The market value of everything is constantly changing. Racing teams are not exceptions.Back in early August, I estimated that the promotional value of a championship caliber, one car IndyCar team was $1.3 million. However, I also noted that each additional race would likely reduce that number because the average television audience would decline.
I have since recognized a small but not insignificant error in one of my assumptions. Specifically, I benchmarked average television viewership for the NASCAR (sans-culottes!) Cup Series in 2009. That was a mistake. Budgets and team valuations for 2009 should have been benchmarked to the 2008 NASCAR Cup television ratings. Because Cup ratings have declined in 2009, we should assume that 2010 NASCAR team valuations shall also decrease.
Therefore, I shall undertake the exercise once again. This will not only improve accuracy, but also incorporate new data.
Math!
Various published reports indicate that a championship caliber, one car effort in NASCAR Cup generates approximately $20 million per year in sponsorship revenue. Therefore, we shall assume that a typical topflight Cup team brought in $20 million for the 2009 season.
The primary driver of value is television ratings. The 36 NASCAR Cup events in 2008 combined to attract 253,868,000 TV viewers in the United States.
$20,000,000 / 253,868,000 viewers = $0.078781098838767
Therefore, the sponsors of a given championship caliber NASCAR Cup team pay a little less than $0.08 per television viewer. That number (not rounded) shall provide the foundation of our analysis.
The Decline of Oh-Nine
The $20,000,000 valuation for 2009 was based on television ratings in 2008. Unfortunately, NASCAR Cup has seen ratings decline significantly this season. Through 27 of 36 events this year, Cup has drawn 177,540,000 U.S. television viewers. The per race average is therefore 6,575,556. We shall now project total viewers for the entire Cup season.
36 Races * 6,575,556 viewers per race = 236,720,000 projected viewers in 2009
Recall that each viewer is worth a bit less than $0.08.
236,720,000 viewers * $0.078781098838786 per viewer = $18,649,062
Therefore, the same NASCAR Cup team that should have earned $20 million in sponsorship revenue in 2009 can anticipate bringing in $18,649,062 in sponsorship revenue for the 2010 season. This, of course, will certainly not be the case. Most racing teams have multi-year sponsorship contracts with fixed prices. However, the continuing decline of NASCAR Cup ratings could very well explain why sponsors such as DeWalt Tools, Jack Daniel's, and Jim Beam have announced their intentions to exit the series following the 2009 season.
The cost of operating NASCAR Cup teams has likely not decreased in correlation with those teams' relative market values. Those that have long-term contracts in place will likely earn more sponsorship revenue than they deserve in 2010. Conversely, those whose contracts expire this year are likely out of luck. No sponsor is going to pay 2008 prices for an asset that decreased in value by 6.75% year-over-year.
One Million Dollars
We use the same equations to determine the value of a championship caliber, one car IndyCar team. Based on sources including the Indianapolis Business Journal and Robin Miller of SpeedTv.com, we can estimate that the 16 IndyCar races in 2009 have combined to attract 10,922,000 U.S. television viewers. The per race average is therefore 682,625. We shall now project total viewers for the entire IndyCar season.
17 Races * 682,625 viewers per race = 11,604,625 projected viewers in 2009
Again, each viewer is worth slightly less than $0.08.
11,604,625 viewers * $0.078781098838786 per viewer = $914,225
Therefore, a championship caliber IndyCar entry should anticipate earning total sponsorship revenue in the amount $914,225 for the 2010 season. That includes associate sponsors.
Don't Blame Versus
What would that same team be worth if all IndyCar races were on ABC and the ESPN Family of Networks? The average IndyCar race on ABC this season (not Indy) drew 955,500 U.S. television viewers. When that number is multiplied by 16 events and the Indy 500 audience is added, the projected audience for the 2009 IndyCar season is 19,888,000 viewers.
19,888,000 viewers * $0.078781098838786 per viewer = $1,566,798
That's better than $914,225, but it still isn't even half of a full season IndyCar team budget. Also, we need to make an adjustment. The night races can not be aired on a network. Previously, we discovered that slightly more than 2 million viewers are lost due to night races that must air on cable. Therefore, we adjust our total season viewership and team valuation.
19,888,000 viewers - 2,016,500 lost to night races = 17,871,500 viewers
Therefore:
17,871,500 viewers * $0.078781098838786 per viewer = $1,407,936
Thus, we can conclude that the Versus contract is costing a championship caliber team less than $500,000 in promotional value. That is not nothing. However, it is also not nearly enough to make IndyCar teams competitive in the market for auto racing sponsorship.
For now, a top IndyCar operation is worth $914,225 to prospective sponsors. A marginal IndyCar team incurs operating costs of at least $4 million per season.
It's sad, really.
Roggespierre
Are you comparing NASCAR's 'viewers' with ICS's 'viewership'?
ReplyDeleteViewership (household's or HH) X viewers per household (a factor determined by the Nielsen alchemists) = Viewers.
Viewership/Reach = Rating. A national rating is based on a reach of 115 million households; a cable rating varies depending on their respective reach.
Miller and IBJ screw this stuff up all the time in their articles.
I'd expect ICS's 'viewers' for the year to be somewhere in the neighborhood of 15 million. Or conversely, NASCAR's 'viewership' to be around 170 million by years end.
-John
Hi John,
ReplyDeleteI'm using the "viewers" numbers from publicly available sources. If I had the money to subscribe to Nielsen, then I would do it.
But, alas, I do not.
My valuations do seem congruent with Paul Tracy's story about Monster telling him that the IRL was worth $1.2 million back when it was on ABC and the ESPN Family. The decreases this year - both at Indy and on Versus - would seem to suggest that my $914K number is very much in the ballpark.
I use Jayski's NASCAR numbers. However, I will check them with Sports Media Watch to verify their accuracy.
Using your numbers - $15M IndyCar and $170M Cup - I still get a proportional rate of 8.823529% for the IndyCar team. If a 2010 Cup team is in fact worth $18,649,062, then we would value a top IndyCar entry (1 car) at $1,645,505. That's still less than half of the budget needed to run the season.
There is nothing to support any claim that the IRL is market-competitive. It just is not so.
That's why Cup has turned sports marketing firms into into investment banks that divide sponsorship into pieces and then sell them off at a higher per-race price.
I never thought I'd see the day.
Best Regards,
Roggespierre
Sorry John,
ReplyDeleteThat time I was confused.
Let's do the math with your 15 million "viewers" number for IndyCar.
15,000,000 * $0.07878109883876 = $1,181,716
Therefore, if your 15 million number is correct, then a top (1 car) IndyCar team should expect to earn $1,181,716 in total sponsorship for 2010.
That's pretty close to my $914,225 valuation.
I'm not ready to admit that I compared apples and oranges. However, if that is in fact what I did, then the difference is less than $200K.
Best Regards,
Roggespierre
Doesn't matter !!! It still means that the value of an Indy Car team is less than the sum invested. Botttom line......Who is going to buy an over priced product in a declining market? I simply know this from business...You CAN"T sell something for more than its worth. I still stand by my original statements...cut the costs and change the rules so teams can compete both on track and financially!!
ReplyDeleteRoggespierre,
ReplyDelete6% seems pretty close just based on the numbers. But with NASCAR you also have all the air-time the drivers/sponsors get on Speed and ESPN, along with national/local media attention and it's probably disproportionate to IndyCar's mentions. If you factored all that in, 4% or 5% would probably be closer to the truth.
-John
"R"
ReplyDeleteAs usual your calculations are spot on!
And since you are--the IRL being on a network that doesn't have enough suscribers to allow for the casual fan or the channel surfer to find open wheel racing and begin to follow it is part of the problem and at just the time when the economy is declining.
I know it is NOT VERSES that caused the problem, but it now is unable to help with the solution.
There is one thing that will always remain true; it is not what your product costs--in the market place it is what your product can sell for when in competition with competing products. Racing competes with every sport--not just NASCAR or F1, and unless and until we can get a product that tickles the American fancy--it'll continue to decline.
What to solve first?
Logic says the product has to be saleable. The IRL doesn't have that product today and it won't have even a chance of getting that product before 2012. It may be too late!
Once there is a saleable product, sponsorships then have to be SOLD!
May I add a couple of additional thought about advertising, and this comes from experience?
Many first time advertisers in racing got involved because of an interest in the sport, and secondly it was SOLD to them--they didn't come in with money in hand.
I question if today's IRL teams actually know how to sell to companies out side the realm of the usual; and they certainly don't know how to price their product.
The good side of all this is that some teams and some people, who can and will, exercise a degree of control over the future of open wheel racing, are reading your presentations.
osca
Just for fun, can you break down your total sponsorship value dollar number into what a fair price point sponsorship packages (primary, associate and introductory) should be offered? I mean, if I am a sponsor and I feel I am getting what I want out of the deal, I don't know that I give a hoot what the total revenue the team is accumulating from other sponsors. In fact, if I like the platform, I want it to remain viable and therefore would prefer that other companies come on board. My considerations in that regard would be that I don't get obfuscated and that any association is at least neutral to my brand positioning. So, how would, according to your evaluation, would you expect a team to structure their tiered sponsorship packages?
ReplyDeleteHello Tom,
ReplyDeleteThat's a good question that is virtually impossible to answer because the permutations are nearly infinite. Because the promotional value is so low, many - if not most - IndyCar sponsors require some kind of direct sales component. Some, but not all, are arbitraged.
Part of the problem is that IndyCar teams still think of sponsorship in tiers. They present the Joyce Julius numbers and a schedule sponsorship tiers that include various price points and signage commitments. The problem is that other sports have the JJ numbers, too, and they're almost all better than the ones that the IRL teams can present.
If you are a prospective sponsor, then you are concerned with your ROI. If you are a large consumer products company, then you might want ROI in the form of promotional value. In that case, you will do much better in NASCAR. That is why Subway opted to sponsor Carl Edwards at three Cup races this year rather than sponsoring IndyCar for the entire season. Subway was able to cherry pick the Cup markets that it wanted and get in at a price-to-value ratio that significantly exceeded anything that the IRL and its teams could offer.
On the other hand, perhaps you seek ROI in the form of direct sales. The best example of that is the Energizer case that we discussed earlier. Let's say that Energizer pays TCGR $1 million. It is granted check-out lane space at Target for a certain period of time. If that space accounts for, say, $1.5 million in additional sales revenue, then Energizer's Project ROI is 50%. That's pretty good.
What promotional value did Energizer get from TCGR? Who cares? It made 50% in direct sales. The marketing guys get good performance reviews this year. I am aware of some associate sponsorship deals that have generated much greater direct sales returns. Unfortunately, I am not at liberty to discuss them publicly.
Each valuation must be conducted from the point of view of a single firm. IndyCar teams can sell approximately $900K to $1.1M of promotional value. They can get more than that, as Penske and Ganassi have ably demonstrated. But that is not because they offer greater promotional value.
Incidentally, Danica also gets more than that. She is the exception because she really does offer additional promotional value. Unfortunately for the league, she creates that additional value away from the race track.
You can divide the approximately $1M in value any way you want. No two sponsorship packages are the same. The page is effectively blank.
I hope that is a sufficient answer. If not, then I'll try again.
Best Regards,
Roggespierre
Was it that long ago when STP paid $25 to slap a sticker on a car, and paid an extra $100 if it won?
ReplyDeleteAnonymous,
ReplyDeleteYes, it really was that long ago, I think.
Best Regards,
Roggespierre
Hi R.
ReplyDeleteI'm playing a little devil's advocate with you. In the big picture, I'm on board with you. I just think you still haven't dialed in the ideal set-up, so to speak. Since your answer kind of mingles in a point I made in another post, I will comment one at a time.
Specific to this thread - and we've discussed this before - you should acknowledge that you are missing a value component. That is, how a sponsor might use the property as a platform for direct sales or even brand transformation. In either case, the cost per thousand is a secondary consideration. They may be creating an immersion experience for high-end clients or they may be wanting to utilize the imagery of the sport in making a statement about their product.
In both cases, the IndyCar product can be attractive because it is cheaper (if you are not assessing by cost per thousand) than NASCAR or other options and has some cache to still being major league due to the Indianapolis 500. I realize these are more ethereal values in that they are hard to impossible to get your arms around, but that does not mean you should disregard them. That's how people that assess everything by numbers get themselves into trouble. Don't ignore human creativity.
The League and its teams certainly shouldn't in marketing their value proposition (although by all my observations, that is exactly what they are doing). Although, I suppose, the many would argue the arbitrage model you have explored is an example of creativity. The problem is that it is, as you have pointed out, flawed.
Before I go on to your Target arbitrage example, I have to thank you for speaking out about the JJ analysis. You are spot on. The dumbest thing in the world is to put a kit together offering those numbers. It plays exactly to your weakness and highlights the strength of competitive alternatives. Do the people making the pitch really think their prospects never get proposals from other sports properties in the realm of auto racing and beyond to stick and ball? Note to race teams: if JJ is the stick you want to be measured by, then you are calling attention to the fact that you are a pip-squeak.
On the Target example, I'll take your word for it that there is no legal issue with the store "selling" preferred shelf space in exchange for supporting the race team, but my gut tells me there is something more to it than that. However, if that is indeed above board and the company (such as Energizer, to your example) can determine an ROI that meets their financial hurdle by making the Ganassi investment, well then, fine. But, again, my gut tells me that if you are seeking a thorough understanding of the economics of the sport (and the diligence you have shown thus far in exploring the issue SHOUTS that this is exactly what you are doing), then I suggest you dig deeper on this one.
Ok... I'm new here and I have a couple of questions. Am I correct when you say that Team X generates $914K of sponsorship revenue that that means that the sponsor pays Team X $914K in the expectation that the sponsor will see more than $914K in increased sales or other or other valuation for the period of the sponsorship.
ReplyDeleteThe second question I have is with all the various economic disasters milling about is there room for cautious optimism for the survival of Indy Car racing and incidentally the Indy 500? My own personal feeling is that the 500 should return to it's prior status as a stand alone event and not be beholden to any series. It can be part of said series but it should not and must not be the financial anchor for said series.
Mr. Cooper,
ReplyDeleteI do see what you mean, and it mirrors something that CART really wanted to believe. The upscale branding thing with regard to auto racing in the United States is a mirage. In Europe, the story might be different.
If you're going upscale, then your target audience is disproportionately located on the coasts. Why, then, would you look to IndyCar racing? Why not golf or tennis? You'll reach much more of the upper crust at the U.S. Open than you could ever hope to reach with IndyCar racing. There is no television viewership for even the Indy 500 in New York, Boston, Providence and other eastern cities. IndyCar racing fans tend to be in the midwest, mid-south, and a few western locales.
When you're selling advertising - as IndyCar teams are - then you're competing against all advertising. That includes :30 television spots on network, cable and local channels. That includes radio, newspaper and magazine buys. Those media tend to offer audiences that much more homogenous than what is left of the IndyCar audience.
Regarding Target, your gut would have been correct several years ago, when Target put a lot more of its own money into TCGR and activation of the sponsorship. Back then, Target clearly saw IndyCar as a good promotional platform. Recall the old ads that featured TCGR drivers. Those are gone. So, too, are the newspaper buys. I believe that arbitrage was once just a small part of the Target sponsorship; it was more about "spreading the costs," as you noted earlier. But I would argue that has changed as the promotional value of IndyCar racing has decreased. Without greater and greater levels of arbitrage, Target would have either switched exclusively to NASCAR or left racing altogether.
Another problem is that IndyCar teams don't seem to understand NASCAR's demographics. The audience is not a bunch of shoeless jackasses in the former Confederacy. Yes, you can try to position yourself as a more upscale racing product, but you will fail to get the TV ratings you need in order to compete on a value basis. There simply aren't that many people up there, and many of them live in places where "car racing" is just not cool.
Energizer operates in a very competitive near-commodity market. The most important elements of its marketing mix are price and place. If the price is acceptable and the place is convenient, then Energizer is going to sell batteries. It's getting place from Target.
Generating sales is the entire reason that the advertising industry exists. Any company that can generate sales without having to incur advertising expenses will choose to do so. That's TCGR's competitive advantage. Yes, the associates pay - but not for advertising. Of course, they do get some advertising and all the benefits of show cars and at-track sales opportunities, as well.
I don't mean to discount the at-track benefits. HP leveraged its Indy 500 sponsorship this year into some significant sales. Her Energy increased its distribution - very important for any new product - through its participation at Indy.
That stuff is great, but it does not provide competitive advantage to IndyCar racing. Every sport offers suites, clubhouses, and other locations where business can be done. If IndyCar is counting on this market, then it will be very disappointed. IndyCar is a very small player. It can not hope to compete with the NFL, the PGA Tour and other much more popular sports leagues that are favored by the rainmaker class.
I'll continue to dig - you can count on that.
Best Regards,
Roggespierre
GreyMouser,
ReplyDeleteWelcome to The Indy Idea. I hope that you will return frequently.
Now, to answer your question:
No, the valuation does not assume that the sponsor can expect to generate $914K in additional sales.
Advertising is a market like any other. The basis of value is the number of viewers, readers, eyeballs, etc. that is exposed to your message. The market is very, very competitive.
The $914K is the amount of advertising that a top IndyCar team can expect to sell to sponsors for the entire 2010 season. That is what sponsorship is worth. At a price that is greater than $914K, a sponsor would do better buying primary sponsorship for specific races from NASCAR teams. That's what Subway - my favorite example - did this year with Carl Edwards' 99 car at Roush Racing. Subway purchased primary sponsorship for three races from Aflac. Subway had been rumored to be a possible IndyCar sponsor, either for the league, Paul Tracy, or both in 2009. Instead, it ended up on the 99 in Cup for three races.
Guess what? According to my calculations, Subway made the right decision. Three cup races are worth more than the entire IndyCar season. If the price was about the same - and we think that it was - then Subway made the right call.
That's why being cheaper than Cup does not matter. You must be cheaper per viewer of Cup. In that regard, the IRL is outrageously expensive.
I set out to determine the price at which an IRL team would be able to match the value (cost per viewer) that Cup offers to advertisers. That price is $914K. At any price greater than that, IndyCar teams are asking prospective sponsors to pay more than the advertising product is worth.
Regarding the 500 and the league, I don't know. Right now it is clear that the league is hurting the 500 very much. As it continues to expand to more international venues and road and street races, IndyCar will continue to attract competitors that are very difficult to sell in the Midwestern United States. That, of course, happens to be where the IMS is located.
Perhaps I'm wrong and the 500 will thrive. I would be very surprised. Wal-Mart learned years ago that smiles and elderly greeters work extremely well in the United States. But when Wal-Mart expanded into Germany, it found that the German people hated that stuff. Customers thought the smiles and greeters were fake. They came to distrust Wal-Mart. The company had to completely restructure its model to compete in the German retail market.
I see no reason why IndyCar racing should be any different. Is there any reason to think that what sells on city streets in Brazil and Canada will also sell in the Midwestern United States? That's quite a leap of faith - a stupid one, in my humble opinion.
So we might see the series and league decoupled eventually. I just hope that it is not too late.
Best Regards,
Roggespierre
Roggespierre: Thank you for the warm welcome.
ReplyDeleteI sense a disconnect here. It may be that I'm missing something fundamental or it's been waaay too long since I took Economics.
You said" "The $914K is the amount of advertising that a top IndyCar team can expect to sell to sponsors for the entire 2010 season."
My problem is I'm not understanding what is meant by the phrase: the amount of advertising that a team can expect to sell to sponsors. If I am a potential sponsor and Team X comes to me and says: You pay us "Y" dollars and your name will be seen by "Z" millions of people. Now in return for me giving you this money what do I get as a tangalbe or intangible return? Something has to accrue to me or I've just wasted my money. If my name is seen by "Z" millions of people and they don't do anything after seeing my name what have I accomplished? This is where I'm not sure what you are driving at.. sorry if this seems trivial but I really don't see what "value" I'm supposed to be getting.
GreyMouser,
ReplyDeleteConsumer products companies ask themselves the same question all the time.
How do we know that our advertising is working?
Unfortunately, this is very difficult to quantify. There are a few exceptions. Ask.com saw its search engine traffic increase significantly this year. NASCAR team sponsorship was the primary new advertising vehicle, so Ask attributed the increase to that. But stories like that are rare.
How do you know if a Super Bowl ad worked? A full-page in USA Today? It's the same with an IndyCar team. The one advantage that racing gives advertisers is that they are in the programming, rather than in commercials that people might tune out.
Otherwise, racing is just like every other advertising medium. That is one reason why direct sales opportunities through racing are so highly valued. The ROI is easy to quantify. And the payoff is in cash, which is always preferable to exposure.
Best Regards,
Roggespierre
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