Market Structure of the Hockey Industry Flashcards
Lecture 3
What type of organization is the NHL?
Non-profit.
Why would teams want to protect interests of other teams?
Some leagues have gate shared revenue (NFL).
Flames wouldn’t want Oilers to go out of business (joint Flames/ Oilers Sportsnet deal).
What is the natural unit of organization in sports?
League
Teams need to protect the interests of other teams and preserve the uncertainty of outcomes.
Constrained by law, gov and other orgs.
What are the elements of a nonprofit organization in sports leagues?
Promote interests of league members
Includes elements of athletic and economic competition.
What are some arguments for a single entity model in sports leagues?
- No team can produce the product by itself
- Need full cooperation of all clubs
- JVs suboptimal – competition
- No economic competition – just for production of the product
- MLS soccer model
MLS Soccer model: Joint entity at the beginning.
What are some arguments for a joint venture model in sports leagues?
- Leagues not pure SEs
- Teams privately owned
- Athletic spills over to economic competition
Not pure SEs: Would not want dynasties, wanting all teams to be competitive.
What joint behaviors do teams engage in within a league?
- Determining schedule and format
- Establishing rules
- Cooperation and championships
- Hierarchy
- Territorial rights
- Franchise agreements
- Expansion and relocation decisions
- Negotiating national TV contracts, sponsorships
- Collective bargaining with Players’ association
Give some examples of joint behaviour by teams in the NHL.
Establishing rules: GMs have a yearly meeting.
Championships: Playoff structure and who plays who.
Hierarchy: Minor league system.
Territorial rights: NYI had to pay an extra fee (on top of expansion fee) when joining NHL, as they were within the Rangers territorial rights.
Expansion & Franchise: Decided collectively.
Contracts: NHL decides league wide (Hyundai for ex.), team decides their own (Molson for the Oilers for ex.).
What intangible assets do sports franchise owners buy?
Logo, brand identity, the right to play in the league, right to acquire player contracts from other franchises.
How is market desirability determined for sports teams?
By MSA (metropolitan statistical area)
Market desirability can differ significantly for hockey compared to other sports.
What are characteristics/ aspects of hockey markets?
Teams are assigned a territory.
Significant disparity between teams in a league; can lead to competitive disparity.
As media revenue increases in importance, league want large market teams to win more.
Competitive disparity: More money + resources = better team.
How is the hockey market different than other markets?
Canadian dollar is so low compared to american, this becomes an issue.
Hockey also is not the top sport in most American cities (ie. Houston has few hockey fans, while Detroit or Pittsburgh have high viewership rates even outside of playoffs).
How does MSA determine market desirability?
More of a market to interact with.
Bigger market = more people, ticket sales, sponsorships…
What are the forms of ownership for sports teams?
Sportsperson: Wealthy individuals who own teams.
Corporation: Disney and the Mighty Ducks for ex.
“Publicly” owned: Privately owned but own it as they feel like it’s their ‘civic duty.’
Publicly traded: League doesn’t want this, can buy stocks (and access financial docs if you buy one).
Give an example of publicly owned and public traded NHL teams.
“Publicly” owned: Oilers. Bought in order to keep the team from moving to Houston.
Publicly traded: Vancouver Canucks for ex.
What are the motives for team ownership?
Profit maximization (primary), Winning (correlated w/ profit), Public aggrandizement (enhancing status)
More profit maximizing focus than winning in NA, unlike in Europe.
What are aspects of intra-league conflict?
Explain the Yankee Paradox in relation to intra-league conflict.
When interests of individual clubs and league are not the same. On-ice conflict carries over with owner disputes and owner influence.
Pursuit of profits of one club undermines all others- Yankees spend crazy amounts of money on players.
Owner influence: Gretzky made 1 mil and that acted as a salary cap on the league (no one could make more than him). He was then offered 2 mil and this messed up the whole league, allowing players to then ask for more.
What are some direct sources of revenue for sports teams?
- Ticket revenues
- Suite and premium seating charges
- Naming rights
- In-stadium advertising
- Local and national media contracts
- Parking
- Other events
- Facility and real estate rentals
- Public-sector incentives (relocation fee)
- Franchise fees for expansion teams (divided up)
- Clothing, merchandise, and souvenirs (NHL gets 8% of retail, which is why teams have their own merch)
What are some indirect sources of revenue for sports teams?
- Team value appreciation
- Related product sales
- Associated asset value appreciation (ie. arena)
- Advertising for related products
- Media value
- Salary and fringe benefits
- Tax advantages
- Interest on loans
- Public sector incentives (tax breaks, Habs play more tax than all American teams)
- Revenue sharing
What are some recent changes in revenue through the league?
Movement away from reliance on gate revenue (sponsorships, media revenue).
Emphasis on premium seating in arenas.
New sources- naming rights, PSLs.
PSLs: Personal seat license. Buying rights to a particular seat(s) in the stadium.
What is the Marginal Revenue Product (MRP) in the labor market?
A PM owner will bid for a player until MR of win = MC
PM: Profit maximizing
MR: Marginal revenue
MC: Marginal cost
What is the Prune Juice Effect?
A win maximizing owner may want to bid much more for players than a PM owner would.
Bidding past when the MR = MC
What is the 1 idiot rule?
It takes only one idiot to overpay a player, then all players around the league will want the money that that player is being paid.
What is MRP?
The additional revenue generated by 1 unit.
What are the rationales for preserving the reserve clause?
Balanced competition and economic stability, Product quality.
Explain the difference between reserve clause and open clause.
Reserve clause: Players reserved by a team cannot be traded. Bound to the team in perpetuity.
Open clause: Can renew contract at the end of the year for a certain price. Still bound to the team but option for more money.
What is Rottenberg’s Invariance Principle?
Mobility rules don’t matter, the best players will end up where they are most valued- usually the biggest markets. (NY?)
Best players will always be pulled to market with best MRP.
What is the purpose of the NHL Draft?
Reallocation of talent.
Maintenance of competitive balance and suppression of player salaries.
Supression of salaries: Players only have to negotiate with the team that drafted them.
What significant changes occurred in the NHL Draft over time?
- NHL Draft started in 1963
- Regular draft introduced in 1969
- Draft age changed from 20 to 18 in 1979
At one point the rights of every player with a Quebecios mother was owned by the Habs.
What has been the trend in professional sports over the last three decades?
Unprecedented growth in attendance, Increase in revenues, Rise in salaries.
How does the draft maintain competitive balance?
Worst teams get higher picks- better players.
