Tuesday, June 3, 2008

NHL Overtime and the Concept of Opportunity Cost

Last night – for those of you on the east coast – early this morning, the Pittsburgh Penguins won Game 5 in triple overtime by the score of 4-3. If you missed the game, you missed one of the best Stanley Cup finals overtime games. Petr Sykora from Pittsburgh’s bench told Pierre McGuire during the second overtime period that he would score the game winner, and the next period – he did just that!

Yet, even with the exciting action on the ice during the almost three overtime periods, my mind starting turning to economics. Specifically, the economic concept of opportunity cost. Opportunity cost is the cost that you incur by making a decision. For example my oldest son had to decide whether to stay up and watch the game or go to bed and be rested for a full day of camp this morning. While he did not actually have to pay anyone, the longer he stayed up and watched the game, the more tired he would be at camp today. NBC also faces an opportunity cost when playoff games go to overtime.

During the regular season network/cable broadcasters have a number of breaks in the game to allow for commercials, one of the prime revenue drivers to network/cable broadcasters. This is also true during the three periods of regulation play in the Stanley Cup playoffs. But in overtime, there are no commercial breaks – just continuous hockey! – and here is where the idea of opportunity cost comes in. NBC has televised games 3, 4, and 5. Games 3 and 4 both ended in regulation, and regularly scheduled programming followed, with NBC able to air commercials. Yet in Game 5, NBC was unable to show the same number of commercials during the nearly three overtime periods – about two hours worth to time. If you figure that for each hour the network shows 15 minutes of advertising, then NBC was unable to broadcast (and receive money) for about 30 minutes of air time. I did a quick search, and found that the top advertising rate for NBC in 2007-2008 was for Sunday Night Football at a 30 second rate of $358,000.

OK, programming that was scheduled to air after Game 5 without going to overtime will not be in that price range. So let’s make an assumption – let’s assume that a thirty second ad for the late night news, the Tonight Show and Late Night with Conan O’Brian was $10,000 per 30 seconds. Then what is the opportunity cost to NBC of last nights Stanley Cup final game extending into air time of about two hours? Well, you can look at two ways.

One, just multiple our assumed $10,000 per 30 second slot (or $20,000 per minute) by 30 minutes (15 minutes per hour by two hours) and you see that the opportunity cost of airing Game 5 is $600,000. The second way is that since the game was extended by two hours, then some shows that would have aired early Tuesday morning – say an infomercial – would not have aired, and NBC would not get the revenue from those infomercial’s airing.

2 comments:

Scott said...

I think you overstate the opportunity cost to NBC.

They were still able to show lots of commercials between periods (as a penguins season ticket holder I was certainly a captive audience), so they didn't lose out on all of the commercial time. Though I don't know if those were paid for at the same rate, higher or lower than what they would have shown in regularly programming.

The demographic for hockey likely even gets more of the marketing world's precious 18-34 year old males.

So they still had eyes on the screen and possibly more of them at the end of the game then they usually have during that time period! Plus that game likely translated into higher numbers for game 6 which combined will allow NBC to ask for more money for commercials during the final next season... the opportunity cost of showing something other than hockey may have been even higher!

Stacey said...

You make a good point. Commercials did run during the intermission, and I should have accounted for that. I am not sure if viewership suffered since the game ended at nearly 1am Eastern. Game 6 numbers were much higher than for game 6 last year, but I would guess most of the advertisement rates were already contracted and thus set before the series started.