Saturday, January 29, 2011

Why You Don't Sell Snow Tires in Havana

This is a guest post by our bud Miles H., a man who enjoys a nice stiff drink… in the morning.
Sparse crowds in weak markets are commonplace in the NHL this year
Sitting in an economics and finance lecture last week, a debate turned to the topic of the NHL and I thought it was one of the more interesting discussions I’d heard in a while, so I started writing along.

The professor began with the premise that,


“the NHL has excess capacity, their ability to produce hockey and hockey merchandise exceeds the demand for these products in the market.”

And the following points were made by both students and the professor:
  • The NHL needs to either achieve an Apple-esque marketing miracle and convince everyone that they need to watch hockey the same way Apple was able to convince everyone they need an Iphone/ Ipod, or, the NHL needs to reduce its supply to match demand. It is very costly to have excess capacity / too little demand for an NHL Team because their revenue streams are mostly short term (ie. ticket sales, beer sales at games, merchandise sales, etc.) but their expenses are long term (multi year player contracts, and huge lease obligations for arenas).
  • It is unlikely the NHL is going to pull off a marketing miracle and successfully break into the southern United States market when competing against the well-established sports of Football, Baseball, Basketball, and of course NASCAR.
  • The Original Six teams, as well as teams in other strong hockey markets, turn a healthy profit nearly every year. However, it is only in years when teams in weak hockey markets have a winning record that they make any real profit. As in all sports, assembling a team that can be successful in successive seasons is very challenging, which means that over and over again these teams in weak hockey markets with low fan loyalty are going to run into financial problems.
  • The NHL has teams too tightly clustered; Anaheim, Los Angeles, San Jose, Phoenix are all home to teams, and can all be fit into a region roughly the same size as southern Ontario, which makes one wonder (a) why have a team in Phoenix at all because it just adds to excess supply of hockey in the region, and (b) why are there only two teams in southern Ontario? There is too much hockey being crammed into a small region, it’s oversaturated with a sport that residents only have a mild interest in. This is why companies don’t sell snow tires in Havana.
  • Much the same can be said of the south-east region of the United States. Florida is home to the Panthers and the incredibly nearby Tampa Bay Lightning. Even with a fairly impressive offensive lineup and a recent Stanley Cup win, the Lightning struggle to fill the stands and turn a healthy profit. If you make a bit of a stretch and include the Atlanta Thrashers in the neighbouring state, the logic for these team locations only gets worse. In weak markets like the southern states, NHL teams need many millions of local residents to find tens of thousands of loyal fans needed to fill a hockey arena. When there are two or three teams competing for fans there will be no successful franchise. The exact same scenario takes place in New York as well. Two teams is one too many.
  • The solution to this problem is simple: strategically reduce the number of teams in the NHL. The Lightning, Islanders, and Coyotes should be eliminated; they are geographically too close to longer standing franchises. They’re elimination would allow fewer teams to share a larger percent of a given region’s hockey fans and make the remaining teams more profitable. However, there is a secondary and hugely beneficial reason to take this approach: the talented players from the disbanded teams would relocate to better hockey markets, or be added to teams in weak hockey markets which would help them win more games, have more successful seasons and in turn draw larger, more consistent crowds to home games. Among these three teams rosters are: Vincent Lecavalier, Martin St. Louis, Steven Stamkos, Simon Gagne, Victor Hedman, Shane Doan, Ed Jovanovski, Ilya Bryzgalov, Keith Yandle, and John Tavares, not to mention many other lesser known talents. These would all be strong additions to most teams in the league, and a massive boost to teams in markets where they have to have a winning record to make a profit. Talent in the NHL is far too diffuse. There are too many predictably awful teams that won’t make the playoffs – imagine how much more interesting and engaging the narrative of a season would be if there was less than five points between the second and last place team in the league.
  • If these players from dissolved teams were in strong hockey markets sales for merchandise of rising young stars alone would be a windfall for a franchise (Stamkos playing in Toronto? Lecavalier in Montreal?) There is a massive return on investment being ignored or lost currently. Brilliant players in strong hockey markets equate to millions of dollars in jersey sales, extra beer sales in winning games, and if the talented players can help a team get into the playoffs then even more profits from playoff ticket sales and ad revenue.
  • This theory also holds true for teams that are in a weak hockey market, but not geographically close to another team (Nashville and Atlanta). There is no point in having extra franchises in a league if they perennially struggle to break even and dilute the talent pool in the league. The Maple Leafs have an abysmal record, but contribute financially to the league, and to the game of hockey in many ways. (If your going to have more franchises, put them in markets where the games will at least sell out, not in weak markets.)

Anyhow, the NHL, like every business, is governed by basic economic principles that cannot be ignored. For failing franchises it’s good old supply and demand, and the fact remains that sports teams need a regional monopoly to survive if there is only mild interest in the sport to start with.

7 comments:

  1. interesting discussion... its just hard to believe that places like Phoenix, Tampa Bay, Atlanta, and Columbus have NHL teams... scrap them or move them to hockey markets

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  2. Agree with much that is said here.

    Gotta part ways with you on Long Island. There's so much crap going on with that franchise, it's a wonder they're still playing games. While it'd be easy to just 'dissolve' them and forget they existed, they've a rich history that can't be ignored.

    What a shame it would be to turn away a franchise that dominated the early 80s like the Islanders did.

    Cheers

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  3. Well, the reason California and Arizona have more teams than Southern Ontario is population. There's more people in California alone than there is in all of Canada. And while it's not the robust hockey market that the northeast is, the California teams aren't the ones that are really, truly struggling to put asses in seats (though they do have a rougher go of it when the teams are less than good.) I also think the Islanders could be a decent draw again if they can get their shit together. It's not just that the team is bad, it was also severely mismanaged for a long time. Nassau and Suffolk counties combine for 2.75 million people in a part of the US where hockey is fairly popular. The situation there is not totally dissimilar to that of Edmonton in the mid-90's, and the Oilers' attendance struggled at that time as well. That said, contraction is definitely something that needs to be considered, as most of the remaining Canadian cities without teams are unlikely to be long-term solutions (though I'm sure Winnipeg and Quebec would both do fine in the short term) and there just aren't that many relocation targets left in the US that would be strong hockey markets that don't already have a team.

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  4. It's true about Long Island, they have the fans... their franchise has just imploded and has been mismanaged ever since Mike Milbury took over. How that man has a job as an analyst is beyond me, the guy needs his brain analyzed for making Alexei Yashin the highest paid Islander TODAY! How do you manage that? Remember when Tavares was being drafted how many people showed up to that arena in Long Island to celebrate? They love hockey there, unfortunately Charles Wang doesn't know what hockey is, and Garth Snow is shittier at managing a team than he was at backing up good goalies.

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  5. Bettman doesn't care about losing money. Look how much the NHL gave away for that stupid Guardian Project.

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  6. I say take Florida, Phoenix and Atlanta and move them to Winnipeg, Quebec City and add another team in Toronto.

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  7. California and Phoenix might have more people than Canada, but population alone cannot be used to determine whether or not a given region will support an NHL franchise. The city of Calgary has a population of less than one million, but the Flames sell tons of merchandise and sell out nearly every game, and have high t.v ratings for their home games. To the contrary, New York City has a population of more than eight million (nearly ten times larger), but can't even support two teams. The percentage of citizens in a given region that are hockey fans is the important number. The population of California and Phoenix is massive, but it's still not big enough because the percentage of people who are hockey fans is incredibly low. The 2010 gold medal olympic hockey final between the U.S and Canada tells you all you need to about the percentage of populations that are or are not hockey fans. Over 25 million Canadians (5 of every 6) watched the game in Canada. In America under 30 million viewed the game (1 in every 10), and that percentage is probably much lower in non-traditional hockey regions.

    Also, the Islanders should definitely be dissolved...the problem there IS not having enough loyal fans. How can you tell? Because the Maple Leafs have had even worse management (and no recent stanley cups ) over the same time frame and not lost any fans / profitability.

    ReplyDelete

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