Sunday, May 3, 2015

The Economics of Mass-Market Events

Yesterday saw two of the largest non-major sporting events going, the Kentucky Derby and the Mayweather-Pacquiao bout.  The money involved is amazing.  For the Kentucky Derby:
The Derby is a bright spot for an industry that’s been declining for years. Betting nationwide has shrunk by a third since 2003, to $10.6 billion last year from a peak of $15.2 billion, according to the Jockey Club, an industry group.
Saturday’s Kentucky Derby already has one guaranteed winner: The company that hosts the storied race will earn about $83 million for a spectacle that lasts a little more than two minutes.
Churchill Downs Inc. has seven casinos and tracks in the U.S., as well as its namesake property in Louisville. Yet the Run for the Roses will produce 30 percent of annual earnings, according to Cameron McKnight, a Wells Fargo Securities analyst. He estimates the race will generate record earnings this year, rising by $5 million, or 6 percent.
To keep profit climbing and entertain the 165,000 or so on hand for racing’s biggest day, Churchill Downs has poured $180 million into the track since 2001. Three years ago, the company opened the Mansion, an area with its own entrance, chefs and 322 seats that average $10,000 each on Derby day. Other additions include a jumbo screen for grandstand fans and 20 finish-line boxes for horse owners....
Tracks like Suffolk Downs, near Boston, and Hollywood Park, in Southern California, have dropped live racing or been razed, and the industry’s biggest players, such as Churchill Downs and Penn National Gaming Inc., have expanded with casinos as the industry has declined.
Slightly more than half of the Derby’s profit comes from premium ticket sales, according to McKnight. TV rights and sponsorships account for 23 percent, while betting is 16 percent. Food and beverages, including 120,000 mint juleps, the race’s signature drink, amount to just 4 percent....
So 30 percent of the company's earnings come from one day's event, even though they have seven facilities [disclosure: I am a Churchill Downs shareholder].  And of that 30 percent, almost half of that comes from the 170,000 people who attend the event.  Meanwhile, in the ring:
Floyd Mayweather won a unanimous decision over Manny Pacquiao in the most lucrative bout in boxing history to remain undefeated at 48-0 and lay claim to being the best pound-for-pound fighter of his generation.
The welterweight fight at the MGM Grand in Las Vegas was expected to draw more than $300 million in revenue, largely from pay-per-view purchases and ticket sales. The fight benefited from almost six years of buildup, as the two camps bickered over drug testing and revenue splits....
Nicknamed “Money,” Mayweather was the world’s highest-paid athlete last year, joining Tiger Woods as the second jock to make more than $100 million in one year. With his cut of the record-setting purse, Mayweather topped $500 million in career earnings. The fighters will share about 60 percent to 70 percent of the estimated $250 million in pay-per-view purchases -- with Mayweather getting about 60 percent of that -- and the rest going to the networks and carriers holding broadcast rights.
Mayweather and Pacquiao also will share about $72 million in gate, an estimated $11 million in sponsorships and at least $35 million in international television rights.
So, approximately 3 million pay-per-view viewers, and 12,000 or so actual attendees will create $300 million in revenue for a handful of beneficiaries, including the two participants.  I don't know whether these numbers only account for viewers in the United States, or whether it includes folks in the Philippines and around the rest of the world.  If it is just the United States, that is less than 1 percent of the population.  From an economic perspective, it is this mass-market profit phenomenon that was first really noticeable in the Gilded Era with the rise of Andrew Carnegie, John D. Rockefeller and the various railroad barons that I think makes the progressive income tax necessary.

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