Professional sports are more than just entertainment – they are big business. Professional sports in Canada generate combined revenues of at least $1.5-billion annually, and the real figure is bound to keep rising. With a growing fan base, consumer and business purchasing power, and media exposure, this highly visible and popular market segment has a bright future in Canada.
Even economists, the so-called dismal scientists, are allowed to have some fun on occasion. My idea of fun was to co-author a book with my colleague Mario Lefebvre, with the very Canadian title of Power Play: The Business Economics of Pro Sports.
Pro sports franchises in Canada and elsewhere can be evaluated in several ways. The foundation for franchise success is the local or regional market, where four key market conditions stick out. First and most important is the size of the market. For a franchise to succeed, a city or region's population must be at least as large as the number of tickets to be sold each season.
In the National Hockey League (NHL), a franchise has about 800,000 tickets to sell each season. Edmonton, Calgary, Winnipeg, Ottawa and Quebec City are all big enough for an NHL franchise – but Saskatoon is not.
Other market factors are: Income levels (or the purchasing power for tickets); the presence of head offices, which is a proxy for sales of corporate boxes; and specific competitive conditions such as tax rates and the exchange rate. Although the Canadian loonie has recently faded to about 90 cents against the U.S. greenback, it has strengthened considerably since the mid-1990s – a key factor in the return of the Jets to Winnipeg.
Within leagues themselves, the existence of a level playing field among franchises is a key factor for league success. The National Football League has the most level playing field financially and competitively. The NFL has a hard per-team cap on player salaries, plus the added advantage of receiving nearly $5-billion a year in TV revenues, and it shares 80 per cent of revenues among its 32 franchises. The NFL is both the most "socialist" and successful of the major North American pro leagues.
Major League Baseball is at the other end of the competitive spectrum. The market fundamentals are significantly different among its franchises, with limited and selective revenue sharing, and MLB does not have a hard salary cap. It's no surprise that teams such as the New York Yankees and Boston Red Sox, in large and affluent markets, are perennially strong, since they have the most resources to attract the best players.
The NHL falls in between the NFL socialists and the market economy of baseball. The NHL has a hard salary cap and a 50/50 division of revenues between owners and players, but it also has much smaller league TV revenues of $600-million annually, and less revenue sharing among franchises. Like the NHL, the National Basketball Association is a mixed economy, with sharp differences among the franchises, a complex salary cap system to restrain spending on players, and some revenue sharing to soften the rough competitive edges. European football (or soccer) is like unconstrained 19th century capitalism, where the richest clubs such as Barcelona and Chelsea rule, and the poorest clubs are left far behind.
In a couple of ways, pro sports are much the same as every other business. First, the quality of ownership and management of franchise matters. Second, the location of the business – in this case, the city and the playing facility – is crucial.
In some markets such as Toronto, Montreal and Vancouver, the NHL team's arena was built with private money and operates profitably. In smaller cities, it is much harder to build a top-quality facility without some financial support from the public sector. This is where business, politics and sports often collide, fuelling public debate in many Canadian cities today.
We foresee a bright future for pro sports in Canada. The country's population will continue to grow, and real incomes will be higher in the decades ahead. The fan base will change – it will become older and have an increasing share of new Canadians. The seven existing Canadian NHL teams are all viable, and up to three new NHL franchises could and should thrive – in Quebec City, Hamilton, and a second franchise in Toronto. With the right mixture of ownership, facilities, media support and timing, new Canadian franchises in the Canadian Football League, NBA and MLB are also possible, while pro soccer is on the rise in Canada. And who knows what new pro sport might come along? Cricket, anyone?
So sports fans (and business analysts), sit back and enjoy the games.
Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.
Glen Hodgson