Friday, October 31, 2008

Economics 101: Why "blame the fan" doesn't make sense

MLSE has no incentive to ice a winning team because the ACC is already full every night, even when the team isn't good. If fans refused to buy tickets unless the team was doing well, MLSE would have to invest in a winning team. Therefore, the fans are to blame for the Leafs lack of success.

The argument above is well-known, often repeated, and makes absolutely no sense.

This really shouldn't be complicated, but apparently a lot of people are struggling with it. And since that includes most of our high-paid media stars, I thought I'd spell it out. This is going to be way too basic, to the point that anyone who really does understand economics will be embarrassed by it, but I'm really going to try to make it as simple as possible.

There are two broad categories of things you can sell: Those with a limited supply, and those with an unlimited supply. Airline tickets are a good example of a product with limited supply. There are only so many of them available for each flight, and once they're gone you can't sell anymore. You've made as much money as you're going to make.

On the other hand, if you're selling sneakers you're only limited by demand, and how many you can manage to produce. If demand goes up, and you can make more, you'll make more money. Some products, like MP3s on iTunes, are essentially completely unlimited since it costs nothing to make and store additional product.

Makes sense? Everyone still with me? Even the media guys?

Tickets to a hockey game have a limited supply. If a team sells all its tickets, it can't sell any more. Putting aside the (excruciatingly basic but apparently ignored) possibility of raising ticket prices, once all the tickets are sold then you can't make any more money. And since only the people with tickets are going to need parking and concessions, those are essentially limited too.

So yes, if the owner of a hockey team knows in advance that they will sell out every game, they have no business incentive to change the product.

This is a very sound argument. If it was 1983.

Sure, back when Harold Ballard was in charge the Leafs made most of their money off of gameday sales. So did every other NHL team. Yes, they sold a few jerseys and they made money off of TV rights. But most of the cash came from tickets and concessions.

So the "no incentive to win" argument probably made sense in those days, as Ballard himself confirmed.

Unfortunately for the fan-bashers, that was twenty years ago. Today, the business landscape is very different in the NHL in general, and that's especially true in Toronto.

The Toronto Star reported that the Leafs themselves estimate that by 2011, ticket sales will account for barely one-third of revenue. By then, the Leafs expect to bring in over $300 million a year from sources other than tickets.

Think about that: $300 million every year from non-ticket sources.

Today, the Leafs have revenue streams that Ballard couldn't have dreamed of. Licensed products, which used to mean t-shirts and jerseys and not much else, have expanded to virtually everything you can slap a logo on, including condos. Gameday advertising (or as they like to call it now, "corporate partnerships") brings in revenue that would be unimaginable in the 1980s. Increased competition for TV broadcasts has caused rights prices to skyrocket. Online revenue, still small today, has enormous potential for growth.

All new or greatly increased sources of revenue. All, unlike ticket sales, virtually unlimited.

You think revenue from any of those sources might go up if the Leafs won a Cup?

And that doesn't even touch on the topic of Leafs TV. While the channel isn't a money-maker yet, it's an enormous opportunity for MLSE. The Leafs are trying to follow the same model that the New York Yankees used in launching their own TV empire. The YES network launched in 2002, on the heels of the Yankees winning four World Series in the past six years.

That network's estimated worth now? Try $2 billion. With a "b".

No incentive to win? Really? Really?

Don't forget, the Leafs' primary owner is the Ontario Teachers' Pension Plan. As a pension, they view the team as an investment to hold onto as long as it increases in value and then eventually sell. That means they need for MLSE to grow. Profits are nice, but investments only go up in value when the company can demonstrate growth. The growth for MLSE is going to come from all of these new revenue streams.

And again, since there's virtually no limit on how many people can watch a game on TV or how many companies can cram an ad onto something, the growth potential is enormous. Especially if the team is winning.

And yet we still hear from reporters -- people who are paid to be experts about the Maple Leafs and the NHL -- who drone on and on about ticket sales. Why?

Could it really be that some of these guys haven't paid for a ticket in 20 years, and so still think about the economics of the game the same way they did back then? Or are they just intentionally misrepresenting the situation because "Blame the Dumb Leaf Fan" is a fun story to write?

I have no idea. But hopefully some basic economics will help at least a few of them see the light.

The bottom line: Arguing that Leafs ownership has no motivation to win because the building is always sold out is like arguing that the increase in concussions must be caused by players not wearing helmets. It's a nice idea, but outdated by 20 years.

The Leafs make a lot of money when they lose. But they'd make even more -- a lot more -- if they could figure out how to win.

MLSE doesn't lose because of lack of interest, they lose because they don't know how to build a winner. And you can't lay that at the feet of the loyal fans.


  1. Thank you. Is it so hard for the average person to understand that winning in Toronto would make MLSE the kind of profits that would make Fort Knox jealous?

    Think of the bandwagoners picking up merchandise, people buying up the channel, the ticket increases, the sponsorship increases, the increase in television rights, etc etc etc.

  2. Sean:


    I have been making this argument for years (though not so clearly expressed) to the haters around my workplace. I remember on one occasion in 2002 I almost had an aneurysm when somebody tried to tell me that the theory was proven by Curtis Joseph's departure as a free agent to the Wings. I pointed out to my tormentor that the Leafs had actually offered CuJo MORE money than the Wings, so the "greedy owners being encouraged by stupid fans" argument was a little flawed.

    Well done.

  3. Pre-lockout. The Leafs were always one of the highest spending teams and tried some deadline deals to go for it all, that unfortunately didn't work out. Conference finals 92/93, 93/94, 98/99,01/02. Yup, definitely a team not trying to field a competitive team. Post Lockout Missed the playoffs by 2 point in 05/06, missed by 1 point in 06/07 before mising by 11 last year, spending right up to the cap each year. 08/09 the rebuild beings, first time they haven't spent all they could to "go for it". The media needs a mirror to see these mindless sheep they speak of, not a computer.

  4. Great point. It's easy to say don't go, when you're getting paid to go to the games. I guess they lost the joy of watching a hockey game. I'm starting to like Buffery's spin on things, as he's been covering basketball for awhile. And although pro-sports is probably the same grind no matter what, a new pair of eyes and a fresh voice is a welcome change...

  5. Wow...great article! Im so sick and tired of all this "blame the fan" attitude spewed forth by Howard Berger and others like him.

    Fans in Toronto are passionate about hockey-more so than in most other places-and its our role support our team. However, it is the managements role to build a winner. If they fail, that is their fault not ours.

    I wish Berger grasped this as well as you do. Great read!

  6. This is such a simple argument, you'd think it wouldn't have to happen.

    Losing = $
    Winning = $$
    Stanley Cup = $$$$$

    $ < $$ < $$$$$

  7. Great post... every fiber is everyones body knows that winning = $$$ and losing does not except here in Leafland. I been beating down that myth for years now and it nice to see someone else say it too.

  8. There's more - players are not paid during the playoffs and that is where a lot of revenue is generated.

  9. Great post!
    I'm following you from Italy for a few time and now, as a Leafs fan, it's a regular appointment for me.

    That's an argument I've tried to explain several times to other hockey-followers here: for a modern-age team, tickets are not the main revenue. Of course, I was not able to explain it clearly as you do.... maybe that's is why they still think about "Leafs' fans are the millstone round Leafs' neck".

  10. I think that when people say "the fans are to blame", they are referring to the many many seats bought by corporations. People who may or may not be hockey enthusiasts. If seats were more readily available for ANY fans, the atmosphere in the ACC might be more supportive of the Leafs.

    That said, your argument is sound and well-written. It's frustrating to see the Leafs lose, but these days they mostly look like they're trying hard and show flashes of brilliance.

  11. Great post, Awesome post. Finally somebody other then myself understands that concept.

    I'm new to your blog, got sent over on a link on puck daddy and I have to say its one of the best blogs out there.

  12. I think your argument is pretty clear. But I think that the amount of people in a stadium is also an indicator to ownership and management on whether they need to make significant changes to a team. As much as they have other sources of revenue, if the ACC is empty night after night, then that's a clear signal from fans that they want a better product. And that effect can trickle down to other sources of revenue.

    As for why people might blame Leafs fans, think about the price of a ticket. It's almost ludicrous to pay anywhere on the low end of $300 to see a team/product that isn't guaranteed to give you a return for that investment. I mean you wouldn't pay that much money for an other type of event or venue. Think of a U2 concert, would you pay $300 to go see Bono knowing that he may/may not have laryngitis. I think that's why I get aggravated by Leaf fans. Leaf fans aren't actually following the basic rules of Economics. In this case, they're creating too much demand without considering the quality of their product.

    So I think you're right, it is basic Economics, and it will take something very extreme ,like Leaf fans not showing up at all to a game to send the final signal. That will be a sad day indeed.

  13. "So I think you're right, it is basic Economics, and it will take something very extreme ,like Leaf fans not showing up at all to a game to send the final signal."

    You do realize that you're talking about the Leafs and not the Penguins. Leafs fans are loyal, like a good friend. Penguins fans are like the paparazzi, they only show up when you matter.

  14. Ahhh the Leafs fans and loyalty. I think a Leaf fan is more proud to be loyal than to have a winning team. What's with the Toronto patriotism? You're like an American who says that if you don't support the troops then you're anti-American.

    Tell you the truth, I'd rather be a Penguin fan in a heart beat. Go figure, I'd get to watch a winning team, with a star goalie, and star players, at half the cost. Not to mention a Stanley Cup.

    Call me disloyal.

  15. DGB, your arguments make a lot of sense. The problem is, does MLSE understand that it does? It's well and good to state that MLSE would stand to earn more money if the team actually was a winner, but it goes for naught if this never entered MLSE thought processes, which I'm convinced it still hasn't.

    First of all, MLSE mismanagement is well-documented. This was a management group that placed a Byzantine process on its General Managers in order for them to get anything done, as well as believing in "stop gap" free agent signings as opposed to grooming players from the draft. This resulted in a lot of teams that were competitive but ultimately lacked the chemistry to get them to the next level. I don't think MLSE probably likes to see a losing product because they're missing out on playoff revenue, but I'm not convinced that a Stanley Cup victory would be anything but a bonus to this group.

    Second of all, MLSE *is* growing- just not in hockey. In the mid-2000s, they poured all their resources into the Raptors, because basketball was a growing entity at the time. Right now, it's Toronto FC that's the soup-du-jour, as soccer has seen a spike in popularity on these shores. Next it will be Maple Leaf Square. So yes, MLSE has shown that it needs to grow to maximize its value but it's doing so by diversifying- and not by creating a winner.

    Now, there may be a glimmer of hope because the hiring of Brian Burke meant the Leafs had a GM that actually knew how to do his job as well as the fact MLSE's other assets- the Raptors and TFC- have floundered- but, with a management group that hasn't shown a proven track record for *actual* success, I have a hard time believing they'll have a change in heart any time soon. Furthermore, in October 2008 Burke still hadn't been hired yet (though it was rumoured) so there was even further the suggestion that MLSE wasn't paying attention to the entity that was giving it its name in the first place. Still, though, given MLSE's spotty history, I wonder how long Burke truly has- they're showing that their patience doesn't last that long, so I wonder how much time they'll focus on the Maple Leafs before they look at something else to "grow".


  16. @DG... thanks for your comment.

    I agree that MLSE has been bad, bordering on incompetent, over the years. I don't argue that these guys have had no clue how to build a winner. That's why I won't give them credit for some sort of strategic decision not to focus on the Leafs winning. They're too dumb for that.

    For example, I think the reason why Peddie wouldn't get out of the way and just let JFJ run this ship is that Peddie honestly thinks of himself as a brilliant guy who needs to be involved in hockey decisions. It was only after he was so completely humbled by the JFJ-era fiasco that he grudgingly gave up control.

    Remember Heinlein's Razor: "Never attribute to malice that which can be adequately explained by stupidity." Replace "malice" with "strategic thinking" and it sums up my feelings on MLSE.

  17. thank you, now send this to every media outlet and Habs fan so they stop trying to blame us