How to (specifically) determine a bidding price in this case?

Hi!

This is a profiability problem. My approach would be the following:

1. Company

1.1 Objectives: profits, gain viewers, brand recognition, positioning in the sport market segment.

1.2 Expertise: do they have experience in broadcasting live sports? This will afect costs through labour, equipment, reaching viewers and customers.

1.3 Financial situation: do they have the money or will they have to borrow it?

2. Competition

2.1 Competitors: who are they? Are they going to bid as well? What are they looking for?

2.2 Reaction if we win

2.3 Possible partnership?

3. Expected revenues.

3.1 Advertisement: broadcasting hours x number of ads/hour x price/ad

3.2 Subscription fees: viewers x price (it will depend on how popular sport is in the country).

4. Expected costs

4.1 Coverage: labour, equipment, accomodation, travelling, network access.

4.2 Opportunity cost: reveneue generated by programs which will be ommited when broadcasting the Olympics.

4.3 Capital cost: discount rate

5. Risks

5.1 Geopolitical risks: what if the country does not take place in the Games? (Russia precedent)

5.2 Uncertainty of future revenues and costs

Once you calculate the expected profit (revenue-cost) you can obtain the NPV of the potential profit. That would be the maximum bidding price to break even.

Let me know what you think about this framework.

Bidding price (cost to us) will be determined the revenue we expect to get. 

Revenue streams:

1. Commercials during breaks.

Number of hours olympic programming per day * days per week it airs * duration * 60/minutes per hour for commercials * $ per minute.

How much we charge for commercials will be determined by how much viewers we have and the market price  

2. New customers to our channel. Should check if we are part of a all-in-one package or sub. 

Now that we know both revenue streams, we can make a bid for the rights which would be lower than our revenue streams  as 1. We want to make a profit and 2. We have risk as this is 4y from now. 

Finally we we can also consider the opportunity cost if we’d like, but this hasn’t been specifically asked in the question. 

Hope this helps. 

Agreed with others that this should be structured as a profitability problem. Even before starting the case I would clarify what is the minimum return that the client would like from investment, would also ask, given the nature of the event, if there are other factors that would relax that threshold in this case.

Then I would go with identifying revenue and cost streams and also the certainty around them. Would make two estimates of expected profit: a worst case scenario (where profits are lower than expected because for example favorite athletes are injured or banned) and an expected scenario.

Finally I would compare these two numbers to the threshold and ask about risk tolerance of client and how the bidding works (single round, multiple rounds).

The nuance in the solution is that the two numbers you found are “walk-away” prices and bidding, if multiple rounds, should start lower and stop when that limit is reached.

Hope it helps,

andrea

Hey anonymous,

Agree with others about going after expected profits... btw, this is a reshuffle of a 2018 Winter Olympics case, reach out if you don’t have the text book solution and want to get it. (I can send it)

Best

Bruno