Fuel, Meet Fire: U of T Report Says GTA Could Support 3 NHL teams

Round and round and round they go, where they stop, nobody knows except that everybody knows it's not here.

Noted fishwrapper/parakeet cage liner the Toronto Star has news today that is guaranteed to fan the already raging nationalistic fire that burns so brightly among many about the state of professional hockey.  According to the Star, a report published today by the Mowat Centre for Policy Innovation at the University of Toronto argues that the league “should focus on bolstering the game in Canada where demand is greatest”.

Canada’s six teams account for nearly one-third of league revenue. Most of those loonies end up in the United States, which has 24 teams, through revenue sharing.

The report, titled “The New Economics of the NHL,” uses potential gate revenue as a measure of economic success. It looks at 10 Canadian cities and ranks each as a potential host for an NHL team, based on size, wealth, geographic location and other factors.

There are six Canadian markets where a new NHL team would thrive, the report found, citing Greater Toronto as the best one.

In fact, with 9 million people, the larger Golden Horseshoe could successfully support as many as three NHL teams. The study found that another team would be successful in Hamilton, London or Kitchener-Waterloo.

Montreal and Vancouver also have enough demand, as do Winnipeg and Quebec City. Teams in any of those cities would generate higher gate revenues than the average U.S. Sun Belt team.

DISCLAIMER: I haven’t read the report.  It follows, then, that in reacting to this news, I am relying heavily upon the Star to have accurately summarized the content of the report in question.  I am well aware that there is little compelling evidence to suggest that such reliance is warranted.

It seems to me, though, that two important points need to be kept in mind about these findings when this report is inevitably brandished by those who favour repatriation of the Coyotes Jets, or the importation of the Atlanta Thrashers (or whatever the troubled franchise du jour happens to be):

1. The study seems to rely upon potential gate revenue (tickets sold) as the key metric of success for an NHL team.  Though I don’t have the time at the moment to Google up the relevant data, I believe that it is true that the NHL, when compared to other professional sports leagues, relies disproportionately upon ticket sales to drive revenue.   The key business problem facing the league as a result of that fact is that it limits the growth potential of the business.  If income is almost entirely dependent upon tickets sold, you can only increase income by selling more tickets; if you can only sell more tickets by either (a) adding more capacity (through expansion of the league or physically increasing the size of the buildings in which the game is played) or (b) ensuring that you sell more of the currently available tickets (increasing efficiency by reducing unsold inventory).   Whichever of these growth strategies are employed (and they’re not mutually exclusive), the fact remains that there are real limits to the currently unexploited potential.   How many teams are too many?   Some would argue that the current complement of 30 is excessive; does anyone believe the NHL would be viable with 36 teams?  Forty?  Similarly, it would be ludicrous to plan for expanding gate revenue by simply doubling the size of the buildings.   The point is that if the NHL is to have its eyes on real sustainable growth of its business over the long-term, it needs to develop additional revenue streams.  By now, everybody should know that “additional revenue streams” means either getting paid for a national television rights in the U.S., or finding another way (Internet, PPV) to deliver the content to consumers willing to pay for it.  At the end of the day, this study – at least according to the Star article – says nothing about the effect upon that growth strategy that an increased concentration of teams in Canada would have.
2. The study assesses the suitability of ten Canadian markets for an NHL team and concludes that six would perform (again, concentrating on gate revenues) better than current “Sun Belt” teams.  Keeping in mind the limitations of the gate-revenue focus discussed above in point #1, all that can really be said is that if the NHL decides it can and should put another team in Canada, that the GTA is the best available option from that perspective, with Hamilton, Montreal, Vancouver, Kitchener-Waterloo and London all ahead of Winnipeg and Quebec City in the estimation of the reports’ authors.  In other words, because of the limitations of the reports’ focus, it should probably only be used as a tool to select among Canadian candidate cities, rather than as evidence of the superiority of the Canadian option on the whole.

One last thought:  it was interesting to me how far down the list of suitable candidates Winnipeg and Quebec City were ranked.  Much of the media coverage of the Coyotes and Thrashers recent problems, at least since the death of Mr. Balsillie’s proposal to bring the Coyotes to Hamilton, has been premised on the unstated assumption that Winnipeg and Quebec City are the leading candidates.  This may very well be so, in that these cities are favoured by the League for reasons of its own.  What is made clear as a result of this report is that if the NHL does have such a preference, it must be premised upon considerations that are much more far-ranging than merely potential gate revenue.