Chargers L.A. Hail Mary worth the risk
Football is a full-contact sport, almost as brutal as business. Last week the Chargers reminded San Diego that the NFL is, above all, a business.
How else to explain the surprising plans for the Chargers and Oakland Raiders to cohabitate, apparently splitting the $1.7 billion cost to build a stadium in the glitter-forsaken, industrial L.A. suburb of Carson?
Both teams have argued for years they aren’t nearly rich enough to build stadiums in their home cities without big public subsidies. So the Carson idea would seem unduly risky, even a little desperate.
Maybe so. However, staying put in San Diego — without public help for a new stadium — seems far riskier than privately funding half a stadium in the lucrative L.A. market.
At the same time, a viable deal with the Raiders strengthens the Chargers’ hand in negotiations with San Diego. We will soon see whether the public and its leaders are highly motivated to keep the team.
To see how this works, let’s run some numbers.
Under NFL rules, owners keep local revenues from skyboxes and club seating. A new stadium in San Diego could produce $50 million in higher local revenue compared to Qualcomm Stadium, experts say (the team doesn’t release financials).
But that increase is about half the $96 million a year in debt service over 20 years, assuming 5 percent interest, required to fully finance a $1.2 billion stadium. That’s why the Chargers say they need the public to foot 60 percent or more of the bill.
Up in Carson, funding half of a larger, fancier, $1.7 billion venue would cost just $68 million a year. Meanwhile, a single team could easily collect an additional $200 million in local revenue in Los Angeles, a much bigger and more lucrative market, according to John Vrooman, sports economist at Vanderbilt University in Nashville.
That works out to $100 million each for two teams in new revenue, although some expenses would rise, too. Still, it seems likely the L.A. market can support two teams.
The Jets and Giants share a relatively new stadium outside New York City, and they earn double the profits of the Chargers and Raiders, according to annual estimates by Forbes.
So it’s easy to see why owners want new stadiums — especially in L.A.
On Jan. 5, Stan Kroenke, the billionaire sports mogul who owns the St. Louis Rams, unveiled a well-advanced deal to build a stadium as part of a giant development in Inglewood, just south of Los Angeles.
Kroenke’s head start precipitated an immediate business crisis for the Chargers.
“The minute he starts moving to L.A., the Chargers are a much less credible threat to relocate (in negotiations with San Diego),” said Victor Matheson, sports economist at College of the Holy Cross in Worcester, Mass.
Yet Kroenke’s deal also poses a tangible competitive threat.
Chargers lawyer Mark Fabiani says 25 percent of the team’s season-ticket base resides in the L.A. market. Losing those customers, even if it takes several years, would cut deeply into local revenue.
Players get roughly half of overall revenue, including the lucrative national media contact. And there are other expenses. Forbes estimates the Chargers turned a $40 million profit in 2013 on $262 million in total revenue.
If local revenue falls because skybox leases join an exodus of ticket holders, the team’s operating margin of safety becomes perilously thin.
Yet even this understates the business dilemma. Over time, all the other NFL teams with new stadiums and rising local revenues will push the player salary base higher.
If they stay at Qualcomm, the Chargers face a classic squeeze of rising costs and falling revenues relative to competitors.
The team is left with two viable, though risky, options: Beat Kroenke into the L.A. market, or convince the San Diego public to help pay for a new stadium, probably in Mission Valley or downtown.
Put simply, Kroenke’s Jan. 5 deal posed an immediate, very real competitive threat.
So how has San Diego Mayor Kevin Faulconer responded? A couple of weeks after the big Rams news, he formed a task force to come up with stadium ideas by September, maybe sooner.
This explains Fabiani’s attacks on the task force since January. The Chargers don’t have that kind of time, so they are better off trying to sack the task force and get the mayor to the bargaining table.
The mayor is scheduled to meet this week with Dean Spanos, who represents his family’s ownership interests.
I have no idea whether the San Diego County public is ready to support this team. Doing so works out to perhaps $720 per household in the county, or about $58 annually over 20 years.
There is no economic case that the public would recoup its investment. Voters would have to value keeping an NFL team the same way they value amenities like a new park or improved waterfront.
But I do know this. With projected new revenue of $100 million a year or so — each — the Raiders and Chargers can finance $850 million apiece for a new stadium in L.A. That cost could rise: Other NFL owners may charge relocation fees.
Still, the 49ers recently raised $550 million from fans in “personal seat licenses” for their $1.3 billion venue in Santa Clara. The Chargers-Raiders may not match that figure, but they could come close.
Is this deal in Carson a convenient bargaining chip? Yes and no.
“I would say it strengthens their hand as it makes the threat to move (and beat the Rams to L.A.) more credible today than it was yesterday,” said Matheson, the sports economist. “I would also say that the deal is still not as firm as the Rams’ deal, as it is contingent on the partnership between the Chargers and the Raiders sticking together. If either one walks away from the deal (because their home cities cave in with a new stadium, for example), the other one is probably not in a position to complete the stadium deal on their own.”
Without question, the partnership faces risks. For openers, Kroenke remains poised to beat them both. It seems likely he will try to convince one of the teams to share his stadium and break up the Carson deal.
Billionaire Phil Anschutz could make another run at getting one or both teams into his downtown L.A. project, which is fully entitled and ready to start construction.
Meanwhile, a new San Diego Chargers stadium is already at political risk. And staying at Qualcomm, doing nothing, imperils the franchise at some point.
Business investment is always about balancing risk with potential returns. For the Chargers, pursuing the Carson deal seems well worth it.
</figure>Q&A: How does Chargers/Raiders stadium plan affect NFL in L.A. issue?
