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Entertainment and Media: Markets and Economics

Entertainment and SportsMega Deals

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Huge Entertainment and Sports Deals

A Capital Budgeting Decision Costs

Known with certainty Known at the time the contract is signed

Benefits Uncertain – depend on success of the agent Long term in the future adding to the uncertainty. Need for

discounting Occasional performance benchmarks are generally only a

small part of the deals. (Total home run bonuses, e.g., for Barry Bonds)

How can the investor do the cost/benefit test?

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GLITTER! And Uncertainty (Need we say more?) Marriage to EMI: Mariah Carey

More #1 hits than anyone else in history April 2001: $100M contract by EMI 5 albums in the $100M contract. How well must she do for them to make ANY money????????

Glitter!!! Bad reviews, downward slide. You know the career is on the way down when they make the movie. Glitter revenue: 16M Costs: $26M Loss: $10M

How do I get out of this? Divorce: EMI pays her $28M at the end of 2001 to go away.

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Shuler was a first-round selection in the 1994 NFL Draft, taken by the Washington Redskins with the third overall pick. He held out of training camp until he received a 7-year, $19.25 million contract, although most of the holdout was due to Shuler's agent and Redskins general manager discussing the parameters of the contract. The Redskins had fallen on hard times since winning Super Bowl XXVI, and Shuler was looked on as the quarterback of the future.

Shuler never succeeded at anything, and was let go after 2 seasons.

Football statistics site Football Outsiders called Shuler "The least valuable quarterback of 1997.

Long Term Deals and Risk/Uncertainty

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Kevin Garnett

In 1995, one month after turning 19, Garnett agreed to play pro basketball without having gone to college. He was the first player in 20 years to do so. At 22, he signed (with his team, the Minnesota Timberwolves) the biggest sports contract in history: six years for $126 million.

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Kevin Garnet’s Contract

The contract gave team owners nosebleeds. It also quickly precipitated last season's lockout and a new labor agreement that mainly guaranteed that, for decades to come, no one will get as rich playing basketball as has Kevin Garnett.*

Equivalent: Every dollar of every seat sold in every game for 5 years “He is,” team owner Glen Taylor said at the start of this season,

“worth every penny.” What does this mean? This is not a labor contract. (Is this a “salary?”) (Lebron James, Kobe Bryant, Michael Jordan) (ex) Tiger Woods. What Mike Tyson might have been.

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Lebron James – Looks Like Kevin

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Quarterback Arms Race in the NFL

Aaron Rodgers, Green Bay 2013: $12M ($35M signing bonus) 2014 $17.9M 2015 $18.6M 2016 $19.6M 2017 $20.7M 2018 $20.9M 2019 $21.1M

Joe Flacco, Baltimore $52M Tony Romo, Dallas $55M Drew Brees, New Orleans $100M+ (Incl $35M SB)

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Labor Contract Supercedes Ownership Claims

HOCKEY; Lemieux Is Finally the Emperor of the PenguinsBy RICHARD SANDOMIRPublished: September 2, 1999, New York Times

Mario Lemieux's path to majority ownership of the Pittsburgh Penguins began in a most peculiar way: the owners of the team he led to two Stanley Cup championships defaulted on paying him more than $30 million in deferred salary. Then the team went bankrupt 10 months ago. So Lemieux put together a group of investors that slogged through the thicket of Federal bankruptcy proceedings, the demands of creditors who were owed more than $90 million and the complexity of negotiating arena leases and television contracts that would take a financial straitjacket off the team.

Lemieux never did get his deferred salary, but the team's debt to him turned into the controlling stake in his former team, making him one of only a few players to own a major league team, following a path blazed by George Halas (Chicago Bears), Connie Mack (Philadelphia A's) and Charles Comiskey (Chicago White Sox).

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That David Beckham Contract

$6M/Year The Beckham rule Beckham reportedly negotiated a profit-sharing

plan with the Galaxy and AEG that, depending on the club's finances, could deliver another $10 million annually

http://www.latimes.com/entertainment/news/arts/la-et-rutten15-2009jul15,0,818801.story

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David Beckham

$50m / year, 5 years Major league soccer (entire league) does not clear $50m

in any year. (LA Galaxy was the only team that made a profit at all as of 2006.)

(As of 2015, the 14 league team is getting close.) What is the nature of the “contract”

Salary is about $6,000,000 The rest is anticipated endorsements

Beckham’s relationship to the LA Galaxy For whom does Beckham “work?” He essentially owned

the team,

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What does it mean?

Filip Bondy (MSNBC contributor Updated: 2:25 p.m. ET Aug 31, 2007)Even in the ultra-capitalistic world of professional sports, there ought to be a limit to the phrase, “buyer beware,” when it comes to a transcendent superstar. If MLS officials don’t rethink an exit strategy now for David Beckham, they will pay dearly for their greed shortsightedness in extra time, infinitum. Beckham is out with a sprained right knee for siz weeks, which basically means the rest of the Los Angeles Galaxy season. He may well finish the year having played all of 310 minutes in six matches for his first $6.5 million. (http://www.msnbc.com/id/20534781/)

Was Beckham really hired to play football?

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Large sports contracts are now routine – mostly in baseball

* Traded to NYY 2004, 21.3M subsidy to NY from TX until 2007.

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The Alex Rodriguez DealDirect CostsYear Salary Bonus Deferred Salary (3%/year)2001 21 2 + 10 5 to 2011 (+Interest $150,000)2002 21 2 4 to 2012 …2003 21 2 3 to 20132004 21 2 4 to 20142005 25 2 4 to 20152006 25 4 to 20162007 27 3 to 20172008 27 3 to 20182009 27 3 to 20192010 27 5 to 2020 (+Interest > 1,000,000)Insurance, Taxes, Loss of Revenue Sharing: About 50% of the contract per year

BenefitsProjected 8 more wins per yearMore fans in the seats because of those wins: Gate, Parking, StuffWhat is the relationship between wins and attendance?

Not known precisely Many empirical studies (The Journal of Sports Economics) My own study

Increased chance at playoffs and world series: Sponshorships, Franchise Value

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The Ghosts of Seasons Past: Long Run ImplicationsThe Shadow Cost

The commitment to A-Rod limited the ability of the Texas Rangers to field a great team. The same problem now faces the Yankees.

A-Rod is aging and becoming less likely to break the records. His steroid use has tarnished his reputation and reduced the value of his history.

Why do teams do these long term mega deals for baseball players?

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Kershaw vs. A Rod Shorter term, risk shifting onto the team Bargaining strength has shifted in favor of the player.

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A Regression Model to Translate Wins into Attendance

team

1 2

3

Attendance(i,t) = α + γAttendance(i,t-1)

+ β Wins(i,t) + β Wins(i,t-1)

+ All_Stars(i,t)

4

5

6

+ Manager Experience(i,t)

+ Pct_Rookies(i,t)

+ Lineup_Changes(i,t)

7 + Change_Manager(i,t)

+ (i,t)

Loyalty effect

i = team, t = year 31 teams, 17 years (1985-2001; fewer years for 6 teams) Winning percentage: Wins = 162 * percentage Rank Average attendance. Attendance = 81*Average Average team salary Number of all stars Manager years of experience Percent of team that is rookies Lineup changes Mean player experience Dummy variable for change in manager

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About 500,000 fans

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Marginal Value of an A Rod

8 games * 63,734 fans = 509,878 fans 509,878 fans *

$18 per ticket $2.50 parking etc. $1.80 stuff (hats, bobble head dolls,…)

$11.3 Million per year !!!!! It’s not close. (Marginal cost is at least $16.5M / year)

Total of other benefits, about $1,000,000 (if they do it every year, which is impossible!!)

The entire team was sold for $385M in 2010.

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Contracts and Profits “Labor contract” Labor claims to profit supercede both bond and

stockholders (when they exist – most teams are purely private).

Conclusion 1: David Beckham owns the LA Galaxy, and operates it at a huge loss, taking all the revenue and more for himself.

(What of the other players?) Conclusion 2: David Beckham works for AEG,

the company that owns the LA Galaxy. What is Beckham’s role in the company?

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Live Nation 360 Contract

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Two Sides to the Bargain

Announcement 10/16/07: Madonna would abandon Warner Music Group Corp., which refused to match the Live Nation deal.

The deal with Live Nation encompasses future music and music-related businesses, including the Madonna brand, albums, touring, merchandising, fan club and Web site, DVDs, music-related television and film projects, and associated sponsorship agreements, the statement said.

Under terms of the deal, Madonna, 49, would receive a signing bonus of about $18 million and a roughly $17 million advance for each of three albums, the person said. A portion of the compensation would involve stock.

The agreement gives Live Nation the exclusive right to promote her tours.

Live Nation CEO Michael Rapino said in the statement that Madonna will be the founding artist in its new Artist Nation division, created to partner with musicians to manage their diverse rights and provide global distribution and marketing.

A new business model for our industry, Some Wall Street analysts have questioned whether Live Nation can squeeze out a significant profit from

the deal.

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Madonna Cost Benefit Test

Her side: $50M cash+stock, $18M signing bonus, $51M for 3 albums

Their side: Assume $200M in tour revenue (as of 2006). Net (after cost, $50M, 90% to Madonna + 70% of

merchandise + 50% licensing) Net net: $5-7M in tickets, $6-7M merchandise. If as in the past, 3 tours in 10 years. Not an obvious winner

After various considerations, a deal with a label could be just as good.

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The Missing Elements

Other markets: Madonna’s clothing line Live Nation’s image Live Nation’s signal to market Attract Jay-Z and others

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Madonna and U2 are about to get a new manager: Live Nation Entertainment.

The concert-promotion titan and owner of Ticketmaster is in talks to buy both Principle Management and Maverick, the companies behind U2′s manager Paul McGuinness and Madonna’s Guy Oseary, and thus solidify Live Nation’s hold on two of its most profitable artists. “This is a way for Live Nation to more efficiently bundle together all those revenue streams related to two artists in which they’ve already made much larger investment,” says Larry Miller, professor of music business at New York University’s Steinhardt School.

Live Nation actually manages a lot of artists: The company’s Artist Nation division works with about 200 acts already, and Madonna and U2 have long been under its wing. In 2007, Madonna signed a 10-year, $120 million deal to let Live Nation distribute her studio albums, promote her concert tours, and sell her merchandise. U2 and Jay-Z struck similar deals in 2008.

So far these deals have paid off. In 2011, U2′s 360 Tour—the band’s first after signing the 12-year Live Nation deal—broke the Rolling Stones’ record for most profitable tour ever by selling more than $700 million in tickets. Madonna’s numbers have been significantly smaller: Last year’s 88-stop MDNA tour pulled in $305 million, which was still enough to make her the top-selling act of 2012.

Concertgoers may be wary of Live Nation’s vertically-integrated stranglehold on the music industry now that it’s managing, promoting, and selling tickets to two of the biggest live acts around, but the deal with Principle and Maverick seems unlikely to raise prices much further. “Prices are already pretty high,” says Miller. “I don’t think this is going to drive them up much further. This is more about optimizing the revenue that’s already coming in.”What’s more interesting about the deal is that Live Nation is investing so heavily in artists who are past their prime. Last year, for example, Madonna’s MDNA album dropped from 359,000 in sales its first week to a shockingly low 48,000 its second week. U2′s last album, 2009′s No Line on the Horizon, was also a disappointment.

But album sales haven’t been an arbiter of an artist’s moneymaking potential for years. These days, its concerts and festivals that bring in all the money—and middle-aged U2 and Madonna fans have more disposable income to spend on tickets. Last year, the average cost of a Madonna ticket ($160) was nearly twice that of Justin Bieber’s.

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Entertainment and Media: Markets and Economics

1. Capital budgeting problems similar to other businesses2. Evaluating costs and benefits in long run contracts A. Micro-level – cost/benefit B. Macro-Level – corporate strategy