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21 APRIL 2014

 

The ABC’s of pay-per-view


By Jeff Fried

It is widely acknowledged that in order for a professional boxer to reach marquee status he must become a pay-per-view broadcast attraction, requiring the boxing (and general sports) fan to actually pay to view a live televised boxing match involving the particular boxer. There is a distinction, at times, between a marquee superstar boxer, and a professional boxer who possesses superstar talent. There are quite a few superstar talented professional boxers, yet only a very few marquee boxers can attract a pay-per-view audience sufficient to warrant the time and expense associated with the promotion of a pay-per-view broadcast.


At the outset, let me inform you that the gurus in the pay-per-view broadcast industry are Jay Larkin of Showtime’s SET and Mark Taffet of HBO PPV. I have been involved in dozens of pay-per-view broadcasts in a promotional and legal capacity, and this note is intended to provide general background information on the mechanics of a pay-per-view promotion. The economics of a pay-per-view event based on theoretical assumptions are likewise illustrated below.

THE PROMOTER AND THE DEAL

Depending on the particular event, the promoter either assumes financial risk in staging a pay-per-view event or secures guaranteed sources of revenue necessary to cover the projected expenses, including purses of the main event participants. The risk arises because there is generally no guaranteed domestic television revenues (such as a broadcast license fee), rather such domestic television revenues are a variable based upon pay-per-view home sales.

The promoter serves as the quarterback of the pay-per-view promotion and enters into various commercial arrangements and customarily undertakes what seems like endless promotional, marketing, compliance, administrative and logistical responsibilities.

1. The promoter enters into a Distribution Agreement with the distributor of the event, such as Showtime’s SET or HBO PPV. While not minimizing the comprehensive and sophisticated technical, marketing, and production efforts undertaken by these distribution entities, they are contractually charged with the responsibilities of marketing and distributing the event to cable operators throughout the United States and its territories (e.g., Puerto Rico). Such distribution by either SET or HBO is undertaken through a variety of pay-per-view affiliates and conduits (such as In Demand), enabling local cable operators such as Cablevision in New York City or Cox Cable in Las Vegas to have the event available for its regional subscribers.

2. As with any boxing promotion, the promoter enters into a site agreement with a venue, broadcast license agreements with international networks and cable stations throughout the World, sponsorship agreements, bout agreements with the boxers for their participation in the bout, among a host of other insurance, travel, production and related vendor and consultancy agreements. Of particular note in a pay-per-view event is that the bout agreement for a main event participant generally provides for the boxer to receive a base “purse” (characterization of the boxer’s compensation for participating in the bout) plus a potential upside based upon the number of pay-per-view home sales and corresponding domestic live television revenues to the promotion (e.g., $5/per home in excess of 150,000 pay-per-view home sales).

3. The promoter and distributor jointly develop a marketing plan to enhance public and media awareness through the (hopeful) creation of a compelling event. They utilize the particular talents and demographic following of the event participants. For example, if one of the main event participants is a Latin boxer there will generally be a focused marketing plan of the event in California, Texas and New York, of which historic pay-per-view data reflects a large Latin population in those states supporting pay-per-view boxing. Promoters also endeavor to supplement the main event with undercard bouts that add diverse elements to attract a broader demographic following so that all bases are covered in attracting the widest fan base.

4. For most pay-per-view events commercial success is achieved by attracting not only the avid boxing fan but also the casual sports fan. For those events that have the good fortune to attract the boxing fan, the casual sports fan and the non sports fan rest assured that everyone involved will be smiling Monday morning as revenues from the event are being tabulated!!

5. Most pay-per-view broadcasts are undertaken in the Spring and Fall for

reasons having to do with broadcast competition at that time (e.g., October World Series and March NCAA Basketball Tournament), holiday season (the consumer is less likely to be focused on or have discretionary dollars around mid-December for a boxing pay-per-view event!!), vacation and social calenders of the average consumer (i.e., most consumers at one time or another vacation during the summer months).

6. Many sponsors prefer to support a pay-per-view event as opposed to a cable televised event because there is customarily a much greater promotional and marketing effort put forward by the promoter, the distribution company and the boxers themselves to “hype” the event. Increased hype and marketing dollars means greater exposure to the public for the sponsor.

7. When a boxing event is a pay-per-view broadcast and revenues are contingent upon the consumer dialing up his regional cable operator and spending discretionary dollars, it is commonplace for the distributor and the promoter to have full-time public relations and marketing representatives working to create awareness for the event.

THE ECONOMICS OF PAY-PER-VIEW; BY EXAMPLE

With the above as background, the following sets forth a fictitious example of the manner in which a pay-per-view promotion operates from a financial viewpoint. The dollar amounts are mere estimates and could materially vary. Certain descriptive budget line items remain the same (although not necessarily the amounts) regardless of whether it is a pay-per-view broadcast or a cable/network broadcast, e.g., site deal, sponsorship, international television rights, etc. The principal variable, of course, is the number of homes that purchase the event generating revenues available for distribution/allocation to the promoter and the boxers.

The following example assumes a pay-per-view broadcast that is estimated to generate between 150,000-200,000 homes (reasonably successful by today’s standards). To provide a framework of just what this means, the July 29, 2001 Roy Jones, Jr. vs. Julio Gonzalez bout and the September 29, 2001 Bernard Hopkins-Felix Trinidad bout reportedly did 185,000 and 450,000 homes, respectively.

While there can be no assurances what a particular event will generate in terms of pay-per-view home sales, there is precedent regarding particular fighters, the compelling nature of certain bouts and other factors which the experts (such as Messrs. Larkin and Taffet) utilize in projecting the contemplated pay-per-view sales and the appropriate retail pricing. Certain aspects, naturally, cannot be projected, such as the weather, current events that may arise and the buying habits of the non-avid boxing fan, and Alan Greenspan’s decision whether or not to cut interest rates!!

PAY-PER-VIEW BUDGET

REVENUES:

Live Gate $ 650,000

Delayed Broadcast 750,000

Net PPV (based on 150,000 homes- see below) 2,800,000

Closed Circuit 100,000

Sponsorship 100,000

Net International Sales 300,000

TOTAL REVENUES $4,700,000

EXPENSES

Main Event Purses $ 3,000,000

Undercard Purses 300,000

Marketing Budget 700,000

Other Expenses 250,000


TOTAL EXPENSES $4,250,000

NET PROFIT (LOSS) $450,000

The following provides explanatory information on Budget:


Revenues

I. Live Gate. $650,000. For a pay-per-view broadcast expecting approximately 150,000-200,000 home buys, $650,000 is a reasonable assessment of the live gate.

II. Delayed Broadcast. $750,000. This is what a premium cable network such as HBO or Showtime may pay to the promoter to broadcast the event on a delayed basis, generally one week following the date of the pay-per-view event. Secondary delay broadcasts on television outlets such as ESPN or Univision may also be available in exchange for substantially lower delay broadcast fees, or more likely as a barter arrangement to promote the pay-per-view event on their network leading up to the event

III. Closed Circuit. $100,000. This addresses the closed circuit rights within the United States, such as bars and other closed circuit outlets and are typically consolidated by the promoter through one closed circuit operator who guarantees the promoter a fixed fee and then sells the event throughout the country to its network of bars and closed circuit operators.

IV. International Sales. $300,000. This is an area where there are tremendous variables, and many agents and subagents involved. With regard to international sales many promoters “package” international sales whereby they sell to various countries on an annual basis a set number of events and allocate the annual gross amounts received over the number of events. It is necessary to review on a country by county basis the maximum amount of revenues for the particular event so that the boxer does not get penalized from such packaging arrangement. This will be confirmed by an independent verification of the international sales for the event.

V. Sponsorship. $100,000. This is generally based upon a beer company and selling of the ring mat and the ring posts together with corresponding signage. Many sponsorship arrangements in a pay-per-view broadcast are a combination of a cash compensation paid by the sponsor and a barter arrangement whereby the sponsor agrees to include the pay-per-view event in their own product advertising.

VI. Domestic Television. As noted above, the domestic television fee is a variable based upon the number of pay-per-view homes for the particular event. Assuming a pay-per-view retail price of $39.95, and following deduction of (a) the percentage of such pay-per-view fee to the cable operator (generally 50% of gross goes to the local cable operator although such percentage differs based upon the marketability of the event and the desire of the cable company to possess the ability to sell the event to its local cable subscribers) and (b) the approximate 7.5% distribution fee remitted to the distributor (SET or HBO PPV as discussed above), resulting in approximately $18.50 from each home purchase received by the promoter and comprising the domestic televison fee.

The following chart is based upon the number of pay-per-view homes and the corresponding net pay-per-view revenues to the promotion based upon the $18.50/per home that would net:

Number of Pay-Per-View Home Sales Net Pay-Per-View Revenues to Promotion (rounded)

75,000 Homes $1.4 million (@ $18.50/per home)

100,000 Homes $1.85 million

150,000 Homes $2.8 million

200,000 Homes $3.7 million

250,000 Homes $4.6 million

300,000 Homes $5.5 million

Expenses

The expenses for a pay-per-view event of this magnitude, including the opponent, the undercard, the press conference tour, advertising, etc. could be in the $4,250,000 range. The promoter either assumes the financial risk or secures guaranteed revenues from the other sources listed above to cover all, or substantially all of the projected expenses.

There are various aspects of the pay-per-view promotion which require a knowledge of the players, legal and commercial considerations and projections as to the results that can be reasonably expected from a pay-per-view broadcast, incorporating the enhanced expense (and time) necessary to stage and promote such an event. This note does not cover all of the intricacies of a pay-per-view broadcast and is not intended in any manner to minimize the enormous effort that is undertaken by literally hundreds of people in order to achieve a commercially successful event.

****

“Jeff Fried is President of Fried & Company, P.C., a Washington, D.C. based law firm that represents a wide variety of sports and entertainment interests, with an emphasis in the area of professional boxing through representation of promoters, managers and select professional boxers.”



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