Wednesday, May 4, 2011

Why 12 Canadian Teams Won't Happen Anytime Soon

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Recently, the University of Toronto’s Mowat Centre published an article that argued that Canada could support six more teams, increasing the total to 12. The paper, written by Tony Keller and Neville McGuire, is an extremely interesting read that makes a compelling argument that Canada has only six teams because of politics, not feasibility, and certainly not demand.

The paper suggests that Toronto, Montreal, and Vancouver can all support another NHL franchise, provided that the new teams share the existing NHL arenas in each city. In addition to another franchise in Toronto, Southern Ontario can support another team in Hamilton, Kitchener-Waterloo, or London. Finally, both Quebec and Winnipeg can support a team – a notion being discussed endlessly with the precarious settlement of both the Phoenix Coyotes and Atlanta Thrashers.

The paper argues that because the NHL largely derives their profits from ticket sales and concessions (in contrast to a league like the NFL which has a lucrative television contract), having a small market that generates big interest in hockey is much more valuable than a large market with less interest. Winnipeg > Phoenix.

The paper uses Edmonton as a benchmark because it is one of the smallest markets in the NHL and houses the smallest arena in the NHL. However, because of the fanatical nature of Edmonton fans, the Oilers are not only able to survive, but strive. According to Keller and McGuire, ticket and in-arena concession revenue makes up approximately 50-75% of a team’s total revenue; in 2007-2008, the Oilers generated approximately $1.2 million per home game from tickets alone.

I highly recommend reading the entire article. Based on the variables examined in the paper, it is clear that Canada can support an additional six teams. The demand is evidently there. And, for the most part, so is the infrastructure. However, the authors do not look at other important variables when examining each city's viability. When they do mention certain drawbacks they do not expand on them and leave them largely ignored. The authors freely admit this stating that their objective was to discover the cities that the free market would support, not what the NHL would allow.

I believe the amount of Canadian teams in the NHL needs to increase, but there could be major repercussions to expanding the NHL’s presence in Canada.

Adding another two teams in Southern Ontario – one in Toronto and one in London, Hamilton, or Kitchener-Waterloo– sounds reasonable. Southern Ontario is already home to approximately one-third of Canada’s population and the Golden Horseshoe is one of the fastest growing regions in Canada. Furthermore, Canada’s major businesses are largely located there, meaning a significant corporate base in place to make operating a team even more profitable. This region can clearly support at least another team, but another team in Southern Ontario could mean the end of hockey in other cities.

Buffalo relies heavily on fans crossing the border to attend Sabres games to make money. The team reported that Canadians coming to their games accounted for close to 100,000 border crossings per year. Tickets to games against the Maple Leafs (and possibly the Canadiens?) are more expensive, which takes advantage of the influx of fans from across the border. Still, Forbes estimated that the Sabres only generated $28 million from gate receipts. As a comparison, the Edmonton Oilers generated nearly $50 million. Forbes also estimated that the Sabres recently had an operating income of $-7.9 million.

Most Canadian fans attend Sabres games because they cannot get tickets to games in Toronto. If there was a team relocated to Hamilton, they would cut into the Canadian market that Buffalo heavily relies on.

Terry Pegula now owns the Sabres, which has solidified the Sabres existence in Buffalo and made the team less budget conscious, but the league wants to do everything to make each franchise a profit earner. Placing another team in the Golden Horseshoe – especially Hamilton – hurts Buffalo. The league would not allow it.

Detroit faces a similar problem if another team relocates to Southern Ontario, which would become more troublesome if that team moved to London. Brian Burke was asked about the viability of more teams in Southern Ontario and explained that Detroit advertises into Canada as far as London. Adding a team to Southern Ontario would certainly cut into the amount of Canadian fans crossing the Windsor border to see games at Joe Louis Arena.

However, Detroit is one of the league’s most valuable franchises (ranked 4th by Forbes) and had an operating income of $15.3 million last season. Another team in Southern Ontario wouldn’t kill the Red Wings, but it certainly doesn’t help. With the current state of the economy in Michigan the league is in no hurry to do anything that could affect the Red Wings franchise.

Adding another team to Toronto is one of the most obvious choices. The Devils, Rangers, and Islanders all exist within close proximity, so why can’t another team thrive in Toronto? First, another team would violate the league’s rumoured 50-mile exclusive territorial zone. Expansion teams have previously circumvented this zone by paying fees to the incumbent team. The Toronto Maple Leafs gain no benefit from allowing another team in on the rich GTA market. The Leafs can sell out regardless of performance and can essentially charge any price for their tickets. Despite some of the most expensive tickets in the league and a dismal record last season, the Leafs still managed to average 102.5% capacity for their 41 home games. The league is in no rush to add a competitor to their most valuable franchise.

Adding another team to both Montreal and Vancouver pose less territorial problems for any U.S. franchises, although you’d have to expect that the same issues surrounding the Maple Leafs’ reluctance to allow another Toronto team would extend to both the Canucks and Canadiens. Another team in Montreal could also have negative consequences on a potential relocated Quebec City franchise.

Ultimately, talking about relocating franchises to Canada is fruitless. Gary Bettman’s southern expansion, regardless of how doomed it has proven in certain cities, is being extended every opportunity to succeed. Many Canadians hate Bettman because he seemingly let both Winnipeg and Quebec City leave at the first sign of trouble, whereas he’s allowing teams like the Phoenix Coyotes to survive on life-support for an eternity. This isn’t entirely fair. The poor Canadian dollar, combined with escalating player salaries, meant that NHL hockey in both Winnipeg and Quebec was doomed. Of course, NHL hockey in Phoenix has been doomed since its inception and many (justifiably) believe that if a team is a going to be dependent on league revenue it may as well be in Canada where people at least care about hockey.

As referenced in the Mowatt paper, both hockey and the Canadian dollar have changed dramatically since the Jets and Nordiques migrated south. The lockout produced a CBA that ties player salaries to league revenue, meaning that they cannot grow uncontrollably. More importantly, the Canadian dollar is extremely strong. Being in a small market paying growing player salaries with a 66 cent Loonie is disastrous. That’s not a problem anymore.

Unfortunately, moving a team back to Canada is admitting failure for Bettman, something that will be hard to do considering he’s staked a large portion of his legacy on his southern expansion plan. It seems like Bettman will keep a team in struggling US markets until there is no other option but to move it – something that is currently playing out in Phoenix. Once there is no other alternative for Bettman and the league, Canada could to add to their existing franchises. Taking into account all of the aforementioned variables, it appears that Winnipeg and then Quebec City are the most viable options for the league to pursue. Unfortunately, the league’s northern relocation will likely end there – despite what the free market can support.


Anonymous said...

Listen up. The only real way to save the Coyotes at this point is with this:

"The Green Bay Packers Board of Directors is the organization that serves as the owner of record for the Green Bay Packers football club. The Packers have been a publicly owned, non-profit corporation since August 18, 1923."

That's right, a board of directors type of ownership where anybody, anywhere who wants the Coyotes to stay in Glendale can purchase a stake into the team. Best of all, the taxpayers of Glendale (especially the ones who don't support the team) don't have to fork over a single penny if they don't want to. Remember, if the taxpayers are not paying for it, then Goldwater backs off.

I know that the NHL board of governors are not crazy about a Green Bay Packers type of ownership, but if they (and the Glendale city council) really want the Coyotes to stay, then they have no choice but to make an exception to the Coyotes and allow them to have a board of directors type of ownership.

So for those of you who want the Coyotes to stay, spread the word. Get this message posted to as many places as possible while there's still time and if you can get this message to Gary Bettman and the B.O.G., that's even better. With everybody's help, the Coyotes will be saved! So spread the word right now or watch the Coyotes relocate to Winnipeg or Kansas City instead.


Anonymous said...

"The Devils, Rangers, and Islanders all exist within close proximity"

Considering that the New York/New Jersey market wasn't big enough to support three baseball teams (and baseball is WAY more popular in that market than hockey by a BIG margin), I'd say the NHL needs to get rid of one of them immediately. The less eastern time zone teams, the better!

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