Posted by John Vrooman on Monday, March 27, 2017 in National Hockey League.

Interview series on Vegas as NHL expansion market.

Vegas Review Journal 

Preds v Titans comparison

Initially the NHL Nashville Preds surprisingly held their own against the NFL Tennessee Titans, but it soon became apparent that the novelty of hockey in a non-traditional sun-belt hockey market was risky business.

Both NFL and NHL teams rely heavily on the corporate client season ticket base. The problem is that almost all gate revenue in the NFL is derived from season tickets whereas only about half of the tickets sold in the NHL are season tickets. Corporate season tickets are more valuable than walk up tickets because they are more certain and inelastic with respect to winning and price.

Because of the amount of revenue sharing the cash flow in the NFL is sure money, whereas each NHL club skates on an economic island. Less than 20 percent of NFL revenue comes from the gate compared to almost 50 percent in the NHL. Almost two thirds of NFL revenue comes from national media while national (NA) media is comparative chump change in the NHL (particularly South of the border).

The average NHL team is currently worth about $500 million (the inflated Vegas expansion fee) or about on fifth of the $2.5 billion average value for a club in the NFL. The value of the Raiders will increase from under $2 billion to about $2.5 billion in Vegas, most of which comes from the $750 million stadium subsidy, the largest public subsidy extortion ever paid for a stadium.

The bad news is that the NHL is sometimes a lonely risky business in non-traditional hockey markets, the good news for fans is that there is a strong economic incentive to win.

Here’s a comparison I worked up for the New York Times previously. The shaded area indicates the Preds operating under original ownership that threatened to sell the club to Blackberry exec. Jim Basille, who was going to relocate the Preds to Hamilton Ontario. New local ownership bailed out the Preds in time for the 2008-09 season. The magic NHL attendance number is 14,000.

The interesting result is that the Preds improved on the ice at about the same time the Titans crashed on the field. There is a very strong cross winning elasticity at the bottom line between these clubs. Attendance and financial success in a non-traditional hockey market like Las Vegs or Nash-Vegas will probably become a zero-sum game played out between the two clubs between their respective lines.

Nashville is the 30^th largest TV market with about 1 million TV households compared to Las Vegas (40) with about 750,000 TV households. Moreover, the Nash-Vegas corporate presence is much deeper and more fully diversified than Las Vegas’ heavy and non-diversified dependence on the gaming industry. This lack of economic depth in Las Vegas could make it difficult to maintain the consistent simultaneous season-ticket demand for both hockey and football in a top heavy economic oasis in the Southwest desert.

---

First it is unlikely the Chargers are the Raiders will relocate to Vegas, but if they did the NFL would consume almost all of the corporate fan base and the NHL team would be relegated to being a stepchild. This happened in Nash-Vegas with the Preds and then the Titans, but again Nashville has economic depth and Vegas is a sham market overly dependent on the gaming and tourism industry.

---

My biggest question about Las Vegas has to do with the entertainment dollar.

– Considering how many entertainment possibilities are in the city, can the NHL stand out as far as how a visitor or local would want to use his/her dollar for entertainment.

The non-traditional Las Vegas demographic is not hockey friendly. Visitors are not coming to Vegas to watch Hockey and unstable transient fan bases do not create value in the corporate client driven NHL.

– Are there enough local sports fans to support the team in your estimation? It is a large market with about 2.2 million people.

The Vegas market is marginal especially for the gate driven revenues of the NHL. Las Vegas is only the 45^th largest TV market with 726K TV households. This is the same size as the relatively successful NBA market in OKC but the fan base is totally different and the entertainment dollar is very competitive in Vegas. OKC has demographic depth while Vegas is a shallow shell market for sustained demand for hockey.

– If the NFL comes to Vegas, what would it mean for the NHL team?

First it is unlikely the Chargers are the Raiders will relocate to Vegas, but if they did the NFL would consume almost all of the corporate fan base and the NHL team would be relegated to being a stepchild. This happened in Nash-Vegas with the Preds and then the Titans, but again Nashville has economic depth and Vegas is a sham market overly dependent on the gaming and tourism industry.

– Is the $500 million expansion fee enough to offset possible issues with the Las Vegas franchise? If so, for how many years?

Yes $500 million would more than compensate the other NHL owners for the economic damages caused by expansion such as the explosion in player salaries after the last expansion just before 2000. The proportion of revenue shared in the NHL is still only about 20 percent compared to 40 percent in the NBA, 50 percent in MLB and about 60 percent in the NFL.

As a result the revenue potential of the expansion markets is not as critical to the League-wide shared revenue stream. My rule of thumb is that the expansion fee should usually be about 60 percent of the value of the average club in the NHL compared to about 80 percent of the average franchise in the NFL.

This is at the point where the value of the club is just equal to the  potential long-term economic damage to the rest of the League (competition for talent and revenue sharing deficit). So if the average NHL club is worth about $500 million that would set the current fee at $300m in the NHL.

– Maybe most importantly, does the NHL even need to expand? What’s the point economically from how you see it? Didn’t they go through two lockouts to finally right themselves from a revenue perspective?

From the outside point of view of hockey fans the League should expand as long as a team can generate a positive profit. From the inside point of view of the owners/governors the league should expand to the point where the marginal expansion club can still afford the compensatory expansion fee.

So in this case the League should add clubs in all markets that have a potential net cash flow worth $300 million, which might barely include Vegas. If they charge a fee of $500 million then the only expansion markets that might generate that value would be in GTA, Seattle and Quebec City in that order. GTA has no chance because it would crowd the markets of the Leafs, the Sabres and even the Wings, and the same might be true for Quebec City crowding the Habs.

So this leaves only Seattle as the best remaining expansion option and no group would even bite at the $500 million expansion fee. All of this implies that the $500 fee is too set way too high for Vegas which would justify a present value of $300 million at the most.

If it is too high for rational bids from Seattle then it is way too high for irrational bids from Vegas.

The last time the league set the fee higher than the clubs could actually affords to pay was back in 1992 expansion into Tampa and Ottawa. The owners of both clubs missed the first installment on the arbitrary $50 million expansion fees. (The Senators were building their own arena and the Tampa owner had never been to the US).

From the internal profit max perspective of the League it might make more sense to relocate the 3 franchises that are struggling in non-traditional hockey markets of Raleigh, south Florida and Arizona. See my proposal for the best reconfiguration of the NHL from the internal optimum for the League. The external optimum would of course have a league where every team made a positive profit at the margin.

---

Vegas expansion is probably a bad idea because there are several superior options, including doing nothing. The BOG is probably doing it for the one time shot franchise fee of a reported $500 million which is the average value of NHL clubs but still a touch on the high side.

The expected cash flow from NHL in Vegas probably won’t support $500 million and the fee should be closer to $300 million, and that would still be a tight squeeze. The rumored $500 fee is probably why Seattle (a far superior option) didn’t even submit an expansion bid.

I have attached my expansion relocation proposals for the League and an interview I gave the Pittsburgh Post-Gazette about the sale of the Pens. The expansion into Vegas is actually competing with the possible sale of the Pens and the Hurricanes.