• A Quick Economics Lesson

    by  • June 17, 2013 • Hockey • 18 Comments

    If Glendale finally fails and the NHL goes to Seattle – and I’m skeptical that they will because there’s no arena deal in place there and the existing facility only seats 11,000 – I am very, very doubtful that it’s because of the possibility of a big expansion fee from Quebec City down the road. People seem to keep saying that the NHL wants to preserve the Quebec market for this but it doesn’t make sense. Consider two scenarios:

    Scenario A: Coyotes move to Seattle for $220MM, three years from now the NHL puts expansion teams in Markham and Quebec at a price of $350MM each. Total: $920MM.

    Scenario B: Coyotes move to Quebec for $350MM, three years from now the NHL puts an expansion team in Markham for $350MM and Seattle for $220MM. Total: $920MM.

    The mathematically gifted amongst you will have noticed that, ignoring the time value of money, the total amounts of money are the same in each scenario. There is a strong economic argument against the NHL letting the owners of existing teams relocate to new markets that are dripping in money. Say Phoenix was still owned by Jerry Moyes and worth $150MM. If he moves the team to Quebec and pays the NHL $200MM to let him do so, they’re dividing $200MM amongst 30 owners rather than dividing $350MM amongst 30 owners. You can see why they would want to prevent this.

    That economic argument falls apart where, as here, the NHL has already dropped $150MM or so on the Phoenix Coyotes. So, unless I’m missing something, the argument that the NHL would want to preserve the Quebec opportunity for itself doesn’t make any sense at all.

    Email Tyler Dellow at tyler@mc79hockey.com

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    18 Responses to A Quick Economics Lesson

    1. June 17, 2013 at

      You cannot charge Markham $350M for expansion and then Seattle only $220M that makes no sense and undervalues the price of getting into the league. That scenario make absolutely ZERO sense.

      • Tyler Dellow
        June 17, 2013 at

        Why’s that? Maybe there’s $200MM a year in revenue in Markham and only $100MM in Seattle.

        • June 17, 2013 at

          Because revenues are not tied to expansion franchise fees. By paying an expansion fee a team is essentially paying for a seat at the NHL table. Revenues are a team’s responsibility once you have a franchise. One share of league revenues, one vote, one fee. The value of that vote is what determines the expansion fee, whether Honolulu or Saskatoon. For Seattle to pay 2/3 (rounded) and get the same say, and same share of league revenue as Markham who pays an extra 1/3 doesn’t work. Why would Markham agree to that? There is no precedent that I could find that a league ever received different expansion fees for teams joining a league at the same time (except for market infringement rights fees (NYI/NYR).

          • Passive Voice
            June 17, 2013 at

            ….

            Who gives a shit about precedent? The NHL is a private club for billionaires. It can do whatever it wants re: entry fees.

            • June 17, 2013 at

              And I stated in the first 10 lines why it wouldn’t work and makes no sense.

            • June 17, 2013 at

              Not to mention that allowing a team in for any less than maximum obtainable fee, de-values each and every one of those Billionaires’ franchises.

    2. Michael Badek
      June 17, 2013 at

      wouldn’t you be dividing by 29 owners?

    3. Cameron
      June 17, 2013 at

      It says Key Arena has 15,000ish seats in Seattle? Did I miss something?

      • jdhardy
        June 17, 2013 at

        For basketball. Hockey seats a lot less, much like Barclay’s in Brooklyn.

        • nathan
          June 17, 2013 at

          http://en.wikipedia.org/wiki/KeyArena

          It has a seating capacity of 17,072 for basketball games,[6] 15,177 for ice hockey games

          • nathan
            June 17, 2013 at

            So apparently the problem is that the seats beyon 11,000 have obstructed views and would not get full freight.

    4. tangotiger
      June 17, 2013 at

      I agree that it would be unprecedented to have different expansion fees in the same season.

      However…. when the Ducks and Panthers joined the league, they each put up 150MM$. But, 75MM$ of the Ducks money went to the Kings for territorial rights. So, technically, the Ducks put in 75 for expansion and 75 for territory, while Florida put in the whole 150 for expansion.

      Similarly, you can make both Markham and Seattle put in 225 for expansion, and an extra 125 for Markham for territory (presumably a nice chunk going to Leafs).

      So, while it may look weird, the league can charge whatever it wants for whatever territory, as long as one buyer is out there willing to pay for it.

    5. June 17, 2013 at

      Look, I read it somewhere on the Internet and cannot find it again for the life of me so I may be hallucinating this, but here goes:

      My understanding is that the big US TV contract is tied to the number of teams in US markets. That’s what makes moving the Coyotes around south of the border a better financial choice than taking them to Quebec city.

    6. Adam
      June 18, 2013 at

      The thing is, it’s highly unlikely that the NHL will be able to “easily” move the Coyotes for more than $90M, since that’s what they told the judge the relocation fee for the Coyotes is.

      If they go above that, they’ll get sued…something they would probably win but would definitely block a move for at least another season.

      • Roke
        June 19, 2013 at

        With the NHL owning the Coyotes does the size of the relocation fee actually matter?

        In the case of Atlanta, you had one owner selling the team and the league getting the relocation fee on top of that. Since the league owns the Coyotes all proceeds from the sale will eventually be distributed to the other owners.

        Could they not have a $90m relocation fee whether the team moves to Seattle, Toronto, Quebec, or Sherbrooke and still benefit from the higher-demand in Toronto or Quebec City by simply selling the franchise for more money than they would have received from Seattle?

    7. Pingback: Spectors Hockey | NHL Postseason Blog Beat – June 18, 2013.

    8. Peter
      June 19, 2013 at

      My understanding is the $220 million is the price of the franchise and the new owners would also have to pay a relocation fee of around $90m as Adam says. I also think the NHL believes they will get more than $350m for new teams in Markham and Quebec City.

    9. Ray
      June 21, 2013 at

      I think it’s all just brinksmanship. There’s too much that would need to be worked out over the short and medium term to realistically move an entire franchise in 6-8 weeks from Glendale to Seattle, because really that’s all they’d have.

      This is about breaking the will of the last holdouts to giving a new NHL owner whatever he/they want from the City of Glendale to keep the team there because the financial repercussions of the Coyotes leaving is not something they wish to contemplate. Seattle is not a viable option today, and even when the new arena is built, there’s no guarantee it would be viable in five years. Who knows if the new rink would be suitable for hockey, or whether the new team would get a favorable deal for the new rink? With so much uncertainty, it doesn’t make any sense.

      If you really wanted to move the team, the only logical place would be to Quebec City. They’re ready today.

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