Wednesday, January 24, 2007


Growth and the NHL, cont'd.

There's some interesting comments on the State of the Union post below that I'd like to delve into. Tom Benjamin notes:
I agree that the CBA creates disincentives for revenue growth, but surely that is an unintended consequence, or if the consequence was foreseen, one that would be offset by other revenue benefits.

The explicitly stated objective (and belief in my view) on the revenue side was that increased parity would sell more tickets in places where tickets were not being sold.

They were (hopefully) trading off some revenue growth in Detroit for more revenue growth in Nashville.

It's my view that the consequence was unwanted perhaps, but certainly foreseen, and accepted nonetheless. I don't doubt that they hoped that arenas all over the league would fill up -- we have as good a shot as any team, thanks to the salary cap! -- but I do doubt that it was expected. I absolutely concede that the salary cap increases the possibility that your lousy team will get better faster, but it would appear that hope only sells so well. (Plus, if the feature of the salary cap is that my lousy team has a better-than-previous chance of improving a lot in the offseason, that still doesn't prod me to buy a ticket now. Why not wait to see how things are panning out in July? Or next January?)

At any rate, it hasn't happened. There's two more broader concepts I want to look at arising from the comments. One, here's dirty jane:
What advantage does it give to current fans if the NHL grows? As far as I can tell growth means increased ticket prices and more teams in US cities.

A good question, and one that's difficult to provide a satisfying (let alone accurate) answer to. Analogies can be lousy and painful sometimes, but here we go:

Take a time machine, and ask your average midde-class person 30 years ago how it would be to their advantage if the grocery business grew. If I'm that person, I say, "I can't imagine. I have no idea." I might even be wary, as I know that growth generally means change, and I'm pretty happy with my present grocery experience.

Back to 2006. I have more places to shop, more selection, and for better deals. Despite the fact that the industry appears to be insanely competitive, grocery companies are constantly renovating and expanding their stores, and building new ones. There's a few people who are unhappy, but most of us are much better off. In 1976, I could not have predicted how the grocery business would improve, nor prescribed how to go about it. In 2006, I cannot predict how it will be improved in 2036 nor how it will happen, but I have a pretty good idea that it will be.

Maybe the NHL business would be worse off if it was more entrepreneurial. I suspect it would be much better off (and have hundreds of years of market history bolstering that suspicion), but I haven't the foggiest idea how so. See? Very unsatisfying.

Two, franchise values. When McLea says
The whole idea of the CBA was to increase franchise values. Period.

I don't think we're disagreeing, as Doogie notes. Most of the franchises have seen immediate and substantial increases in their value, because a lot of the risk that previously existed has been removed or reduced.
Plus, if you're having trouble bringing in the ca$h, the richer franchises will subsidize you. Clearly an outfit like Forbes will look at most franchises and decide that, with the risk reduced and the rate-of-return stabilized, the franchise is worth more than before.

There is a flip-side to this, though. Independent valuators like Forbes are very good at assessing the financials of a company, and pretty good at assessing risk. They are much less able to assess opportunity.

What would happen if you took Google Inc. right now and said, "No more investments in new businesses. 90% of your present revenue is now to be paid to shareholders as dividends. We're going to reduce your risk." Google would become a more attractive investment to some people (e.g. old ladies on a pension), sure, but clearly today's share price would plummet. Google Inc. is valuable to its present investors because of the opportunities; not just the ones they can imagine (say, a slice of the market for TV/movies over the 'Net), but the ones that they can't yet imagine.

It's a fact that the "investor profiles" of most NHL owners resemble the old lady on a pension more than they resemble the venture capitalist in his mid-30's. Fine. But that does not mean that in the long run, the value of an NHL franchise is best protected by structuring it more like a 10-year government bond than like GOOG. What opportunities are being missed? I dunno.


I suspect it would be much better off (and have hundreds of years of market history bolstering that suspicion)

Buddy, the NHL isn't an ordinary market. First, teams are given local monopolies. So the owner of the Predators can't just move out and set up shop in Toronto if things go sour in Nashville. This ia a huge market distortion that pretty much fucks up everything. Second, unlike almost every other industry on the planet, teams don't benefit by putting their competitors out of business. The Leafs can't just run everybody else into the ground and claim victory. A good chunk of what they are selling is "world class competition", and they can't provide that when they are playing Senior House League teams.

So you can take your hundreds of years of market history and throw it out the window, because a lot it simply just does not apply to the NHL.

I usually don't respond to comments that start with "Buddy," but I'll make a one-time exception.

The laws of economics apply to everything, regardless of whether this is fortunate or unfortunate. Incentives matter.

If the primary goal of the NHL is to protect its weakest members, then it can do this. It is a conservative approach and it will be (and is) at the expense of overall growth.

If the primary goal of the NHL is overall growth, then it could do this too. I disagree that "teams don't benefit by putting their competitors out of business". They might benefit a lot, for all I know.

What would NHL revenues be in 2017 if there were only 20 teams left and the other 10 had gone tits-up because they couldn't compete? You can't seriously claim to know this, can you?

Apart from the hard case of the few thousand loyal fans in each of the 10 abandoned cities, would the NHL be better for fans, or worse? I have no doubt that it would be better, because however the 20 went about getting rich enough to squeeze the others out, they will have done it by extracting money voluntarily from said fans.

The question is again, how much should the NHL do to protect its weakest franchises? If you think the right answer is "Whatever it takes", then fine; I just happen to think that the right answer is "Very little!"

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