Very few of us get to wager more than $1 billion on a new stadium, but Lew Wolff is one of those guys. Will his bet pay off? Clearly, Lew thinks it will, if he ever gets to make it. Certainly, the Giants made a similar bet pay off, big time. But, man, a billion is a big nut to crack.
Wait! What am I talking about? A billion? Isn't the new stadium supposed to cost $400 million? Where did one billion come from? Let me explain. Four hundred million was the estimated construction cost a couple years ago. Under the First Law of Construction Dynamics, we know that every project will take longer and cost more, especially projects with government involvement. So, let's say construction will run a half-billion by the time the A's are ready to roll.
Now figure Lew will finance the $500 million. He could cover a big chunk of that with prepaid sponsorship money and seat licenses, but there are a lot of balance-sheet reasons to finance. Let's say he takes an interest-only 20-year note at 2.6% (the current 10-year Treasury rate); that's roughly 13 million bucks in interest annually, or $260 million over 20 years. So, the bet is up to $760 million already.
Then you have to figure the loss of the $30 million (reputedly) annual revenue-sharing subsidy. (Lew has said a new stadium, wherever it may be, would make the A's independent.) But let's say the A's true subsidy is more like $10 million a year. That's 200 million over 20 years. The bet is up to $960 million, but we're not done.
One of the supposed attractions of a new stadium is being able to afford to keep your best players. So player payroll has to rise, right? The average major league team payroll is $98 million. I can't ever see the A's spending that much, but let's say they add another $10 million to the amount they would normally spend. That's $200 million over 20 years.
So the bet is up to $1.16 billion. That's not counting the increased costs for staffing and maintenance. And don't forget potential litigation costs. No matter where the A's eventually settle, somebody is guaranteed to sue them.
How is Lew going to win a bet that big? That question keeps rolling around my brain. So, today, in an exercise of complete, barely-responsible speculation, I am going to play Lew Wolff and try to figure out how to win the Big Bet. That's the beauty of playing make-believe with someone else's money.
Capacity & Market
To win, I (Lew) must generate a ton of new revenue, somehow. The new stadium is going to have a capacity of 32,000 seats. Yikes! That's nearly 10,000 fewer seats than Phone Booth Park. With that capacity restriction, I (Lew) must sell every available seat in the new stadium. That's a season-long total of 2,592,000 seats, or nearly 52 million over two decades.
There are only two potential (and available) stadium locations in the entire West with the affluence and the population density to absorb 2,592,000 tickets, Oakland and San Jose. In Oakland, I can put my 32,000-seat stadium at Howard Terminal. In San Jose, I can put it next to the Diridon station. Let's assume each site will have the same number of legal, construction, logistical, and financial problems. Will either site give me a chance to win the bet?
The A's average ticket price now is $21.64. Multiply that by 2,592,000 and you get $56 million. That ain't going to cut it in this high stakes game. So, say good-bye to $2 Wednesdays! The average ticket price is going up. How much?
The Giants' average ticket price is $27.21, but they have a greater capacity, 31% more. To generate the same ticket sales revenue as the Giants, my new price average will need to be at least 31% higher than the Giants average. That comes out to $35.65. Take that figure, multiply it by 2,592,000, and you get a little more than $92 million. Now we're getting somewhere!
But will the market rebel against a 65% price increase? The Cubs average ticket price (Wrigley Field capacity: 41,019) is $46.30; at Fenway Park, capacity 37,499, the Boston Red Sox average ticket price is $53.38. So, maybe, $35 will fly. To maximize volume as well as revenue, I am going to charge a boatload for premium seats (with seat licenses) and suite seating, and let the rest of the tickets float at Giants' levels.
People will be eager to pay up for a new stadium, won't they? I know from experience everybody talks a good game until they have to take out their wallets. Reality is, the novelty effect of most new stadiums wears off rather quickly. Dennis Coates and Brad Humphries, a couple of economists at the University of Maryland-Baltimore County, studied the problem and produced a working paper in 2003 called "The Novelty Effects of New Facilities on Attendance at Sporting Events." They wrote:
"It appears, at least in baseball, that the novelty effect of a new stadium now has a much shorter duration than in the past. For example, in Pittsburgh, where PNC Park opened in 2001, attendance was down about 26.8% in the 2002 season from the 2001 level, almost back to its level from the last season in Three Rivers Stadium. After 51 home dates in the 2003 season attendance continued to decline another 9% from the 2002 season. In Detroit, where Comerica Park opened in April, 2000, attendance was down 21.7% in 2002 relative to 2001, which was lower than the 2000 level, and even below the level for 1999, the last in Tiger Stadium. After 49 home dates in the 2003 season attendance continued to decline by another 9% from the 2002 season.
In Milwaukee, where Miller Park opened in April 2001, generating a boost to Brewers' attendance of 1.23 million over the 2000 season, attendance was down by 30% in 2002 relative to 2001, and after 54 home dates in 2003 continued to decline by 22% from the 2002 season. Admittedly, the national economy has been in, or sluggishly emerging from, a recession for the past few years, and the threat of a work stoppage hung over much of the 2002 season. However, attendance was only down 6.2% across all of Major League Baseball in 2002 and several teams experienced attendance growth."
I know these guys were legit because the rest of the report was filled with equations and scholarly terms like "demand shifters," "dummy variables," "equilibrium conditions," and "intercept parameter."
Well, that was a decade ago, so I did my own informal study of six teams that have acquired new stadiums since 2000, the Mariners (2000), the Giants (2000), the Padres (2004), the Nationals (2008), the Twins (2010), and the Marlins (2012). I looked at attendance and wins in the years just before and just after the teams moved to their new digs. I was looking for something that might give me a betting edge.
What did I find? A lot of dummy variables and inconsistencies, that's what. The Giants are the big winners. Their attendance jumped 60% with the move from Candlestick and has remained in the 40,000 per game range ever since, win or lose. The Mariners attendance jumped to 38,868 per game with the move to Safeco Field but that was meaningless because Mariners' fans support winners, not facilities. In 1997, in the wretched Kingdome, the attendance was 39,410 per game. As Seattle's field performance dwindled so, too, did its attendance, despite a new stadium. This year the Mariners are averaging 22,025 per game, one thousand per game less than the A's!
The Padres' attendance jumped 50% in 2004 when they moved to Petco Park. When their wins dropped, however, their attendance tailed off. The same thing happened with the Twins. The Nationals attendance actually dropped when they moved out of RFK Stadium (no doubt due to a huge ticket price increase.) Curiously, the Nationals' attendance has increased as the field wins have decreased. Well, it is Washington D.C.
And that leaves the Marlins. What a piece of work! The Marlins attendance jumped 46% last year with the debut of Marlins Park. When Jeff Loria, the owner and Master Thinker, blew up the team, the fans rebelled. This year, attendance has fallen below what it was in Dolphins Stadium. People in Miami don't want to give their money to a jerk. Congratulations, Jeff, you are the new Charlie Finley!
So, in making a big stadium bet, I know this: The novelty of a new stadium will carry ticket sales for a year. After that, the team had better win.
One other thing I should mention about these stadia: the taxpayers are on the hook for all of them except for Phone Booth Park. We know public funding of sports facilities in the Bay Area is not going to happen. Still, in Oakland or in San Jose, local government is going have to come up with at least $100 million for infrastructure improvements and, of greater importance, make problems go away. I (Lew) have dealt with three cities on this stadium deal. Only San Jose has come up with what I need. To get it, however, I'm probably going to have wade through the Ninth District Court of Appeals and the Supreme Court.
I (Lew) am going to have $52 million a year coming from a new national TV deal. That's for eight years, and that is big. Without the national TV money, I wouldn't even consider a bet this size. As for a local broadcast deal, I don't see much changing, unless I can fashion some combination A's-Earthquakes deal with Comcast. But such a deal would benefit the Earthquakes more than the A's. Now I will admit some sort of an A's-Earthquakes synergy would be great, but I can't see MLB going along with such a scheme. The Giants are already soiling themselves over such a possibility.
So, I (Lew) might be able to cover the bet through attendance, novelty windfall and TV, but I want to win the bet. How do I do that? There's only one way: corporate sponsorship, and lots of it.
If I put the stadium in Oakland, I can count on support from Don Knauss, the CEO of Clorox. Knauss cites Chevron, Safeway and Kaiser Permanente as the other big players who would sponsor the A's. (I suppose I could also count on the company formerly known as Overstock.com.) Of that group, only Chevron ($246 billion in annual revenue) has the financial muscle to seal the deal. And I haven't heard that Chevron is in for anything other than the advertising dough they are already spending.
Safeway? It is losing money and its debt equals its market capitalization (about $5.5 billion). Not good. Kaiser Permanente is a 48-billion-dollar non-profit organization. Sure, Kaiser advertises but I don't know of any not-for-profit corporation that ponies up serious big bucks for sports sponsorship. And Clorox? It's a Fortune 500 company but it has already moved part of its operation out of Oakland. At some point, Knauss is going to have to come up with some cattle to go with his hat.
Santa Clara County, on the other hand, is a target-rich environment for corporate sponsorship. Hewlett-Packard, a proven venue sponsor, does $127 billion in sales annually. There's Apple ($108 billion), Intel ($54 billion), Cisco ($43 billion), Google ($38 billion) and nine other companies that generate as much or more than Clorox in annual sales. Cisco has already put up money for naming rights. Better still, I (Lew) know many of the heavy hitters at these companies.
Of course, there is a big orange-and-black fly in that ointment, the Giants. They are going to use every other law firm in America to prevent me from settling in San Jose. They are already engaging in guerrilla warfare with several proxy lawsuits against the City of San Jose. Not only will the Giants be trying to cut me off from sponsorship nirvana, they'll be suing my ass besides. This isn't fair but, hey, many things are not fair. I've got to be clear-headed because there's a billion-dollar downside to this adventure. There's no crying in baseball.
So, to repeat the central question, can I (Lew) win the Big Bet under the conditions I see? The stadium mess is likely to get messier. The gestation period is likely to get drawn out another ten years. The expense is likely to mount. For the next five years, the Coliseum Authority is going squeeze me for every dime they can get. Where else can I go? And in five years, what happens? Hope is not a strategy
If I sold, I could double my money right now, maybe triple it if Magic Johnson's twin brother comes to town. Even without a new stadium. By selling, Oakland fans would love me. The Giants would love me. Bud Selig would love me. About the only person who would be pissed at me is Chuck Reed, the Mayor of San Jose, but you can't win ‘em all. Life would be beautiful.
Honestly, I am trying to think of reasons to stay in the game. I suppose I could bide my time and let the franchise value appreciate, but how much higher can it go without a new ballpark?
Perhaps there is one more question to ask: Knowing what I do, would I buy the A's? Pay $400-$500 million, be confined to the East Bay, and not even have a new stadium? Would you make that deal?
So, maybe that's the answer. If I'm unwilling to buy the A's, it's probably time to sell.