If you aren’t en economist, you probably think that I am going to dive into a discussion about Olympic athletes who win gold either not being as successful in life as their silver medal counterparts or perhaps randomly getting struck by lightning or caught in avalanches or something. (“winner’s curse,” get it?) But no. In my world, NBC is the cursed winner:
The tally is in: NBC lost $223 million on the Winter Olympics in the first quarter.
Oops. Let’s look more closely- where did the profit shortfall come from?
The Olympics did bring about $800 million in extra revenue to GE. But NBC had a lot of production and other expenses, including $820 million just to acquire the rights to carry the Vancouver Games on television and online. That expense was cited as the main culprit for the red ink.
Oops. So did the extra revenue not cover the cost to acquire the rights because viewership (or rather projected viewership, and thus ad sales) was poor, or did NBC pay too much?
GE executives said the high-profile event had ratings that were 14 percent better than the 2006 Winter Olympics in Turin, Italy, for which NBC paid $613 million.
Oops. So from what I can tell, the conversation in the NBC conference room must have gone something like this: “Well, I’ll admit that the Torino games four years ago were a dud from a ratings perspective. But I’ve got a good feeling about Vancouver…I mean, it’s close to the US, people speak English there, TV has gotten so bad that it’s basically a choice between watching this or watching a Kardashian sister, so we really can’t lose. Let’s up our bid for the games coverage some 30 percent from what we ponied up in 2006, k?”
And you wonder why things went poorly for NBC. (Sidenote: I love how the articles that I found when searching for numbers were generally of the form “Vancouver: At least it’s not as bad as Torino. Oh wait, the ratings dipped below those of Torino. Oh, now they’re back up, thank goodness.”) But before we go laughing about how dumb NBC was, I would like to point out that this situation is not as uncommon and you would think, and it’s a great example of what economists refer to as the winner’s curse.
Consider the following situation: there’s an auction (more specifically, a sealed-bid auction, not the gavel and fast-talking dude kind) for a huge jar full of quarters. Or at least you think it’s full of quarters- you see something that looks like a jar full of quarters, but you can’t actually poke through the jar and make sure that the middle of the jar isn’t stuffed with beanie babies or something instead. (Ha. Remember the days when the beanie babies would have been worth more than the quarters?) Actually, you haven’t seen the jar of quarters itself so much as a picture of the jar full of quarters, so you’re not entirely sure how big the jar is in reality.
Luckily for you, you were told how much the jar weighs. Now, you’re not exactly sure what to do with this information- you could find out how much a quarter weighs and divide the weight of the jar by the weight of the quarter, but this doesn’t help if you if the jar has things other than quarters in it. Nonetheless, you feel good about this information because you think that no one else has it…but they could have information that you don’t have, or they could have a slight variation of the information that you have and be interpreting it in a different way. Ready to bid? =P
Not surprisingly, different bidders come up with different valuations of the item, since they have different information and interpret it in different ways. (The situation where an item has a more or less objective valuation but information needed to determine the item’s value is spread across bidders is known as a common-value auction.) So we get something akin to the following:
This is what economists are referring to when they talk about the winner’s curse. Granted, the bids don’t have to follow a nice normal distribution like I drew here, and they don’t have to be symmetric around the actual value of the item, but the fact remains that it is overwhelmingly likely that if the bidders bid their estimated valuation of the item, the winner of the auction will have bid more than the item is actually worth. Oops.
The bidders in these auctions aren’t completely naive in a lot of cases. If they are aware of this winner’s curse concept, their thought processes go something like this: “Well, if I bid my estimated valuation and I win, I will have overpaid for the item. Therefore, I am going to scale down my bid somewhat in order to try to avoid this problem. I might not win as a result, but better to not win than to overpay, despite what eBay might try to have us believe.” This mindset lessens the effect of the winner’s curse, but it doesn’t guarantee that it will go away entirely.
Now, back to NBC…basically, NBC was the bidder and the Olympics was the jar of quarters. There is a more or less objective valuation of the Olympics that becomes known after the rights are purchased. This value is the amount of revenue that the event generates for the holders of the rights. Granted, this valuation depends on how well the ad sales and whatnot are implemented, to some degree, so it’s not quite as fixed as in the quarters example, but the point still holds. Each network had its own interpretation of the available information, and perhaps even some private information, but no network has enough information to know for sure how much money the Olympic broadcast is going to bring in. NBC, apparently, was the network that had the rosiest outlook and/or didn’t scale down its bid enough to overcome the winner’s curse.