NHL Revenue and how it’s confusing the issue – Part II

In Part 1 of this series, we looked at the fact that the NHLPAs recent CBA proposals are tied to NHL revenue growth, as well as the possibility that this growth is unsustainable. Let’s take a further look at that possibility here.

Let’s be clear – the NHL never expected its revenue to grow as quickly as it has since the last lockout. If they had, they would never have setup a system in which the salary floor could ever have risen as high as $54 million. Why did the numbers grow so quickly? Well, there’s been some organic growth, and some of the poorer markets have acquitted themselves well since the last lockout. But the majority can be attributed to two reasons which might have been unthinkable during the last lockout: a Canadian dollar that rose to par with the US dollar, and skyrocketing ticket prices in a few major markets.

Let’s first take a look at the organic growth. According to ESPN.com, nine NHL cities have seen attendance increases of more than 10% since the 2003-04 season. Remarkably, Pittsburgh’s attendance has risen 56.3% while Chicago’s rose 62.50%, increases which can be attributed to much-improved teams in those markets (and a new building in Pittsburgh). Even strong markets like Calgary and Boston rose over 16%. Meanwhile, just 4 teams have seen attendance decreases of over 10% during that period – Dallas, Colorado, Columbus and Phoenix. In all cases, it would be fair to attribute those decreases to declining team success, as well as ownership issues in the case of Dallas and Phoenix.

The overall attendance numbers for the NHL are up 5% since the last lockout – not overwhelming numbers, but healthy growth. Considering that a number of markets are selling out every night, you could argue that the numbers might be artificially constrained by building sizes. Assuming that ticket prices stayed the same or rose slightly over the past 7 seasons, this should have translated into modest revenue increases for the NHL.

But there’s where it gets a little sketchy. Remember that talk about NHL teams lowering ticket prices after the last lockout? Not so much. According to agent Allan Walsh, “The average NHL ticket price has increased 39% since 2004”. ESPN reports that the average ticket price last season was $57.10. Now, no-one should have put much stock in the idea that ticket prices would go down after the last lockout. NHL tickets are a commodity, whose prices are governed by supply and demand. The NHL product itself has arguably become more entertaining due to tighter enforcement of obstruction rules, and as such fans have returned in droves. But are going to see another 40% increase in ticket prices over the course of this next CBA? This guy doesn’t think so, and points to a recent poll by Leger Marketing to prove it. He says that “70% of Canadians making less than $40,000 a year say they haven’t attended a single NHL game in the past five years,” and that the NHL has priced itself out of reach of the average Canadian. Certainly in many Canadian cities, the NHL has become a big ticket, where the best tickets are owned by corporations who want to impress their clients. You don’t see a lot of dads taking young kids anymore – it’s just too expensive. The average ticket price in Toronto is now $123. Meanwhile, in cities where there are lots of seats available, teams are still having to make tickets a bargain in order to draw a crowd. It’s just not realistic to think that even the biggest markets can continue to absorb huge price increases, nor is it realistic to pretend that sun-belt markets will ever be paying big-dollar prices for tickets. Do you think Winnipeg, whose tickets average $99 already, is going to go for $140 tickets in 5 years? Or that Nashville fans will pay what Rangers fans pay now? Unlikely.

The biggest concern, however, is the effect of currency on revenues. In the past decade, the Canadian dollar has risen from around 63 cents US to just over par, a climb of approximately 60%. Remember the Canadian Relief Program, the supplement for northern teams to compensate for the fact that they were paying US salaries with Canadian dollars? These days the seven Canadian teams are accounting for around 40% of the NHL’s revenue. This has been a tremendous boon for the NHL, and one which they could not have fully predicted. Unfortunately, it’s not sustainable. There is very little likelihood that the Canadian dollar will rise another 60%; in fact it might be reasonable to think that it could drop somewhat as the US economy recovers.

If you combine the 60% rise in the Canadian dollar with 40% increases in ticket prices, it’s likely that gate revenue from Canadian teams has increased 120% since 2004. Undoubtedly there is still room for growth in revenue, but growth at this rate is absolutely unsustainable. Given that the Canadian teams account for around 40% of NHL gate revenue, it has to be a concern for the NHL when the NHLPA’s proposals make assumptions of 5% year-over-year growth. It’s not inconceivable that revenues could decrease slightly during one or two of the years covered by the next CBA. Thus, don’t be surprised as the NHL rejects player proposals which guarantee player-revenue increases.

In Part 3 of this series, we’ll take a look at the myth and reality of profit and loss for NHL teams.

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