Professor William Greene
Contracts Between Talent and
Bargaining Situations and
The bilateral monopoly
Downward sloping demand
from the seller’s viewpoint
The bargaining (monopolist – the star)
Upward sloping supply
from buyer’s viewpoint
? (monopsonist – the
The outcome depends on the bargaining strength of the two parties.
Who Are the Simpsons?
Kelsey Grammer $2M/episode+
Ray Romano $1.5M per, +
Jason Alexander $0.6M per
Friends $0.7M per
Fox: Advt. + Syndication: $1.5B
Julie Kavner $0.125M per
What is the bargaining
situation? Who holds the
stronger hand? Why?
May, 2004 settlement for “fees,” and no percentage of earnings from the show.
Simpsons Redux? (2007)
Video Game Voice Overs
Screen Actors Guild (strike?)
Added value from big name actors
Conventions in the movie business
A game voice is less important
It’s not Hollywood
Demand for additional fees for 400,000+
sales was a deal breaker.
Moved to Tinseltown (LA)
Which is the more
Reality television became a force because viewers liked it and because, without celebrities or big
salaries, it was cheap. The shows can cost as little as $200,000 for a half-hour episode, compared
with the $1 million or more typical for hourlong scripted shows.
But now the genre is creating its own stars on shows like “Jersey Shore,” “The City” on MTV and the
“Real Housewives” franchise on Bravo. With stars come demands for higher salaries, threatening the
inexpensive economic model of reality TV. Are the shows falling victim to their own success?
Countervailing Market Power
Composers, Authors, Publishers of
pieces of music own their copyrights
Do they have any market power?
“Buyers?” Record labels, elevator
operators (muzak) websites, etc.
“Sellers?” Cheryl Crow, Britney, 5 million
Union organizers: ASCAP, BMI and
SESAC. What function do they play in
There is No Net
Forrest Gump (1994) (Paramount Pictures)
US Box Office $330M
Foreign Box Office $350M Total, About $830M
Soundtracks, etc. $150M
Net profit -$ 62M (!) A disappearing act?
U.S. Box 50% to Exhibitors (Theaters)
Paramount Receives Approx $191M
Distribution “Fee” = 32% $ 62M
Distribution Cost $ 67M (Advt., Prints, Screening, etc.)
Advt. Overhead $ 7M (10% of Distribution Cost)
Production “Negative” Cost $112M
(Tom Hanks, Robert Zemekis, $20M (8% of GROSS, each)
Studio Overhead $15M
Interest on Negative Costs $ 6M
Net Profits from the Project -$62M
Winston Groom, Author 19% of NET = 0
Eric Roth, Screenwriter 19% of NET = 0
Coming to America (1988) – The Art Buchwald Case
Profit Sharing Contracts
Simple Risk Sharing by Bigger Stars
Hanks/Zemekis: (Gump) Fixed % of Gross, no fixed
Midler/Dreyfuss (Down and Out in Beverly Hills) All
fixed fee, $600,000. Low cost
Currently, Cruise, Hanks, Julia Roberts work on
commission – they participate in the gross
Why the participants in the “Net?”
Small bargaining strength
Last residual claimant to output from production
Least favorable position in risk chain.
That Tom Cruise Contract
Box Office – Gross vs. Net.
Large participation in box office gross (20%+)
Now only 1/3 of the story.
Originally: 80% of total receipts kept by studios.
20% “Royalty” is the “gross”
Mission Impossible: 100% accounting; Gross is receipts
after direct expenses.
MI-1: 22% participation in the new gross. ($70M)
MI-2: 30% of 40% royalty based on total gross (before
MI-3: same deal. Smaller gross revenues)
Paramount has (apparently) decided it can no longer
afford huge budget actors like Tom Cruise.
Reshifting Risk in the New
Most of the three-dozen or so top-billed actors in the 10 films up for best picture in this Sunday’s
Academy Awards ceremony, including blockbusters like “Up” and “Avatar,” appear to have received
relatively minuscule upfront payments for their work.
When the estimated salaries of all 10 of the top acting nominees are combined, the total is only a little
larger than the $20 million that went to Julia Roberts for her appearance in “Erin Brockovich,” a best-
picture nominee in 2001, or to Russell Crowe for “Master and Commander,” nominated in 2004.
Once upon a time, the biggest stars were rewarded with deals that paid them a percentage of so-
called first-dollar gross receipts; that is, they began sharing in the profits from the first ticket
sale, not waiting until the studio turned a profit.
Now studios often insist that even top stars forgo large advance payments in return for a share of
the profits after a studio has recouped its cash investment. The fashionable deal now is called
“CB zero.” It stands for “cash-break zero,” and refers to an arrangement under which the star or
filmmaker begins collecting a share of profits after the studio has reached the break-even point.
“For Movie Stars, the Big Money is Now Deferred,” NYT, 3/4/10
Then and Now: Terminator 3
Q. How much was that guaranteed “pay-or-play” fee?
Q. Plus bus fare...?
A. Actually, yes, the contract did include a perk package to cover essentials. It provided a lump-sum
payment of $1.5 million for private jets, a fully equipped gym trailer, three-bedroom deluxe suites on
locations, round-the-clock limousines, personal bodyguards--that sort of thing.
Q. So, let’s see--you made $30,750,000 on this film?
A. Not including my contingent compensation.
Q. And what is that contingent on?
A. The movie reaching what is known as “cash break-even.” According to my contract, once the movie
reaches cash break-even, I get a sum equal to 20 percent of the total adjusted gross receipts from every
market in the world--including movie theaters, videos, DVDs, television licensing, in-flight entertainment,
game licensing, and so forth.
Q. But doesn’t Hollywood accounting famously use smoke and mirrors to make sure movies never reach
A. Of course you hear about that happening to weaker players , but my contract--thanks to my lawyer,
Jacob Bloom--is pretty tough. Take video and DVD sales, for example. Under the standard Hollywood
contract, studios only credit the film with a video “royalty” equal to 20 percent of the sales. That means
that if DVD sales total $20 million, only $4 million of that is counted towards reaching the break-even
Q. And in your contract?
A. The royalty is calculated at 100 percent of total video and DVD sales in determining my cash break-
even. So if $20 million worth of DVDs are sold by Warner Brothers, $20 million is counted towards
reaching the threshold where I begin collecting my 20 percent.
Mega Deals for Stars
A Capital Budgeting Computation
Costs and Benefits
Long Term: Need for discounting
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.
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
“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)
Tiger Woods. What Mike Tyson might have been.
* http://www.salon.com/people/feature/2000/02/12/garnett/index.html 2/12/2000
Labor Contract Supercedes
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).
Large sports contracts are now routine – mostly in baseball
* Traded to NYY 2004, 21.3M subsidy to NY from TX until 2007.
The Texas Deal for Alex
2001 Signing Bonus = 10M
Total: $252M ???
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.
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)
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
All costs in year t
PDV of Costs =
t 2000 (1 .08) t
Discount factor for 10 years out is .46
Discount factor for 20 years out is .21
Total costs: About $165 Million in 2001
More fans in the seats
Gate – the major component
Increased chance at playoffs and world series
(Loss to revenue sharing)
How Many New Fans?
Projected 8 more wins per year.
What is the relationship between wins
Not known precisely
Many empirical studies (The Journal of
My own study…
A Dynamic Model for Attendance
Attendance 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.
Suppose Y(0) = Y0 (Year 0 is 1984; Y(0) = 1984 attendance)
Suppose we fix X(t) at some X* and at 0.
What 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)))
Y(t) depends on everything in the history, but the most recent influences
are the most important.
A Dynamic Model for Attendance
How does the path of the teams 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 year
How would Texas' attendance change if they won 8 more games every year?
Y(t) = a(1+c+c2 ... c t-1 ) bX*(1+c+c2 ... c t-1 )+c t Y1984
Suppose 0 < c < 1. Y(later year) = + X*.
dY(later year) b
= (This is per game)
dX * 1-c
31 teams, 17 years (1985-2001; fewer years for 6 teams)
Winning percentage: Wins = 162 * percentage
Average attendance. Attendance = 81*Average
Average team salary
Number of all stars
Manager years of experience
Percent of team that is rookies
Mean player experience
Dummy variable for change in manager
The Regression Model to Translate Wins into
Attendance(i,t) = α team + γAttendance(i,t-1)
i = team, t = year + β1Wins(i,t) + β 2 Wins(i,t-1)
+ 3 All_Stars(i,t)
Loyalty effect + 4 Manager Experience(i,t)
+ 5 Pct_Rookies(i,t)
+ 6 Lineup_Changes(i,t)
+ 7 Change_Manager(i,t)
Translate Attendance into Revenue
Marginal 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)
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!!)
Team lost more games
They were never out of last place
The fans didn’t come
Was it entirely wrong?
What would have happened without
Traded to New York after 2004 season.
What about the Yankees?
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
Certain to break Bonds’ HR
New deal: $275M over 10 years
Chicago Cubs offer included team
That David Beckham Contract
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
$50m/ year, 5 years
Major league soccer (entire league) does not
clear $50m in any year. (LA Galaxy is the only
team that makes a profit at all as of 2006.
Others are getting close.)
What is the nature of the “contract”
Salary is about $6,000,000
The rest is anticipated endorsements
Beckham’s relationship to the LA Galaxy
For whom does Beckham “work?”
What does it mean?
really hired to play
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
six 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
Contracts and Profits
Labor claims to profit supercede both bond and
stockholders (when they exist – most teams are
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?
Live Nation 360 Contract
Two Sides to the 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
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.
Madonna Cost Benefit Test
Her side: $50M cash+stock, $18M signing
bonus, $51M for 3 albums
Their side: Assume $200M in tour revenue (as
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.
The Missing Elements
Other markets: Madonna’s clothing line
Live Nation’s Image
Signal to market
Attract Jay-Z and others
GLITTER! And Uncertainty
(Need we say more?)
More #1 hits than anyone else in history
Early 2002: $80M contract by EMI
EMI: How do I get out of this?
Glitter revenue: 16M
Now, the uncertainty: 5 albums in the $80M
contract. How well must she do for them to make
Divorce: EMI pays her $28M to go away.
Entertainment and Media: Markets and
1. Contracts with labor talent in
entertainment. Bilateral monopoly style
2. Capital budgeting problems similar to
3. Evaluating costs and benefits in long run