Transcript Entertainment and Media: Markets and Economics Contracts Between Talent and Entertainment Producers Appendix: A-Rod Deal 3:C - 1(17) Contracts.

Entertainment and
Media: Markets and
Economics
Contracts Between Talent and
Entertainment Producers
Appendix: A-Rod Deal
3:C - 1(17)
Contracts
The Texas Deal for Alex Rodriguez
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2001
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Total:
3:C - 2(17)
Signing Bonus = 10M
21
21
21
21
25
25
27
27
27
27
$252M ???
Contracts
The Real Deal
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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.
3:C - 3(17)
Contracts
Costs
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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)
3:C - 4(17)
Contracts
PDV
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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

t
(1

.08)
t  2000
Discount factor for 10 years out is .46
PDV of Costs =
Discount factor for 20 years out is .21
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3:C - 5(17)
Total costs: About $165 Million in 2001
Contracts
Benefits
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More fans in the seats
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3:C - 6(17)
Gate – the major component
Parking
Merchandise
Miscellaneous
Increased chance at playoffs and world series
Sponsorships
(Loss to revenue sharing)
Franchise value
Contracts
How Many New Fans?
Projected 8 more wins per year.
 What is the relationship between wins and
attendance?
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Not known precisely
Many empirical studies (The Journal of Sports
Economics)
My own study…
3:C - 7(17)
Contracts
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.
3:C - 8(17)
Contracts
A Dynamic Model for Attendance
How 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 year
instead?
How would Texas' attendance change if they won 8 more games every year?
Y(t) = a(1+c+c 2  ...  c t-1 )  bX*(1+c+c2 ...  c t-1 )+c t Y1984
Suppose 0 < c < 1. Y(later year) =
a
b
+
X*.
1-c
1-c
dY(later year) b
=
(This is per game)
dX *
1-c
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Contracts
Baseball Data
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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
3:C - 10(17)
Contracts
Baseball Data
3:C - 11(17)
Contracts
The Regression Model to Translate Wins into
Attendance
Attendance(i,t) = α team + γAttendance(i,t-1)
i = team, t = year
+ β1 Wins(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)
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Contracts
3:C - 13(17)
Contracts
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)
3:C - 14(17)
Contracts
Marginal Value of an A Rod
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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
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7.5% for League Championship * 10M
3.75% for World Series * 10M
Total, about $1,000,000 (if they do it every year!!)
Contracts
3:C - 16(17)
Contracts
The IPN Player
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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.
3:C - 17(17)
Contracts