Chapter 2

Chapter 2Sports and Entertainment Economics

1. Top revenue producing movies2. The cost of making Spiderman

Sites

What is Profit?◦ the amount of $ remaining from revenues after all

expenses are paid.◦ Revenue: $ a business receives from the sale of

goods and services.◦ Movie ticket sales have increased each year but

movie studios struggle for earnings◦ Costs of production and marketing have increased

even more.◦ Studios are looking for ways to cut costs and

make more profit.

Profit Makers

Home video and international box-office sales are sometimes larger sources of income than US ticket sales.

Studios seek out partnerships with rival studios to help produce, promote & distribute films.

Movie studios, sports teams, sports venues, and the various media companies are ALL in the business to make $$$$.

Means making decisions to use resources in ways that result in the greatest profit.◦ Ex: NFL teams have total revenue in excess of

$5.5 billion. Teams operate under agreement to share total revenue among all 32 teams.

◦ The financial resources that teams share is called the total football revenue (TFL).

Includes revenues from local and national TV broadcasts, ticket sales, and sales of concession and merchandise

Profit Motive

Agreement ends in 2012 (hence the lockout)◦Players receive about 50% of TFL.◦Another percentage goes to pay all other

costs of operating the business.◦About $150 million per season is

transferred from the top 15 high-revenue teams to the low-revenue teams.

◦The money that is left after all of the expenses are paid, including salaries and taxes, is the profit.

NFL

New Agreement (July 2011)◦Division of revenue

53% to owners 47% to players

◦Salary Cap $120 million in salary and bonuses Plus $22 million in benefits

NFL

Worldwide distribution revenue is critical for movie profits.◦ Income from international release of a movie can

increase the box-office take by 50-100% over domestic ticket sales.

◦ Titanic: biggest ticket seller in last 100 yrs. With $600.8 million in US ticket sales and $1,234.6 million in overseas tickets, more than double the total sales of Star Wars which is 2nd in sales.

CULTURAL OPPORTUNITIES

When Toyota, a television sponsor of Desperate Housewives, found out the show would be available free to viewers, it could have pulled its support. Instead Toyota signed on to sponsor the online version as well. Toyota views the Internet as a way to complement the older technology of TV. The Internet gives viewers more choices about when they can view their favorite shows. Toyota benefits from the increased exposure both on television and the Internet.

What are some additional opportunities for online viewers traditional TV shows? Do you think the Internet will totally replace television? Why or why not?

What do you think??

The study of how goods and services are produced, distributed, and consumed.

◦Macroeconomics – study of economics of the entire society (the big picture).

◦Microeconomics – study of relationships between individual consumers and producers. Focus of sports & entertainment marketers

ECONOMICS

People have limited time and money to spend on sports and entertainment.◦ Decisions are based on the amount of satisfaction

they believe they will receive from the product.

◦ Economic utility: amount of satisfaction a person receives from the consumption of product/service

◦ S&E marketers are constantly seeking ways to increase the economic utility of products/services.

Sports & Entertainment Economics

Form utility: when the physical characteristics of a product/service are improved

◦ Ex: offering a movie in DVD format vs. full length film

◦ DVD can be mailed in an envelope; the full length movie must be packaged for shipping

4 Types of Utility

Time utility: result of making the product/service available when the consumer wants it.

◦ Ex: Movie theater schedules several different showings of movie throughout the day

Types of Utility

Place utility: ensures that the product is available where the consumer wants it.

◦ Ex: if the consumer wants to watch a movie at home, then the movie must be made available for purchase or rental at conveniently located retail outlets

Types of Utility

Possession utility: results from making the product/service available at an affordable price.◦ Ex: to take possession of the movie, the consumer

must be able to obtain it at an affordable price

◦ Ex: allowing consumers to rent instead of buy

◦ Ex: having more than one payment option is a convenience for customers

Types of Utility

Opening a sports & entertainment business requires taking risks.◦ Risk is the possibility of financial gain or loss or

personal injury Financial loss can occur if a business does not

make a profit and has to close Personal injuries can occur if businesses do

not take the appropriate safety precautions Must consider types of risk.

RISK MANAGEMENT

Boston preparing for final game of Stanley Cup

Articles/Video Clipshttp://www.businessweek.com/ap/financialnews/D9NSDPHO0.htm

Use for Sports Marketing discussion about risk...http://abcnews.go.com/US/texas-rangers-lower-flags-create-fund-fan-fell/story?id=14025751 (Texas Ranger Fan)http://www.huffingtonpost.com/2011/08/22/fans-fight-49ers-raiders-ravens_n_932795.html (NFL fight)http://abcnews.go.com/US/slideshow/indiana-state-fair-stage-collapse-14302448 (Indiana State Fair pics)http://abclocal.go.com/wls/video?id=8305742 (Indiana State Fair video)Who, if anyone, is to blame?What preventative measures should be taken?Kinds of risk?

1. Natural Risk Includes weather conditions that can’t be avoided

Tornadoes, blizzards, hurricanes, droughts, floods, etc.

Hurricane Katrina Population decreased by 80% Hotels, restaurants, & other tourist attractions lost

months of business 2010 Vikings/Eagles Sunday Night game was

moved to Tuesday (snow)

3 Types of Risk

2. Human Risk Can result from customer dishonesty, employee

theft, and employee incompetence

Customers: shoplifting, credit card fraud, bad checks

If employees aren’t trained properly, they can present a financial and safety risks

3 Types of Risk

3. Economic Risk Result in changes of the economy.

The economy affects consumer’s lifestyles which plays an important role in deciding purchases

Good economy = consumers have more discretionary income

No guarantee that consumer demand will remain consistent for a long period of time.

3 Types of Risk

Gain or Loss Risk Sports teams that don’t attract enough fans can

cease to exist People who started team can lose investments.

If team is successful, investors make $$$ Since outcome is unknown…speculative risk

If there’s a chance of an event occurring could result only in risk….pure risk

Ex: if a flood closes a golf resort

Additional Classifications

Controllable Risk If a loss can be prevented or the likelihood of its

occurrence reduced Ex: a theater has adequate fire exits, sprinkler

systems, and employees that have been trained on safety procedures

Uncontrollable Risk If a loss can’t be controlled

Ex: If a tornado blows away the theater

Additional Classifications

Insurable Risk Pure risk for which the chances of loss are

predictable and the amount of the loss can be estimated

Ex: the likelihood of a fire and the average dollar amount of the fire can be calculated using stats similar losses that have occurred in the past

Additional Classifications

Involves preventing, reducing, or lessening the negative impacts of risks by using the following strategies…

1. Risk avoidance2. Risk insurance3. Risk transfer4. Risk retention

*Marketers must develop risk strategies.*Careful planning is required to prevent

financial loss and personal injuries.

Risk Management

1. Risk Avoidance Hire security personnel/perform background

checks Unlock fire exits in a theater

Can be sued if appropriate steps are not taken Liable: means the business is legally

responsible for damages and may have to pay medical costs and other losses

Added measures: security guards, video surveillance, controlled access to public/private areas, safety training

Managing Risk

2. Risk Insurance

S&E business contract with insurance companies and other financial institutions to cover risks of financial loss

Insurance companies can predict potential loss

Ex: property insurance, liability insurance, or theft insurance

Managing Risk

3. Risk Transfer

Can transfer risks to another company or consumer

◦ Ex: park wanting to host a fireworks display may contract with another company to be responsible for the show

◦ Ex: statement on the back of the event ticket saying that the promoter isn’t responsible for any harm to the ticket holder

Managing Risk

4. Risk Retention Businesses that face uninsurable risks must

assume the cost of the risk

Owner of theater production company may not sell as many tickets as planned due to bad reviews

Business can set aside funds to use for unplanned circumstances.

Managing Risk

What do you think??

List four steps a sports venue could take to avoid risk of injury to fans attending games.

ESPN's Outside The Lines: South Florida Youth Football Stands Teeming With GamblersBy Gus Garcia-Roberts, Tue., May 3 2011 at 10:13 AM ESPN's Outside the Lines spent some times in the stands watching South Florida Youth Football League games-- which feature 30,000 kids aged 5 to 15 from Palm Beach to Miami-- and emerged with a pretty stunning short documentary on how gamblers have turned the matches into their own personal cockfights.

From a coach confronted with footage of him exchanging money, to brawls breaking out in the stands, to young players stashing hundred-dollar bill graft payments in their uniforms, the evidence here is beyond damning. The league's website now has an alert about gambling, saying that any coaches caught gambling will receive a "lifetime ban".

Gambling in Youth Football

Gambling Follow Up

Ethics – a system of deciding what is right or wrong in a reasoned and impartial manner.

◦ Important part of sound decisions.

◦ Integrity, trust, and fairness.

◦ Ex: 1998 NBA lockout (Olajuwon, Shaq)

BUSINESS ETHICS

Principles – high standards of rules and guidelines in both business and personal life.

◦ Character Development: can be divided into stages in which people advance from childish behavior to mature and responsible behavior based on principles.

Ethics and Character Matter!

Early Stages: Child learns that bad behavior will result in punishment; good behavior will result in rewards.

Later stages: Eventually reach a stage which acts are based on a set of principles. Consider results and others when making decisions.

Some youth may have difficulty developing the later stages of ethical behavior due to lack of mature adult role models.

Character Development

Do poor examples of ethical behavior receive more attention while good examples are ignored?

Are there more instances today of unethical behavior or is it just being reported more than in previous decades?

Do people justify unethical behavior by saying “everybody is doing it”?

Questions to ponder

Seeking an Advantage: Ex: athletes taking illegal drugs

When Being Bad is Profitable: Ex: athletes being assessed fines for inappropriate behavior

Effective and Ethical: Good decisions are the right choices for the long term.

Business Behavior

College-Mascot Controversies◦ http://education.newsweek.com/photo/2010/10/18/college-

mascot-controversies.html

Steroid Scandal Could Affect Endorsement Deals◦ http://

advertising.about.com/od/celebrityendorsements/a/steroidscandal.htm

Worst Scandals in College Sports

Penn State sponsors

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Main purpose of all business activity surrounding sports and entertainment is to make a profit.

Finding Funding: individuals and businesses make profits at many levels.

Each entity has the possibility to make or lose money.

FINANCIAL ANALYSIS

Either the people who are the owners of the event idea must risk their own money to stage and market the event, or they must find other who are willing to invest in or sponsor the event.

Owners/originators must have plan that will convince investors of the potential for profit. The plan must show..◦ What expenses will be incurred◦ How revenue will be produced from the sale of tickets

and other items

FINANCIAL ANALYSIS

Investors generally provide funding for an event to cover all the costs that must be incurred before tickets are ever sold…◦ Ex: salaries for the cast and crew◦ Ex: costs of the facilities◦ Ex: costs of promoting the event to fans◦ Ex: other costs that go into making the event happen

Return on Investment (ROI): income from a venture that is distributed to investors.

FINANCIAL ANALYSIS

Money Sources…◦ Generated through ticket sales◦ Broadcast rights◦ Licensing◦ Facilities

Television networks generate revenue by selling commercial time to advertisers and by selling programs to affiliated stations.

FINANCIAL ANALYSIS

Decisions made about where and how to spend money impact profitability.◦ Financing involves budgeting, finding ways to pay the

costs of doing business, and managing the costs.◦ Careful financial plans must be prepared and records

must be kept.◦ Forecast is developed to predict expenses to be incurred

and revenues to be received from the event.◦ Budget: a plan for how available funds will be

spent “Road Map” for spending – to control costs

WHERE IS THE MONEY?

Balance Sheet◦ Shows assets (items of value including cash, property,

etc.)◦ Shows liabilities (purchases made on credit and loans)◦ Show company’s net worth◦ Specific time

Income Statement◦ Shows all revenues received◦ Shows all expenses incurred◦ Over a period of time

Financial Statements

Forbes Names the Most Valuable Sports Brands: Teams, Athletes, Events and Businesses◦ http://

www.theoffside.com/world-football/forbes-names-the-most-valuable-sports-brands-teams-athletes-events-and-businesses.html

Livestrong Sporting Park Hoping to Set the Standard for Future MLS Stadiums◦ http://

blogs.forbes.com/sportsmoney/2011/06/10/livestrong-sporting-park-hoping-to-set-the-standard-for-future-mls-stadiums/

Rutgers University hires firm to boost sports ticket sales ◦ http://www.businessweek.com/ap/financialnews/D9NMDO381.htm

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KC unveils $200 million new soccer stadium◦ http://www.businessweek.com/ap/financialnews/D9NOCKSO0.htm

The Problems With Paying College Athletes◦ http://

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In the FCS Huddle: Promotions score big in the FCS◦ http://

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