Most anyone who is reading this blog is a fan of hockey and therefore aware of the impending labor strife. While the players are winning the PR Battle right now in the media, I’m going to ask our reader(s) to play devil’s advocate and take a look at some key aspects of relocation from the NHL’s point of view:
Sports is America’s version of nationalism. In Europe, the English root for the English, Germans root for Germans, and the French root for whomever is currently occupying their land. In America, Philly roots for teams in Philly, New York roots for teams in New Jersey, and Pittsburgh roots for whichever of their teams is currently a contender. Because only the most egregious fans root for teams from multiple cities (you know the guy…from Akron but roots for the Yankees, Cowboys, Lakers/Heat…also swears the Steelers are his “AFC Team” and is a die hard Pens fan but owns a Red Wings hat…I’m looking at you LeBron…) (in times of war these people would be considered traitors), having a successful hockey or basketball team in a city like Pittsburgh will lead to some overflow from the large Steelers’ fanbase. David Stern is even on record mentioning how the Consol Energy Center would be a great place for an NBA team.
With that in mind, imagine you are one of the 29 owners in the NHL, say the Senators.
Eugene Melnyk (you) bought the Ottawa Senators in 2003 for $92M, and Forbes says the team is now worth $196M. Over a ten year period, an 11% rate of return looks really good, but this doesn’t take into account the amount of debt you took on to purchase the team, inflation, opportunity costs, etc. For the sake of argument, let’s hypothesize your return is really closer to 4.4% after a loan with a 6.6% rate (VERY Simplified).
While we would all love to think that people purchase sports teams because they want to win championships, this just isn’t the case in the majority of situations. Championships increase your return on your investment, which is why you bought the team in the first place. Very few owners care more about winning a championship than they do about making money (WE LOVE YOU ED SNIDER!). Sure, you’d love to be a hero in Ottawa and bring the Cup back to Canada, but you didn’t get to purchase this team by running businesses poorly (unless you happen to own the Rangers).
Now it’s 2012, and a prospective ownership group of which I am majority owner says ”I want to take a financially floundering team away from a market of 4.1M (Phoenix) people who don’t care about hockey and move it to a market with 519k people (Hamilton), many of whom already root for another (your) team.” Phoenix is an untapped market. People in Phoenix aren’t “switching allegiance” by rooting for the Coyotes, but people in Hamilton just might be, which takes dollars away from you, Mr. Senators owner. Remember: in house revenue is not shared amongst the 30 owners, so if I tell you “I’ll sell out the building! We already have a waiting list” you’re thinking “Ok, that’s great…for you.” Basically I just told you ”There are 15,000 fans in your market whose revenue I can have!”
As Pittsburgh and Washington (and to a lesser level Chicago and Tampa) have proven, given intriguing storylines and an exciting team on the ice people will go to hockey games. Sure, there’s a huge bandwagon aspect in some cities (*cough* Pittsburgh *cough*) but remember, you’re an owner, and this is a business you’re running. Exciting teams in large markets make a lot more money than diehard fanbases in smaller markets. TV revenue is shared amongst the owners, and larger markets mean more TV revenue.
Relocating to WInnipeg or Quebec City is one thing: the people in Quebec City aren’t really your fans anyway, anymore than Seattle Sonics fans are now Trailblazers fans. Sure, they’re rooting for you because of their love for the sport and you’re the closest hottest thing around, but they’ve been abandoned by your nemesis and you’re just a rebound. It’s been enough time that if they’re going to stick with you, they’re going to stick with you when she comes calling again, or they’re gonna run back as soon as Bettman makes a drunk dial to Quebec City. They know this, Bettman knows this, and most of all, you know this. Hamilton on the other hand is YOUR market. You paid for it when you bought the team!
Given this information, why would you allow a new owner to move YOUR TEAM (remember you own the Coyotes too) into your market? Well, there are two answers:
2) Lots of $$$. Like enough to make you whole for your expected losses, and some money on top of that just because you can.
Now I have to buy this franchise that’s ALREADY losing money, and I need to pay a premium on top of it in order to be allowed to move it into your market, which lowers MY return on investment to an unacceptable level? You haven’t given me much of an option here because my ownership group wants a substantial return on their investment (they don’t have a say in operations like I do, so the other investors REALLY only care about the money) or they’ll pull out of the ownership group. How can we come to a resolution?
Option 1: Lower the price of the Coyotes to a level where I can pay the premium to you and still get the return needed to satisfy the lesser members of the ownership group, but wait, 29 people own the Coyotes, not just you, and the other 28 owners aren’t taking a discount so YOU can be made whole. It’s not their problem.
Option 2: what if the other 28 owners say “Screw you Ottawa, we’re gonna let him relocate and you’re gonna like it!” Legal issues aside (I’m not a lawyer but I’m positive owners have a right in the league’s charter and TV agreement to certain markets) this is not happening. If Ed Snider says “Sure, you can move into his market!” he’s risking someone saying “Hey! Philly/South Jersey/Eastern PA can support TWO hockey teams, I’m buying the Panthers and moving them there!!” When that vote comes up Mr. Senators owner, how quickly are you voting against the man who shoved the Hamilton team down your throat? Yea, I’m spiteful too.
Option 3: MORE REVENUE SHARING. At its heart, we fans want to think revenue sharing is a way to allow teams in every market to be on a level playing field. No. Revenue sharing is an investment by the big clubs into the league itself. Provide enough revenue sharing that my ownership team can afford to operate in the Phoenix market, which if run successfully will return on your “investment” through increased television revenues. It sure works in the NFL, but football is America’s favorite sport, and it’s an all-weather game. It’s a lot easier to convince Jerry Jones that sharing the Cowboys TV revenue will increase league profits because fans will watch competitive football than it is to convince James Doolan to share the Rangers’ revenue with the Florida Panthers. One reason is because self made man Jerry Jones is just a better business man than trust fund baby James Doolan, and the other reason is that…well, both men are right. The Phoenix Coyotes and the NHL just don’t hold the national audience the way the Dallas Cowboys vs the Arizona Cardinals will…which leads me to…
Option 4: CONTRACTION. Oh, Gary you hate that word don’t you? It almost makes your heart beat…something you haven’t felt since you sold it to David Stern in the 80s. With no skin in the game it makes sense, right? “Get rid of the team, cut the losing asset.” The problem is that nobody, least of all Bettman, like to admit failure.
Option 5: Reduce Variable Costs. Bear with me here, I’m digging into my financial background. Without the NHL’s financials we as fans don’t know if the Coyotes, despite losing money, have a positive contribution margin. (CM) Simply put, contribution margin is a products selling price (P) less its variable costs (VC).
Example: let’s say you buy a factory for $10,000. The facotry makes 1,000 widgets per year. You maximize revenue by selling these widgets for $10 apiece. The total fixed costs of the factory are $5,000, and you have $6 of variable costs per widget for $6,000 in total VC. Your total revenue is $10,000 (1,000 widgets at $10 per) but your total costs are $11,000 ($6,000 VC + $5,000 FC). That means you’re losing $1,000! Shut it down! CLOSE THE FACTORY! WE’RE LOSING MONEY!!!
Wait just a minute. Right now we’re losing $1,000 per year. If stop producing the widgets, we save $6,000 in variable costs, true, but we also lose $10,000 in revenue, and we still have $5,000 in fixed costs, so we actually lose more money. Follow me? How can we improve our situation?
You can’t do anything about fixed costs because they’re…umm….fixed.
We could raise the price of the widget, but we’re running an efficient business so we’ve already priced our product at the point of maximum revenue. If we up the price to $11 a widget but only sell 900, we’ve actually lost $10 in revenue, $6 in Variable costs, and fixed costs are still $5,000, so we lost $1004 by increasing our sale price.
What’s left? Variable Costs. By reducing our variable costs, we can lower our total costs to a point where we become profitable. In the example above, if we can lower variable costs to $4.56 per unit, instead of losing $1,000 we make $440, or a 4.4% return on our investment before taxes.We accomplished this by reducing VC by….24%. See where I’m going here?
In the business world, you call your vendors and try to negotiate a better price on your most expensive supplies, or you find a lower quality substitute. In hockey, your largest variable costs are the player contracts. Either you contact your vendor (the NHLPA) and negotiate a better contract, or you find a lower quality substitute…like replacement players.
Now, Mr. Senators owner, balance all of these things together, and what would you do?
Yea, it feels heartless, but we all chose option 5.