FanPost

Economic Analysis of Moving the Bills or any NFL Franchise to Los Angeles


With the recent announcement of a 400 million dollar penalty the conclusion has been that he Bills are almost assuredly going to stay in Buffalo for the near future. While a $400 million payment (plus relocation fees) seems like quite a cost to pay, it is not inconceivable that the increase in value of the Franchise might be sufficient to cover this costs making relocation an attractive option to prospective owners. Therefore the key question that we need to answer is what is the value of an NFL franchise in Los Angeles?

The first step was to collect data on the value of NFL franchises. This data can be found on the Forbes website

http://www.forbes.com/nfl-valuations/list/

I then collected data on team records over the last five years, population in the teams metropolitan area of location and median income in the team's home area and threw the values into a multi linear regression, in addition to the data that forbes provides on revenue and income. After throwing all that data into an excel regression we found the best fit was a regression of Value on Revenue, specifically that the value of an NFL franchise is 4.1 times its Revenues.

Already at this point we can transform our initial question about increase in value to a question about increase in revenues. Specifically to add $400mm in value, annual revenues would likely need to increase by 97.4mm per year, to about 353.4mm. As a point of reference, this amount would have been the fourth highest in the NFL in 2012.

The next question we need to ask then is what are the drivers of the revenue that an NFL team can generate. We know that each NFL team received approximately $170mm in revenue from the leagues various TV deals in 2012. We can further break down the additional revenue into gate receipts and other revenue. I ran regressions for both of these sources of revenue that were able to explain 99% of the variance in gate receipts and 86% of the variance in other revenue respectively. (A few technical notes, first I assumed that the Jets and Giants split the NY market and I had to use a dummy variable for the cowboys to account for their unique stadium licensing deals.)

We find that stadium revenue is a function of median income in the teams metropolitan area, the age of the team's stadium, the stadium capacity and the performance of the team over the last five years. We find that other revenue (e.g. in stadium advertising, naming rights etc) is a function of the population of the teams metro area with an adjustment for the cowboys of an extra $230mm.

Armed with these regression we can then calculate the value of the bills franchise if it was moved to los angeles and played in the LA Coliseum. We find that value to be $1.178bn which does not cover the $400 penalty. However if we assume that the team would move to a new modern stadium (seating 75,000 to be conservative) the team's potential value increases to $1.3bn which would likely be sufficient to cover the penalty.

Does this mean that the Bills will move. Not necessarily so. First the estimate is subject to a fairly decent amount of error as we cannot be certain that the increase in value is greater than the 400 cost. Secondly, the NFL would likely charge a relocatioon fee which some have estimated could be as high as 300 million. Additionally there are several things that the Bills can do to make relocation less enticing for prospective purchasers:

1) Sell for a higher price than the forbes valuation. Our model suggests that the value of the Bills franchise should be closer to 913 million as opposed to the 870 that it is currently valued at. Given that there are only 32 NFL teams and they are sold quite infrequently, it is likely that they could fetch an even greater premium (for comparison purpose the Browns earn only 8 million more per year but are valued at a shade over $1billion. Paradoxically inviting in bidders who have the intention of moving the team might actually drive up the cost to the point that moving the team is economically unfeasible

2) Continue to gain a greater share of the GTA. Currently we see that the Bills generate more revenue than one would expect given the greater buffalo area's population and median household income. Given that GTA is over 5 times the size of greater Buffalo and that the median household income is about a third higher capturing a greater share of that market would further increase the team's advertising revenues.

3) New Stadium. While undergoing a significant overhaul will help, building a brand new stadium would likely increase the value of the team by about $50mm.

In conclusion it is not a foregone conclusion that the $400 mm lease penalty will be a sufficient deterrent for a new ownership group who wanted to move the team. However when coupled with the relocation fees it is likely that the team isn't going anywhere in the short run. In the long run to end all speculation regarding potential relocations, the team needs to continue to execute on its regionalization strategy as well as build a new stadium. Finally winning a few more games would also increase the value of the Franchise all of which should help to convince current ownership that they can build a great business keeping the Bills in Buffalo!

Just another great fan opinion shared on the pages of BuffaloRumblings.com.

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