Why Can’t The Sharks Turn a Profit?

Are players salaries to blame for the Sharks financial losses, or is it something else?

CSNBayArea.com hockey columnist Kevin Kurz recently wrote a column with the intriguing title, “Should Sharks owners be allowed to profit?”, highlighting the difficulty the current ownership group of the San Jose Sharks face in turning a profit under the current NHL collective bargaining agreement.

The Sharks are a franchise which Kurz describes as having “seemingly done everything right on the business side yet still falls short in terms of profit”,  last season reportedly losing “upwards of $15 million” despite selling out their home arena every night.

It should be noted the Sharks reportedly lost $7.8 million in 2010-11, so if we take the reported total for this season at face value, they’ve doubled their losses from the previous season.

The reason for that could be the Sharks marched to the Western Conference Final in 2011, but bowed out in the opening round of the 2012 post-season.

Kevin Compton and Stratton Sclavos, two members of the Sharks ownership, cited several factors for the losses; among them:

-The Sharks are considered a “mid-market” team; in other words, they’re not “big market” like most of the Northeastern US teams, but aren’t struggling like most of the Sun Belt franchises.

-The increase in the salary cap from $39.5 million in 2005-06, to the projected $70.2 million for 2012-13, along with the elevation of the “cap floor” to $54.2 million for next season, and

-The Sharks willingness to keep pace with that rising salary cap “even though the revenues don’t justify it, in the goal of winning the (Stanley) Cup”.

Sclavos added if the goal of the Sharks were to be the most profitable team in the league, they would’ve done things differently, but that’s not their goal, and “we’ll do whatever we need to do” to pursue their goal of a championship.

Kurz wondered if it was “fair” for a team, which has now sold out 110 consecutive home games, to “be forced to take a loss”?

Under the current collective bargaining agreement – which the team owners felt was worth killing an entire season over, containing the “cost certainty” they claimed was their salvation, with a three-tiered salary cap system which is arguably the most restrictive in North American pro sports, ensuring the players receive no more than 57% of league revenue each season, while guaranteeing the owners get back a portion of the players’ salaries should they exceed revenue in a given season – yes, it is fair.

The reason it’s “fair” is the Sharks ownership chose to spend what it did on payroll. No one forced them to do it. It was a conscious decision to invest $7 million per season in Joe Thornton, $6.9 million per season in Patrick Marleau, and over $5.76 million per season in Brent Burns. It was a conscious decision to acquire Dan Boyle’s expensive (over $6.6 million per season) contract and a brittle Martin Havlat’s $5 million per season deal.

The Sharks ownership understood how the salary cap system worked.  It was a conscious decision to keep pace with a rising salary cap, even if it meant losing money in the process, rather than spend what they could comfortably afford.

The Sharks problem is they’re a “mid-market” team, operating under a system which favors ownership, spending beyond its means.

But are the Sharks truly “mid-market”? If one goes by population, no. San Jose is California’s third-largest city, and the tenth-largest in the United States.

That place them ahead of such “big-market” hockey cities as Detroit (18th) and Boston (20th), as well as Washington (whose Capitals were tenth in NHL fan cost index last season, well ahead of San Jose’s Sharks), and notable hockey markets like Minneapolis-St Paul and Pittsburgh.

San Jose is also part of the San Francisco Bay area, which includes San Francisco and Oakland, making it the sixth-largest combined statistical area in the United States.

That ranks just behind the fifth overall Boston-Worcester-Manchester (Bruins), and ahead of Philadelphia-Camden-Vineland (Flyers), Detroit-Warren-Flint (Red Wings,  Minneapolis-St. Paul-St. Cloud (Wild), and Pittsburgh-Newcastle (Penguins).

Perhaps the definition of “mid-market” is how many fans the Sharks have been able to attract. Given the size of their market, there appears considerable room for improvement.

If the Sharks ownership wishes to continue spending like a big market team, they’ll have to find ways to generate more revenue.

Last season, the Sharks were 19th overall in fan cost index. As a “mid-market” team, they’re right where they need to be in terms of charging fans what their market will bear, though that FCI jumped by nearly 13 percent compared to the previous year. That suggests room for more increases.

The city of San Jose owns the Sharks home arena,  the 17, 562-seat HP Pavilion at San Jose, but the hockey team is the anchor tenant, so one assumes they get most, if not all, hockey-related revenue generated during their home games.

Sharks games are broadcast via Comcast Sportsnet Bay Area, and via radio on KFOX, which covers the San Jose-Oakland-San Francisco area, so broadcast coverage in their region doesn’t appear an issue. Maybe their broadcast contracts aren’t as lucrative as those in other large NHL markets.

Perhaps the reality is, despite playing in one of the largest markets in America, hockey simply isn’t as big a draw in the San Jose area. Obviously, they’re doing well at the gate, but their other revenue streams in that market might not be as strong as in more “traditional” hockey markets.

If so, no further reduction of the players share of revenue is going to help them over the long run, short of returning to the old Original Six days, when players had to work second jobs in the off-season to augment their pitiful hockey salaries.

The Sharks ownership has every right to spend toward the cap in the belief it’ll eventually bring them a championship, but it seems pointless to continue doing so if  it consistently fails to turn a profit. If the goal is a Stanley Cup, and they’ve been falling well short of that goal in recent years, then perhaps they need re-evaluate the investment in their current roster.

At some point, the Sharks – and other franchises claiming to be losing money – have to consider other options to address their problems besides continually pinning the blame upon the players’ share of revenue.

4 Comments

  1. My San Jose friends and I discuss this all the time. Without having a peek inside the organization, this is the only thing that makes sense to us: The “San Jose Sharks” lose money. But “Sharks Sports and Entertainment,” the bigger company that owns the team…. NO WAY. It’s telling to me that te owners always say “the Sharks lose money,” but not “Sharks Sports and Entertainment loses money.” It’s a fine distinction but a very important one that I’ve never seen a local journalist clear up. They manage HP Pavilion, one of the busiest arenas in North America – they’re making money hand over fist there. They own two ice rinks and run a third – probably not a ton of profit there but they ain’t losing money. Sharks Ice has one of the biggest, if not biggest, rec leagues in the US. And so on…

    The claim that the Sharks are losing money is probably true. But it’s gotta be an accounting trick. The “Sharks” pay arena rent to “Sharks Sports and Entertainment.” The same people own both organizations. For lots of line items, a debit for the Sharks is a credit for Sharks Sports and Entertainment – rent, concessions, travel probably. It reminds me of the old owner of the Coyotes charging the team massive rent for office space they weren’t using in one of his buildings. Of course the team loses money. But the overall owners? Not a chance.

  2. Interesting read and I agree. If owners spend money they don’t have it is unfair to claim poverty at any level. They need to start focusing their efforts towards trying to find new sources of income or marketing to generate wider interest in hockey.

  3. Actually based on BK’s point it sounds like the owners are trying to game the revenue sharing system with the players, by saying the “team” is losing money. However, they have parent corporations (ie MLSE) that manage facilities and receive the revenue from concessions etc.

    Since each team can be managed differently depending on who runs their rink etc. it is possible that some teams that don’t have parent corporations and don’t run their rink could easily lose money if they aren’t getting cut in on all the revenue streams.

    Spector: It’d be interesting to see how each team is managed in terms of corporate governance and then see where they are on the revenue side. I’d bet there are some creative accounting practices going on similar to movies which don’t make a profit.

  4. That’s like saying the Canadiens lost money but Molson breweries made money so no worries…