Cinderella Blues

Posted by on Saturday, June 15, 2019 in National Hockey League, Sports Econ Blog.

Interview with St. Louis Biz JournalComplete Interview with Graphics / Graphics XLS.

Blues into the black graphics  / Follow-up graphics XLS.

Broadly speaking, what does a Stanley Cup championship mean for an NHL franchise financially?

The first Stanley Cup Championship for the Blues will pay the bills and sell plenty of t-shirts, but in the relatively risky business of pro sports it will not affect the bottom line value of the franchise as much as the consistent run of 7 playoff appearances in the last eight seasons leading up to it.

Like any sports league, franchise values in the NHL are driven by the relative certainty of long-term net cash flow. The NHL is different than other leagues because it has the least risk diversification through revenue sharing. With an average 75% home /25% league revenue sharing formula, each NHL team is virtually an economic island largely dependent on the revenue potential of its home market. (By comparison the other leagues share more revenue: 50/50 in the NBA and MLB and 40/60 in the NFL)

The Blues hosted 13 home games during their playoff run. Is that significant revenue generator for the team in and of itself? In other words, what does hosting playoff games mean for an NHL franchise’s bottom line?

The classic rule of thumb in the NHL is that mid-market clubs break even over the regular season, and then generate positive in the black profit during each successive post-season round.

My best guess is that the Blues clear just under $1 million in local gate and venue revenue per Stanley Cup playoff game. The Blues banked 13 home games in the playoffs, which should bring the net post-season profit to a cool $12 million, compared to a break-even regular season.

(Forbes pegged the Blues operating income at $10 million in 2017-18 compared to $37 million for the Boston Bruins and $65 million for the MLB Cardinals).

Because of relatively low revenue sharing in the NHL, the post-season runs are financially critical for the home team. The key to playing their way into the NHL black is to win consistently in the regular season and extend the run beyond the first round of the Stanley Cup playoffs.

What kind of impact will the Stanley Cup Championship have on the Blues’ franchise value?

Does it pay to win in the NHL? Unfortunately for the Blues ownership, the short answer is no, not so much. Not to rain on the Stanley cup parade, but for reasons discussed here winning doesn’t seem to matter as much as media-market size and a hard salary cap in determining NHL value to the owners, but it does improve the welfare for the Blues fans and sponsors.

By comparison, consistent winning over a cumulative 5 year-10 year span is important for the MLB values of mid-market teams, and longer winning traditions (See the Cardinals) can ultimately wash out the value advantage of asymmetrically larger TV markets.

As a result, NHL playoff teams are concentrated in the bottom two thirds of the league clubs in value compared to MLB where most post-season teams are the top third. (See the attached Forbes value chart).

Forbes values the Blues at $465 million, which is about 26% lower than the NHL average $630 million for 2018-19. By comparison, the beloved Cardinals are valued at $2.1 billion, which is 18% higher than the MLB average of $1.776 billion. The value-winning correlation differences between the Blues and the hometown Cardinals are shown in the following graphs.

What steps/actions does the St. Louis Blues’ ownership need to take to capitalize on this championship to see it become a continued positive financial boost to the franchise?

The owners need to stabilize performance on the ice and at the bottom line. In spite of the loyal Blues fans and a very strong corporate support in St. Louis the owners must still lock down contractually obligated revenue sources and diversify risk in an inherently risky business.

Season tickets, rights fees and corporate partnerships are risk-sharing quasi-contractual agreements that the Blues will consistently provide quality product on the ice. If the Blues perform their end of the contract, the season-ticket holders and corporate sponsors will come.

A minority interest in the St. Louis Blues is currently up for sale. Does the team’s recent success help to potentially find investors for that share?

When franchises are sold they are usually go at prices 25% to 30% higher than their actual true value, because a sports franchise is a monopoly cash cow and the winning bidders systematically pay top price in a highly-limited subjective monopoly auction. This is especially true for a minority ownership interest with limited control.

See the attached graphics showing monopolistic rates of return for the franchise values in professional sports league cartels as compared to the best available competitive rate of 5.1% since 2000 for the S&P 500 stock market index. This is strong evidence of the monopoly power of professional sports franchises and their respective league cartels.

The most obvious problem facing the Blues is that in spite of its territorial monopoly power in St. Louis, its franchise value has increased at the same rate as the competitive 5.1 percent publically available in the S&P 500 since 2000. The value of a Blues limited partnership share is in the eyes of the investor.


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