Sports hedging continued.
Tim King, musing on the upcoming England - France Rugby World Cup clash, hits on the significant financial stakes in play for broadcasters:
Much of the anti-English hysteria which will be whipped up over the next five days is market-led. For the past month until last Saturday, the rugby World Cup had become a matter of enormous indifference to the French. Few understand its rules, even fewer its tactics, and France’s first-match defeat to a team deemed petit had convinced many that the game is of no national interest. Consequently all last week the media worked their socks off trying the impossible - raising interest in an apparently inevitable mauling by the All Blacks. They had to sell the New Zealanders’ game as something rare, beautiful and fascinatingly exotic, a spectacle not to be missed, a team so special that even defeat at their hands could be honourable. It worked, and according to TF1, France’s main TV Channel, Saturday’s viewing figures were “un record historique” of 16.6 million (since last year’s soccer World Cup attracted more than 22 million viewers for the France-Portugal match, “historique” is clearly a relative term). A great day for advertisers and a totally unforeseen windfall (my emphasis) for the TV companies, who are confident that this coming Saturday they will get even higher figures (and an even higher advertising revenue). Especially if they keep playing up the ros-bif bashing.
So this time, the (sporting) results have smiled upon the French (and English!) broadcasters (and advertisers targeting the French and English public) - but if you are a shareholder in one of these companies are you really investing in their managers’ sports prognostication skills? My suspicion is no. No more than you are investing in their foreign exchange or interest rate trading skills. So why do these firms not hedge their sporting risk? Arguably for these types of businesses, this is a more important business risk than ‘traditional’ financial risks which are managed as a matter of course by any self-respecting finance department.
Indeed TF1 and ITV (the respective local broadcasters) should have been laying (selling) France and England respectively before the games last week end. Indeed, giving the odds (prices) prevailing before the games last weekend (approximately 6 to 1 against), these hedges would have been relatively inexpensive. Furthermore taking an enlightened risk management approach to this business risk would allow a myriad of interesting and potentially innovative business strategies. The simplest of course would be to keep the risk ‘on balance sheet’. By estimating the potential revenue loss arising from a French or English loss, the firms could have mitigated this risk and reduced the volatility of their expected earnings. Perhaps more interestingly using modern risk management, the broadcasters could sell outcome-adjusted advertising packages to their advertisers: tailoring the rate for exactly who will be playing in any given round - ie pay x the semi-final is New Zealand v Australia, 3x if it is France v England…(obviously this could be made more or less sophisticated depending on how robust a model you have for viewership, target audience, outcomes, in-play - think more expensive half-time ads for a close game than a blow-out, etc.) Finally, although due to population, time zones, etc. probably not entirely symmetrical, it is clear that broadcasters down under had the opposite risk to the French and English broadcasters. They should have been taking the other side of the trade.
Given that there are vibrant and liquid exchanges for this risk (Betfair, Betdaq, etc.) managing these risks is not only feasible but can be done dynamically throughout the tournament, and indeed even during play. Ultimately I believe that one day - combining real-time targeted ad-serving technology (which already exists), with a traded market in advertising prices, with sports risk trading will lead to a world where advertising slots for major sporting events are traded and managed up to the moment when they are served, allowing the invisible hand of the market to allocate this scarce and wasting resource to be optimally allocated all the time - the right advertisement at the right price at the right time. (Indeed, I alluded to this in AmazonBay, with respect to Google hedging its advertising revenues based on the fact that the audience size - and thus the advertising rates - varying as a function of the finalists in the the soccer World Cup; ie Brazil v China (in 2012 2014!) is better (for advertisers) than Denmark v Iraq…and even this example ignored the fact that at least for advertisers targeting the Danish market it would be a great outcome.)
Of course there are many many other businesses who are directly exposed to these sporting outcome risks: promoters/ticket resellers, concession vendors, hotel and tour operators, etc. etc. Better yet, there is usually (although admittedly not always symmetrical, see above) a two sided market: for each given outcome some businesses prosper while others suffer) which is a key ingredient (alongside active and intelligent speculators) to creating a vibrant and liquid market.
There is a business to be had here - a specialist sports risk management investment bank (advisory, trading, derivatives, market-making) - if anyone out there wants to send me a business plan I’d love to take a look. Of course there are challenges, not the least being the hysterical view of many legislators and regulators who refuse to see the outcome of sporting events as just another business or financial risk. But my feeling is that with time that will change (and is changing) and in particular there is a real opportunity for the UK (and London) (anyone for better aligning the FSA and the Gambling Commission and ending the artificial distinction? PM Brown? Mr Cameron? Bueller?) to extend its lead as the world’s leading financial and risk management centre by embracing and nurturing yet another emerging risk market.
Oh and by the way, take all the above and mix in weather risk management (the probability of any given sporting outcome is very often weather dependent. The odds for next weekend’s France - England match are certainly different in my opinion if it is pouring rain, than if it is warm and dry.)
October 10th, 2007 at 12:11 pm
How do you know the broadcasters do not already hedge their sporting risk using traditional techniques such as insurance policies?
Also, not to be too picky, but the only world soccer tournament in 2012 will be the Olympic one. The soccer World Cup is two years either way. Happy to offer you any price on the finalists being Denmark and Iraq!
October 11th, 2007 at 9:04 pm
Well I don’t. But I would certainly be surprised to learn that was the case. If anyone knows of any examples I’d be keen to learn of them.
Yes I was lazy, couldn’t recall what I had put in AmazonBay and couldn’t be bothered to think about the dates…indeed I should have said 2014…will correct!
Well there is a price for everything and since you did say ‘any’ price I’d take your offer at say 100,000 to 1 for £10 but I’m not sure how I’d hedge the credit risk. You wouldn’t post a bond would you?
Ok so I took a particularly extreme (and highly unlikely) example, but it was somewhat to deliberate: to underline the extent of the potential risks from ‘black swan’ sporting outcomes.
October 11th, 2007 at 10:54 pm
Good post Sean. I think that real time advertising will be arriving sooner than later. Sports books and exchanges have begun issuing in-game wagering for popular contests. Many studies have shown that gaming markets are excellent predictors of outcome (Justin Wolfers), and odds can easily be converted into percentages of probability. Therefore broadcasting networks need not invent/utilize any complex risk formula, rather view the in-game odds for each team winning the contest in order to price advertising slots. If each team’s odds are close, the more even the match will be and accordingly attract additional viewers.
I have also been looking at long-term hedging for sports franchises i.e. the % chance they make the postseason and realizing the revenue streams associated with the feat. Metrics exist for forecasting the value of these streams (Vince Gennaro ‘Diamond Dollars’), however most teams leave this risk uninsured. In order to price the present value of these streams, teams may look to pre-season odds provided by sports books (earnings consensus?) and discount these revenues correctly.
Heck, Jordan’s Furniture (New England, USA) had Berkshire Hathaway underwrite an insurance plan which would reimburse all customers for items purchased between March 8th and April 16th provided the Red Sox win the World Series.
October 12th, 2007 at 12:56 am
Dominic asks “How do you know the broadcasters do not already hedge their sporting risk using traditional techniques such as insurance policies?”
Having been inside more than one or two insurers and reinsurers, I can tell you they don’t insure or hedge their sporting risks in the traditional markets.
On a related note: actually getting execs to think about risk and hedging is much harder than it seems like it should be. I’ve found that any number of VPs will tell you they don’t mind losing $2MM on whatever their business risk is, but losing $20K on that “paper” is not what business they are in. Hard to hedge when one is conceptually unwilling to lose money on “paper.” Not that I tend to focus on the risk cognition problem… ok, so maybe I do.
October 12th, 2007 at 11:44 am
Sean, I would be happy to take your £10 but unfortunately my liquid assets don’t amount to enough to post a meaningful bond, certainly not the NPV of £1m in 2014.
JD, I am surprised they don’t do this. Clearly Sean is quite right about the sporting outcome having a massive financial effect on forecast and actual profits. Maybe the insurance industry would never have got started if the FSA had been around in the seventeenth century.
October 13th, 2007 at 9:22 am
I stand corrected. I didn’t know about the Berkshire deal. That, however, is not a typical open market insurance deal since Berkshire owns Jordan’s. Sounds more like a marketing play backed by the parent instead of a risk transfer deal.
Anyone else know of any sports risk deals written on insurance paper? I’m sure its been done, but also sure its rare.
October 16th, 2007 at 10:02 am
[…] Following up from my last post, reading the paper in the tube this morning, I couldn’t help but notice the article headlined “Cashing in on Success: ITV set to earn £10,000 a second as rugby fever grips nation.” Media experts believe ITV could make £11million on the night, way beyond advertising bosses’ wildest dreams for a tournament where few gave England much chance of progressing past the quarter-finals. […]