Ever-increasing media broadcast rights

Ever-increasing media broadcast rights


One of the most amazing phenomena in the sports
industry over the last generation has been the seemingly unabated ‘rise and rise’ of
the value of broadcast rights. Indeed, in 1999 top sports economists Rod Fort and James
Quirk wrote: “It’s a no-brainer…over the past 20 years, from 1980 on, the most important
single factor responsible for the wild explosion in franchise prices and in player and coaching
salaries is the huge increase in pro sports’ television income”. And in the last decade
or so, we’ve seen more of the same. With reference to the AFL, from 1988, the rights deals increased
in successive waves from $30,000,000 to around $80,000,000 to $150,000,000 to $500,000,000,
then to $780,000,000 over the period 2007-11. And just when you think they’ve plateaued,
they manage to pull yet another rabbit out of the hat — the most recent rights sold
for a staggering $1,253,000,000, and the experience is similar in the NRL, not to mention many
other analogous stories across European football and the North American Major Leagues. So what
causes media networks to bid ever-increasing amounts to secure the rights? Well, they believe
these sports will help boost ratings and provide other benefits, but proceed down the chain
by a level, and the funds ultimately come from advertisers who want to get you to consume
their product. In that desire, these advertisers have been willing to throw more and more funds
into advertising. Let’s try to drill down into this aspect, by modelling firms and advertising
choice. The ‘worth’ of advertising is related to its marginal revenue product. But what
if the advertising’s impact falls directly on brand switching (not really on overall
consumption increases)? Then, the net result depends not only on how much advertising we
do (firm X), but also on how much our rivals do (firm Y). We can write this formally as:
marginal revenue product equals marginal product, which is a function of the amount of advertising
by both firms, multiplied by marginal revenue (a function of level of sales of the advertised
product), meaning that marginal revenue product is a function of all three variables. We can
use Game Theory — a field of economics somewhat popularised by the portrayal of joint 1994
Nobel Laureate John Nash in the Oscar-winning film, “A Beautiful Mind”. OK, let’s take a
duopoly for a product ‘thingamyjigs’, assume both producers, X and Y, start with $50,000,000
each. Consider the following (one-shot) game — both face a simultaneous choice; and $10,000,000
cost of advertising, but if they advertise and the other does not, they succeed in switching
$15,000,000 worth of consumption from their rival. The full set of payoffs are summarised
in this grid, and the initial status quo is the bottom-right cell. Consider what is the
best strategy for Firm X (Lentex): if Firm Y were to increase, we get $40,000,000
if we had increased, $35,000,000 if we did not. If Firm Y were not to increase, we get
$55,000,000 if we had increased, but only $50,000,000 otherwise. Therefore, the conclusion
is Firm X should increase irrespective of Firm Y’s action (it’s called the ‘dominant
strategy’). However, using the same reasoning, Firm Y’s dominant strategy is likewise to
increase. The upshot — both end up with $40,000,000. Note of course that both would prefer $50,000,000.
This outcome is known as “Prisoner’s Dilemma”, or perhaps here an advertising dilemma, it’s
applicable not only to many scenarios in sport, but also many other phenomena, even an international
arms race. All this spending does neither firm any good, so how to ‘escape’ the ‘dilemma’?
Well, you can’t collude with the other firm (that’s illegal in most developed industrialised
nations), so without outside intervention, your only hope is to come to some kind of
tacit understanding not to advertise, at least at the same time — that is, if it’s a repeated
game, (let’s say advertising for the AFL Grand Final, which is every year), each firm might
just be able to work out over time what the other is going to do. With outside intervention,
however, it’s easy — if we take the government-imposed ban on tobacco advertising on television in
the 1970s, firms no longer had to worry about preserving sales in the face of rival advertising,
and subsequently profits skyrocketed (albeit temporarily). In summary: one thing for certain
is that media rights are here to stay, and probably to rise even further still.

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