Anatomy of a music festival's death

The festival was supposed to take place this weekend, at the foot of Mount Currie in British Columbia's picturesque Sea-to-Sky Corridor. Tens of thousands of people would have filled the sprawling festival grounds each day. Chance the Rapper, Muse and A Tribe Called Quest were scheduled to perform.

Instead, the Pemberton Music Festival was suddenly cancelled in May, news of its bankruptcy trickling out in dribs and drabs. The event organizers had billed as "the best weekend of your life" was suddenly no more – possibly along with more than $8-million of ticket holders' money.

The cancellation made those in the industry question the viability of large-scale commercial music festivals in B.C. The Squamish Valley Music Festival, Pemberton's chief competitor, was cancelled just one year prior.

Read more: B.C.'s Pemberton Music Festival cancelled as event goes bankrupt

Read more: Management lessons from the music festival circuit

Read more: Squamish Valley Music Festival cancelled

"No one's going to do this again for a long, long, long time," said Lewis Neilson, owner of Production Power Corp., which provides electrical, heating and lighting services to the film, entertainment and special events industry.

Mr. Neilson's company, which has serviced the Pemberton Music Festival since 2014, is owed more than $55,000 and is one of 120 unsecured creditors owed a total of more than $13-million.

"I've been doing this for 35 years, so I've seen a lot of stuff. This will take a long time to recover [from] – if we ever do," he said.

The Pemberton Music Festival began as the Pemberton Festival, a three-day event in 2008 produced by Live Nation and headlined that year by Jay-Z, Coldplay, Nine Inch Nails, Tom Petty and the Heartbreakers and the Tragically Hip. While Live Nation was optimistic the festival would become an annual event, financial hurdles and delays in obtaining land use permits resulted in cancellations in 2009 and 2010.

Canadian investors partnered with Louisiana-based Huka Entertainment, a seasoned festival producer, to resurrect the event for 2014. But the two sides have starkly different accounts of what has transpired since.

According to a preliminary bankruptcy report prepared by Ernst & Young in June, Huka projected a profit of $2.4-million (U.S.) – approximately $2.64-million (Canadian) at the time – for that first year, but instead the festival lost almost $17-million (Canadian). In 2015, the festival was projected to lose about $4-million (U.S.) – approximately $4.9-million (Canadian) at the time – but instead lost $16.8-million, according to the document. For the 2016 festival, Huka assured the Canadian investors that the Pemberton Music Festival brand was growing and that that year's festival would, at a minimum, break even. Instead, it lost $14-million.

Over three years, Huka collected monthly producer fees totalling $3.45-million (U.S.), according to the Ernst & Young report. The investors said they were not aware of this and received no funds in return on their investment.

In March, 2017, the investors said they would not proceed with this year's festival with Huka as producer. The parties went into mediation, which resulted in a numbered company, 1115666 B.C. Ltd., replacing Huka subsidiary Twisted Tree Circus GP Ltd. as a general partner.

"After [1115666 B.C. Ltd.] took possession of the books and records of the [Pemberton Music Festival LP], it became clear that the PMF was in worse financial shape than Huka had initially represented to the Canadian investors," the bankruptcy report states.

Meanwhile, weak ticket sales added to the worry. In 2015, the festival averaged 25,151 tickets sold for each day, generating $10.3-million in revenue; in 2016, the average was 38,423 for each day for $15.2-million in revenue. By mid-May of this year, the festival had sold about 18,230 tickets for each day, generating $8.2-million in revenue. Budgeted expenses hovered around $22-million.

It also became clear that Huka would not be able to attract new investors, as it had promised, and it would therefore "be impossible to hold a safe and successful festival," according to the report.

On May 16, directors of the numbered company voted to file for bankruptcy, officially doing so two days later through Ernst & Young. On the evening of May 17, as vendors and suppliers began receiving phone calls about the festival's cancellation, word began to spread online and to ticket holders, who tried in vain to get answers from the festival's website and Twitter account. The cancellation was officially announced late in the afternoon of May 18. There would be no automatic refunds.

The bankruptcy report cites decreased revenue, increased operating costs due to the weakening Canadian dollar, the inability to secure additional funding and increased difficulty in sourcing talent as the causes of insolvency.

Huka characterized various aspects of the report as misleading, incorrect and exaggerated. In its response, the festival producer said the Canadian investors were "operational partners from the outset" and had full access to the music festival's finances. It also vehemently denied taking any funds to which it was not entitled or without explicit authorization.

"In fact, Huka worked for months at a time without pay, in an effort to make events viable," Huka's submission states. "By way of contrast, the Canadian investors did redirect funds intended for other purposes, including taxes owing, and instead used those funds to pay for themselves and a select group of vendors."

No one from Huka could be reached for comment.

At a meeting of creditors held in early June, a representative from trustee Ernst & Young outlined Pemberton's dire situation. The festival owes unsecured debt of just over $13-million; the trustee took possession of just over $3-million and is working on recovery of the festival's remaining assets.

The two secured creditors, the investor groups who were together owed $3.5-million, withdrew their claims. As of this week, Ernst & Young has received 267 claims from unsecured creditors.

However, ticket vendor Ticketfly is claiming a deemed trust; if successful, all money in the estate would go back to Ticketfly and there would be no recovery to the unsecured creditors, Ernst & Young's Kevin Brennan said. If not, the money would be distributed among unsecured creditors. The application is before the courts.

Mr. Neilson of Production Power Corp. said he kept working with the festival over the years because, while it often paid vendors late, it did ultimately pay. He was disappointed to learn of Pemberton's demise and saddened by what it might mean for major music festivals in B.C.

"Pemberton tried to compete with Squamish and that killed them both," he said. "Who wins? We all lose."

While smaller festivals such as Shambhala and the Rockin' River Country Music Fest continue to draw sizable niche crowds in B.C., industry insiders say the thin profit margins and huge financial risk of bigger events make them unviable.

"Major festivals of 30,000, 40,000, 50,000 people, with camping and all the stuff that goes along with it – I'm not sure if that's a sustainable model any more," said BRANDLIVE's Paul Runnals, executive producer of the Squamish Valley Music Festival.

"In the festival business, you start at the beginning of a booking cycle hoping for a lineup that will sell enough tickets to get you to where you want to be, but that process can take four, five, six months. You're committed before you really know what it is you're selling to your ticket buyers.

"The model of trying to camp and house and feed and water and keep safe tens of thousands of people – it's a challenging model. And there are signs in numerous places that it may not be sustainable."

As well, many artists sought for these large commercial festivals hail from the United States and must be paid in U.S. currency, which has become increasingly costly with the relatively weak Canadian dollar.

The trend, Mr. Runnals said, appears to be toward city festivals, such as Osheaga in Quebec, Austin City Limits in Texas and the Governors Ball in New York. These events are close to a city's downtown core rather than in small towns and are easily accessible by public transit.

On a smaller scale, Surrey's FVDED in the Park is one such festival. In the three years at Holland Park, the two-day festival's attendance has grown from 28,000 to about 40,000, according to organizers.

The TD Vancouver International Jazz Festival, which draws about 500,000 people over 10 days, utilizes various indoor and outdoor locations around the city, including concert venues, public plazas and parks.

Mr. Runnals said it's doubtful the Squamish Valley Music Festival would return in its previous form.

"Never say never – I would be a fool to do that – but the underlying issues haven't really changed," he said. "The size and scale … that we had grown it to, I don't see it being viable until something changes in that equation."

MORE FROM THE GLOBE AND MAIL: