Tuesday, January 23, 2007

 

State of the Union, meta

Now's the time of year (didn't you miss this in '05 and '06!) when the media comes out with their What's Wrong With the NHL stories, generally punctuated with a colon (not a question mark). The alarm, such as it is, is that the NHL does not appear to be growing. NHL marketing is "not working very well", and they still haven't gotten the "Great American TV Contract... the economic foundation for modern day professional sport". Attendance, or at least filled seats, appears to be down in many cities.

I have to admit to a little frustration at these pieces, in particular Mark Spector's, as he was one of the louder proponents of the owner's side in the CBA. I'm frustrated because the CBA is working exactly as it was designed, yet guys like Spector seem unable or unwilling to put two and two together.

The whole idea of the CBA was to trade off uncontrolled (spiralling!) growth to achieve stability and profitability. The explicit premise of the thing was that organizations like the Detroit Red Wings were killing the NHL. Spend lots of money on players, improve the team, get more fans, increase the value of their brand, earn more money to spend on players, etc. etc. -- that was growth, and that was the problem.

The Dallas Stars and the Florida Panthers came to their respective cities at about the same time, neither with any particular natural advantage over the other. Dallas is now one of the better American hockey markets (i.e. it grew), while Florida is one of the worst, yet you'll recall that it was the Stars who were ruining the league by doing stuff like paying Bill Guerin millions of dollars.

The CBA worked. There are fewer franchises in dire financial difficulties. The investments of the 30 owners were protected. It worked -- now all the franchises are behaving as "responsibly" as the Blackhawks and the Panthers. The trade-off has been, and was always going to be, less growth. This is what I wrote in July 2005:
Every innovation in the past 50 years of the NHL has been initiated by a team, not by the league as a whole. (I use innovation not in the sense of "new technology", but rather "new idea designed to extract money from fans voluntarily".) Many of these innovations have been widely adopted, or even uniformly adopted as NHL policy, but the fact remains that they all came from businesses seeking to grow, improve, and gain profit.

Third jerseys, seat licenses, Pizza Hut in the concourse, game packs, coaches' radio shows, reserved parking lots, etc. etc. etc...none of these things came as a result of a partnership committee in the NHL offices. Individual teams initiated these things to grow revenue, improve their teams, and/or make more profit.

Both a salary cap and revenue sharing act as disincentives for this kind of innovation. In the case of (say) the Leafs, it's a powerful one. Proponents of revenue sharing seem to take the pile of league revenues as a given, as if redistributing them won't change anyone's behaviour. This is economically illiterate.

[...]Suddenly the Leafs are in a situation where their revenues far exceed what they are allowed to spend on players. What will they do?
  • At the one extreme, they could maintain or raise ticket prices, and continue to take risks to develop new revenue streams, all so that a good portion of their excess revenue can be mailed to Nashville and Pittsburgh.
  • At the other extreme, they could drop ticket and beer prices to a level where they spend the full cap, cover their other expenses, and make a tidy but not gaudy profit. Obviously much less, if any, revenue is available to redistribute in this case.
The reality will no doubt fall somewhere between these two extremes. But note that the first extreme is pleasing to people in Nashville, whereas the second is pleasing to people in Toronto. I'll leave it to you to determine how that might affect the Toronto Maple Leafs' planning.

When a team like the Leafs isn't even sure that they want to grab all the revenues that they know are available, they will absolutely not be risking anything on ventures where they don't know that money is available. This means zero growth.

Maximizing growth in an industry necessarily involves some creative destruction, and some of the weaker firms in the industry being left in the dust. The 30 NHL owners decided that this wasn't the way they wanted to proceed, and even lost a full season to ensure it. They were backed loudly by the fans along the way. Problem? What problem?

Here's a question (one of 21) I posed even further back, in February 2005:
Based on their observed performance managing their respective brands, whose business model should be the freaking last one outlawed, not the first?
  1. Mike Ilitch
  2. Bill Wirtz
  3. Gary Bettman

Yeah, so the NHL isn't growing. The die was cast in July of '05. Maybe they will be able to achieve some moderate growth going forward, but I'm skeptical -- central planning usually accomplishes it pretty poorly.

Contrary to the impression I'm giving, I'm not down on the NHL. I like the game. I don't think I'm "missing" an innovation that hasn't happened, but who knows? Something significant that improves my enjoyment of hockey would have been much more likely to come from one of 30 capitalists (and then copied by others) than it will from a majority vote of an NHL marketing committee.

Comments:

All that work and you failed to mention how the geniuses running the teams decided it was a bad idea to have Crosby and Ovechkin come out west more than once every three years? It's not the CBA preventing growth. It's the personnel.
 


Marketing has suffered greatly because the game is being tinkered around way too much. Yes a change was needed but at what costs to the actual product itself. With so many power plays...the game's actual flow is disrupted. That is a big turnoff to fans...but a bigger turnoff to the diehard ones. Simply put Bettman needs to give it a few years...and just concentrate on marketing and getting a better tv arrangement.

stevens@www.thenhlarena.com
 


With so many power plays...the game's actual flow is disrupted. That is a big turnoff to fans...but a bigger turnoff to the diehard ones.

It's not a turnoff to me. The maul fest that was the "old" NHL had me turned off. NHL hockey from about 96 on generally sucked ass.
 


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.

It's like living in a city: little neighbourhoods are always better than high-rise apartments. If you like skyscrapers, follow the NFL.
 


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.
 


The whole idea of the CBA was to trade off uncontrolled (spiralling!) growth to achieve stability and profitability.

The whole idea of the CBA was to increase franchise values. Period.

And I can't even begin to understand what you were getting at with the rest of your post, so that's all I've got.
 


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

And they were hoping that this growth would be more beneficial for the league as a whole.

When teams grow their revenues by taking advantage of their market's inherent advantages (ie the greater revenue generating ability of a hockey player in New York than in Edmonton) this was bad for the league because it created an environment where the bottom half the league couldn't compete. So in effect, this was zero sum "growth", where teams were growing revenues only at the expense of other teams.

Through the CBA, the league essentially prevented teams from achieving growth in this manner and instead hoped that they could drive growth through competitive parity - growth that was far less costly for the league as a whole.

That, and the CBA significantly cut the cost of generating the existing revenue, so even if your claim of stunted growth is true, the trade off - more profitable and stable revenues from now until the far future - far out weighed this potential drawback. And how do I know this? Team valuations have never been higher, and like I said, this is all the owners were ever after in the first place.
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The whole idea of the CBA was to trade off uncontrolled (spiralling!) growth to achieve stability and profitability.
===
The whole idea of the CBA was to increase franchise values. Period.

And I can't even begin to understand what you were getting at with the rest of your post, so that's all I've got.


You can't see how stability and profitability necessarily improve franchise values? Am I missing something? Because that seems pretty fucking obvious.

As for the rest of the post, I can't even begin to understand why the Leafs would put all the effort and risk into developing new revenue streams when more money would wind up going to have-not markets than their own payroll, so that's all I've got.
 


this was zero sum "growth", where teams were growing revenues only at the expense of other teams

That's patently untrue. Toronto, NY et al were certainly cannibalizing revenue from the also-ran cities. But they were also creating new revenue where it didn't exist (for them) before, everything from higher beer prices, to expansion fees, to LeafsTV)
 


But they were also creating new revenue where it didn't exist (for them) before, everything from higher beer prices, to expansion fees, to LeafsTV)

And that's different from today how?

Teams are still roughly free to grow their revenues as much as possible (with new constraints granted, but certainly not on their ability to sell beer at $10 a pop), but what's really changed is that they are no longer able to drive up everyone else's costs at the sametime.

See what I'm getting at? If you drive up your teams revenue by X amount of dollars by signing Player Y, but by doing this you drive up everyone else's player costs by X amount of dollars as well, the net benefit to the league is O. This is why, before the CBA, there were so many teams on the verge of dying. Because in Detroit's pursuit of maximizing their profits, they were driving all the teams that didn't share Detroit's inherent market advantages out of business.
 


You can't see how stability and profitability necessarily improve franchise values? Am I missing something?

Yah, probably my very next post. But thanks for coming out.
 


And that's different from today how?

You're right, it's not. But that's not what I'm claiming. Your point was that under the old system, there was no new growth -- only cannibalizing. That wasn't true then, and its not true now. It's marginally less incroeect now, but still not true. Teams both find new revenue streams, and steal it from each other. If anything, there's less revenue growth now, since revenue sharing (albeit toothless) takes away some of that incentive.

This is why, before the CBA, there were so many teams on the verge of dying.

And that's different from today how?
 


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