Entertainment and Media: Markets and Economics

1. Entertainment and Media: Markets and Economics Entertainment and SportsMega Deals

2. 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 deal. (E.g., total home run bonuses, for Barry Bonds) • How can the investor do the cost/benefit test?

3. 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.

4. 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.”

5. 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.

6. 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.

7. Lebron James – Looks Like Kevin

8. 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)

9. 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).

11. That David Beckham Contract • $6M/Year • The Beckham rule: Each team can have a Beckham • 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

12. 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 2016, the 20 league team is getting close. Observers differ whether MLS is profitable at all. • What is the nature of the Beckham “contract” • Salary is about $6,500,000 • The rest is anticipated endorsements • Beckham’s relationship to the LA Galaxy • For whom does Beckham “work?” He essentially owned the team. (Retired in 2012)

13. Large sports contracts are now routine – mostly in baseball * Traded to NYY 2004, 21.3M subsidy to NY from TX until 2007.

14. The Alex Rodriguez Deal Direct Costs Year 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 2013 2004 21 2 4 to 2014 2005 25 2 4 to 2015 2006 25 4 to 2016 2007 27 3 to 2017 2008 27 3 to 2018 2009 27 3 to 2019 2010 27 5 to 2020 (+Interest > 1,000,000) Insurance, Taxes, Loss of Revenue Sharing: About 50% of the contract per year Benefits • Projected 8 more wins per year • More fans in the seats because of those wins: Gate, Parking, Stuff • What 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

15. A Regression Model to Translate Wins into Attendance Loyalty effect • 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 i = team, t = year

16. About 250,000 fans

17. 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.

18. 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?

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

20. Live Nation 360 Contract

21. Two Sides to the Madonna 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.

22. 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.

23. The Missing Elements • Other markets: Madonna’s clothing line • Live Nation’s image • Live Nation’s signal to market • Attract Jay-Z and others

24. New 360 Deal for Madonna? Her 10-year partnership with concert-promoter Live Nation expires in 2017, just nine months after she wraps up her third and final tour under the deal. And no one expects the soup-to-nuts 360 deal that guaranteed Madonna an unprecedented $120 million in 2007 to be renewed in its current incarnation. “[The 360 contract] is a relic,” Albert Fried analyst Rich Tullo said of the deal pioneered by Live Nation that, in exchange for providing marketing, promotion and touring support, gave the promoter income streams from merchandising, performing and recording. But consuming patterns have changed drastically in the past decade. Music lovers often stream or pirate their favorite tunes as US album sales have cratered to 257 million units last year from 501 million units in 2007. “Only a half-dozen artists make more than $10 million from any one album anymore — not nearly enough to justify the upfront expenses of a 360 deal,” Tullo said. That places unprecedented emphasis on an artist’s concerts, at which Madonna has historically excelled. Her “Sticky & Sweet” tour in 2008 raked in $408 million, the biggest box office ever for a solo artist, while her “MDNA” tour in 2012 netted $305 million.