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Running in the red: Hockey's losing mix

How do you make the team look good while asking taxpayers to help with losses in the concert business? New documents offer a few clues.

Published June 22, 2003

[Times photo: Dan McDuffie]
Lightning officials say they hope the playoff enthusiasm translates into increased ticket sales.

The Tampa Bay Lightning has spent more on marketing than any team in the National Hockey League. At one point, the team gave away more tickets than any other team. And its arena, the St. Pete Times Forum, is one of the nation's top-selling concert venues.

But it's not enough to be a financial success.

Hundreds of documents, submitted as evidence in Palace Sports & Entertainment's recent tax trial in Hillsborough County civil court, paint a detailed financial portrait of a hockey team struggling to grow its fan base while its arena business grapples with a severe downturn in the concert industry.

The Times Forum and the hockey team racked up operating losses of nearly $27-million for the 2002 fiscal year, which ended last June. Add in noncash expenses, and the combined losses were $32.5-million.

Palace Sports' woes are not unusual as arenas across the country struggle to make profits from hockey games and concerts, two industries suffering for different reasons.

But the internal documents offer financial proof of how a wealthy professional sports team owner attempts to have it both ways. Billionaire Bill Davidson is trying to market his hockey team as a financial turnaround story, but at the same time he's seeking a taxpayer bailout for the building in which it plays.

Part of the explanation may lie in what appears to be an intermingling of arena and team books, with some team expenses picked up by the Times Forum. Lightning president Ron Campbell insists "the books are fairly stated between the two entities."

The financial reports also help explain some seeming contradictions at the Times Forum: How can one of the top 10 concert venues in the country be a money-loser? And how can the Lightning skate into success in the playoffs yet face the prospect of more multimillion dollar losses next season?

The documents offer some explanations on both team and arena.

While the Lightning pays no rent to its parent company and benefits from relatively cheap Florida labor, the team is still a money-loser. Gate receipts are among the lowest in the league, broadcast revenues are mediocre and marketing costs are high.

The Times Forum operation, meanwhile, shows a profit from holding concert events, but the tab for subsidizing hockey and arena football games along with property taxes and other operating expenses pushes it into the red.

Among other insights gleaned from the documents:

- The "average" National Hockey League team paid nearly $3-million in 2001 for rent and maintenance, but the Lightning paid nothing. Davidson's Detroit company, Palace Sports & Entertainment, also books certain other expenses not on the team budget, but as an expense for the Times Forum.

The accounting helps the team appear to be in better shape and, conversely, makes the Times Forum operation appear worse. Arguably, that could underscore Davidson's plea for taxpayer help at the forum at the same time he is touting a turnaround for the hockey team.

Campbell insists that distinguishing the two parts of his operation is irrelevant. "We look at this as one entity," he said. "It doesn't matter where the costs are or the revenues are."

- While the NHL leadership has blamed exponential player salary increases for hockey's financial difficulties, salary inflation hasn't seemed to have hit Tampa Bay with the same intensity. Salaries, according to NHL spokesman Frank Brown, increased 252 percent league-wide between 1995 and 2002. In 1996, Lightning president Saburo "Steve" Oto told the St. Petersburg Times the team was spending $17.6-million for salaries, pensions and insurance in the 1995-96 season. In 2002, financial statements show the team spent $24.6-million on the same items, an increase of 40 percent - a significant increase, but a far cry from the league average.

- The Lightning has an advantage from cheap Florida labor. The team paid less in salaries and benefits to employees (excluding players) than almost anyone in the league. They spent $827,000, which in 2001 ranked the Lightning 29th among 30 NHL teams.

- The Lightning's gradual bump in attendance the past couple of years came after the team spent more money giving away free tickets than any other team in the league. The team says it has pulled back on the practice, but remains in the top third of teams doling out free tickets.

- Food and beverage sales for all events at the Times Forum brought in $3.2-million in profits in 2002, reflecting a 38 percent markup. Yet, hockey fans are spending less. During the last three years, per capita concession spending dropped slightly to $8.28 a fan in 2002.

- Concerts, before overhead, have been mildly profitable the past three years, family shows are close to break-even and sporting events have been big losers.

- The Times Forum's salaries and benefits have risen sharply over the last three fiscal years while the number of nonhockey events held have dropped. Times Forum income statements show salary and benefits rising from $2.3-million to $4.7-million between the 2000 and 2002 fiscal years. At the same time, the number of events dropped from 157 to 109.

Campbell explains the jump in salaries by pointing out that Palace Sports eliminated a $1-million outside management contract and made employees out of other third-party contractors for everything from security to housekeeping.

The revelations come from documents meant to bolster Palace Sports' position in its lawsuit against Hillsborough County Property Appraiser Rob Turner. The appraiser assessed the 20,000-seat arena at $120-million in 2001.

Palace's lawyers argued the value for tax purposes ought to be commensurate with its ability to make money. That's why the company entered as evidence hundreds of pages of financial documents, which Circuit Judge James M. Barton II had in his chambers last week as he prepared to issue his final judgment.

In submitting the documents, Palace put into the public record the most complete accounting of the finances of its operation, which has run the Lightning and the forum since 1999.

Bill Davidson's era

The Times Forum has been a profit-challenged proposition from the outset. In its early days as the Ice Palace, the team struggled on the ice and on its balance sheet. Ownership changed hands from reclusive Japanese businessman Takashi Okuboowners to retired insurance executive Art Williams.

A new era was imported from Detroit in 1999 thanks to Bill Davidson. He paid $100-million for the Lightning and arena leasing rights, acknowledging at the time that he was more interested in the concert venue than in owning a hockey team.

Davidson predicted his management team would break even on revenues by 2002. And there was enough history of success to back up the bravado.

In Detroit, Davidson owns the Detroit Pistons basketball team and the Palace of Auburn Hills, where that team plays. He had suffered through dark days with the Pistons but profited after the team started winning fans and championships in the late 1980s. Almost a third of Palace Sports' roughly $200-million in annual revenues comes from the Pistons alone.

Davidson saw the Tampa arena as a complement to the Auburn Hills facility, which ranked third in attendance among U.S. concert venues according to a Pollstar survey.

Last year, Davidson signed a 12-year, $30-million sponsorship deal with the St. Petersburg Times that changed the name on the building from Ice Palace to St. Pete Times Forum. But Palace Sports still runs the Times Forum and the Lightning, and it says the approximately $2-million a year from the naming rights deal is not enough to offset continued losses.

Intensely private, Davidson has a reputation for surrounding himself with people he trusts and keeping his finances close to the vest. That has made it difficult for the public to learn details of Davidson's operation in Tampa. Hillsborough County officials have groused that they had limited access to Palace Sports' finances even as the company was asking for tax relief and a break on paying the county surcharge fees for events at the Times Forum.

The struggling arenas

The formula that Davidson was banking on to make the Tampa operation profitable - concerts plus hockey - has been tried at other venues with similarly iffy results.

At the Office Depot Center in Sunrise, the owners of the Florida Panthers hockey team saw revenue from nonhockey events drop from $8.6-million in 2001 to $6.4-million in the 2002 fiscal year ended Sept. 30. The Panthers' parent company, which runs the arena and the team, reported a cash loss of $17.5-million despite the fact it made it to the finals of the Stanley Cup championships as recently as 1996.

The Panthers' arena-operating arm considered taking out a $30-million loan to cover shortfalls and has had to warn in financial statements that it may not be able to continue as "a going concern" unless its cash flow improves.

Still, Jeff Cogen, the Panthers' chief operating officer, said the team expects to become profitable "in the near term."

Across the country, the balance sheet likewise is bleak at the Staples Center in Los Angeles. The Los Angeles Kings hockey club was expected to lose $12.5-million this season, bringing total losses to $108-million since the current owners bought the team in 1995, according to one financial analysis.

Hockey's flawed formula

The Kings have one huge advantage over their Tampa Bay counterpart. The West Coast hockey team shares Staples Center with the Los Angeles Lakers and benefits from the basketball team's success.

Even though seats in Staples primarily are sold to Lakers fans, the Kings and Lakers are on equal footing in splitting some revenues. Each of the teams, for example, receives 25 percent of net ticket and license revenues from premium and box seating.

Another big advantage comes from playing in the Los Angeles megalopolis. As a financial analyst who studied the Kings' finances recently pointed out, the huge market forces advertisers to pay mightily for sponsorship and local television rights despite poor ratings.

"Weak ratings in a large market can mean more than strong ratings in a small market," Philip Propper wrote in a report about the Kings, alluding to bigger broadcast revenue deals available in large markets.

Still, the Kings operation, like many of its competitors, remains in the red, largely because of fundamental flaws in the financial game of hockey.

Among the problems: low television ratings, low-revenue television deals and mediocre crowds. That wouldn't be so bad if player salaries weren't increasing exponentially.

During the last nine years, the NHL's revenues have jumped 163 percent, said Frank Brown, NHL spokesman. The record revenues, however, were more than offset by rising player salaries.

Considering NHL teams spend nearly three-quarters of revenues on salaries - for the Lightning it's 62 percent - it's easy to see why so many hockey teams are having financial difficulties. The Buffalo Sabres and Ottawa Senators both recently landed in U.S. bankruptcy court.

Then there's television.

NHL viewership on ABC is down 17 percent for the regular season this year versus last year. On ESPN, which showed 21 regular season games this year and 27 last year, ratings remained flat with a 0.5 rating, which translates to 400,000 homes, said Mike Humes, an ESPN spokesman.

NHL ticket sales declined slightly this season over last, to an average of 16,591 a game. The Lightning's average ticket sales for the regular season were slightly less, but the trend in Tampa is a positive one, with an increase of 10 percent over the 2001 season.

Fan support grew with the Lightning's postseason performance - the team made it into the second round of the playoffs - and Lightning officials say they hope the enthusiasm will translate into increased ticket sales in seasons to come.

That is, if anybody is playing after next season.

The NHL's collective bargaining agreement with players is set to expire Sept. 15, 2004, and there are sharp differences.

Most league watchers are predicting a work stoppage that could last a year or more, said Dean Bonham of Denver, a sports business consultant. Eventually, though, the NHL could return with a new, more promising economic model.

"The bigger concern is what kind of impact you have on the fans," Bonham said.

Big show, small profit

When Paul McCartney came to Tampa last year, nearly 17,000 fans rejoiced in the former Beatle's performance of All My Loving and Blackbird, while critics derided the pricey $250 charged for the best seats.

The show, with more than $2-million in tickets sold, was the highest-grossing event in the history of the forum, still known at the time as the Ice Palace. Yet Palace Sports said that after expenses it netted only $70,000.

And in November, when Bruce Springsteen played the Times Forum, the entire "gate" after costs went to the superstar and the promoter. Palace Sports had to squeeze what profits it could from the concession stands.

In recent years, the concert business has been radically reshaped due to a sharp decline in CD sales and increased downloading of songs from the Internet. Concerts used to be a way for musical acts to promote their latest album. Now concerts are the artists' profit centers and CDs just draw fans to a show.

Performers are demanding 90 or even 100 percent of the gate for major concerts. Once the performers settled for half. So even though ticket prices have more than doubled in many cases, concert venues are taking an ever smaller piece of the pie.

In many cases, they're also assuming a bigger risk to pay artists a guaranteed minimum if promised ticket sales fall short.

"All the artists are pushing hard ... because they're the ones who can sell tickets in this environment. They're the ones that are in control," said John Stoll of Fantasma Productions in West Palm Beach, one of the country's biggest independent promoters.

Compounding the crunch on concert profits is the Clear Channel conglomerate. As a dominant promoter of acts and a growing presence in the arena business, the nation's biggest radio station owner has unparallelled power in cutting deals. It steers acts to its collection of amphitheaters - such as the one it plans to build at the Florida State Fairgrounds - and keeps profits down at non-Clear Channel venues where it books acts.

Palace Sports' operation in Tampa has felt the impact.

"It's a lot harder to make a buck today than it ever used to be," said Campbell, the Lightning president who also oversees other events at the Times Forum for Palace Sports. "There's so many fewer major acts (and) so many more places competing for them."

But not everybody finds the concert business the sure money-loser that Palace Sports says it has become at the Times Forum.

At the Office Depot Center in Sunrise, Cogen said that although profit margins have eroded, concerts are still profitable. He said he counts on concerts for up to 20 percent of operating income, easing the sting of financial losses on the hockey team but not eliminating it.

The newly released documents from the Lightning's court case bolster Cogen's analysis, showing that Palace Sports brings in just over $1.5-million a year from concert ticket sales and concessions. That doesn't include offsetting expenses for using the Times Forum and personnel, which the company does not itemize.

Seeking solutions

Fixing the situation won't be easy.

Some say the first step in the bay area is to avoid making the situation worse by building the Clear Channel amphitheater at the fairgrounds. "It's a huge mistake; I don't think they should allow it," said Stoll of Fantasma Productions.

But Palace Sports has sat out that debate. As a hedge, the Times Forum operator secured an option for 50 percent ownership of the amphitheater. Palace executives said they expect to be contacted soon by Clear Channel and then have 90 days to decide whether to exercise the option.

Privately, some promoters look to concert performers to help salvage the industry.

Bobby Rossi, director of entertainment at Ruth Eckerd Hall, says recently more artists seem willing to craft deals. Instead of demanding $50,000 a night, for instance, an artist might agree to a $30,000 guarantee along with a bigger percentage of the profits.

That leverage for negotiations disappears for the bigger acts. "The ones that are the home runs," he said, "they know they've got you."

In hockey, some say it's simply a matter of coaxing more fans into arenas.

"Rather than whine about macro issues I can't control, I focus on the business needs I can," said Cogen of the Florida Panthers. "If we could sell 3,000 more tickets a game, we'd be just fine."

But others believe fixing hockey might require a major retooling of the game. Some are pushing for revenue sharing like baseball's new deal, with profitable teams in large markets subsidizing struggling franchises in small markets. Others think any winning formula should include player salary caps.

Philip Propper, the Sacramento fan-turned-hockey analyst, argues that fixing the league's broken economic formula means getting rid of the four to six weakest franchises - including the Tampa Bay Lightning.

Contraction, Propper said, is the only way to reduce the disparity between the large-market and small-market teams.

"Until this is accomplished, solutions such as revenue sharing and a player salary cap will be unacceptable to both the owners and players and will prove to be mere Band-Aids that will delay the final reckoning."

- Times researcher John Martin contributed to this report.

Packing 'em in
The St. Pete Times Forum ranks eighth in attendance among U.S. entertainment arenas, based on tickets sold in 2002.
1. Madison Square Garden New York
2. First Union Center Philadelphia
3. Palace Of Auburn Hills* Auburn Hills, Mich.
4. Philips Arena Atlanta
5. FleetCenter Boston
6. Nassau Veterans Memorial Coliseum Uniondale, N.Y.
7. First Union Spectrum Philadelphia
8. St. Pete Times Forum* Tampa
9. KeyArena At Seattle Center Seattle
10. Continental Airlines Arena East Rutherford, N.J.

* Run by Palace Sports & Entertainment Source: Pollstar magazine
[Last modified June 22, 2003, 06:40:58]

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