Something in John Shannon’s latest at Sportsnet has started me thinking:
One small business note that might be worth following this season: Both the Versus contract and the NBC TV deals expire at the end of the season. The message at last week’s board of governors meeting was positive.
The commissioner told the board that there is a tremendous amount of optimism that revenues from new national TV deals in the U.S. can mirror that of Canada. At present, Canadian TV deals account for between $30- $40 million dollars more in rights fees than the US. I don’t know if the impending merger between Versus and NBC will help or hurt the negotiations, but I can tell you that participation in the Sochi Olympics will play a key role in deciding the length of the contract.
I’ve long thought that it was somewhat incorrect not to account for the contribution made by small market Canadian teams to the national Canadian TV contracts in talking about how much revenue those teams generate. While I suspect that the bulk of the value of the Canadian TV contract comes from CBC’s rights to Leafs games, teams like the Oilers obviously generate some marginal value. The pricing presumably includes the possibility of a Canadian team going deep in the playoffs, something that increases with the number of Canadian teams involved. The late game on CBC has a huge audience, even if it’s significantly smaller than the Leafs’ audience earlier.
The Canadian national TV money is, of course, shared amongst all thirty NHL teams in the United States. Everyone in Winnipeg who watches Hockey Night in Canada, everyone in Quebec City who watches Soiree du Hockey, they’re helping to fund the operation of the Colorado Avalanche and the Phoenix Coyotes. Assume, for the sake of discussion, that there’s $120MM in Canadian TV money and $80MM in US TV money. If Canadian national TV money – essentially, the monetization of our interest in the game – was shared equally amongst Canadian teams, with American TV money being shared equally amongst American teams, you’d see the Canadian teams getting $20MM annually in national TV rights money and the American teams getting $3.33MM. There’s a vast interest in hockey here that funds hockey in the United States.
In Canada, by and large, we don’t really believe in the funding of professional sport through free stadiums. We certainly don’t believe in it to the extent that our neighours do. Unfortunately, because we follow an NHL that straddles the border, we are, in effect, competing with American cities for professional sports teams in general, and for American teams specifically.
Governments in Canada are still struggling with how best to respond to this. Quebec and Winnipeg left for the United States after they were unable to generate enough in the way of revenue in Canada. What’s frustrating is that this isn’t really a fair competition. These teams are lured away (and new expansion teams go to the United States) in part to play in facilities that American cities and states have foolishly decided to fund.
It became anathema to talk about funding professional sport in Canada after John Manley was forced to withdraw a plan to January of 2000 that would have seen money handed over to Canadian NHL teams after widespead public criticism. There have been recent signs of a thaw, as City Council in Edmonton is (insanely) considering handing the Oilers hundreds of millions of dollars for a new arena and Stephen Harper is considering providing federal funds for a new arena in Quebec City – the province and city are already on board there – just for a whisper of a hope that a new team will come back to Quebec.
It is, I think, beyond dispute that part of the reason that the NHL is such a wealthy league is because of the public subsidies that the league gets, mostly south of the border. Outside of New York, it looks like the public has played a role in financing every single NHL arena in America. This alters the economy of the league, in that you can presumably sell a nicer experience for more money, making it more difficult and less economically sensible to put a team in a place like Winnipeg or Quebec.
While I’m of the view that Winnipeg and Quebec City would have a hard time generating enough money to compete in the NHL right now, I don’t necessarily think that they would be in a contest that wasn’t rigged with public dollars. I have a hard time believing that there are more hockey dollars in places like Carolina or Phoenix than there are in Winnipeg, although there may be more dollars for hockey + an opportunity to entertain clients.
When Edmonton talks about funding an arena for the Oilers or when Stephen Harper muses about contributing to the funding of an arena in Quebec, what they’re really asking is this: how can we incent an NHL team to locate in Edmonton or Quebec? To date, the terms of the discussion in Canada have all been in positive terms – what can we give the NHL to come here? What carrot can we dangle?
It strikes me, however, that we don’t just have to use carrots. Sticks are an option as well. There are two major sources of NHL revenue from Canada that are shared leaguewide – TV rights money, as I’ve referred to above, and the sale of league branded merchandise. While I don’t know what percentage of league branded merchandise sales are made in Canada, I’m pretty confident in guessing that it’s substantially more than 20%. It looks like Canada accounts for something like 65-70% of national TV revenues.
The stick that’s available to governments is heavy taxation of these streams of revenue in order to either provide the kinds of subsidy that American teams do in the forms of stadiums and such for teams to locate here or, in the case of TV rights, by establishing a cap on the amount that the NHL could earn in national TV revenue per team located in Canada, to provide some incentive for more teams to be located here.
For example, it would be hard to say that it would be inequitable for Canada to announce a formula whereby the sale of national TV rights in Canada will be taxed at a rate that results in the league netting the same amount, per team in Canada, that it generates from the sale of national TV rights in the United States. So, if they earn $3.33MM per team in the United States, you would want to leave them with $19.98MM from the $120MM in TV rights money that they generate in Canada, so the tax rate for 2010-11 would be 83.3%. That would leave you with a pot of money worth $100.02MM, which could then be redistributed to NHL teams in Canada, building stadia, whatever you want. Heck, the money could simply go into an NHL infrastructure fund – come to Canada and you’ll get a free arena. The Winnipeg, Hamilton and Quebec markets would probably look a lot more attractive in those circumstances. If you wanted to, you could come up with some similar scheme to apply to the sale of merchandise.
The NHL acts as any business would, chasing the money that is available to it. As interest in the NHL is most substantial in Canada and free money from stupid governments is most available in the United States, we’ve ended up in a situation in which Canadians are effectively funding NHL hockey throughout the United States because that’s how the league maximizes revenues. I don’t blame the NHL for doing this but our governments have let them do it. The solution is not, I think, in handing over public money to them but in saying to the league that, they’re having decided to chase public dollars, we’re getting into the game. And we’re going to find the dollars to do so by confiscating a lot of the money that Canadians are already spending to have teams in Florida, Georgia and Arizona and redistributing it to teams in Canada. I’m a bit of a jerk, so if I was Stephen Harper, I’d do this by inviting Bettman to a ceremony at which I announce a major Canadian commitment to funding for the NHL, without telling him where the funding is coming from. You can probably do it without that though.
I don’t usually think that giving public money to private organizations is defensible but this is a unique case. The interest in NHL hockey in Canada is certainly here. We’ve let an American run NHL cash in on our interest in our interest in hockey while they simultaneously cash in on the willingness of American governments to give them money, somethat that Canadians aren’t historically willing to do. This does not have to be the case and it is, in my mind, entirely justifiable for the Canadian government to fight back against the American willingness to do this in this way.