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					Entertainment and
Media: Markets
and Economics
Professor William Greene
Entertainment and
Media: Markets
and Economics
 Contracts Between Talent and
 Entertainment Producers
            Bargaining Situations and
            Market Power
            The bilateral monopoly
                                             Downward sloping demand
                                             from the seller’s viewpoint
The bargaining                               (monopolist – the star)
range
                                                      Upward sloping supply
            Ps
                                                      from buyer’s viewpoint
      ?                                               (monopsonist – the
                                                      studio)
            Pb




    The outcome depends on the bargaining strength of the two parties.
             Who Are the Simpsons?
                                                   Other Shows:
                                                   Kelsey Grammer    $2M/episode+
                                                   Ray Romano        $1.5M per, +
                                                   Jason Alexander   $0.6M per
                                                   Friends           $0.7M per
                                                   The Simpsons:
                                                   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

 Game Producers
     A game voice is less important
     It’s not Hollywood
 Demand for additional fees for 400,000+
  sales was a deal breaker.
Friends vs.
Law&Order


              Moved to Tinseltown (LA)

                Which is the more
                profitable show?
           Bargaining




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
      others
 Union organizers: ASCAP, BMI and
  SESAC. What function do they play in
  the market?
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
http://io9.com/5747305/how-much-money-does-a-movie-need-to-make-to-be-profitable
Profit Sharing Contracts
(Weinstein)
 Simple Risk Sharing by Bigger Stars
   Hanks/Zemekis: (Gump) Fixed % of Gross, no fixed
    fee.
   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.
               DVDs.
                     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
                      expenses) ($38.4M)
                     MI-3: same deal. Smaller gross revenues)
               Paramount has (apparently) decided it can no longer
                 afford huge budget actors like Tom Cruise.


http://www.edwardjayepstein.com/cruise.htm
                Reshifting Risk in the New
                Movie Economy
   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
                 http://www.edwardjayepstein.com/x-rar1.htm
Q. How much was that guaranteed “pay-or-play” fee?
A. $29,250,000.
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
“break-even”?
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
point.
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
     Certainty: Costs
     Uncertainty: Benefits
 Long Term: Need for discounting
                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.
           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)
              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
            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).
               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
           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 ???
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.
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)
    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
                     t  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
  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
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…
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.

             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.
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)))
Reinterpretation:
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
 instead?

 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

                                           a     b
 Suppose 0 < c < 1. Y(later year) =           +     X*.
                                          1-c   1-c
 dY(later year) b
               =     (This is per game)
     dX *        1-c
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
Baseball Data
     The Regression Model to Translate Wins into
     Attendance

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)
                        + (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!!)
Conclusion?
 What happened
     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
  Rodriguez?
 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
      network
    Certain to break Bonds’ HR
      record (Asterisk?)
    New deal: $275M over 10 years

 Chicago Cubs offer included team
  ownership.
A Postscript
               That David Beckham Contract

                $6M/Year
                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
                   million annually


http://www.latimes.com/entertainment/news/arts/la-et-rutten15-2009jul15,0,818801.story
David Beckham

 $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?


                                                                             Was Beckham
                                                                             really hired to play
                                                                             football?




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
million. (http://www.msnbc.msn.com/id/20534781/)
Contracts and Profits
 “Labor contract”
 Labor claims to profit supercede both bond and
    stockholders (when they exist – most teams are
    purely private).
   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




http://www.msnbc.msn.com/id/21324512/ (10/30/09)
               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
    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.



http://www.msnbc.msn.com/id/21324512/ (10/30/09)
Madonna Cost Benefit Test

 Her side: $50M cash+stock, $18M signing
  bonus, $51M for 3 albums
 Their side: Assume $200M in tour revenue (as
  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.
  The Missing Elements


 Other markets: Madonna’s clothing line
 Live Nation’s Image
 Signal to market
 Attract Jay-Z and others
http://www.nytimes.com/2008/12/28/business/media/28radio.html?scp=1&sq=Satellite%20radio+payday&st=cse
GLITTER! And Uncertainty
 (Need we say more?)
 Mariah Carey
    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
    Costs: $26M
    Loss: $10M
    Now, the uncertainty: 5 albums in the $80M
     contract. How well must she do for them to make
     ANY money????????
 Divorce: EMI pays her $28M to go away.
Entertainment and Media: Markets and
Economics
           1. Contracts with labor talent in
           entertainment. Bilateral monopoly style
           bargaining situations.
           2. Capital budgeting problems similar to
           other businesses
           3. Evaluating costs and benefits in long run
           contracts

				
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