The New Economics of the NHL
April 11, 2011 | By Mowat Centre |
Why Canada Can Support 12 Teams
The paper finds that Canada can likely support 12 NHL teams—double the current number of Canadian franchises. Southern Ontario can support two more teams—one new team in the Greater Toronto Area and another in Hamilton, London or Kitchener-Waterloo. Vancouver and Montreal can each support a second team, while Winnipeg and Quebec City would also be successful homes to NHL franchises.
The paper estimates that a team located in Canada can expect to take in roughly $23 million per year in extra gate revenue relative to an American market of the same size. The NHL has so few Canadian teams due to its monopoly structure, not due to a lack of local demand or economic viability. The paper raises public policy issues related to anti-trust questions and whether Canadian tax dollars are being used to subsidize unprofitable American teams through the NHL’s television contracts.
For four decades, the NHL has pursued a Southern Strategy, increasing the number of teams in the United States, particularly in the fast-growing Sun Belt, in an effort to grow interest in hockey in the US. These efforts have been largely unsuccessful, with many of these franchises suffering from low fan interest and low revenues. As a result, there is increased pressure to relocate some of these teams to Canada where demand for hockey is stronger. In this Mowat Commentary, we estimate how much stronger this demand is, and identify which Canadian cities would be the best locations for new NHL teams.
We conclude that Canada can likely support 12 NHL teams, or double the current number of Canadian franchises.
We analyzed 10 Canadian markets, assessing their ability to support an NHL team. We conducted a regression analysis, along with a qualitative analysis of the demographic and economic strengths of each market. Each of the potential NHL cities was compared to our benchmark city, Edmonton.
Edmonton is the NHL’s smallest market and has the league’s second smallest arena, yet thanks to the higher level of interest in hockey in Canada, the Oilers consistently generate higher arena revenues than most American NHL teams.
Using the main variable identified as being essential for the success of an NHL team—the size of its home city—but controlling for whether a city is in Canada, we estimate that a team located in Canada can expect to take in roughly US$23 million a year in extra gate revenue, relative to an American market of the same size. This greater level of fan interest north of the border means that small Canadian cities are bigger hockey markets than most large American cities.
Our analysis shows that:
- The best location for a new team is Ontario’s Greater Golden Horseshoe, a market of 9 million people that can support 3 NHL teams.
- The best location within the Horseshoe is the Greater Toronto Area, which can support a second NHL team.
- A new team would also be successful in one of the following cities to the west of Toronto: Hamilton, Kitchener-Waterloo or London.
- Vancouver and Montreal each have enough demand to support a second NHL team.
- Despite their small populations, teams would be viable in Winnipeg and Quebec City.
Teams in any of the above locations would likely generate higher gate revenues than the average US team. If owners and entrepreneurs were free to either move existing teams or create new teams, our findings suggest that Canada would have 12 NHL franchises.
Why has the league not moved more of the supply of hockey to where the demand is? Why has the NHL not allowed investors to establish new teams in those six underserviced Canadian markets?
The answer has to do with the monopoly structure of the league. Professional hockey in North America is not a free market. NHL owners are not competitors but instead collaborators in a cartel. The NHL, just like the MLB, NFL and NBA, artificially restricts the supply of top-tier professional sport for the benefit of its members, by limiting the number of franchises and controlling where they play.
This artificial scarcity in turn causes cities to compete for the right to host a big league pro team, with most American state and local governments using taxpayer funds to lure or keep a franchise. Those taxpayer subsidies—omnipresent in the US, uncommon in Canada—significantly distort the market. Absent those subsidies, which are often large enough to offset a lack of ticket sales and local fan interest, teams would move to where the demand is. The Phoenix Coyotes are a long-standing case in point.
Several Canadian markets are large enough hockey markets to support a new NHL team. The demand is there. They do not have a team because of the structure of the NHL, which undermines the free market to the detriment of Canadian hockey fans. The barrier to more NHL teams in Canada is not economic. The problem is political and legal, as are the solutions.
Tony Keller & Neville McGuire
April 11, 2011