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Entertainment and Media: Markets and Economics

Contracts Between Talent and Entertainment Producers

Appendix: A-Rod Deal

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The Texas Deal for Alex Rodriguez

2001 Signing Bonus = 10M 2001 21 2002 21 2003 21 2004 21 2005 25 2006 25 2007 27 2008 27 2009 27 2010 27 Total: $252M ???

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The Real Deal Year Salary Bonus Deferred Salary 2001 21 2 5 to 2011 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 Deferrals accrue interest of 3% per year.

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Costs

Insurance: About 10% of the contract per year (Taxes: About 40% of the contract) Some additional costs in revenue sharing revenues from

the league (anticipated, about 17.5% of marginal benefits – uncertain)

Interest on deferred salary - $150,000 in first year, well over $1,000,000 in 2010.

(Reduction) $3M it would cost to have a different shortstop. (Nomar Garciaparra)

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PDV

Using 8% discount factor Accounting for all costs Roughly $21M to $28M in each year from 2001 to 2010, then the deferred payments from 2010 to 2020

Total costs: About $165 Million in 2001

t 2020

tt 2000

All costs in year tPDV of Costs =

(1 .08)

Discount factor for 10 years out is .46

Discount factor for 20 years out is .21

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Benefits

More fans in the seats Gate – the major component Parking Merchandise Miscellaneous

Increased chance at playoffs and world series Sponsorships (Loss to revenue sharing) Franchise value

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How Many New Fans?

Projected 8 more wins per year. 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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A Dynamic Model for AttendanceAttendance in year t depends on

(1) What happens in year t, X(t) = wins, all stars, rookies, manager changes, etc.

(2) Fan loyalty to the team, Y(t-1) = attendance last year

(3) Random events, ε(t) = breakout stars, bad luck, player injuries, etc.

Y(t)=a+bX(t)+dY(t-1)+ε(t)

Suppose Y(0) = Y0 (Year 0 is 1984; Y(0) = 1984 attendance)

Suppose we fix X(t) at some X* and at 0.

W

hat values does Y(t) take

Y(1985) = a + bX* + cY1984

Y(1986) = a + bX* + c(a + bX* + cY1984)

Y(1987) = a + bX* + c(a + bX* + c(a + bX* + cY1984))

Y(1988) = a + bX* + c(a + bX* + c(a + bX* + c(a + bX* + cY1984)))

Reinterpretation:

Y(t) depends on everything in the history, but the most recent influences

are the most important.

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A Dynamic Model for AttendanceHow does the path of the team's attendance change when something

in X* changes. For example, if we assumed the team had 3 all stars

on it, how would everything be different if we had 4 all stars every

2 t-1 2 t-1 t

year

instead?

How would Texas' attendance change if they won 8 more games every year?

Y(t) = a(1+c+c ... c ) bX*(1+c+c ... c )+c Y1984

a bSuppose 0 < c < 1. Y(later year) = + X*.

1-c 1-cdY(later y

ear) b= (This is per game)

dX * 1-c

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Baseball Data 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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Baseball Data

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The 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

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Translate Attendance into RevenueMarginal Value of One Win

Using the formula for a dynamic equilibrium

dAttendance b[Wins(t)] + b[Wins(t-1)] + b[Allstars(t)] =

d(Games Won + Allstar Added) 1 - c[Attendance(t-1)]

9563 + 2299.92 + 17090.5

= (1 - .54572)

= 63,734 (Fans per Win + All star effect)

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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)

Increased probability of reaching playoffs times payoff of reaching 7.5% for League Championship * 10M 3.75% for World Series * 10M Total, about $1,000,000 (if they do it every year!!)

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The IPN Player

A-Rod and Yankees – The Iconic Performance Network Player Attendance rose to 4M in 2005,

4.3M in 2007 MVP in 2005 and 2007 Huge growth in the YES network Seemed certain to break Bonds’

HR record (Asterisk?) New deal: $275M over 10 years

Chicago Cubs offer included team ownership.

Drug Problems probably derailed this career path.