Does the NHL's Business Model Work?

This is the first of a two part article.

The uncertain saga of the Phoenix Coyotes continues. The Atlanta Thrashers have lost scads of money and could be relocating to Winnipeg. The Columbus Blue Jackets announced they lost $25 million over the past season. Other franchises are losing money. In fact, according to Forbes magazine, 16 of the 30 NHL franchises showed an operating loss for the just completed regular season.

This should cause a prudent person to ask, "Does the NHL's business model work?"

That question is central to the overall health of the League's franchises and the League itself.

The history of the League is replete with mismanaged franchises. Recent history has seen the Ottawa Senators, Buffalo Sabres, Los Angeles Kings, and Pittsburgh Penguins all file for bankruptcy. Obviously, mismanagement will quickly doom a franchise, but is mismanagement solely to blame for the financial problems that have plagued various franchises throughout the history of the NHL?

Or is the business model of the League a contributing factor?

To answer that question, one must look at the sources of revenue for a franchise and compare that with the operational costs of fielding a team. Examining both sides of the equation yields some interesting results and gives insight into not only team valuations but into the long term viability of individual franchises.

Looking at the revenue side of the equation, the major areas of revenue for teams come from five sources: gate revenues, or ticket sales; venue revenues;  merchandise sales; media revenue; and revenue sharing.

In the just completed season, the average ticket price for an NHL franchise ranged from a high of $114.10 for the Toronto Maple Leafs to a low of $35.66 for the Dallas Stars. One can extrapolate a median ticket price for the League at $74.88 using this data. The main driver of the difference in ticket price will be the demand for tickets in the local market of the franchise. Franchises will price their tickets for what their market will bear and the demand for tickets in markets like Toronto is decidedly different than is a market like Atlanta.

Gate revenues are the single biggest driver of the profitability of a franchise, and the disparity of ticket prices among the teams points out the inequality in demand for the League's product in various markets. The high demand for tickets in Toronto skews the median price of a ticket for the NHL. Teams that have consistently struggled on the ice lack leverage to raise ticket prices to meet rising costs as they often play to less than sold out arenas. The dilemma for many franchises is that although League revenues are rising, and therefore the salary cap, the revenue for a particular franchise may not be keeping pace.

Rising League revenues are problematic for franchises that are in smaller markets or are unable or unwilling to raise ticket prices because even though these franchises can choose not to spend to the salary cap, the salary floor is also rising, causing the smaller market franchises to have to spend more money on payroll.

The second source of revenue is the revenue that comes from media sources. The just completed season saw each team receive $1,935,000 from the national television deal. Each franchise also has a a local deal with a regional sports network (RSN), and these will vary with each franchise. The franchises in larger markets will obviously be able to negotiate a higher fee for their broadcasts simply from the size of the potential viewing audience. Radio broadcast rights add to this revenue stream, and the variability between franchises is enormous.

Merchandise sales are driven by the size of the team's fan base and the success that a team has on the ice. The depth of the original six team's fan base is sizable, as is that of long established franchises. This leads to a strong revenue component from merchandise sales. Franchises that have experienced recent success also see an uptick in merchandise sales.

Another source of revenue for an NHL franchise comes from the venue itself. Naming rights are the most prominent source of venue income. Suite sales provide an additional revenue stream. Additional revenue comes from non-hockey usage, as most teams get a revenue split from concerts and other events. Again, this varies dramatically from team to team. The Columbus Blue Jackets are at the extreme, for example, as they receive no income from naming rights, suite sales, or parking.

The final source of franchise revenue is revenue sharing from the League. To qualify for a full share of the revenue sharing pie, a franchise must have an average attendance of 14,000 throughout the season, must be in the bottom half of the League in terms of total revenues, must spend no more than the mid-point of the salary cap, and be in a market of 2.5 million people or less television households. The current revenue sharing arrangement distributes 4.5% of revenue from the top ten revenue producing teams to the bottom revenue producing teams. The revenue sharing process in the NHL is a complicated process and has generated much discussion about the fairness of the process.

So what does it cost to operate an NHL franchise? Outside of  team payroll, most teams assiduously guard this data, so once again, we must extrapolate the cost data. Operating costs function as a percentage of operating revenue, and franchises adjust payroll and other costs they control in light of their projected revenue. Some do this better than others.

According to Forbes magazine, the results for all 30 teams for this past season were as follows:

TEAM                  REVENUE          OPERATING INCOME
                                ($Mil)                              ($Mil)

Maple Leafs                187                                  82.5

Rangers                       154                                  41.4

Canadiens                   163                                  53.1

Red Wings                  119                                  15.3

Bruins                         110                                    2.6

Flyers                         121                                   13.3

Blackhawks                120                                   17.6

Canucks                     119                                   17.6

Penguins                       91                                   -1.6

Stars                            95                                     6.4

Devils                         104                                     6.9

Kings                           98                                       .7

Flames                         98                                     4.6

Wild                             92                                   -2.3

Avalanche                     82                                     2.3

Capitals                        82                                    -9.1

Senators                       96                                    -3.8

Sharks                          88                                    -6.2

Ducks                           85                                    -5.2

Oilers                            87                                     8.2

Sabres                          81                                    -7.9

Panthers                       76                                     -9.6

Blues                            79                                     -6.2

Hurricanes                    75                                     -7.3

Blue Jackets                 76                                     -7.3

Islanders                       63                                     -4.5

Predators                      74                                     -5.5

Lightning                       76                                     -7.9

Thrashers                      71                                     -8.0

Coyotes                        67                                    -20.1

Not a pretty picture, is it?

While there is some dispute about the numbers that Forbes compiles, there can be no disputing that many franchises are operating with little to no margin for error when examining their revenues.

There are certain factors that affect these numbers. Generally, teams that are in established markets and have deep roots with their fan base are profitable. The ties of a team to their community and to their fans are instrumental in building a consistent stream of revenue. These teams have cultivated a fan loyalty factor that allows them to survive down periods. That is not inexhaustible, however, as the Islanders have proven.

Closely related is the stability of the owner or ownership group. Turmoil in the ownership group, as the Nashville Predators have shown, can affect the entire operation, from the quality of the on-ice product to marketing efforts and ticket sales. The franchises that have shown the most consistent profitability are those that have consistency in the owner's box.

The on-ice product obviously drives ticket sales. A franchise can survive a slump in the level of play, but only for a finite period of time. Consistently put a bad product on the ice, and eventually the fan interest will wane. The Maple Leafs are an exception to this rule, but few franchises enjoy this luxury.

Even if these factors are favorable, there are franchises that are showing an operating loss. So we come back to the question, does the NHL's business model work?

In the second part of this series, we will look closely at the components of revenue and suggest some proposals to improve the process and the results for the teams and the League.


A special thanks to James Mirtle at the Globe and Mail for his input on this article