NHL Ticket Revenue, Relocation and Exchange Rates

A story in today's Toronto Star:

A secret National Hockey League report detailing the ticket revenues of its 30 teams provides additional ammunition for those suggesting more struggling U.S.-based teams should be relocated to Canada.

The confidential document shows that the six Canadian NHL clubs last season accounted for about 33 per cent of the $1.2 billion (U.S.) in league ticket revenue. In 2007-08, Canada's six teams represented 31 per cent.
The report, which was obtained by the Star from several league sources, suggests operating a club north of the border is much more lucrative for the NHL. Five of the top six-revenue generating clubs are based in Canada, with the New York Rangers being the lone team from the U.S. in that group.

“There will be a lot of people using these numbers to argue that the league would be better off with teams in Quebec City and Hamilton, Ont., rather than Columbus, Ohio, and a number of other locations where the NHL is not setting the world on fire,” said Marc Ganis, president of a Chicago sports advisory firm that has advised the buyers of several NHL franchises.

I wanted to test exactly that - how would new teams in Canada fare in terms of gate revenue.  More importantly, how susceptible would they be to exchange rate fluctuations?

The online version of the story did not include revenue figures but they were available in the print version.  Tyler Dellow of mc79hockey.com sent me a copy of the full list (he also wrote a blog post on the Star report):

All the ticket revenue per game (in millions) figures are in U.S. dollars but no exchange rate was given.  However, it is very straight forward to figure out.  According to Tyler, the NHL CBA uses an average of every day of the league season - July 1 to June 30.  From the Pacific Exchange Rate service, we see the average value of the Canadian dollar during this period was 0.99546 USD. In other words, parity. (For those interested, other seasons: '07-'08 0.990746, '08-'09 0.862505, '09-'10 0.948394)

Let's add two teams to the mix.  We want a worst case scenario, so we will assume the new Canadian teams will not be particularly successful.  I'll add a team "AAA" that earns 80% of the revenue of the Ottawa Senators and a team "ZZZ" that earns 60% of the revenue of the Sens.  Our new league looks as follows:

At current exchange rates, the AAA team is right around league average and earns more in gate revenue than 15 of 24 US teams.  The ZZZ team is naturally less successful, but is in the same revenue class as Carolina, Dallas and St. Louis.

But what if the exchange rate goes south? First 90 cents:

We're assuming here that the exchange rate doesn't alter ticket sales in any way, which is probably unrealistic.  A drop in the Canadian dollar likely means that oil prices are lower, which means less disposable income in Calgary and Edmonton.  But it may also mean more disposable income in Ontario, so we won't worry about it too much.

Even at a 90 cent Canadian dollar, 5 of the top 6 teams in the NHL are Canadian (again, assuming nothing else changes).  Our AAA team falls only behind Buffalo in terms of revenue.   Our ZZZ team still outperforms six U.S. teams in terms of gate revenue.

Next 80 cents:

A big fall for Edmonton, which is no longer a top-10 revenue team and now Ottawa is only league average.  Our ZZZ team still outperforms five US teams, while our AAA team outperforms 10 while tying the New Jersey Devils in gate revenue.

Let's do one more.  Absolute worst case scenario - 65 cents:

We have Edmonton and Calgary still above average, which is highly unrealistic, given a 65 cent dollar means that oil prices are in the $20-30/barrel range.  Our ZZZ team is now in trouble, as it has a revenue right around the level of two relocation candidates.  Our AAA team, however, has gate revenues equal to that of Nashville, a team which does not appear to be going anywhere anytime soon.

While there are other revenue streams other than gate revenue, it would appear that a new team in Canada could survive all but the most extreme of exchange rate fluctuations.

Just for fun, here is what our figures look like when the Canadian dollar appreciates to $1.20 US.

 

Comments

[ohthehumanity]

What does Mike do when he's working?

[Alice Woolley]

Mike, this isn't relevant your overall argument, but I would note that since oil and gas produced in Canada is still sold in US dollars, Canadian producers do better in Canadian dollars when the Canadian dollar is weak. Unless of course you mean, which you may, that the low Canadian dollar is likely to be coincident with/reflective of, low oil prices.

[garik16]

Alice, not sure if Mike is saying this here (doubt it), but if Oil and Gas is sold in US Dollars in Canada, then the price of such goods goes UP when Canadian currency drops, resulting in less disposable income for Canadians to spend on hockey games. I don't think Mike is saying this here due to his talk of oil prices affecting different parts of Canada differently, but it would presumably hurt ticket sales.

[mclea]

"Alice, not sure if Mike is saying this here (doubt it), but if Oil and Gas is sold in US Dollars in Canada, then the price of such goods goes UP when Canadian currency drops, resulting in less disposable income for Canadians to spend on hockey games."

The Canadian Dollar is, for the most part, a petro-currency that moves up and down with the price of oil http://bit.ly/uzrZOH. I appreciate that this is difficult for Ontarians to believe.

[Cornelius]

Interesting analysis.

I'm sure U.S. teams make tons on concessions and merchandising anyway - more than enough to make up for mediocre ticket sales.

[Frances Woolley]

mclea "I appreciate that this is difficult for Ontarians to believe."

You're absolutely right that the Cdn $ is a petro-currency. But to the extent that increases in the $US price in oil tend to be offset by decreases in the value of the $US relative to the $Cdn, and vice versa, this dampens the impact of changes in the $Cdn or changes in the price of oil on demand for Oilers and Flames tickets.

Please think twice before hurling around words like "Ontarian" - unless you're describing Mike, who being a born-and-bred Ontarian, is unlikely to be insulted.

[Josh]

@Cornelius: How do you come onto an economist's blog and leave a comment that slack?

Do you really think the Nashville Predators sell more in merchandise than any of the Canadian teams? And it doesn't matter anyway - merchandise revenues are league-wide and are collected by the league, then split evenly.

[Frances Woolley]

Cornelius - "I'm sure U.S. teams make tons on concessions and merchandising anyway"

Historically TV revenues has dominated every single other factor, and that's why the NHL has put up so much resistance for so long to having more Cdn franchises - more Cdn franchises have a fairly marginal impact on the size of Cdn TV audiences - it just diverts the audience from one game to another.

NHL expansion has been driven by the desire to maximize US TV revenues. Period.

Although ticket sales and the $Cdn are probably part of what's going on here, another factor may be the decline of conventional TV and the increasing importance of things pay per view, streaming, etc.

Mike, did you see the article in one of the recent editions of Hockey News about the possibility of a new franchise in Markham? Hockey News seems to figure it's pretty close to a sure thing.

[Jacques René Giguère]

IIRC, in the 60's Harry Johnson argued that the best way to run a professionnal sport would as a unfied business, sharing the revenues between each team and letting the local management to work out how to use their share of the budget. With the bulk of revenue coming from TV and merchandising, team location is becoming irrelevant ( though empty seats carry a bad image).
Come to think of it, that's how Formula One is run, with great fun having had by all.
It would be even cheaper to play every game in the same arena ( or racetrack).
After all, the main reason some well-known international competitions change locale each time might be the 10% in the construction budget...

[Frances Woolley]

Jacques Rene: "IIRC, in the 60's Harry Johnson argued that the best way to run a professionnal sport would as a unfied business, sharing the revenues between each team and letting the local management to work out how to use their share of the budget."

This is how the NFL works, which means that teams have an incentive to relocate to smaller centres where they can get large tax subsidies (which each individual franchise keeps) even if it reduces the league's TV revenues - since each team just gets 1/32 of the revenue pie.

Professional sports associations are exempt from anti-trust rules/the competition act. Also, and who knows how they get away with this, the NHL is a non-profit association (it must be true, it's on wikipedia).

[Jacques René Giguère]

Frances: that the local ownwers found a new revenue source ( municipal councils idiocy,hardly a novel concept after all) doesn't invalidate Johnson's model. It merely means that the league should get all the broadcast rights. There should be no local owners, a legacy of the past. There are as inefficient in the big picture as car dealerships, something the Japanese car companies can do without.
And the leagues are non-profit. After all expenses there is nothing left. There is always enough expenditure...
And funnily, the for profit bit, the clubs, are the only businesses that always show losses or trivial profits and still sell for huge amounts. Accounting is subtle but deadly sport.
OTOH, owners providing nothing in the production technical process, they should get nothing. Which is why they concentrate on the dark side of the deal.

[Greg Tkacz]

Looking at several indicators (income, population, corporate presence, etc.), a Mowat Centre study last spring concluded that Canada could support up to twelve teams. I don't claim that the empirical work performed to reach this conclusion is necessarily stellar, nor do the authors consider the potential negative impact of new franchises on the profits of existing franchises. However, even a casual observer could deduce from the data that the "NHL pie" could grow if two or three sunbelt teams were relocated to Canada, especially now that the NHL has its coveted long-term U.S. TV deal with NBC, which pays it $200 million per year. Here's a link to the paper:

http://www.mowatcentre.ca/research-topic-mowat.php?mowatResearchID=31

[Mike Moffatt]

RE: "Unless of course you mean, which you may, that the low Canadian dollar is likely to be coincident with/reflective of, low oil prices."

Should have made it clearly. That's exactly what I mean.

"But to the extent that increases in the $US price in oil tend to be offset by decreases in the value of the $US relative to the $Cdn, and vice versa"

In part, but it matters less than one might think. Historically, when oil is around $100 we have a currency at par. When oil is around $30 USD we have a currency at about 70 cents. That gets boosted to about $43 CDN, which is nice, but a long way off of $100.

"Mike, did you see the article in one of the recent editions of Hockey News about the possibility of a new franchise in Markham? Hockey News seems to figure it's pretty close to a sure thing."

No! I'll have to check it out - thanks for the tip! I'm a subscriber but I must have missed it.

[Frances Woolley]

Mike, it's right at the end. Very good article. If I was more enthusiastic I'd try to figure out what property deals this guy is planning - because these hockey franchise deals are almost always tied into big property development schemes.

[Nick Rowe]

Jacques Rene: "Come to think of it, that's how Formula One is run, with great fun having had by all."

You've been reading the UK tabloids! (Or did Allo Police pick up the stories of those kinky parties?)

[Jacques René Giguère]

Nick: what's posted on the cyberspace stays in the cyberspace forever. Don't reveal such dark secrets as knowing the existence of Allô Police.
Unless..
They have very good crosswords. My mom, as prim a woman as can be ( first woman to be elected marguillier (church elder)in Québec in the '60's) is a fan. Though, to escape public opprobrium, the task of buying is delegated to whichever son is visiting. One Saturday morning years ago a childhood friend, a promising lawyer, was on the front page,for murdering his wife. Acquitted for insanity caused by brain tumor.
Ken Kesey has seen it all. Even denying that Lerner was right.... ;-)

Tell me you love crosswords.