Sometimes numbers are presented in a way that makes you pause, and marvel at the gross misallocation of funds known as Capitalism. On Tuesday, Greg Easterbrook reported that ESPN pays $65,000,000 for each of the 17 NFL games they will broadcast this year, a total of $1,100,000,000. They paid $1.1 billion dollars for the right to televise fifty-one hours of sports, $65,000,000 to broadcast a three hour contest.
The real amount of revenue the NFL generates from television rights is actually $3,700,000,000, about ten percent more than the $3,400,000,000 it pays its players. Ticket revenue, which can easily be between $40,000,000 and $50,000,000 per year per team (the average ticket price is $62 in 2006), parking, concessions, radio and other revenue streams usually offset overhead, yielding profit for the owners, according to Easterbrook.
From this point forward, I use data for illustrative purposes.
Let's assume that advertisers will reimburse the networks with ad dollars that exceed the $3,700,000,000 the networks paid the NFL for the right to broadcast football games. In order for advertisers to obtain a suitable return on investment, they need consumers (that's us) to purchase enough products and services to generate enough profit to offset the $3,700,000,000 expense they incur. This means that between $8,000,000,000 and $16,000,000,000 of merchandise must be sold to generate enough profit to cover the $3,700,000,000 expense.
The theory is that by targeting the audience watching football, the football viewers will buy the products and services advertised. Consumers will purchase between $8,000,000,000 and $16,000,000,000 of merchandise, enough to cover the cost of advertising.
If we assume that 50,000,000 Americans regularly watch football, roughly three times the audience that watched an average Monday Night Football game in 2005, then the math becomes clear. The average NFL fan has to purchase between $160 and $320 of products and services each year from the advertisers running commercials on NFL football games, in order for the advertising to pay for itself. This allows the networks to break-even or make a profit from televising football.
It is possible that the advertising does not pay for itself. If that is the case, then a portion of the $3,700,000,000 spent on advertising is simply an expense that competes with other expenses on the corporate profit and loss statement. This means that your average company may need to send jobs overseas, or cut corners on quality, or borrow money, in order to fund the advertising.
Think of it this way. If the advertising does not drive any revenue, then the $3,700,000,000 of advertising expense is roughly equal to 92,500 jobs that pay an annual salary of $30,000 per year, including benefits.
The National Football League has a brilliant business model. They have fostered unimaginable brand loyalty for the thirty-two teams they represent, and a level of civic pride seldom equaled elsewhere. Every twenty years, they convince taxpayers to fund $500,000,000 stadiums. This year, they convinced television networks to pay $3,700,000,000 to pay their employees, the 2,000 players in the National Football League. They convinced advertisers to pay at least $3,700,000,000.
These advertisers must convince the football fan to spend between $160 and $320 per person on their products and services, in order to get a suitable return on investment. And if the sports fan is unwilling to spend money on these products and services, the advertisers must trim a portion of the $3,700,000,000 of expense from the profit and loss statement. Guess who gets hurt by that? Lastly, the NFL generates another $1.0 billion dollars or more in ticket revenue, annually, and who knows how much in radio broadcast rights, concessions, parking, merchandise, and however else they monetize their business??
Holy honking cow! The rest of us battle our brains out running businesses with the hopes of generating a five percent profit margin. The NFL is a brand that has really figured out how to monetize their product, relying upon advertisers and taxpayers to fuel their ever-increasing revenue machine.
September 12, 2006
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