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Part Two: Olympics Television Rights Case Solution

Max is an aspiring consultant who is looking to secure an analyst role with one of the top firms for the upcoming recruitment cycle in September 2011. His interest in management consulting was sparked by a failed McKinsey interview last year. In this series of blogs, he will be sharing his background, case preparation process, useful resources, and any breakthroughs or setbacks that he experiences.

***

Practice makes perfect – at least that’s what I keep telling myself during this period where I’m trying to rip through as many quality cases as I can. Today, I would like to take you through a case that I did last week over Skype – I was in the role of the candidate. In order for you to get the most out of this, I suggest that you actually go through the setup of the case to see if your structure would have revealed the insights.

Interviewer:

The year is 2009, and your client is a major U.S. TV station. They are trying to put together a bid for the broadcasting rights to the 2010 Winter Olympics. What amount should they bid?

****STOP. Before you read the case solution, please take some time and think about what you would do next****

My Response:

That’s an interesting problem, and I just want to make sure that I understand the situation correctly before I dive in and structure my analysis. Our client is a major U.S. TV station, and they are trying to determine the optimal bid amount for the broadcasting rights to the 2010 Winter Olympics?

Interviewer:

That’s correct.

My Response:

Great. What is their goal in obtaining these broadcasting rights? Is it profits, national exposure, or something else?

Interviewer:

Their goal is to make money.

My response:

Do they have a particular numerical goal?

Interviewer:

Let’s say that they would like a 20% return on their investment.

My response:

One final question before I structure my analysis. What does possession of the broadcasting rights mean?

Interviewer:

The station with the broadcasting rights will be able to broadcast every event of the 2010 Winter Olympics. At their discretion, they can also sell certain events to other TV stations.

My Response:

Great, may I please have a moment to structure my thoughts?

Interviewer:

Of course.

****If you would like, take a few moments and sketch out the branches of analysis that you would like to use for this case, and then compare them with what I did.****

My response:

Ok I think I’m ready to begin. Since the goal of the client is to make a 20% return on the bid amount, I think it makes sense to analyze this problem from a profitability perspective. Since profitability is composed of revenues and costs, I would like to analyze both of these areas in order to understand how much profit can be generated. If you don’t mind, I would like to start off by looking at the revenues.

Interviewer:

Sure. What would you like to know?

My response:

The first thing that I would like to understand is how revenue will be generated from these broadcasting rights. Intuitively, I imagine that the revenues will come from both advertisements as well as licensing certain events to other TV stations. Is this correct?

Interviewer:

You are correct. However, for the purposes of this case, let’s assume that most of the revenue will be generated from the advertisements, and the licensing of events is a negligible amount.

My response:

Great. In order to determined the potential revenue that will be generated from advertisements, we’re going to need several pieces of data such as average price per advertisement, length of advertisement, and advertisement time available. Do we have any information on that?

Interviewer:

Yes we do.

-Primetime Rates: $400,000/30seconds

-Non-primetime Rate: $200,000/30seconds

-Usually 10 min out of every hour is available for advertisements.

My response:

When does primetime occur?

Interviewer:

7-10pm on weekdays, and all day on weekends.

My response:

I see. I think the next step here is to determine how many hours of primetime and non-primetime the 2010 Winter Olympics cover. Do we have any information on that?

Interviewer:

Yes we do. The opening ceremony is 7-10pm on a Friday. The events run for two weeks, and the closing ceremony is three hours long on a Saturday.

My response:

Ok, and do these events go on 24 hours a day, or is there a specific timeframe.

Interviewer:

The event go from noon to 10pm everyday.

****At this point, feel free to crunch the numbers in your head and see if you can get the same answer****

My response:

So every weekday consists of three hours of primetime and seven hours of non-primetime. This means that during Olympics, there will be:

Primetime: 3 hours/weekday X 5 weekdays/week X 2 weeks + 2 weekends x 2 days/weekend x 10 hour/day = 30 hours + 40 hours = 70 hours during the event

Since both the opening and closing ceremony are primetime as well, the total is 76 hours

Non-Primetime: 7 hours/weekday X 5 weekdays/week x 2 weeks = 70 hours

So if the for each hour we have:

Primetime: $400,000/30seconds X 60seconds/min X 10min/hour X 76 hours = 608 Million

Non-Primetime: $200,000/30seconds X 60seconds/min X 10min/hour X 70 = 280 Million

The total revenue generated if we sold all advertisement time is 888 Million

Before I go any further, is it safe to assume that all advertisement time will indeed be sold?

Interviewer:

Yes.

My response:

Based on the analysis we just did, we will likely generate 888 million dollars from advertisements if we have the broadcasting rights to the Winter Olympics. While there are other revenue streams that are associated with having the rights (such as licensing out events), we have captured the bulk of the revenue. Since we are looking to get a 20% return on our bid amount, I would like to take a look at the cost side so that I can make a good recommendation.

Interviewer:

Sure, what would you like to know?

My response:

I would like to take a look at the costs, and break them down into their components. Do we have any information on that?

Interviewer:

In terms of the Olympics themselves, it will cost 488 million dollars to set up the necessary equipment, broadcasting stations, hire staff etc. You can assume that all costs associated with the actual running of the broadcasts are captured in the 488 million.

My response:

Great, are there any other costs?

Interviewer:

What do you think?

My response:

The only thing I can think of is that during the broadcasting of the Olympics, the station will not be able to play its regular programming so there may be some cost there.

Interviewer:

Do you know what this type of cost is called?

My response:

I do not.

Interviewer:

It is called the opportunity cost, and let’s say that this is roughly 50 million.

My response:

At this point, we know that we can generate revenues of 888 million, while incurring costs of 538 million. This means that we will have a profit of 350 million. Since we want a return of 20%, the bid amount, as it stands now, is at roughly 290 million.

Interviewer:

Do you see any other costs?

My response:

No, not really.

Interviewer:

What about the time value of money? We are placing the bid now, but will not generate any revenue until the Olympics start in about a year.

My response:

Yes that makes sense, and I failed to consider that during my initial analysis. Do we have information on how much depreciation we will have?

Interviewer:

Let’s say 10%. This includes inflation as well as interest for the amount that we will have to borrow to make the bid.

My response:

Excellent. With this new information, we know that 350 million dollars in a year is worth roughly 320 million in today’s dollars. Therefore, if we want to make 20% return, we will have to place a bid of roughly 270 million. Before I go on, does the company have the ability to either raise or borrow this kind of money?

Interviewer:

Yes, the company has good relations with a few banks, and money will not be a problem. As we mentioned before, the interest rate is already taken into account. We are running out of time, and there is one question I would like to ask you before I get you to conclude. Do you see any other potential benefits to owning the broadcasting rights?

My response:

Yes, there are several benefits that I can see:

1) Increased prestige and brand recognition for the station

2) Taking potential revenues away from competitors

3) Merchandizing opportunities

Interviewer:

What about increased viewership of the station’s original programming?

My response:

That would likely be the case for the programs directly before and after the Olympics come on the air.

Interviewer:

Why don’t you give me your recommendation.

My response:

After preliminary analysis, the station should put forth a bid 270 million dollars for the following reasons:

1) From our profitability analysis, this bid will yield the desired return on investment of 20%

2) The company can afford it

3) There will be intangible benefits such as increased brand recognition, as well as tangible benefits such as increased viewership of its original programming before and after the Olympics come on the air

Going forward we should look into several other factors such as the state of the competition to see if they are even capable of putting up a bid close to 270 million. If they are not, then we should lower our bid since that will result in even more profits generated. In addition, we should verify that we will indeed be able to sell all of the advertisement time. With your permission, I would like to get the team to go forward with analyzing these issues.

Interviewer:

Thank you for your analysis.

My response:

My pleasure.

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