Explaining Southern California's economy

NBA game cancellations could show strength of LA's diversified entertainment economy

Staples Center

Eric Richardson/Blogdowntown

Vehicles pass by a darkened Staples Center on October 10, 2011.

As my new KPCC colleague Eric Richardson reported this morning, NBA commissioner David Stern has decided to cancel the first two weeks of the season, in the face of an ongoing labor impasse. This is going to cost money, in terms of lost ticket sales and the spending that people engage in when they attend games. If more games are cancelled, the costs are going to be significant.

Here's the math, for the sacrificed Lakers and Clippers games at the Staples Center, assuming the cancellation extends throughout the rest of 2011:

  • $30 million in ticket sales
  • $40 million for everything else
  • Grand total: $70 million

As Richardson points out, the $30 million is less relevant than the $40, because the latter is money that won't go to Downtown businesses (the $30 million represents "sunk" costs — money already expended that can't be recovered). The $40 million will get spent elsewhere in the city.

So it's not as if it will vanish. Rather, it will simply be, in a manner of speaking, redeployed. People, being people, will seek entertainment, and a planned entertainment expenditure is unlikely to be saved.

And that's a good thing — a sign of our strength and a vindication of our big-city investment in a plethora of entertainment options.

On balance, this isn't a terrible blow to the city's economy. And in any case, the city is sufficiently diversified to handle it. There's plenty going on in L.A. at any given time. It's important to remember that in a properly diversified economy, every entertainment option — from pro sports to fine dining to miniature golf courses to movie theaters — is competing for consumer dollars. If something goes offline for a while, something else is ready and willing to fill the gap.

If competition is lacking, then you really have a problem. You don't want the only game is town to cancel its first two weeks. Then you really do have darkness, and the alarming economic implications that go with it.

The company that runs the Staples Center, AEG, knows this and has worked it into their business plan. They haven't bet the farm on pro hoops. Here's Blog Downtown again:

[T]he picture is not entirely bleak for the central city. Because AEG does schedule so heavily, the arena's 38 remaining non-basketball events are still more than other prominent arenas. Madison Square Garden would lose 14 dates if the Knicks did not play a game before the end of the year, leaving 20 booked events. Chicago's United Center would lose 11 Bulls games, leaving it with 33 events—a number buoyed by 12 days hosting the circus. L.A. Live also still has events at Nokia Theatre and the other venues in the L.A. Live complex, keeping a steady stream of visitors flowing into the neighborhood.

Blank said that traffic is part of a smart strategy by AEG. "They're all about leverage," he noted. "They're diversifying, and they've taken that risk up front."

AEG operates the entire LA Live complex, so Staples, albeit the anchor, is just one part of the overall business. This is a clear evolution beyond the old way of thinking about sports facilities. The model that's been criticized in the past insisted that public funding for stadiums would create economic activity around those stadiums — but that activity doesn't always materialize, or is greatly overstated by the sports facilities' boosters.

If the stadium doesn't get enough use or only hosts a single sports franchise, then the model can fall apart. AEG has set up a different model, one that integrates a variety of entertainment options. LA Live is so well-diversified that even though it may end up losing its share of $40 million on cancelled NBA games, it can handle the hit. There are people who go to the place regularly who probably don't even care about the NBA. They're in it for the bowling.

If the 2011 segment of the 2011-12 NBA season is lost, we'll be able to compare notes with other cities. In the end, LA will probably come out OK. In fact, economists may study our experience.

Diversification. It's a beautiful thing. To quote Judge Reinhold's Brad Hamilton from "Fast Times at Ridgemont High" when confronted by a shirtless Sean Penn and a shirtless Eric Stoltz and a shirtless some other guy: "Learn it. Know it. Live it."

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