Developing a Profitability Model for Professional Sport Leagues: The Case of the National Hockey League

John Nadeau
Norm O'Reilly

Escalating costs in professional sport, increased competition from entertainment alternatives, and a recent labor dispute in the National Hockey League (NHL) provide the impetus to study the underlying structure of team profitability. The current study takes advantage of this opportunity by developing and testing a profitability model for NHL teams based on the underlying premise that there are multiple determinants to franchise profitability. An extensive data set of more than 40 variables was extracted from the 2001-02, 2002-03, and 2003-04 NHL seasons to explore the complex nature of franchise profitability. The number of variables is reduced using principal components analysis and the model interactions are tested using a regression analysis. The results demonstrate that having a winning team is an important feature but it is not the only factor related to profitability. Indeed, winning is not directly related to profits but indirectly influences profits through the level of market support. The resulting model implies that profitability is directly determined by market support and player investment while a variety of other influences on profitability are enabled through the direct considerations. These indirect determinants include improved performance; team playing style; team composition; historical performance; market competition; arena location; and level of sponsorship. Regional and local television, the intent of ownership, and market characteristics are additional considerations that should not be completely dismissed from the list of profit determinants. The model has implications for both theory and practice and contributes towards the development of a profitability model for all professional sport leagues.