SAMPLE Entertainment, Media and Technology (EMT) Program New York University B10.3355.20: Accounting and Valuation Issues in the EMT Industries Spring 2004 Professor Stephen Ryan (10-87 KMC, 998-0020, Fax 995-4004, [email protected]) Office Hours: MW 4:30-6 and by appointment Classroom: KMC 5-140, MW 3:00-4:20 Description: In this course, we will discuss financial economic, financial accounting, and valuation issues that pertain to the entertainment, media, and technology (EMT) industries. It is useful to analyze the EMT industries together because they exhibit common characteristics and are jointly evolving and in some respects converging because of digital technology. Digital technology has had and will continue to have a profound effect on the production, distribution, and consumption of the services provided by EMT firms. The EMT industries exhibit following common characteristics, among others: 1) complex cost structures: i) large up-front fixed or sunk costs ii) complementarities among various types of costs 2) highly uncertain or skewed demand 3) complicated contractual (e.g., compensation and financing) arrangements to share risks, provide incentives, etc... 4) investments are real options in that they: i) pay off big with low probabilities, ii) are made over time and yield information about subsequent payoffs, and iii) are specialized and irreversible. 5) path dependencies that cause demand to depend on: i) random events, ii) technological lock-in, and iii) other consumers’ choices. 6) subscriber bases that churn or grow, 7) libraries with multiple revenue streams, and 8) largely intangible economic assets. Because of these characteristics, accounting – while distinctly limited – is richly tied to the operations and valuation of EMT firms. In this course, we will explore this richness, focusing on salient, generalizable examples of EMT firms. A primary goal of the course is to adapt standard methods of financial analysis to the analysis of EMT firms, either by adjusting accounting numbers or by supplementing accounting numbers with non-financial measures. Readings and Non-Graded Assignments: There is no assigned text for the course. I will hand out class notes for each session and other materials such as articles, problems, and cases. All material should be read and thought about prior to the class session. For the student who wants background material, a diffuse but occasionally quite insightful introduction to the EMT industries, Entertainment Industry Economic: A Guide for Financial Analysis, Fifth Edition, Harold L. Vogel (Cambridge University Press, 2001) is well worth a read. Grading: There will be two take-home exams that will each determine 30% of your grade. These exams will be handed out after the end of the sessions on subscribers and accounting-based valuation. Assuming I stay on schedule (by no means a sure thing), these exams will be handed out in class on 3/10 and 4/21 and will be due one week later (spring break week does not count for the first take-home). You may discuss these exams among yourselves, but they should be completed individually, with no exchange of written work in any form. There will be a group project, discussed further below, that will determine 40% of your grade. The group project is due in the final exam slot assigned for the course. Class participation of the productive sort is encouraged and will be rewarded by one-quarter of a letter grade increase. I emphasize that productive participation does not require being either an expert or correct; for example, asking good questions is sufficient. Group Project: The group project should be a case study or report related to a specific accounting or valuation issue for an EMT firm or industry. Flexibility is allowed and encouraged in the choice of topic. Relevant readings (e.g., articles from the popular press or academic journals, contract, financial statements) should be attached, as they can be useful to me in incorporating materials into subsequent courses. The text of the case study should be 5-10 (double-spaced, 12 point font, 1 inch margin) pages. Groups can be any size from 1 to 5 students. I prefer the groups not to be 1 in size, but I recognize that group work can be difficult for some students. I recommend that groups have a brief discussion with me about their topic for the group project before they expend substantial effort. You should be thinking about potential topics throughout the course (e.g., as you read the paper) rather than waiting until the last minute. The group project is due on 5/3 (the last day of class) at 6 pm. Web Access to Materials/Blackboard: While I will hand out all materials needed for the course in class, the materials that are in electronic form will be available on Blackboard. I do not use Blackboard for any other purpose. 2 Outline of Sessions (Tentative) 1/26 Organizational Session and Overview Read: Class Notes Articles on the history of, trends in, and predictions about the EMT Industries: “Movies Meet New Technology: The Sequel to the Sequel”, New York Times, September 20, 2000 “A Cable Network of Their Own”, New York Times, November 2, 2003 “Rupert’s World”, Business Week, January 19, 2004 “Merger Brief: One House, Many Windows”, The Economist, August 19, 2000 “The Outer Limits of Optimism”, New York Times, October 14, 2002 “The Technology Sector’s Rise and Fall is a Tale as American as the Model T”, New York Times, December 14, 2000 “Telecom Wreck Provides and Opening for AT&T”, New York Times, September 1, 2002 “Cellphones: An Industry Watches Japan’s Experience”, New York Times, December 29, 2003 “Time Warner Deal Raises Ante in Cable Bid for Phone Market”, New York Times, December 9, 2003 “A Debate on Web Phone Service”, New York Times, January 5, 2004 “Heavyweights Are Choosing Sides in Battle over Next DVD Format”, December 29, 2003 “The Owners of Culture vs. the Free Agents”, New York Times, January 18, 2003 3 Part I: Financial Economic Issues and Discounted Cash Flow Valuation 1/28-2/2 Large Fixed Costs and Complementarities Between Fixed and Variable Costs Read: Class Notes Various industries: “Major Stars Not so Crucial as Concept Trumps Celebrity”, New York Times, June 23, 2003 “More Companies Pay Heed to Their ‘Word of Mouse’ Reputation”, New York Times, June 23, 2003 Theater: “Off B’way Pumps up Prices”, Weekly Variety, February 19-25, 2001 "Why Neil Simon Decided to Turn His Back on Broadway", New York Times, 1994 “It’s Broadway. Well, Virtually.”, NewYork Times, March 18, 2003 Film: “Gambling on a Film Fantasy”, New York Times, December 12, 2001 "The $75 Million Difference", New York Times Magazine, November 16, 1997 “With ‘Sand and Fog,’ Can Year be Salvaged?”,New York Times, December 15, 2003 “Even Blockbusters Find Fame Fleeting in a Multiplex Age”, New York Times, August 13, 2001 “Digital Production of Films is Coming. Now, Who Pays?”, New York Times, October 13, 2003 “Movie Theaters Build Themselves into a Corner”, New York Times, September 4, 2000 “For a Theater Chain, A Revival May be Near”, New York Times, January 27, 2002 Television: “‘Law & Order, A Hot Franchise, Seeks a Rich Deal Early from NBC”, New York Times, June 2, 2003 “What Price Touchdowns?”, Wall Street Journal, January 3, 2003 “Following HBO, Networks Test Short-Run Series”, New York Times, January 19, 2004 “Reality Shows Alter Way TV Does Business”, New York Times, January 25, 2003 4 Music: “No. 1 With a Bullet: Madonna Opens Big, and She’d Better”, New York Times, May 11, 2003 “Tune Biz Gets Its Game Face On”, Weekly Variety, February 3-9, 2003 “Ticketmaster Auction Will Let Highest Bidder Set Concert Prices”, New York Times, September 1, 2003 Museums/Fine Arts: “The Guggenheim’s Scaled-Back Ambition”, New York Times, January 20, 2002 Book Publishing: “Publishing Trends Go Beyond E-Books”, New York Times, December 18, 2000 Internet/e-Commerce: “Microsoft’s $1 Billion Bet on Xbox Network”, New York Times, May 20, 2002 “Amazon’s Risky Christmas”, New York Times, November 28, 1999 Telecommunications: “Europe’s Wireless Vision in Dashed”, New York Times, December 17, 2001 “Telecommunications Industry Too Devastated Even for Vultures”, December 17, 2001 “Fiber, Fiber Everywhere...”, New York Times, November 19, 2001 “Globalstar, Bankrupt Satellite Company, to Be Sold for $55 Million”, New York Times, January 16, 2003 Prepare: Fixed Costs Problem Evolving Cost Complementarities in Theater Problem Up-front Costs, Efficiency, Option Value, and Risk Problem 5 2/4-2/9 Compensation Contracts and Definitions of Gross and Net Profits Read: Class Notes Read at least one of the following 2 lengthy articles (the article by Weinstein has a more complete historical treatment of profit-sharing contracts while the article by Goldberg has a more interesting conceptual edge) “Profit-Sharing Contracts in Hollywood: Evolution and Analysis”, Weinstein, Journal of Legal Studies, January 1998. “The Net Profits Puzzle”, Goldberg, Columbia Law Review, March 1997 “Big Hollywood Hits Don’t Ensure Big Profits”, New York Times, September 2,\ 2002 “Columbia Pictures to Share Movie Profits with Writers”, New York Times, February 6, 1999 “Strike Fears Grip Hollywood as Unions Flex New Muscle”, New York Times, October 1, 2000 “Screenwriters Adjust to Being Bit Players Again”, New York Times, December 9, 2001 “Music Stars Complain about Stringent Contracts”, New York Times, September 6, 2001 “Spit Out By the Star-Making Machinery”, New York Times, February 3, 2002 “Selective Accounting”, Forbes, December 14, 1998 “Will Today’s Huge