Wednesday, November 15, 2006

A tale of two NHL cities – this is the second one

The Buffalo Sabres are the toast of the National Hockey League as the league reaches its quarter mark. The Sabres have the best record in the NHL, 15-1-1, a league leading 80 goals. The Sabres took eventual Stanley Cup champions Carolina Hurricanes to seven games in the Eastern Conference finals last year seemed poised to seriously challenge for the franchises’ first Stanley Cup. Off the ice, the picture is nearly as perfect, the franchise is looking at selling out their entire 2006-07 regular season schedule, this a franchise that declared bankruptcy a few short years ago. But hold on, the picture may not be as pretty as it appears to be.

In the space of a few days in early January 2003, first the Ottawa Senators and then the Buffalo Sabres declared bankruptcy, some of the darkest days in the business history of the National Hockey League.

The NHL took control of the Sabres after owner John Rigas and his Adelphia Communications Corp., fell under bankruptcy protection. In what was a remarkable achievement at the time, NHL commissioner Gary Bettman managed to not only save both franchises but keep both teams in their markets. Many believed the prudent business decision would have been to let both teams’ fold, hold a dispersal draft and send an unforgettable message to the National Hockey League Players Association. The chance to contract two franchises would have scared the NHLPA straight, when it came to understanding how broken the NH:L’s economic system was at the time. Bettman instead used the two failed businesses as his bully pulpit to drive home how terribly broken the NHL’s economic system was in 2003.

"We need to change our economic system because no matter how quickly our revenues have grown, no matter how strong our following is, the economics of this game -- because of the escalation of player salaries -- doesn't work for a number of our clubs.''

“It is not surprising that the league and its commissioner would try to convince the public that the bankruptcy filings are directly related to the collective bargaining agreement and thereby attempt to cover up the real cause of the problems -- the bad business decisions and personal situations of the clubs' owners,'' Bettman told ESPN at the time.

Two months later, in March 2003, Rochester, New York businessman Thomas Golisano purchased the Sabres for a little more than $92 million. The deal also included Buffalo’s HSBC Arena. The Sabres debt load at the time of their bankruptcy was near $150 million, the organization projected loses in excess of $25 million for the 2002-03 season and the franchise still owed $22 million on their arena.

According to a New York Times report: Golisano’s agreement to purchase the Sabres included $45 million to assume liabilities, $25 million for the Sabres' projected debt by the end of this season and the $22 million debt remaining on the arena. The deal includes payments for the team's unsecured creditors of about $2.5 million.

The Sabres to a man told The New York Times in January, Golisano made the ultimate franchise save.

''It's a great hockey city,'' said Buffalo Coach Lindy Ruff, who is in now in his ninth season, the longest tenure among current N.H.L. coaches. ''To go from where we were at, from being without ownership to getting ownership and out of bankruptcy, we've really turned the corner.''

''I remember thinking, This team might be moving -- we might have to pack up and get out of here,'' defenseman Jay McKee told The New York Times, who has been with the Sabres since 1996 (McKee signed with the St. Louis Blues during the off-season). ''That was really disappointing, because I'd been through the '99 run through the playoffs and the Stanley Cup and seen the energy and the passion the city had for the team. The uncertainty was pretty tough to accept.''

''I think they felt really betrayed by the Rigase’s -- there were a lot of promises made,'' said Rob Ray, a forward who served as the team's enforcer from 1989 to 2003 and now works on the team's game telecasts in The New York Times report. ''And it never really happened. So I think people were very, very down about that part of it, the ownership side.''

''Tom came in and walked through the locker room and said, 'That was such an exciting game and I'm so proud of you guys,' '' Martin Biron recalled in The New York Times report. ''Nobody really expected that upbeat atmosphere to be part of the locker room. He brought that, and it's been that way ever since.''

The Sabres cut off season ticket sales at 14,815 this season, and now have a waiting list of 700. Three years ago when Golisano saved the team the franchise sold fewer than 5,800 season tickets, one of the worst season ticket totals in the National Hockey League. All this after the Sabres last year made the playoffs for the first time in four years. The difference between the Sabres of the Rigase era and the Golisano era – stability in the front office and a sense the franchise is in Buffalo to stay.

According to Forbes Magazine’s 2006 NHL financial valuation the Sabres are worth $149 million an increase in value of 45 percent in two years, the highest increase of value for any NHL franchise on Forbes subjective list.

The news isn’t all good in Buffalo. The Buffalo News in a front page report Sunday suggested even if the Sabres mange to sellout their entire 2006-07 home schedule, enjoy a long playoff run (NHL teams on average generate around $1 million from each home playoff game), the franchise could still lose money this year. In an NHL that is doing its best to resurrect itself from the dead economically, the poster franchise for the NHL losing money despite selling out every home game is a chilling reminder how scary it can be to own an NHL franchise.

"The effect is chilling," Ted Fay, a Cortland State College sports management professor, said of the small-market teams. "Unless you have someone like a [Sabres owner] Tom Golisano, who has made a personal commitment to Western New York, you're going to have franchises at risk that are going to move for the best price."

"Absent a miracle on increased TV revenues, any small-market team trying to compete by using most of its cap money risks losing money every year," added William F. Savino, a local business attorney with Damon & Morey.

The Sabres increased their payroll by $12 million, keeping last year’s team virtually intact save for four players. According to The Buffalo News, the Sabres selling out their entire regular season won’t pay for half of the teams’ payroll increase.

How then in a gate driven league can a franchise set to sell out their entire home schedule lose money? The culprit, how aggressively the Sabres have priced their ticket. The Sabres according to Team Marketing Report have the second lowest average ticket price at $30.07. The NHL’s average ticket price is $43.13. The Sabres are also the second best buy when you factor in TMR’s Fan Cost Index. TMR’s The Fan Cost Index™ comprises the prices of four (4) average-price tickets, two (2) small draft beers, four (4) small soft drinks, four (4) regular-size hot dogs, parking for one (1) car, two (2) game programs and two (2) least-expensive, adult-size adjustable caps. The Sabres FCI is pegged at $187.23.

Two years ago prior to the season that never was (the NHL lockout season) Golisano announced in early July (two months before the lockout) the Sabres would lower the cost of season tickets by anywhere between 12 percent to 28 percent. Under the Rigas family Sabres tickets where expensive and the team didn’t win. A poor product combined with increasing ticket prices was a recipe for disaster.

Golisano has followed the most basic sales principal – the law of supply and demand. The Sabres had no real attendance issues prior to the 2001-02 season. The Sabres averaged 17,206 fans per game or 92.1 percent capacity. The next year after not making the playoffs the Sabres averaged 13,735 fans per game or 73.5 percent capacity. The 2003-04 season (the season in hell) the numbers increased slightly with the Sabres averaging 15,343 fans per game or 82.8 percent capacity.

Golisano didn’t need a map to show him one of the Sabres biggest problems, empty seats at their home games creating an ambiance that was less than exciting. Golisano understood he had bought a business that had a terrible perception. Lowering the ticket prices increased the demand in their tickets. Last year the Sabres average attendance increased to 16,910 fans per game or 91.2 percent capacity. The Sabres will play their eighth home game of their season tonight against the Ottawa Senators, their eight sellout. In a few short seasons under the leadership of Thomas Golisano the Sabres have increased their ticket sales by more than 25 percent.

Compare that to the drop of more than 40 percent the St. Louis Blues are experiencing. Remember the Blues missed the playoffs last year for the first time in 25-years and saw that as an opportunity to increase their ticket prices by an average of 10 percent.

By cutting ticket prices, Golisano created a demand for Sabres tickets. It took courage and conviction to lower ticket prices and to keep that pricing in place for this year. You have to know Golisano knew full well with his aggressively lower ticket pricing in place the Sabres where going to lose money even if they sold out their season. Golisano took it one step further by investing an additional $12 million in the Sabres payroll. When was the last time the owner of a sports team lowered ticket prices while at the same time increasing his payroll by more than 40 percent?

The Sabres seem determined to keep their season ticket holders happy. In late October the organization announced “Sabres Replay” The Sabres are allowing their season ticket holders to post up their tickets to up to ten games on the ticket board. Tickets may be offered at a minimum of 10% below box office prices, up to a maximum of 33% above the Replay minimum. All sales are subject to restrictions of New York State law governing the resale of tickets.

The Ottawa Senators introduced an opportunity for their season ticket holders to resell their tickets, which is different from the Sabres. The Senators only allow season ticket holders to post tickets once 95 percent of the available inventory is sold for a game. The Sabres have no such restriction. The Sabres have a bigger season ticket base than do the Senators.

The Sabres are also the kings of NHL variable ticket pricing. The Sabres broke down their game day ticket pricing into four categories, Gold, Silver, Bronze and Value. Gold games cost as much as $150, value games as much as $70. The Sabres have made an art of creating game day pricing that meets anyone’s budget if they’d like to attend a game. Having sold out their entire regular season the Sabres have found the right for pricing formula for their market. More importantly consumers have bought into the concept.

Golisano and Sabres fans both understand ticket prices are going to have to increase. Golisano may love Western New York and he may enjoy owning an NHL franchise, but at the end of the day Golisano isn’t going to keep on writing checks to pay the Sabres bills. First by saving from the franchise from the brink of extinction, then by lower the prices; followed by a 40 percent increase in his teams’ payroll Thomas Golisano has done everything right.

Certainly the Sabres record has helped create the demand for their tickets, but factor in the tremendous goodwill Golisano is building in Western New York. The Sabres appear to have a bright and secure future in Buffalo something that could not have even been suggested a few short years ago.

For Sports Business News this is Howard Bloom. Sources cited in this Insider Report: The Buffalo News and The New York Times

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