be proposed to enable more competition with respect to new entrants to the market, it's hard to really comment.

[Frances Woolley]

Declan: "something like the multi-tiered soccer approach might make for lower initial barriers to entry, for example (although in practice this seems to make little difference)"

Or rather, the differences are so profound that it's hard to even begin to think about it. In soccer (and here I'm going to write about England, because that's where my resident expert is from) there's promotion and relegation, so every year the top teams move up a division and the bottom teams drop down. Imagine the Toronto Leafs being demoted to the American Hockey League and you get the idea. How is English soccer different from N. American hockey:

- there's no amateur draft
- which leads to a totally different system of player development
- every player is a free agent
- franchises can move wherever (though interestingly, in practice they almost never do)
- an owner can build a great team by pouring money into it (cf. Elton John with Watford)

Take a look at a map of the premier league teams. Compare it to a map of the NHL teams. Notice how the soccer teams are all concentrated in the big markets - London has several teams, medium-sized markets have none. Whereas there is just one team in the enormous Southern Ontario hockey market.

If the NHL didn't have such tight control over individual franchise owners, there would be at least two teams in the Toronto area and (probably) two teams in Montreal also.

[Nick Rowe]

The comparison to English soccer is most useful. It makes me wonder what the underlying legal(?) differences are that create those other differences.

[Mike Moffatt]

"Originally, the NHL/WHA merger had not gone through, because Montreal and Vancouver were opposed."

I'm a bit of a WHA nut, so here goes:

There were *several* attempts at a merger, including one after the first year of the league, proposed by the New York Rangers, that would see any (and potential all) WHA teams enter the NHL, so long as they paid a 3M expansion fee.

The NHL required a 3/4 vote to allow for a merger, which in practice meant that a coalition of 5 teams out of 17/18 were enough to block the move. The Leafs, Canadiens and Canucks were all worried about splittling HNIC revenue. The Bruins didn't want to share a market with the New England Whalers. The L.A. Kings opposed many of the merger plans, for reasons that have never been clear to me. Plus 3 owners/Presidents held MAJOR grudges against the WHA for having their rosters raided: the Leafs (half the Houston team was made up of players from the CHL's Phoenix Roadrunners - a Leaf farm team, plus they lost 4 of their top 5 scorers from 71-72 to the league - Ullman, Henderson, Keon and Jim Harrison, though not all at once), the Bruins (Cheevers, Sanderson, Pie McKenzie, Mike Walton and a bunch of role players/minor leaguers), and the Blackhawks (Bobby Hull and Whitey Stapleton). Since all that was needed was 5 of the following 7 teams: Leafs, Canadiens, Canucks, Kings, Black Hawks and Bruins to vote no, a merger was next to impossible. The Molson situation and Bassett in Birmingham signing all the Baby Bulls pretty much forced the NHL's hand.

[Declan]

The Premiership is one of many soccer leagues which operate on a similar basis, and many of the other leagues (Bundesliga, Serie A, La Liga, the French League (whatever name it goes by) have a distribution of teams which seems quite similar to the North American leagues. Even the Premiership isn't too far off North American patterns allowing for the uneven distribution of economic strength by city in England - the main oddity is the high number of teams in the Manchester area - perhaps a historical relic(?). As you say, the main lack in the NHL distribution of teams is the absence of a second/third team in the Toronto area (depending if you count Buffalo), something that seems bound to happen eventually, although the league seems willing to stall for a while first.

[prairie storm]

The WHA was a great alternative for players tired of the NHL dictatorship-like style and forced the NHL to improve player-relations.

I remember the Molson situation very well as sales of their products dried-up at the Winnipeg Arena after Montreal voted against a WHA merger. They soon changed their minds!! It's always about the money.