Monday, January 26, 2009

The Coliseum as Loss Leader

The Town of Hempstead likes to repeatedly remind us of their "generous" offer to Charles Wang and Scott Rechler to renovate the Coliseum and then tackle the rest of the Lighthouse Project once that's done. Let's set aside questions of timeline and jurisdiction for a moment to explain why this is not possible. To do that, I need to detour and discuss the concept of a loss leader.

In business, a loss leader is an item that is sold at a heavily discounted price, often at a loss, in the hope of guaranteeing future sales. This is very popular in the video game industry. Often, the makers of video game systems absorb hundreds of dollars in losses on each hardware unit. This is possible because each customer is expected to buy somewhere around 10 games, and games are very high-margin products that will in most cases guarantee all customers are profitable.

I believe the same concepts apply to the Lighthouse Project. To recap, here is the current arena situation:

  • The lease with Spectator Management Group (SMG) is, by all accounts, suffocating. The New York Islanders could sell out every home game every season and still lose money.
  • Due to economic conditions and recent precedent, the local government has refused to provide any money from taxpayers for a new or refurbished arena.
These facts necessitate exactly what the developers chose to do - develop the land around it to privately finance the arena. In essence, the projected $400 million spent on the Coliseum is a loss leader, because that money should be recouped through other developments such as the apartments, hotel, and conference center. Simply renovating the Coliseum leaves the rest of the project up in the air and does not provide a reliable way to recoup the investment.

In addition, the idea of simply renovating the Coliseum ignores the fact that this is a negotiation. I do not have any inside information to confirm this, but I would imagine the Town of Hempstead would want less development and, ideally, just a new arena. The Lighthouse group wants the full project that received the blessing of Nassau County, the land owner. Renovating the Coliseum eliminates leverage for the Lighthouse group, because the Town now has the thing it most wants and there is no pressing need to debate the rest of the development. In addition, the "or-else" is now taken out of the equation. It is understood that the Islanders would likely leave the are and the Coliseum would likely be abandoned if the Lighthouse does not go forward. With a new arena (and a new lease), the "or-else" is now gone - the Islanders are tied to the area, and the investment will likely be lost.

I know my economics was a bit simplistic there, but I hope I've made the point. The entire Lighthouse Project was approved by the county government. The development in the Lighthouse Project will provide reliable revenue streams for the developers and justify the investment in the Coliseum. Therefore, the offer to simply do the Coliseum and table the rest of the project was and should have been rejected.

As always, don't forget to sign the petition and pass it on!


  1. The bigger point is that the land's owner, Nassau County, wants it developed. Mr. Wang and Mr. Rechler are carrying out the wishes of the land's owner. If all Nassau County wanted was the Coliseum refurbished, they would have done that a decade ago. What they want--what they think the county needs, in the big picture--is a development to anchor the center of the county and pump cash into the depressed areas around it.

  2. thanks for setting this up nick. i find the secret stairs/lirr connection info fascinating. i wonder if that could be revived. was the entire route of that train going to be underground? did they actually build any of it? you wouldn't have to disturb anybody with an underground train.

  3. Nick.
    Have you considered trying to mobilize local biz people, celebs, anyone who cares and might help with some kind of PR effort? There must be some high profile, recognizable fans (ie.Christie) of this team who care enough to help with a radio spot, a local tv spot, some sort of promo or appearance or anything to light a fire under the collective tuccus of those who want this done and those who aren't paying attention yet. This kind of thing can't hurt, and sometimes it can save the day.

  4. The guys from the HBO Entourage are big Isles fans. Kevin Connolly and the producer specifically.

  5. This is the kind of information that needs to be shouted from the mountain top. The only way to get the residents of the Town of Hempstead to pressure their elected officials to get behind this project is to refute the perception of Charles Wang as a money grubbing land grabber and to convince them of the huge benfits of the Lighthouse Project.

  6. Nick, I've asked you this before but I want to know the answer so I can explain it to people.

    What happens in 2015 when the lease is up with SMG? Why is it so impossible that Wang can't sign a new agreement with the county for a situation where the team can make money with a new lease agreement and a new management group?

    Why can't Wang invent Wang Management Company and acquire all the rights to all the concessions and ticket money for the entire venue? Concerts? Boat shows etc?

    I'm obviously a Lighthouse supporter. It's great for the town and county. However, if it doesn't go through, why is something written in the above impossible?

    I just want the facts as to why it's impossible. I'm not saying it is possible or it should happen or I'm questioning Wang or the Lighthouse, but it's the only question I don't have the answer for when it comes to the Coliseum.

  7. Isles316: It's a good question about SMG, but you're forgetting the fact that SMG also has a role in negotiations. It wants to be the manager of a spankin' brand new arena, with concerts and all sorts of events. It knows that the ability to attract that is limited in a stand-alone, which as has been noted by so many people over at Botta's blog, is not a model being pursued ANYWHERE anymore. So your assumption is that they can get SMG to take some lease arrangement that is so one-sided for the Isles that Wang can make money as a result of the generous lease. In the negotiations, which is what Nick accurately called what is going on, you can't assume that SMG is going to be some pigeon ready to be rolled at the end of the process. It isn't.

  8. Thanks for the answer. I'm not assuming SMG will be. Why can't another company be hired? I'm not asking for anyone to get rolled over but if I'm correct. The Islanders do not receive parking or food concessions and must give up 10% of the game to every game. There has to be a way where the Isles can recieve food profits.

  9. OK, but you're still advocating -- not so much advocating, as just settling for -- a model of a stand-alone revamped arena where the Islanders can make money out of a better lease than the one they have now. I guess it's possible that with a better lease and a renovated arena, they could make some money. I don't know. But it would never be that much. I'm trying to be flexible here, but that model probably isn't that profitable.

    And if that stand-alone area with a better lease was a truly viable model, with an acceptable rate of return, somebody would have bid it in the RFP process. Nobody did. And nobody will in what we can assume would be a second RFP process that the Coliseum would put out if the Lighthouse was killed.

  10. Hey Nick:

    Great site. I wish you nothing but the biggest success in getting the word out.

    Have there been any thoughts about building on the acres in sections, or is this going to approve the entire 100 acres. Is it possible for Wang to receive a vote and say, refurnish the Coliseum and the next 25 acres, so this gives Wang at least SOME indication that the TOH really wants to do this?

  11. Hey guys, welcome to the blog and thank you so much for taking the time to read and comment.

    First of all, on the Coliseum/lease issue - tigmet is right, so I won't waste your time rehashing his (her?) good points. Gary Bettman, in all his recent interviews, has said the status quo is not acceptable and he has advised Charles Wang to not even think about a new lease until the project is approved.

    Netminder - the project will be built in phases, but it's approved as a whole. I don't know the exact construction schedule, but I know the Coliseum and Grand Canal zone are first.

    rvcjohn - You're right that the underground train solution would disturb the fewest people. However, it would also be much more expensive than other options. I wish they could build it but I wouldn't bet on it.

    day1fan - You're reading my mind. This blog exists to (hopefully) mobilize people who care. I would love to do all those and I'd love all your help to do it.

    You guys can always email me direct -

  12. No,Nick. Tigmet is the same as JayK on CB's blog, but I couldn't figure out how to sign on here as JayK. So I used the "select profile" function and used my AIM account.

  13. Ah, then welcome JayK! Glad to have you.