1. Sports and Entertainment Economics
Chapter 2
Sports and Entertainment Economics

2. Sites
Top revenue producing movies
The cost of making Spiderman

3. Profit Makers 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.

4. 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 $$$$.

5. Profit Motive
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

6. NFL 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.

7. NFL New Agreement (July 2011) Division of revenue Salary Cap
53% to owners
47% to players
Salary Cap
$120 million in salary and bonuses
Plus $22 million in benefits

8. CULTURAL OPPORTUNITIES
Worldwide distribution revenue is critical for movie profits.
Income from international release of a movie can increase the box-office take by % 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.

9. What do you think??
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?

10. ECONOMICS
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

11. Sports & Entertainment 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.

12. 4 Types of Utility
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

13. 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

14. 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

15. 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

16. RISK MANAGEMENT
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.

17. Articles/Video Clips Boston preparing for final game of Stanley Cup
Use for Sports Marketing discussion about risk...
(Texas Ranger Fan)
(NFL fight)
(Indiana State Fair pics)
(Indiana State Fair video)
Who, if anyone, is to blame?
What preventative measures should be taken?
Kinds of risk?

18. 3 Types 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)

19. 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

20. 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.

21. Additional Classifications
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

22. 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

23. 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

24. Risk Management
Involves preventing, reducing, or lessening the negative impacts of risks by using the following strategies…
Risk avoidance
Risk insurance
Risk transfer
Risk retention
*Marketers must develop risk strategies.
*Careful planning is required to prevent financial loss and personal injuries.

25. Managing Risk 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

26. 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

27. 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

28. 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.

29. What do you think??
List four steps a sports venue could take to avoid risk of injury to fans attending games.

30. ESPN's Outside The Lines: South Florida Youth Football Stands Teeming With Gamblers
By Gus Garcia-Roberts, Tue., May 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

31. BUSINESS ETHICS
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)

32. Ethics and Character Matter!
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.

33. Character Development
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.

34. Questions to ponder
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”?

35. Business Behavior
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.

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37. FINANCIAL ANALYSIS
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.

38. 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

39. 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.

40. 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.

41. WHERE IS THE MONEY?
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

42. Financial Statements Balance Sheet Income Statement
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

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