The Committee of Public Safety seeks help from the citizens.
Many are worried about the IndyCar television contract with Versus. Most, in our estimation, would prefer that the IRL purchase and re-sell time on a major network.
For the sake of argument, we shall assume that there is a network that is willing to enter into such an arrangement.
Robin Miller has reported that ChampCar purchased air time on NBC and CBS for $800,000 per race. He added that IndyCar would not need to spend as much because it has an in-house production company. Therefore, let's assume that each race would cost an additional $600,000.
Total cost also includes opportunity cost. In this case, that means adding $6,000,000 of unrealized revenue from Versus. Citizen John was kind enough to provide advertising revenue projections for this project. His number is $6,000,000. This is convenient because it offsets the opportunity cost.
Let's do the Math!
Total Cost (Revised): (600,000 * 12) + 6,000,000 - 6,000,00 ads = $7,200,000
How many additional viewers can the IndyCar Series expect to attract?
IRL Average on ABC 2009 (no Indy) = 1,154,750 viewers
IRL Average on Versus 2009 = 240,000 viewers
Additional Viewers per Race: 1,154,750 - 240,000 = 914,750
Total Additional Viewers: 914,750 * 12 races = 10,977,000 additional viewers
Therefore, the network arrangement would cost the league $7,200,000 and allow for 10,977,000 additional viewers.
Cost per Viewer: $7,200,000 / 10,977,000 = $0.66 per additional viewer
That's fairly expensive. Still, it might be worth it.
The Benchmark
Previously, we calculated that NASCAR (sans-culottes!) Cup earns an audience of 7.055 million viewers per event. That number has likely changed because NASCAR has completed additional races. Still, we'll use the number.
7.055 million viewers * 34 Cup Races = 225.760 million viewers for the season
We also cited published reports that a top NASCAR entry is valued in the marketplace at $20 million. Therefore, we divide that number by total viewers to get the cost per viewer that is paid by NASCAR team sponsors.
20,000,000 / 225,760,000 = $0.09 per viewer
Therefore, each viewer is worth $0.09 in the market for racing team sponsorship. Did we not say that $0.66 per additional viewer was fairly expensive?
Anyway, the IndyCar teams should therefore anticipate acquiring additional sponsorship in the amount of:
$0.09 per viewer * 10,977,000 additional viewers = $987, 930
The Results
The IRL spends an additional $7,200,000
The IRL loses $6,000,000 in revenue
The IRL recoups $6,000,000 in advertising
Total Cost to IRL = $7,200,000
Each team acquires sponsorship value of $987,930
Shall we say 22 teams will run each race next year?
22 teams * $987,930 = $21,734,460 total projected revenue to teams
Conclusion
This remains a very tough call.
21,734,460 team revenue - 7,200,000 IRL cost = 14,534,460 value to enterprise
The decision hinges on the probability that all 22 teams will in fact acquire $987,930 in additional sponsorship due to the move from Versus to a network broadcaster. Each team that fails to do so will cause the "team revenue" and "value to enterprise" to decrease. This is where an assumption must be made.
Also, there is no firm anywhere that would agree to incur $7.2 million in additional costs so that its suppliers might earn an additional $21,734,460 in revenue. However, it is also true that the IRL will benefit if it has teams that are better financed.
We ask the citizens: what would you do?
1. How should the IRL and its teams share the $7.2 million switching cost?
2. What is the probability that all 22 teams will reach the $987,930 threshold due to the switch?
3. How should the IRL and the teams spread the financial risk associated with teams that fail to acquire the additional sponsorship?
4. How much advertising do you think the IRL can sell? This number is important because it will offset a portion of the cost. Citizen John has answered this question for us. Thank you, Citizen John. All resulting changes are in green.
5. Is the switch worth it to the IRL and its teams, provided that they can agree to specific terms?
Obviously, we have had to make some assumptions. Otherwise, this is the way the decision would be made - a real, or at least plausible, IRL management decision. The answer might not be so obvious as it seemed in Robin's original column.
We invite you to help us fill in the blanks and tell us what should be done.
Roggespierre
Lowering costs? Trying to sell additonal sponsorship in this economy of 1 million? Great ideas but I think the real issue is the fact the product is stale. The exploits of one driver do not carry the series. If with the new found "close racing", the product is in a market where the choices for motorsport are numerous. Pick one, F1, NASCAR, Rolex, etc. All either delivering at a cost ratio less than Indy Car or providing greater fan interest. I think we really need more numbers to accurately produce what it will take to put Indy car back on the road to recover.
ReplyDeleteOldwrench,
ReplyDeleteNo doubt, but we can't fix everything at once. This might be a decision that needs to be made today, or at least soon.
What should the IRL do?
I think it is impossible to answer your questions without first defining what the problems are.
ReplyDeleteBut our difficulty is that since it is a series composed of many problems, hence any solution will be complex.
The problems are,(in no particular order):
A flawed business plan,
A formula that is running huge deficits,
An economy that is costing all racing series an ever increasing lose in fans and sponsors,
Old technolgy,
Too few teams,
A shrinking fan base,
Lack of interest from major firms who spend to advertise,
A TV package that isn't available to the casual viewer.
Too few American drivers,
An engine program that costs too much,
A chassis program that costs too much,
Lack of innovation,
Lack of leadership,
Lack of real competition,
and I am sure a bunch more.
Where to start?
Solving the TV broadcasting problem won't change anything, unless more people WANT TO WATCH open wheel racing.
Therefore, I think a new workable business plan based on reality has to come first---agree?
Anything else--is like putting a dress on a goat, and trying to sell it as a girl you'd like to date.
"4. How much advertising do you think the IRL can sell? This number is important because it will offset a portion of the cost."
ReplyDeleteWith average viewers of 1,000,000 per race and a CPM of $12.50 = $12,500 ad revenue per 30 second spot.
40 ad spots per race @ $12,500 per ad = $500,000 ad revenue per race.
12 races per season @ $500,000 per race = $6,000,000 ad revenue per season.
-John
Anonymous... of the Metaphoric Goat,
ReplyDeleteYour points are well taken. Those who come here tend to think in terms of the big picture. That is what I want and attempt to cultivate.
However, I think that we must keep in mind the view of the participants. Robin Miller is as skilled as they come in that regard. I have always believed that his writing is representative of what the drivers and teams are thinking. Right now, they are thinking about lousy television ratings and the fact that there will be few sponsorship opportunities in 2010. They seek an immediate solution for an immediate problem.
My analysis here is intended to demonstrate whether or not an immediate solution is available. You and I both know that it is not. The cost to value ratio is dismal. We therefore are going to have in 2010 what we have in 2009, if not something less.
This is dictated by economics. Engineers, drivers and others associated with racing teams do not spend a lot of time thinking about economics. This is understandable; they're busy doing what they do, just as we all are. They are frustrated. They want somebody to do something about it right now.
That is why we're dealing with marginal issues such as incremental increases in television ratings. We know that such issues simply do not matter if you spend at least $4 million and generate only $1.3 million in promotional value. Switch television carriers, and you now have half of a legitimate budget for a lousy 2010 IndyCar team. Unless you have a significant direct sales opportunity to leverage for a sponsor, the situation is hopeless.
I believe that the participants should know the facts. The present combination of equipment, drivers, teams and tracks is not sustainable. Very, very big changes must be made.
Perhaps some participants might take up the cause. We can hope, anyway.
Best Regards,
Roggespierre