Spanos gives Faulconer event revenue concession, still may screw Padres

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The mayor of San Diego recently endorsed Measure C, putting his political clout behind the Chargers’ new stadium initiative. According to the Union Tribune, Faulconer’s decision to break his silence and publicly endorse the deal is a result of (probably non-legally-binding) personal assurances he received from Dean Spanos on a number of related issues.

One of those assurances was that the City of San Diego would get to keep 100% of the non-football event revenues. This would include events like the NCAA Final Four, Wrestlemania, and whatever other events they may procure. These events are a key arguing point for how the new stadium may infuse economic activity into downtown San Diego.

Before getting to the main point – that the Padres will likely be screwed by this agreement – let me remind readers of something we discussed here in the past. Because of the incentives created with a 100/0 split between the city and Chargers, receiving 100% of the revenues is actually bad for the city. San Diegans (should have) learned this through our experiences with Petco Park.

Let me explain …

When Petco Park initially opened, 75% of non-baseball event revenue was going to belong to the city with 25% belonging to the San Diego Padres. The Padres, tasked with booking and planning these events, eventually concluded that it was not a very profitable setup for the team. Essentially, they put forth a significant effort to put on events where they saw just 25% of the profit. It wasn’t worth their time.

So back in 2013, the Padres and San Diego renegotiated and amended their joint-use agreement. The shares the Padres and City of San Diego receive from events were swapped, giving the city just 25% of the revenue. To ensure the city made additional money, the amendment also dictated a significant quota that the Padres were required to reach annually.

As a result, despite a 50% absolute reduction in their share of event revenue, the actual amount the city has received has increased. Quoting our own article from earlier this year:

In 2013, the Padres renegotiated the agreement with the city, flipping the 70/30 split into the Padres’ favor. (The Padres also agreed to increase the minimum yearly payment from these events, as a means for the city to guarantee a larger paycheck.) The result? Non-baseball events at PETCO inMay through July of 2015 alone matched the 2012 revenue and profit figures. And even with just a 30% share, instead of 70%, the city directly took home a larger paycheck in 2015 from these events than in 2012. For the Padres, that additional 40% on a larger volume of events translates to millions of dollars every year.

Another ancillary benefit to the new arrangement is that the city can reasonably plan for future revenue, instead of having a highly fluctuating revenue source in their budget.

If, like the Petco Park agreement, the onus to book and plan events remains on the team, then the agreement that Faulconer received guarantees the city will make $0 on non-NFL events; the Chargers have literally no incentive to book anything at all.

In order for the city to turn a 100% share into a net positive, they’ll have to plan and book events themselves or pay a third party to do it for them. This brings up a handful of questions, like “why not just let the Chargers have a share instead of some random third party?” and “what San Diego entity will make these bookings?”.

If you read the ballot measure, you’ll understand that the current design allows for a “Governmental Entity” to make bookings during the non-football season, with the team able to schedule events during the football season. (As discussed, the team will book zero absent a profit motive.) The definition of “Governmental Entity” is fairly broad in the text of Measure C, but is basically a city-controlled entity or city-formed non-profit corporation. In other words, the city controls bookings.

If the measure passes and the city books events themselves, then the agreement between the Chargers and the city is something which will greatly work against the San Diego Padres, for several reasons:

  • The Padres will face increased competition to book events. It’s likely that the price tag for the events will increase as a result of market competition, driving down profit margins for the Padres.
  • The Padres will lose event volume. Some events – for example, a Taylor Swift or Paul McCartney concert – are equally suited for Petco Park or the proposed Chargers Stadium. I imagine more of these events will choose the newer venue, but even if it is randomly split down-the-middle, it’ll eat into the Padres non-baseball event revenue.
  • The Padres agreed to pay the city a minimum sum annually for non-baseball events. It’ll be more difficult to reach this minimum value.
  • There’s a perceived conflict of interest for the city of San Diego between the Padres and Chargers’ deals. In one deal, they’d receive 100% of event revenue. In another deal, they’d receive 25% of event revenue. There may end up being backdoor handshake agreements to influence a specific event to book with the Chargers, instead of the Padres. Need a waiver from the city to book a certain event? No problem: book it with the city-controlled entity, not the Padres. This is a huge potential problem.

Given everything above, the end result might be the Padres electing not to book a single event at all, instead choosing (like they did in 2013 and before) that the effort required is not worth the potential return. In that case, the Padres would accept a yearly fine from the city in order to reach the minimum sum they recently renegotiated. This would unequivocally hurt the Padres.

There is a way to make this all work, but it’s not by the city getting a 100/0 agreement from the Chargers. In order to make any Chargers Stadium deal equitable for the Padres and the city, it’ll require three main pillars:

  1. Level playing field between the Padres and Chargers.
  2. No “favored” event location for the city. This is a conflict of interest that could influence event bookings.
  3. Reduced minimum annual contribution the Padres must make to the city, to compensate for potential lost event revenue.

All three of these pillars can be accomplished by making one overarching adjustment to both the Padres joint-use agreement and Measure C: revenue generated by both teams is pooled into one pot that they share, with the city receiving a substantial cut. Other setups could include partial pooling, but the same split for the Chargers/city as the Padres/city, such that the city doesn’t have a conflict of interest in which site wins the booking.

As I previously mentioned, the Chargers Stadium agreement needs to be composed in a way that will not materially hurt the San Diego Padres. If you’re a fan of both, you should realize that in an uncapped league, every dollar is a competitive advantage. The Padres themselves consider their event revenue a “big deal”. With all that considered, a deal which hurts the San Diego Padres’ revenue streams hurts the San Diego Padres on the field far more than than it would the Chargers. We should be holding out for better and asking our politicians to ensure the Padres get their fair say in the negotiation.

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3 responses to “Spanos gives Faulconer event revenue concession, still may screw Padres

  1. This is pretty convincing. One quibble though: if the “pool” structure was setup where the Chargers and Padres share revenue, why wouldn’t that create the same crappy incentives as when the Padres shared more revenue with the city? One team could sit back and earn revenue based on the work of the other. Seems like it would create a weird incentive where each team tried to push events to the other venue, since that would let them keep the profits without the effort.

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    • Yeah, I think partial pooling may work best. Retain some individual incentive, while providing a decent backstop for all parties.

      The main thing is an even split to dissuade conflicts of interest, and a system that won’t financially harm the Padres.

      Like

  2. Pingback: How to vote Padres this election | Gwynntelligence·

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