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Opportunity cost for ads

Anonymous A asked on Oct 16, 2019 - 1 answer

Hello all,

Today I came across a concept of opportunity cost for the first time. Could you please help understand it? The prompt of the case is:

"Our client is a major US television network that is trying to figure out how much to bid for the 2024 Summer Olympics and has brought you into to help us figure out the right bid. The Summer Olympics are a huge deal and will require a significant amount of capital to secure the rights. Before our network bids on the Summer Olympics, we want to make sure that we’ve considered all the right things."

You also can find out that:

Summer Olympics schedule (16 days)

Day 1 Friday is opening ceremony w/ 3 hours of
programming from 8 11pm

Day 2-15: Games 10 hours / day
•Weekday (9 12, 2 5, 7 11)
•Weekend (11am 9pm)
Day 16: Closing ceremony w/ 3 hours of programming

Revenues
• No subscription revenue, but can keep 100% of advertising
revenue
• Ad rates are $400K / 30 second ad for primetime (M F 7 11Pm, all
weekend) and $200K / ad for non primetime

Costs
•$428M of total costs
•Opportunity costs for ads: $1M / hour
•Time value of money: 6 year lag for receipt of revenue

My questions for you are: 1) How do you calculate opportunity costs usually? 2) What are opportunity costs for ads and how should I calculate those here? (I have the answers too, but I don't see how the casebook got to it).

Thank you

1 answer

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Sidi
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replied on Oct 16, 2019
McKinsey Engagement Manager & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 100+ candidates secure MBB offers
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Hi! These are typical questions you HAVE to ask the interviewer! You cannot just assume something or, even worse, apply "real world knowledge". What is tested in these interviews is your ability to think through an issue and to identify the critical information and definitions that needs to be nailed down in collaboration with the client (aka the interviewer).

This is why using solutions of case books is usually quite harmful and contributes to the widespread fundamental non-understanding of what cases are actually testing. Cases are no oral exams where you are asked to showcase conceptual or factual knowledge! Cases are a mechanism to showcase rigorous thinking, crystal clear communication, and rock solid quantification (aka written math) skills.

Cheers, Sidi

So what are you saying Sidi? We shouldn't be using Casebooks from MBAs to prepare at all? So how would you suggest to prepare? I find your answer not helpful at all and very arrogant. I asked for an explanation of a business concept. Preplounge offers partial answer to it with its new Quiz page. However, I would still like somebody to help me understand what is the lost opportunity in advertising here. — Anonymous A on Oct 16, 2019 (edited)

Please do not feel personally attacked! I was pointing to a very widespread reason for difiiculties that people have in addressing case questions. And yes - the use of MBA casebooks is VERY problematic! I do not say you should not use them at all, but it is important that you are aware in which way you can use them. Looking at the solutions provided is quite harmful in many cases, since they misguide readers into a direction that will not lead to success in actual interveiws. If you want to discuss the nature of opportunity costs in advertizing and adjacent topics, feel free to write me a personal message. I work in this space (i.e., for one of the biggest sports leagues in the world) and selling sports rights to media houses is part of my daily work. Nevertheless, this knowledge is IRRELEVANT to your capacity of adequately addressing case questions. So please stop feeling attacked, and try to re-read what I wrote and what it means. — Sidi on Oct 16, 2019