28 August 2008

Inelastic demand

In Part II of the AN/Wolff interview, out popped the most curious exchange (emphasis mine):

Blez: I’m going to get to the tarp and the Coliseum a little later, but how do you sell a team that is in rebuilding mode to a market that at times can be ambivalent? The Coliseum wasn’t even selling out when the A’s were the class of the AL a few seasons back. Does it take a World Series victory or even two to motivate these fans again? Or is this just a dead market?

Wolff: I do think that the proximity between us and the Giants hurts. They’ve actually moved closer to us. The six years prior to the year 2000, the Giants outdrew us by around a half a million on average per year. In 2000 they opened the new ballpark and the attendance has jumped and pretty much has stayed there. The difference is now about a million and a half although I haven’t checked it this year. That (the new venue) has something to do with it. Maybe not 100 percent. Secondly, Barry Bonds was a big attraction there and we didn’t have Barry Bonds. The other side of it is the demographic. Both the Giants and ourselves have a lot of water in front of us so there isn’t anyone else living there. A couple of other owners tease us that we may be the only inelastic demand team in baseball. That means that if you won the World Series, the next year would you have two and half or three million out there? In other words, our band of attendance has been approximately 1.7-2.1 million, win or lose that’s where we’ve been.
The comments thread had a nice exchange regarding inelastic demand. What does inelastic demand mean? Simply put, it's a lack of demand change for a product relative to price change. The formula for demand elasticity looks like this:

When the value (absolute value) of this coefficient is between 0 and 1, demand is considered inelastic. You're probably wondering what how the A's demand has looked recently. To that end I compiled a table showing the FCI average ticket price and annual attendance (2008 attendance projected):

You can see that from 2001 forward, the demand ratio (coefficient) has been less than 1 or less, hence inelastic. This is despite a 102% hike in ticket prices in that timeframe. The rich teams have unique market positions. The Yanks, Mets, Red Sox, and Cubs are effectively monopolies. That's how they can continuously raise ticket prices with zero effect on demand. They are the antithesis of the A's. As long as the A's are in the Bay Area, they will always be in a competitive position, not a monopoly position.

So why has this happened? We've gone over most of the reasons in great detail. The Coliseum is long-in-the-tooth, disaffection from long-time fans, the Giants moving closer and poaching casual fans, on-field performance, susbtitute entertainment options, etc. ad infinitum. Is it a reason to abandon the market? Of course not. This market is plenty big enough for six or seven major sports franchises as long as they have good venues and are located properly. In light of this, I don't expect the current business model at the Coliseum to change much in the remaining years of the lease - no untarping the third deck, no cheaper beer or concessions, no ticket price freezes. There's little impact to project from such moves, and thus little reason to make any moves.

Parsing the AN interview: Television

Let's get started.

First, on the television situation. The possible move to Comcast SportsNet West is definitely positive, but not without its downsides. The main issues here are the number of games and on which tier CSNW will be carried in the Bay Area. To illustrate the first issue, I've dragged out the table from the May post on RSN's:

The obvious inequity is that CSNW is carried on the extended basic tier in the Central Valley, while it's on the digital channel 400 in the Bay Area. It really comes down to the number of televisions that can view the channel. Not every household uses the digital converter box offered by Comcast, and for those that do, not every television will be mated to a box. So if you want to watch a game while working on a car in the garage (where there's likely no box), you won't catch the game. Or if you're a kid that wants to watch the game in his/her room but your parents don't feel you need a box, you'll have to watch elsewhere in the house. For some it will be inconvenient. For some it won't.

Then there's the matter of CSNW being on 400. 400 has always been a placeholder as there's little content to put onto the channel at this point other than second-tier college sports. However, there's a unique feature to 400 that many aren't aware of: it's not encrypted. That means even though it's digital, a converter box isn't needed as long as you have a digital TV. The rate of adoption isn't high and there's a level of frustration regarding digital TV tuners, but at least for now the box isn't needed for a digital TV. That said, once the A's are on CSNW could easily become encrypted. The bottom line is that CSNW could be encrypted or not, or it could be moved around the channel lineup.

With the MLB Network launching next year, one fewer channel slot will be available on the analog tier. The Hallmark Channel is typically one of the first to get bumped to digital. In your area this may have already occurred. There are also a number of shopping-oriented channels. QVC is considered untouchable. Jewelry Television, which is typically on Comcast systems on a leased basis, is probably the next candidate. This channel is usually on channel 410 (CSNBA+) when a game isn't being broadcast. Complicating matters are a number of community access stations on a given city's analog tier, which could vary from city to city. Comcast could even end up competing against itself, as it has equity stakes in several other channels, such as Versus and The Golf Channel. (If you want to get an idea how inconsistent the systems are in the channel lineups, go to this Comcast form and put in some valid addresses around the Bay Area. You might be surprised.)

In the end, I think Comcast will figure out a way to put CSNW on the analog tier. They might have to put it high up, say in the upper-70's along with Versus and Golf. It's not in the "sports pocket" with the ESPN's and CSNBA, but at least it would be available. The motivating factor is Comcast's stake. They want to make as much from the network as possible, and that would be an order of magnitude more difficult to do from a digital-only slot.

Two other factors have real impact. A switch like this usually carries with it a massive schedule change. The Giants inked a deal with NBC 11 to broadcast 20 games, whereas 140 went to CSNBA. It's likely a similar split would happen with the A's on CSNW. They might even go to the extreme like the Florida Marlins, eschewing over-the-air broadcasts completely. High definition also will become paramount in the coming years. KICU doesn't do HD broadcasts. I'm pretty sure the other affiliates don't either. Blame that on either the A's or the affliates, it's still pretty costly. By moving over to CSNW, broadcasting expenses become more of a sunk cost as the partners become more interested in promoting the brand. There will be some figuring of what digital space is available to carry CSNW-HD, but that's only an issue in the Bay Area and can be easily accomplished with compression techniques and additional channel movement from analog to digital.

Behind the scenes, there will be an issue of talent and staffing. CSNBA hired a bunch more people and embarked on building a local studio. Would personnel and facilities be shared among the teams despite the split?

Who loses? Well, if this were five years ago, I'd say over-the-air-only viewers. Unfortunately for them, the digital switch is already going to make their experience difficult. Many people in the Bay Area will come out of the switch getting only 6-8 channels, and KICU probably won't be one of them.

5:16 p.m.: A couple more thoughts. There shouldn't be more than a handful of scheduling conflicts each year between the A's and the Kings because the MLB and NBA regular seasons only overlap during the first two weeks of April. That translates to 6-7 possible date conflicts per year. Those games could be easily accommodated by either team's affiliate networks. Also, weekday afternoon games should be available once the deal goes through. I'm guessing that the existing broadcast deal with CSNBA, which runs through the end of the decade, would be torn up and replaced by a long term deal. The Giants supposedly were paid $100 million over 25 years in addition to their equity stake in the channel.

Later today, I'll talk about the ballpark situation.