Tab 8
Tab 8
Mitglieder
Dr. Kevin P. Mongeon, Assistant Professor of Sport Management, Brock University, St. Catharines,
ON, L2S 3A1, [email protected], 905-688-5550 x 5155.
Contents
1 Expert Report of Dr. Kevin Mongeon
2 Assignment
5 Market Conduct
5.1
5.2
10
5.3
Labour Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
6 League Outcomes
13
7 Player Benefits
14
7.1
Franchise Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16
18
9 Affidavits Comments
19
Assignment
Charney Lawyers has asked me to provide an expert report on the following areas in the
context of the Ontario Hockey League (i.e., OHL) and the Western Hockey League (i.e.,
WHL), hereafter Leagues:
explain how teams and leagues produce games and generate revenues, and discuss
players involvement,
discern the leagues and teams operating objectives and measure their business outcomes,
discuss the viability of a player minimum wage policy,
provide economic perspective on the validity of arguments made in the defendants
affidavits.
with a request for class certification and that I am not being asked to opine on the merits
of this claim. Rather, I am using my knowledge of Sports Economics and the available data
to provide expertise on a number of questions that clarify the behaviours of hockey players,
teams and leagues.
My examination of the economic environments and the business operations of the OHL,
WHL and their member teams led to the following conclusions:
all players contribute to the value of all teams within their league,
teams consistently interact with players in the common,
the Leagues and their member teams make decision to maximize profits,
a minimium wage is a viable policy that will have a negligible effect on the provision
of teams.
Sports Economics theory offers insight into how hockey markets operate. Specifically relevant
to the case at hand, Sports Economics models explain how leagues and teams produce games
and measure the impact of potential policy changes on sport markets.2
Like most markets, sport markets are defined by how industry (i.e., teams and
leagues) respond to consumer demand (i.e., fan preferences). Sport fans are unique consumers. Fans want their home team to win (i.e., quality), but also demand uncertainty in
their game outcome (i.e., competition). Sport leagues respond to fan demands by providing
games that are characterized by quality and competition.
In hockey, two teams (home and away) collectively produce games with talent
supplied by players. Home team business operations sell games, which are defined by quality
and competition, and collect related revenues. Since hockey fans have the choice to consume
games from various leagues and levels of play, the quality and competition of games is not
only determined in relative terms (i.e., across teams), but also in absolute terms (i.e., across
leagues). The unique characteristic of sport markets lies in the mutual reliance between
competing teams to produce games. This mutual reliance requires teams and leagues to
cooperate to jointly produce games and generate revenues.
An important outcome of the co-production of games is the fact individual team
revenues, as well as league-wide revenues, are a function of the contribution of players
throughout the entire league. These revenues extend beyond ticket sales and include all
revenues that would not be generated without players contribution (e.g., television rights,
merchandise, concessions, parking, etc.). The economic value of a player is determined by
the revenue generated from his contribution to the game.3 From a production perspective,
although individual player contributions to revenue vary, all players contribute to revenue
generated throughout a league.
2
For example see Fort and Quirk (1995); El-Hodiri and Quirk (1971); Mongeon and Winfree (2013).
The economic value of a player is determined by his marginal revenue product (Kahn, 2000; Scully,
1974).
3
In my report, the analysis of team objectives, ticket revenues, and franchise value
estimates are presented at the team-level and show that each team in the Leagues can support
a minimum wage policy. The viabilility of this policy should be based on aggregated team
values given revenues are co-produced.
Market Conduct
Previous research has found that teams have cooperated beyond what is necessary to enable
game play by engaging in joint venture activities through the strategic allocation of teams
and through the imposition of labour market restrictions. I assess the behaviour of the
Leagues and their teams to discern their objectives.
5.1
The systematic expansion and relocation of teams to previously occupied regions is an indicator of under-expanded Leagues and of profit-maximizing teams. Under-expanded markets
are characterized by the threat of viable relocation from which teams and leagues extract
benefits. Owners need only show a threat of alternative location to extract benefits.
Data from the OHL show evidence that benefits have been extracted from strategic
expansion and relocation. For example, a $22 million public subsidy was generated from
the OHL expansion to Mississauga in 1998. In 2007, the team was sold and relocated to St.
Catharines along with a $44.7 million public subsidy. The data also reveal that the benefits
extracted extend beyond the duration of the threat. Under the agreement on allocation
of revenues between the Ice Dogs and the City of St. Catharines, the Ice Dogs receive a
significant portion of the revenues generated at the new venue, including 100 percent of all
media revenues from team games, advertising in the arena bowl, sales from their retail store
and 50 percent of concessions, pouring rights and in-house advertising.
The movement of teams in and out of a given location allow leagues and teams to
extract direct and indirect benefits. This is evidenced in the NHL where the league received a
$60 million relocation fee from the relocation of the Atlanta Thrashers to Winnipeg in 2011.
Data from the OHL show that the league and teams extract direct and indirect profits, most
notably by leveraging public subsidies. As an example, the OHL expansion into Brampton in
1998 was accompanied by the opening of the $26 million Powerade Centre. After completion
of 15-year lease with the Powerade Centre, the Brampton Battalions move to North Bay
led to a $16.2 million renovation subsidy.
While patterns of relocation and expansion in the NHL and OHL reveal profitmaximizing behaviour, this behaviour is not evidenced in the case of the WHL where the
threat of relocation has not generated public investments comparable or relative to the
OHL. For example, the mayor of Chilliwack refused to meet the Chilliwack Bruins demand
for annual financial support, which led to the teams sale and relocation to Victoria, where
it plays in an arena that was already constructed.
5.2
Buisiness that operate in a competative market are not able to profitably increase prices
because consumers have the ability to purchase similar (i.e., substitute) products from competing business. The OHL and WHL provide teams wth exclusive geographic territories
rights and local monopoly in Major Junior Hockey. In the absence of direct competition for
tickets, teams exhibit profit-maximizing behavior by exercising market power and profitably
increase ticket prices.
To determine whether the Leagues use their market power to set ticket prices, I
estimated teams price elasticity of demand (p,d ) and compared it with the theoretic known
value of -1. I estimated the price elasticity with a traditional demand equation that controls
for other factors that can potentially influence demand beyond price.4 The demand for game
attendance is expressed as
atts,i
ln
pops,i
(1)
atts,i
,
pops,i
is
per capita attendance. The independant variable price denotes the teams average ticket
price, win denotes the annualized winning percentage, and N HL is an indicator variable
identifying whether the ith team is located in a region with a NHL club. The win term
controls for team quality and the N HL term controls for the availability of a substitute
hockey product. Economic theory suggests that the parameter estimates of price and NHL
should be negative to reflect a decrease in demand from increase in price and the presence
of a NHL team, and winning should be positive to reflect an increase in demand from an
increase in team quality. I collected 80 season attendance, average ticket prices, team winning
percentage, and population census observations and estimated the equation with Ordinary
Least Squares.
4
I estimated various demand equations in terms of specification and functional forms. All model estimates
have similar results.
10
atts,i
ln
pops,i
(2)
The price elasticity of demand estimate is -1.02, which is the theoretic value of
a profit-maximizing monopolist. The interaction between price and quality would cause
teams to generate less revenue if they altered their current price strategy and increased or
decreased their ticket prices. This is an important finding because it provides strong evidence
that teams profit-maximize and exercise market power when setting ticket prices.
The parameter estimate of winning is 0.76, indicating that winning increases attendance. The expected difference in attendance for teams with a winning percentage of 0.450
to 0.550 is 400 spectators per game. The parameter estimate for the NHL is -1.58, implying
that the presence of an NHL team decreases attendance. The NHL variable acts as a control
variable rather than a predictive variable because of the large difference in populations of
cities with NHL teams. Nonetheless, depending on the size of the city, the presence of an
NHL team decreases attendance from approximately 5000-10000 spectators per game.
I used equation (2) to derive the inverse demand function P (A) and total revenue
curves (R = P (A) A). The estimated revenues are presented in Table 1.5 Based on 2014
data, I estimate that the average team game level revenue was approximately $4 million
annually with some of the smaller regions generating less than $2 million and larger regions
generating close to $10 million. Note that these are conservative estimates because they only
account for ticket revenue, and some teams can generate similar revenue from other sources.
5
Note, Hamilton is a new franchise with limited data available. Therefore, their estimated revenues reflect
potential revenues.
11
5.3
Labour Market
The wages people recieve is determined by competition for their services. In a competative
labour market a players salary reflects the revenue they generate. Team owners have long
argued that policies restricting player salaries are needed to ensure competitive balance. This
argument rests on the assumption that, without policies, systemic competitive imbalance will
ensue. Since competitive imbalance can reduce fan interest in games, leagues, teams, players,
and fans have a vested interest in preserving competitive balance.
Economic theory explains that many league policies have a negligible or non-existent
impact on competitive balance because talent inevitably moves to where is it valued most
regardless of whom collects the revenues (Rottenberg, 1956). When player transactions
occur in competative markets, a new team pays the player to move from their old team.
In restricted markets, a new team pays a players old team to move the player. Identical
amonts of money are transacted between a player, and their old and new teams, only the
distribution of the money differs.
The OHL and WHL have eliminated all intraleague competition for players. First,
players gain entry into the league via the entry-level draft that involves teams picking players.
Second, upon entry into the league a players services are retained by their team for the
duration of their career. The draft and Player Service Agreement have collectively eliminated
the labour market for player services. As long as teams are able to trade players and the
Leagues are the only supplier of Major Junior Hockey, teams will retain the entire value of
a players services.
12
League Outcomes
Exclusive geographic territories leads to varying benefits from winning to vary across teams.
Profit maximizing teams optimally invest in winning causing competitive imbalance. I measure the Leagues competitive balance to make inferences about teams business objectives.
I use standard deviations ratios, which measure the dispersion of winning percentage
throughout leagues, and normalize it to 1 to allow comparison across seasons with varying
number of games played.6 A standard deviation ratio equal to 1 indicates a perfectly balanced
season. Values greater than 1 imply less (worse) competitive balance. The standard deviation
ratios based on the 2011-2015 team winning percentage across all teams, OHL teams, and
WHL teams are 1.63, 1.64, and 1.62 respectively. These ratios are similar to historical NHL
standard deviation ratios that range from 1.61 to 1.71, indicating that the Leagues have
similar levels of competitive imbalance as the NHL and are profit maximizing.
6
Standard deviations ratios allow comparison of standard deviation by dividing standard deviations by a
perfectly balanced season and the number of games played, 0.5
m
13
Player Benefits
CHL players receive benefits from participating in the Leagues. While the conditions of
their participation can vary across teams and Leagues, all players receive provisions for
housing, education, allowance, transportation, and equipment. Several of these provisions
are conditional on the period and type of services offered to players.7 Scholarships, for
example, must be taken within 12 months (WHL) and 18 months (OHL) of leaving the
league, and players become ineligible upon playing at the professional level. Other items
such as transportation and equipment are costs of business and not player benefits.
Insofar as teams and Leagues can act as conduits to other sports leagues, they also
provide players with professional benefits. In order to determine the value of this benefit,
I use data to estimate the probability that the Leagues players will play in other hockey
leagues. I analyzed OHL player-draft and roster data from three cohorts (1999, 2000, 2001)
over 10 years to discern the likelihood that the OHL will lead to a NHL career. Tables 2
and 3 present the results.
The data show that players who get drafted to the OHL in early rounds have
a much greater probability of playing in other hockey leagues than those drafted in later
rounds. Players drafted in the first round have a 44 percent probability of playing at least
one game in the NHL. That probability drops to 21 percent in the 2nd round and to less
than 10 percent by the 4th round. Probabilities based on whether or not a player will play
at least 100 games are similar.
Players drafted in later rounds are probable to play at least one game in a league
other than the NHL. For example, players drafted in the 4th round have a 75 percent
probability of playing a game in a North American junior league and a 15 percent chance
of playing in an European league. The associated probabilities decrease to 17 and 6 percent
when we increase the number of games played to 100.
7
For example, billet families receive $300 a month and 2 season tickets in the OHL and $200 to $350 a
month in the WHL. OHL players receive an allowance of $470 or $900 for over age players. Teenagers in the
WHL receive $250 and 20 year olds receive $350.
14
The logistic and Poission specification are expresssed as N HLs,p = F (0 + 1 ln (ohlgps, p). In the logit
specification, N HL is an indicator variable identifying playing in the NHL league, ohlgp is the number of
games played, and F () represents the Poisson functional form.
9
http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/educ71a-eng.htm
15
7.1
Franchise Values
The general principle of business ownership is to maximize profit. The profit maximizing
hypothesis, which is a common economic view, holds that owners make decisions about their
venues, players and media contracts to maximize the difference between total revenues and
total costs.
Complete and sufficiently publicly available revenue and cost data are rarely available to analyze and estimate franchise values. Accounting regulations do not always attribute
revenues and costs and can also make valuation estimates based on balance sheets difficult.
Many team owners have a background in investment and business ownership suggesting CHL
team ownership is an investment vehicle.
Market prices, however, provide observable information of franchise values. In
recent years the Mississauga franchise has sold twice. Expressed in 2015 dollars, the Mississauga franchise sold for $4.56 million in 2003 and $10.68 million in 2006, resulting in a
138 percent
10.684.56
4.56
and created a rate of return model that accounts for population to estimate franchise values
(Tables 4 and 5). The average rate of return of a franchise can be expressed as:
pricey,i
ln
populationy,i
= 0
(3)
where pricey,i is the selling price expressed in 2015 CAD and populationy,i is the regions
census metropolitan area.
I find that the average rate of return of a CHL franchise is 7.9 percent. Note that
this is a high rate of return and substantially greater than the average Canadian GDP growth
rate of 3.0 percent. My finding is similar to research findings that the rate of return of Major
League Baseball franchises is approximately 1.6 times greater than the economy Fort et al.
(2006). My model estimates that CHL franchises located in markets with populations of
100,000, 500,000, and 1,000,000 are currently worth $6.2, $31.4, and $62.8 million dollars
16
respectively. Table 5 presents the estimates the current franchise values of OHL and WHL
teams.
10
10
Franchise values and team revenues are positively correlated. Franchises values located in large cities
reflect their increased potential of a stadium subsidie.
17
The literature concerning the impact of sport league policies is vast (Marburger, 1997; Szymanski, 2004, 2010). Economic models of sport leagues explain policies by representing small
and large markets based on their share of talent to determine each teams winning percentages, and the proportion of total revenues allocated to the small and large market owners
and players. The models discern the impact on revenue, player pay, and winning based on
their impact on owners incentives to invest in winning.
A player minimum wage resulting in equal pay throughout a league can be expressed
similarly to a payroll floor. Payroll floors have no effect on league outcomes unless they are
binding and force an owner to make investment in player decisions they would not otherwise
make. The amount of hockey revenue generated from players in the smallest markets far
exceed the cost of a player minimum wage. Therefore the minimum wage policy will not
impact owners incentives or the league outcomes. It will however have an impact on the
redistribution of revenues from owners to players.
A minimum wage policy based on a 40 hour work week, for 25 weeks, with a 25
player roster at the Ontario minimum wage rate of $11.25 costs $281,250. I estimated that
small markets generate over $1.5 in revenues, not including other source of related revenues
(i.e., sponsorships, merchandise). According to the Erie Otters financial statements, ticket
revenue represent only 50 percent of total related revenues. The model becomes simpler from
a normative perspective if we safely assume that every player contributes at least his salary
to hockey revenues (i.e., $11,250).
The viability of a minimum wage policy will not impact competitive balance or the
number of teams in the league. Under a straight owner centric model with no sharing, the
small market teams pay a larger portion of the revenues they collect to their players. If this
is an issue for owners, a number of appropriate revenue sharing models (i.e., pooled gate
revenue sharing) exist that will redistribute money amongst owners with little to no impact
on league outcomes.
18
Affidavits Comments
19
accounting practices are to count monies for the purposes of tax, not to discern the accurate
values of assets. Economic value is based on the market price of the asset. Many businesses,
including sport teams, can legitimately show accounting losses while also showing economic
gains.
20
References
El-Hodiri, Mohamed and James Quirk, An economic model of a professional sports
league, The Journal of Political Economy, 1971, pp. 13021319.
Fort, Rodney and James Quirk, Cross-subsidization, incentives, and outcomes in professional team sports leagues, Journal of Economic Literature, 1995, 33 (3), 12651299.
et al., The value of Major League Baseball ownership., International Journal of Sport
Finance, 2006, 1 (1), 920.
Kahn, Lawrence M, The sports business as a labor market laboratory, The Journal of
Economic Perspectives, 2000, 14 (3), 7594.
Marburger, Daniel R, Gate revenue sharing and luxury taxes in professional sports,
Contemporary Economic Policy, 1997, 15 (2), 114123.
Mongeon, Kevin and Jason A Winfree, The effects of cross-ownership and league
policies across sports leagues within a city, Review of Industrial Organization, 2013, 43
(3), 145162.
Rottenberg, Simon, The baseball players labor market, The Journal of Political Economy, 1956, pp. 242258.
Scully, Gerald W, Pay and performance in major league baseball, The American Economic Review, 1974, 64 (6), 915930.
Szymanski, Stefan, Professional Team Sports Are Only a Game The Walrasian FixedSupply Conjecture Model, Contest-Nash Equilibrium, and the Invariance Principle, Journal of Sports Economics, 2004, 5 (2), 111126.
, The economic design of sporting contests, in The Comparative Economics of Sport,
Springer, 2010, pp. 178.
21
Tables
Table 1. Estimated Ticket Revenue, in thousand of dollars
OHL team
Revenue
WHL team
Revenue
Barrie
Erie
Flint
Guelph
Hamilton
Kingston
Kitchener
London
Mississauga
North Bay
Oshawa
Ottawa
Owen Sound
Peterborough
Saginaw
Sarnia
Sault Ste. Marie
St. Catharines
Sudbury
Windsor
386.73
310.16
221.70
253.19
1245.90
367.74
646.41
1142.01
376.17
145.41
366.36
476.07
57.14
205.06
118.13
208.67
196.93
350.09
343.08
594.52
Brandon
Calgary
Cranbrook
Edmonton
Everett
Kamloops
Kelowna
Kennewick
Kent
Lethbridge
Medicine Hat
Moose Jaw
Portland
Prince Albert
Prince George
Red Deer
Regina
Saskatoon
Spokane
Swift Current
Vancouver
Victoria
136.75
618.24
39.39
405.61
277.94
232.58
344.92
188.22
262.89
237.91
146.48
88.48
1501.07
94.90
187.34
256.26
510.93
517.70
538.18
36.50
285.83
242.76
22
Table 2: Probability that a player drafted will play 1 game in other leagues, by
rounds
Round
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
All rounds
OHL
1.00
0.96
0.85
0.69
0.62
0.55
0.45
0.41
0.43
0.36
0.36
0.22
0.38
0.32
0.32
0.56
NHL EP Junior
0.44 0.25
0.22
0.21 0.05
0.35
0.19 0.08
0.62
0.08 0.15
0.75
0.08 0.06
0.68
0.12 0.10
0.71
0.06 0.10
0.82
0.02 0.10
0.80
0.07 0.12
0.79
0.08 0.08
0.78
0.05 0.18
0.74
0.03 0.12
0.62
0.04 0.11
0.80
0.02 0.17
0.78
0.08 0.03
0.82
0.12 0.11
0.67
Low. prof.
0.69
0.63
0.44
0.50
0.34
0.33
0.39
0.41
0.40
0.32
0.41
0.31
0.36
0.37
0.34
0.43
CIS
0.20
0.33
0.44
0.31
0.26
0.27
0.14
0.20
0.33
0.30
0.21
0.25
0.22
0.29
0.21
0.27
NCAA
0.00
0.09
0.17
0.25
0.16
0.24
0.33
0.20
0.31
0.32
0.28
0.41
0.29
0.29
0.34
0.23
EP denote European professional, Junior denotes lower junior (e.g., Junior B), and
Low. prof. denotes a lower professional league.
23
Table 3: Probability that a player drafted will play 100 games in other leagues,
by rounds
Round
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
All rounds
OHL
0.98
0.79
0.67
0.50
0.32
0.31
0.20
0.17
0.26
0.26
0.26
0.19
0.22
0.12
0.11
0.39
NHL EP Junior
0.32 0.05
0.03
0.12 0.02
0.05
0.17 0.02
0.12
0.06 0.06
0.17
0.04 0.00
0.34
0.08 0.04
0.06
0.04 0.02
0.37
0.02 0.00
0.34
0.02 0.00
0.31
0.08 0.02
0.22
0.03 0.03
0.23
0.00 0.03
0.28
0.00 0.00
0.29
0.02 0.05
0.34
0.08 0.00
0.34
0.08 0.02
0.22
Low. prof.
0.42
0.33
0.25
0.23
0.16
0.24
0.18
0.22
0.24
0.16
0.26
0.22
0.11
0.24
0.08
0.23
CIS
0.07
0.11
0.15
0.15
0.08
0.02
0.02
0.02
0.17
0.08
0.00
0.06
0.09
0.10
0.03
0.08
NCAA
0.00
0.04
0.06
0.15
0.08
0.10
0.20
0.12
0.19
0.12
0.18
0.19
0.11
0.20
0.16
0.12
EP denote European professional, Junior denotes lower junior (e.g., Junior B), and
Low. prof. denotes a lower professional league.
24
Team
Spokane Chiefs
Owen Sound Attack
London Knights
Mississauga Ice Dogs
Mississauga Ice Dogs
Windsor Spitfires
Kamloops Blazers
Portland Winterhawks
Saskatoon Blades
Prince George Cougars
Erie Otters
Price
1.50
2.73
5.043
4.56
10.68
5.80
7.95
7.77
9.28
7.08
9.23
25
Value
8.53
6.25
6.22
7.69
32.69
7.76
13.78
23.02
44.85
3.37
9.41
55.53
1.36
4.95
3.13
4.55
4.72
8.26
10.08
13.26
26
WHL team
Brandon Wheat Kings
Calgary Hitmen
Kootenay Ice
Edmonton Oil Kings
Everett Silvertips
Kamloops Blazers
Kelowna Rockets
Tri-City Americans
Seattle Thunderbirds
Lethbridge Hurricanes
Medicine Hat Tigers
Moose Jaw Warriors
Portland Winterhawks
Prince Albert Raiders
Prince George Cougars
Red Deer Rebels
Regina Pats
Saskatoon Blades
Spokane Chiefs
Swift Current Broncos
Vancouver Giants
Victoria Royals
Value
2.90
68.95
1.21
51.06
6.48
5.39
7.37
4.65
5.81
5.25
3.77
2.09
36.70
2.21
4.52
5.69
12.14
13.97
13.13
0.97
37.94
5.03