By Alexander Meade
Editors Note: This article was originally completed as an assignment for Harvard’s Sophomore Tutorial (Economics 970: Sports Economics) that asked for students to conduct an economic evaluation of the Chargers move from San Diego to Los Angeles.
After spending 55 years in San Diego, the Chargers are moving back to Los Angeles this upcoming NFL season. Until the Los Angeles Stadium at Hollywood Park is finished being built in 2019, the Chargers will play their home games at the StubHub Center, with a maximum capacity of 30,000 (Florio 2017). The NFL’s average attendance per game is nearly 70,000 (Florio 2017) and the Chargers are expecting to sell out every home game. The decrease in the supply of seats has forced the franchise to raise ticket prices to a league-high average of $192 per ticket; the league average in 2016 was $93 per ticket (Florio 2017). This paper aims to forecast the revenue and franchise value of the Los Angeles Chargers following their move from San Diego.
To get a wide view of how different variables affect franchises’ revenue and current values, I used 2016 NFL Valuations from Forbes. I analyzed the following variables for all 32 teams: current value (Billions), one-year percent value change, debt/value, revenue (Millions), operating income (Millions), 2016 player salaries (Millions), 2016 average attendance, 2016 win-percentage, number of super bowl wins in franchise history, gate revenue (Millions), metropolitan area population (Millions), stadium capacity and average ticket price. Using Stata, I regressed every variable to revenue and current value, and narrowed down the variables by eliminating the ones that weren’t statistically significant. I created the following model for revenue: expected revenue (y hat) = -8.397 – .197(one-year percentage value change) + 1.285(Operating Income) + 1.188(Player Salaries) + 0.0009(Average attendance). For current value my model was: expected value (y hat) = -1.24 + .013(one-year percentage value change) + .006(revenue) + .018(Metropolitan area population) + .009(Average ticket price). For one-year percentage value change, I used the 2016 change for the Los Angeles Rams (100%), who just moved to to California last year from St. Louis. This allowed me to factor in the effect which moving to Los Angeles has on the value of the franchise. For Average attendance, I used 30,000, because the Chargers announced that they expect to sell out every home game next year. Interpretations for the coefficients of the revenue model would be as follows: holding all else constant we would expect a $197,000 decrease in revenue for each one percent increase in one-year percentage value change, a $1,285,000 increase in revenue for every $1,000,000 of operating income, a $1,188,000 increase in revenue for every $1,000,000 of player salaries and a $900 increase in revenue for a one-person increase in average attendance. We would expect a franchise to have a revenue of -$8,397,000 if they had no one-year value change, operating income, player salaries or attendance at their games. Interpretations for the coefficients of the current value model would be as follows: holding all else constant we would expect a $13,000,000 increase in value for a one-percent increase in one-year percentage value change, a $6,000,000 increase in value for a $1,000,000 increase in revenue, an $18,000,000 increase in value for a 1,000,000 person increase in metropolitan area population and a $9,000,000 increase in current value for a $1 increase in average ticket price. We would expect a franchise to have a current value of -$1,240,000,000 if they had no one-year value change, revenue, metropolitan area population and ticket price. According to my models, the Chargers would earn $330,630,000 in revenue in Los Angeles, which is a $13,370,000 decrease from the $344,000,000 they earned in San Diego in 2016. Additionally, their franchise value would increase $520,000,000 from $2,080,000,000 to $2,600,000,000.
While my models take a lot of variables into account, they still have many limitations. For example, neither of the models take into account the fact that NFL teams collect 60% of the gate revenue from home games and 40% of the gate revenue from away games. Adding this into the model could end up increasing the Chargers’ revenue because they would be gaining revenue from their away games in stadiums that have capacities much greater than 30,000. Also, while I used the one-year percentage value change that the Los Angeles Rams experienced following their move from St. Louis, it is difficult to assume the Chargers will experience the same exact increase. They are moving from a city much closer to Los Angeles, and that could have an effect on their future revenue and value. Lastly, the model does not take into account the fact that there will now be two NFL teams in Los Angeles, and that football fans in the city are likely going to be divided between the two teams (e.g. New York Yankees and New York Mets, Los Angeles Lakers and Los Angeles Clippers). While the models do have their limitations, they provide a good estimate for the revenues and values of NFL franchises, and can assist the Chargers in forecasting the results of their move to Los Angeles.
Florio, Mike. “Chargers Announce Season Ticket Prices for StubHub center.” ProFootballTalk.
N.p., 14 Feb. 2017. Web. 21 Feb. 2017.
“2016 NFL Valuations.” Forbes. Forbes Magazine, 2016. Web. 21 Feb. 2017.
If you have any questions for Alexander, feel free to reach out to him at firstname.lastname@example.org.