Entertainment and
Media: Markets and
Economics
Entertainment and Sports
Mega Deals
3:B - 1(27)
Mega Deals
Huge Entertainment and Sports Deals
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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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Mega Deals
GLITTER! And Uncertainty
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(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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Mega Deals
Long Term Deals and Risk/Uncertainty
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.
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Mega Deals
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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Mega Deals
Kevin Garnet’s Contract
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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.*
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Equivalent: Every dollar of every seat sold in every game for 5 years
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“He is,” team owner Glen Taylor said at the start of this season,
“worth every penny.” What does this mean?
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This is not a labor contract. (Is this a “salary?”)
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(Lebron James, Kobe Bryant, Michael Jordan)
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(ex) Tiger Woods. What Mike Tyson might have been.
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Mega Deals
Lebron James – Looks Like Kevin
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Mega Deals
Quarterback Arms Race in the NFL
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Aaron Rodgers, Green Bay
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2013:
2014
2015
2016
2017
2018
2019
$12M
$17.9M
$18.6M
$19.6M
$20.7M
$20.9M
$21.1M
($35M signing bonus)
Joe Flacco, Baltimore
Tony Romo, Dallas
Drew Brees, New Orleans
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$52M
$55M
$100M+ (Incl $35M SB)
Mega Deals
Labor Contract Supercedes
Ownership Claims
HOCKEY; Lemieux Is Finally the Emperor of the Penguins
By RICHARD SANDOMIR
Published: 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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Mega Deals
3:B - 10(27)
Mega Deals
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
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http://www.latimes.com/entertainment/news/arts/la-et-rutten15-2009jul15,0,818801.story
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Mega Deals
David Beckham
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$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”
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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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Mega Deals
What does it mean?
Was Beckham
really hired to play
football?
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/)
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Mega Deals
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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Mega Deals
The Alex Rodriguez Deal
Direct Costs
Year
Salary
Bonus
2001
21
2 + 10
2002
21
2
2003
21
2
2004
21
2
2005
25
2
2006
25
2007
27
2008
27
2009
27
2010
27
Insurance, Taxes, Loss of Revenue Sharing:
Deferred Salary (3%/year)
5 to 2011 (+Interest $150,000)
4 to 2012 …
3 to 2013
4 to 2014
4 to 2015
4 to 2016
3 to 2017
3 to 2018
3 to 2019
5 to 2020 (+Interest > 1,000,000)
About 50% of the contract per year
Benefits
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Projected 8 more wins per year
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More fans in the seats because of those wins: Gate, Parking, Stuff
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What is the relationship between wins and attendance?
 Not known precisely
 Many empirical studies (The Journal of Sports Economics)
 My own study
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Increased chance at playoffs and world series: Sponshorships, Franchise Value
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Mega Deals
The Ghosts of Seasons Past: Long Run Implications
The 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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Mega Deals
Kershaw vs. A Rod
 Shorter term, risk
shifting onto the team
 Bargaining strength
has shifted in favor of
the player.
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Mega Deals
A Regression Model to Translate
Wins into Attendance
Attendance(i,t) = α team + γAttendance(i,t-1)
+ β1Wins(i,t) + β 2 Wins(i,t-1)
Loyalty effect
+ 3 All_Stars(i,t)
+ 4 Manager Experience(i,t)
+ 5 Pct_Rookies(i,t)
+ 6 Lineup_Changes(i,t)
+ 7 Change_Manager(i,t)
i = team, t = year
+ (i,t)
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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
Mega Deals
About 500,000 fans
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Mega Deals
Marginal Value of an A Rod
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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.
Mega Deals
Contracts and Profits
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“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?
Mega Deals
Live Nation 360 Contract
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Mega Deals
Two Sides to the Bargain
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Announcement 10/16/07: Madonna would abandon Warner Music Group Corp., which refused
to match the Live Nation deal.
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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, musicrelated television and film projects, and associated sponsorship agreements, the statement
said.
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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.
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The agreement gives Live Nation the exclusive right to promote her tours.
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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.
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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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Mega Deals
Madonna Cost Benefit Test
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Her side: $50M cash+stock, $18M signing bonus, $51M
for 3 albums
Their side: Assume $200M in tour revenue (as of 2006).
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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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Mega Deals
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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Mega Deals
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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Mega Deals
Entertainment and Media:
Markets and Economics
1. Capital budgeting problems similar to other
businesses
2. Evaluating costs and benefits in long run contracts
A. Micro-level – cost/benefit
B. Macro-Level – corporate strategy
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Mega Deals