Posted by John Vrooman on Wednesday, January 13, 2016 in National Football League.

Interview with CNN.

NFL Stadium Pack

I am doing a story today about the Rams move to LA and would love to get your thoughts on why this ultimately wound up being the decision that the NFL owners approved. Would also love your perspective on Kroenke.

The City of Angels is obviously valuable as the second largest TV market in North America, but TV ratings and viewership for sporting events is typically lower in LA compared to other mega-markets even if an LA team is involved in the game. When the Raiders and Rams both occupied LA/Anaheim before 1996, their home games were rarely sold out and were therefore blacked out on local TV. So the size of the blacked-out LA mega-media market was irrelevant before the moves if not detrimental to national TV ratings.  

Ironically the empty LA market has probably been more valuable to the NFL as the 3^rd leg in a public stadium funding extortion triangle over the last 20 years than would have been the case if it had been occupied since the Rams and Raiders both bolted  Tinsel Town in 1995.

Monopoly cartel sports leagues almost always prefer single-team monopoly markets to 2-team or multiple team markets, This is because two monopoly markets are always more valuable than one duopoly market regardless of market size or either team’s market share. As a result multiple team markets are always a negative sum move for the League overall. Both of the existing two-team markets (NY and SF-OAK) are vestiges of the AFL-NFL rival league mergers in 1970.

 NFL cartel membership is artificially limited to internally maximize franchise value and enhance the credibility of franchise relocation extortion threats. As a result internal league profit-max size is considerably smaller than the external social welfare optimum, which could easily be enhanced if the NFL simply expanded into LA and probably a half-dozen other viable but unoccupied NA markets.

In the minds of the NFL cartel owners the relocation rights of an empty LA market still belong to them, even if the LA market is was twice abandoned two decades ago. Given the major differences between the values of the franchises under alternative scenarios playing in a variety of stadium configurations in different markets, the appropriate relocation fee for the other NFL owners would tax away almost, but not all of the potential gains from relocation.

If the relocation fee is higher than relocation value gains then the Chargers/Rams/Raiders would not make the move and if the fee is lower, then the difference would disproportionately accrue to the relocating club.

 According to my estimates (see attached profile), the net gain in franchise value from LA relocation for each of the 3 candidates would probably be in the range of $800 million to $1 billion. If these gains were split evenly between the relocating club and the League then the relocation fee could approach $400 million to $500 million. A reported fee of $650 million reportedly being entertained by the rest of the NFL owners would capture 65 percent to 80 percent of the potential gains .  

  The actualization of the proposed Raiders-Chargers joint venture in Carson ultimately depended on the pretzel logic of the wider NFL venue extortion game being simultaneously played out in Oakland, San Diego, St . Louis and LA (Carson and Inglewood/Hollywood Park).

 It is very unlikely that the other NFL owners will allow a double/joint relocation of 2 franchises to the LA market, regardless of how well connected the Carson venture is to Disney (ABC/ESPN).  This is because the League always prefers several monopoly markets to one duopoly (two-team) market regardless of market size.

 Ironically the potential cost savings from two clubs splitting a $1.8 billion stadium in Carson (LA) would almost completely be negated by the reduction in present value of net cash flow from two competing clubs in one market. This is why the league cartel avoids two team markets and  leads to the obvious conclusion that only one team will relocate to LA.

 Existing duplicate team markets like SF 49ers and Oakland Raiders the Bay area are vestiges of rival league mergers in the past like the AFL and NFL merger in 1970. Following the reverse cartel monopoly logic the League would also prefer the relocation of an existing  dual market team like the Raiders to that of a single market monopoly team like the Chargers or Rams, because it would simultaneously increase the values of both the Raiders in LA and the 49ers in Santa Clara.

 This leads to the theoretical economic conclusion that the League would prefer the single relocation of the Oakland Raiders to LA instead of either the San Diego Chargers or St. Louis Rams. This would simultaneously create monopoly markets in the Bay area (Santa Clara) and LA, while leaving the Chargers alone in San Diego and the Rams in St. Louis.

 In the relocation-extortion end game all four clubs (including the 49ers) would then monopolize their respective single-team markets in state of the art luxury venues like Levis Stadium where half of the fans are effectively being charged twice as much.

 So by process of elimination, the relocation odds still probably favor Stan Kroenke paying the fee and moving the Rams to a $1.8 billion luxury Hollywood Park stadium that synergistically anchors his wider economic development project in Inglewood. In the end there is just not enough economic pop in the Carson joint venture to justify the coexistence of two competing clubs.

The private cost of the $1.8 billion venue in LA should tilt the odds in favor of the only owner who can use the stadium as an anchor for a more comprehensive project.  So the pragmatic economic odds probably favor Stan Kroenke’s Rambling Rams, especially after his negative relocation proposal has blown up all of his bridges back to St. Louis.

 Ironically St. Louis currently has the most fully developed City/State stadium plan of the three markets now being pressured by the League threats of relocation, followed by San Diego with Oakland not even out of the gate. St. Louis could then become the relocation target of another footloose NFL club, even the Raiders.

 The Raiders solo spinoff relocation would be a secondary longshot, but this is exactly what happened in the 1995 expansion relocation extortion derby..  As the musical chairs game played out, the 4 frustrated finalists in the Carolina Panthers/Jacksonville Jaguars expansion of 1995 were St. Louis, Baltimore, Oakland and Memphis/Nashville. Each immediately became the relocation target of opportunistic NFL franchises in Houston, Cleveland and LA (I’m not making this stuff up).

 The NFL then retro-expanded into Cleveland 1999 and Houston 2002 leaving, the LA market as an empty example of what happens when a major city ends up on the short end of the shell game of the NFL cartel.

 Almost every mid-market NFL stadium funding discussion in the last two decades since the 1995 expansion has involved a not so veiled “build-it-or-we-will-leave” threat for opportunistic clubs to relocate to the City of Angels. All 10 of the stadiums associated with the 1995 expansion receive major if not total public subsidy…notable exception was Carolina who went private with all PSLs.

Total public money $2.15 billion…the estimated value of the LA relocation club. Indy, Phoenix and Minneapolis each threatened LA. Total public money $1.4 billion…This is what I mean by LA being more valuable empty as a bargaining chip than occupied with a team for the last 20 years. If the Rams move to LA then a vacant St. Louis (or San Antonio) would become the next relocation target in the relocation game of musical chairs.

 In the final analysis however, abstract economic theories don’t always work in the often counterintuitive world of the NFL. In the real and sometimes antagonistic world of the NFL cartel there is a complex overlay of insider political coalitions and cronyism among the owners that will probably influence, if not completely  determine the outcome.

So the political/economic end game would have the Rams in LA (Hollywood Park), the Chargers would remain in San Diego and the Raiders would threaten to relocate to either St. Louis or San Antonio– and probably end up in St. Louis.

 Here are some brief answers to your specific questions:

Why did the NFL owners ultimately agree to Rams/Inglewood and not Chargers/Raiders/Carson? Especially since the old guard relocation committee initially backed Carson project? And had support from Bog Iger of Disney as well?

As stated above the NFL would probably avoid two-team duopoly markets to max out the internal profit of the league regardless of the recommendation of the relocation committee recommendation. The decision also involves the internal politics of the League where Dean Spanos is probably the most popular of the 3 owners but Stan Kroenke has the synergy from a larger development project and an important alliance with Jerry Jones. T

he final decision makes the best pragmatic economic sense because Kroenke’s project is already out of the gate and running. The relocation of the Raiders makes the best  economic sense in theory for the reasons above, but in the political reality of the NFL Mark Davis is still apparently paying for the sins of his maverick father Al Davis, who sued the League cartel  and won in the relocation of the Raiders to LA in Raiders v. NFL 1980-82. In the end the League wanted to allow the owners as much freedom and flexibility as possible while keeping the internal profit-max options of the League open into the future.

The relocation extortion game is not over. The first move is Rams to LA, with the Chargers still holding in SD with $100 million from the League to sweeten that local option and a continuing threat to join the Rams in LA to enhance the relocation option. In the third move the Raiders will now threaten to relocate to San Antonio or St. Louis.

The City of St. Louis could even threaten legal action against the League for Kroenke’s failure to bargain in good faith following Cleveland’s precedent over the relocation of the Browns to Baltimore (Raiders) in 1995. Following that Browns-Ravens precedent the League could then settle the suit by relocating the Raiders to St. Louis where there now exists a  premade stadium deal on the Riverfront.

Is the Rams/Inglewood project going to wind up being more economically favorable to the NFL?

Yep the League benefits more from two monopoly markets than one 2-team (duopoly) market every time regardless of LA market size and market shares of either team. The League will also benefit directly from a larger expansion fee.  Kroenke is going to make big money from wider development surrounding the relocation of the Rams even if the League relocation fee taxes all of his franchise gains from the actual move.

He is the only relocation candidate that could break even on the stadium deal and still make mega-bucks over under around and through the Hollywood Park project. Those synergies were not there in the Carson joint venture.

How respected is Kroenke among his fellow owners?

My understanding is that he has a few friends in highly influential places, and he had the project that made the most sense in the real world. In Missouri he is persona non grata after blowing up all of the bridges back to St. Louis.

How important are Kroenke’s Walmart ties in terms of his own wealth? I realize that he’s “self-made” through his real estate ventures. But aren’t a lot of those real estate projects related to Walmart – thanks to his marriage to Ann Walton (daughter of co-founder/Walmart real estate guru Bud?)

I’m not sure but apparently the land being used for the propose stadium was originally designated for a Super Wal-Mart which ironically would have had a greater economic impact that the new hermetically sealed monolithic stadium that generates jobs paying about the same as those at Wal-Mart.

The Inglewood facility is supposed to cost about $1.8 billion and open in 2019. Do you think it will go over budget? If so, by how much? And will it open on time?

Yep, it will go over budget and could hit $2 billion, The secondary proposal of the Chargers joining the Rams at Hollywood Park playing in a $3 billion 2-team venue makes absolutely zero economic sense.

 The development project already has much of the overhead capital in place connecting it to the economic  Hollywood Park grid, and it should open on time.

 Perhaps the most important issue overlooked in either the Carson or Glendale proposals is that there is no way that these smaller suburban governments can recapture a lion’s share of the economic spread effects throughout greater LA. Even if the venues are privately financed.

They will experience the overhead costs of congestion that will far outweigh any economic gain that leaks out of the monolithic NFL stadium. Equally important most of the private finance schemes are full of property tax and bond funding loopholes that will pass a major share of stadium costs to local taxpayers.

 Unfortunately the costs will be shifted to the local economy and most if not all of the gains will accrue to the teams and the opportunistic owners of the NFL.

V