Posted by John Vrooman on Friday, January 6, 2017 in National Football League.

Interview with San Diego Times Union.

I’m researching a column about the state of play facing Dean Spanos as he decides among three options:
1) Forego or seek to extend the L.A. option and stay in San Diego, under the Qualcomm lease that expires in 2020.
2) Stay in San Diego, pursue stadium deal for another several years.
3) Move to L.A. under the Kroenke lease terms.

I’d like to include your thoughts on the various options and what you consider most likely at this point. He has until Jan. 15, ostensibly, to accept or forego his L.A. moving option.

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Chargers options XL

Coliseum Pic

Okay here are my value estimates for the three options revised since the big referendum:

1. Bolts value of $2.2 billion from $500 million Q reno with $250 from City; $200 from Bolts and $50 from NFL G-4.
2. Bolts value of $2.7 billion from recent $1.8 billion project proposal of “Convadium” next to PetCo Park.
3. Bolts value of $3.225 billion from relocation to $2.6 billion LA stadium, cost shared with the Rams 50/50. Word on the Street is that the Bolts could be facing a relocation fee up to $650 million over 10 years. That relocation fee would have a present value of $525 million now, which would reduce net value of the Bolts to $2.7 billion and neutralize any potential gains from relocation to LA.

I have two pretty reliable theories that could help predict the ultimate outcome and explain the motives of the NFL in the relocation extortion game and the move toward smaller stadiums.

Vrooman’s Law #1 The Dual Market Theorem: The value of two monopolies is always greater than the value of one duopoly two-team market. The gains to the second team (Chargers or Raiders) in a market (LA) are always outweighed by the losses to the existing monopoly team(the Rams), even if they split the stadium costs (unless they conspire).

Relocation to an already occupied market is therefore a negative sum move. This is why leagues usually if not always prefer one monopoly team per market regardless of market size. Existing dual markets like the Bay Area and NYC are usually if not always vestiges of previous rival leagues. (AFL v. NFL) This is also why the League probably prefers that the Bolts stay in SD, and the Raiders get out of the Bay area (because the positive sum gains to the monopoly Niners in Santa Clara would be greater than the losses to the monopoly Raiders in Vegas).

Vrooman’s Law #2: Monopoly theorem. It is classic monopoly pricing behavior for monopoly teams to charge half as many fans twice as much. This is fundamental driving force behind the downsizing luxury stadium revolution over the last two decades. This is particularly true in the NFL where there is an excess inelastic demand for tickets.

The profit maximizing stadiums are becoming more and more exclusive, corporate and opulent and everyday fans are strategically excluded by price. This fan swap is aggravated in the NFL where the asymmetric revenue sharing scheme includes gate revenue but excludes venue revenue from luxury suites and club seat fees. There is a clear and present incentive in the NFL to downsize and trade gate revenue for venue revenue, and that is at the heart of the stadium extortion game now being played out in every NFL home market.

In venue finance certain risk-free cash flow is more valuable than variable risky cash flow that fluctuates with team performance. In the new luxury stadium revolution the long-term luxury-seat leases from suites and club seats are more valuable than the general admission seats in the upper deck. It is classic value maximizing behavior for the clubs to trade the maybe for the sure cash flow. In the new luxury stadium the prime revenue drivers are the club seats and luxury seats in what I call the motel in the middle (see green area in graphic).

The relatively certain cash flow from the opulent club seat and luxury suite mezzanine is more than enough to finance the complete stadium by itself. The lower bowl and upper deck are simply structural appendages to the motel in the middle (rather than the reverse in older stadiums). Moreover, upper deck seats are the hardest to sell-out and the usually the most expensive to build. The new smart venues in the NFL are becoming lean and mean and wired for wi-fi and the new NFL is made for new media.

This could be a reasonable third alternative for the Bolts:

You might want to check out the $500 million renovation of the Miami Dolphins newly named Hard Rock Stadium (originally Joe Robbie Stadium 1987)that was privately funded by Dolphins owner Steve Ross. (He also owns the stadium). This deal has floated under the radar, but the renovation basically rocks (no pun). The project used no public money per se but taxable industrial development bonds were publicly issued to be repaid by the Phins. The NFL also kicked in a $29.4 G-4 loan.