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One day in early November, Pam Berg, Manager of theCoastal Credit Union Music Park, was reviewing the operating results for the year just completed in preparation for the executive board meeting the following Friday. While the year ended in the black, she was disappointed that theCoastal Credit Union Music Park failed to earn the budgeted profit goal. This was the second year since Ms. Berg assumed the manager's position at theCoastal Credit Union Music Park. After the somewhat disappointing first year, she was determined to exceed the budgeted profit in the coming year. While not all events developed exactly as expected at the time of preparing the budget for the year, there were no major surprises during the year. Yet, the operating results are below the budgeted goal. In addition, Pam was frustrated by the lack of clear guidelines for contract negotiations with artists, for setting ticket prices, and in dealing with unexpected low ticket sales for certain concerts.

THECoastal Credit Union Music Park FOR LIVE ENTERTAINMENT

TheCoastal Credit Union Music Park in Raleigh, North Carolina is an outdoor amphitheater that provides live concerts to the public from April through October each year, hosting as many as half a million patrons a year. The seven-month season usually hosts an average of 40 concerts, and 12 year-round staffplan and manage each season.Live Nation Entertainment Inc. operates the pavilion.Live Nation is one of the largest diversified promoters, producers, and venue operators for live entertainment events in the United States. It has 71 venues either directly owned or operated under lease or exclusive booking arrangements in 29 of the top 50 U.S. markets, including 14 amphitheaters or pavilions in 9 of the top 10 markets.

Coastal Pavillon wants to be the nightlife for the Triangle (Raleigh-Durham-Chapel Hill, NC) and eastern North Carolina, and one of the most beautiful, technologically advanced, and successful amphitheaters in the world. It features the most modern state-of-the-art acoustics and video of any facility of its kind. In the last few years,Coastal Credit Union Music Park staged shows by the Dave Matthews Band, Alan Jackson, Brooks & Dunn, Toby Keith, Santana, Tim McGraw, Aerosmith, James Taylor, Jimmy Buffett, and many other national, regional, and local artists. The Pavilion claims, "There isn't a bad seat in the house. Whether you choose to spread a blanket on our gently sloping festival lawn or select a reserved seat in our pavilion seating area, you are guaranteed a great view of the action on the stage" (Coastal Credit Union Music Park website). Exhibit 1 shows the stage and seating of the amphitheater.

History/Development

The city of Raleigh and Pace Entertainment Company of Houston, Texas jointly built theCoastal Credit Union Music Park in 1991. Pace Entertainment and Cellar Door Inc. of Raleigh, NC had the initial contract to manage the Pavilion. Hardee's Food Systems, Inc. of Rocky Mount, NC, the original sponsor of the amphitheater, paid an annual fee to carry its name and logo on all signs and ads regarding the amphitheater. On February 3, 1999Coastal Corp (http://tel.com) became the title sponsor for the amphitheater.

The demand for the outdoor facility came about because the rapidly growing city of Raleigh lacked a major entertainment complex. In the late 1980s Pace Entertainment and the city of Raleigh came to an agreement to build the facility. The city of Raleigh would own the land while Pace Entertainment would own the facility and assume sole operations of the facility; Cellar Door would do the booking for all the concerts. Pace Entertainment would pay income taxes on earnings from the use of the facility.

In2008,Live Nation Entertainment Inc. acquired Pace Entertainment Inc. The amphitheater facility and its employees became part ofLive Nation Entertainment Inc. Also, in2009Live Nation Entertainment Inc. acquired Cellar Door Inc. and merged with Clear Channel Communications Inc., one of the largest owners of radio stations in the country. This move brought together both worlds of the entertainment business. While the company has diverse holdings, the philosophy ofLive Nation is "One Company, One Mission." Many companies that are now owned byLive Nation were at one time bitter rivals in the concertpromoting business. These companies now maintain good working relationships withinLive Nation. A key goal forLive Nation is for the net operating income of each of its holdings, including theCoastal Credit Union Music Park, to grow 5 percent each year.

The Pavilion competes with the RBC Center (http://www.rbccenter.com) at North Carolina State University in Raleigh (NCSU), the Dean Smith Activities Center (http://tarheelblue.ocsn.com/genrel/ 092301aad.html) at The University of North Carolina in Chapel Hill, NC (UNC), and the Verizon Wireless Amphitheater in Charlotte, NC (http://www.verizonwirelessamphitheater.com/charlotte/), among others. In contrast to the facilities at NCSU and UNC that offer only indoor events, the Pavilion offers outdoor as well as sheltered seating for its events.

Marketing, Operations, and Accounting

When the marketing department plans a promotion for an upcoming event, it coordinates with the sales department to see if there is a conflict in sponsorship. Marketing also coordinates with the operations department to effectively manage the activities on show days. Finally, the budget of each department (sales, marketing, and operations) is reviewed by the accounting department, which provides overall financial management of the project.

Bringing Concerts to Reality

A concert becomes reality in many steps. First, a group or performer with an interest in performing atCoastal will discuss with Cellar Door, Inc. and the Pavilion the possibility of performing at the Pavilion, and look at the open dates. Upon reaching an agreement, Cellar Door, on behalf of the Pavilion, signs a contract with the booking agent for the performer. A time is specified for gate openings, and once the gate is opened the show is underway. The job of the staff during a concert is to make sure every customer of theCoastal Credit Union Music Park has a pleasant experience and that the mission of the company is clearly seen by everyone that "a concert ... it's better live." Clean Sweep Inc. of Raleigh handles the cleanup after a show.

Key Business issues

Marketing has an important role in the success of theCoastal Credit Union Music Park, but marketing expenditures are carefully watched. For every show, the marketing budget is limited to $25,000. For many shows it is difficult to stay within the budget, since the Pavilion serves a five-market region consisting of Raleigh-Durham, Fayetteville, Wilmington, Greensboro, and the Carolina Coast. Most of the marketing budget is spent on advertising with radio, TV, andsocial media in the designated regions. Prior to developing advertising plans, the marketing staff analyzes ticket sales geographically over the five-market region. It is important to know the demographics of the five regions and compare them with the profile for each performer. The moreCoastal Credit Union Music Park can know about the fans, the more they know where to spend the $25,000.

Live Nation develops measures of performance and profitability for each advertising media, by region. This type of analysis is important to theCoastal Credit Union Music Park because increased ticket sales, through effective advertising, not only affect ticket revenues, but also revenues from parking, merchandise, and concessions. It is also important because of the increased cost of advertising. The advertising rates in the Raleigh-Durham region are comparable to the rates in Washington, D.C. The rates are up50 percent over the last five years, while the budgets per show are only up 15 percent over this time.

The cost of the performing artist has also increased dramatically. The average fee for an artist is approximately $260,000. Some artists are paid on a fixed-fee basis, while others are paid on a per capita basis. Generally, the most popular artists seek a per capita contract because they are confident of a high level of attendance. In contrast, the artist paid a fixed-fee is guaranteed the same fee whether 100 or 20,000 people attend (the capacity of the Pavilion is approximately 20,000 attendance). On average, the total number of paid tickets per fixed-fee concert is8,000.

The role of marketing and advertising is especially important for fixed-fee shows. One method the Pavilion uses in addition to advertising is to distribute "comp" tickets (comp tickets are free tickets distributed throughout the community) to build interest in the Pavilion that will later be realized in paying customers. Comp customers also bring in revenue for parking, concessions, and merchandise sales. In a fixed-fee concert, the number of comp tickets is approximately 25 percent of the number of paying tickets, while a per capita show has no more than 2.5 percent.

Because of the increasing cost of the performing artists,Coastal Credit Union Music Park tries to reduce nonartist costs. Nonartist costs atCoastal Credit Union Music Park include expenses for sales, marketing, parking, security, concessions, and merchandise. Since assuming the manager position, Pam has developed several avenues to reduce nonartist costs and/or increase revenues and profits, including reducing expenses, having the parking service pass out flyers for upcoming events, trading "comp" tickets for online spots in the radio industry, and giving local businesses tickets in exchange for advertising on their premises.

Revenues, Costs, and Flash Report for the KFBS Allstars Concert

Exhibit 2 is a mock flash report for an illustrative fixed-fee show, the KFBS Allstars. A flash report is a projection of costs and revenues for a scheduled concert. The guarantee/talent cost ($260,635) is the amount the KFBS Allstars are guaranteed for the show. Projected sales is the number of projected paying ticket holders, while the "drop count" is total attendance, including both paid and comp tickets. Setting ticket price is often done together with the performer, taking into considerationLive Nation's national and regional pricing policies, prices of comparable venues, and the Pavilion's desired profit for the concert. Pam uses the flash report to plan potential concerts and to evaluate the success of concerts already presented. The report shows the variety of revenues and costs for a concert, and the projected profit for the concert.

The flash report projects total revenues including ticket sales, parking, food, and merchandise based on per capita (drop count) rates. Ticket sales are in four ticket categories: A seats and B seats are regular price tickets for the reserved and lawn seating sections respectively; C and D seats are promotional (discount) price tickets for reserved and lawn seating, respectively. Other revenues include per capita facility charges paid by the sponsoring corporation for naming rights (based on paid ticket holders) and a per capita service charge paid by the performer for food, transportation, and other services. Not included are the annual lease payments for VIP seats at $10,000 per year. Patrons to the VIP seats also have to pay the ticket price of A-level seats. Reserved and lawn seating areas are shown in Exhibit 1.

The parking, food concession, and merchandise operations are outsourced to other service providers, so the direct costs for parking, merchandise and concessions are determined based on contracts with the service providers that include both a percentage (10 percent) of applicable revenues and a fixed fee. Operating expenses include an allocation of the total of fixed production and operations costs for the season, the advertising expenses for the KFBS Allstars event, and other variable expenses. These are then added to the direct costs for concessions, merchandise, parking, and insurance to determine total operating expenses.

REQUIRED

1. How would you describe the competitive strategy of theCoastal Credit Union Music Park? Given the firm's strategy, what are the critical success factors for the Pavilion to achieve its goal of continuous annual growth in operating income?

2. Complete two selected cost-volume-profit analyses for the show illustrated in Exhibit 2, the KFBS Allstars (Think of there being two products - Regular Tickets and Comp Tickets):

a) How many tickets must theCoastal Credit Union Music Park sell to break even for KFBS?

b) How many tickets mustCoastal sell to earn $30,000 operating income after taxes, assuming a20 percent tax rate?

3. What should be the average ticket price for the KFBS concert if the fixed-pay fee is $300,000 and theMusic Park expects to sell 7,000 tickets and wants to earn $30,000 after20 percent in taxes?

4. Negotiating the fee for the KFBS Allstars: fixed-pay or per capita contracts:

a) What is the maximum fixed fee that the Pavilion can pay the KFBS Allstars if the Pavilion wants to earn $45,000 after20 percent tax and expects the show to have an average ticket price of $36.29? Assume the show is expected to draw7,000 paying ticket holders.

b) What is the maximum fixed fee that the Pavilion can pay the KFBS Allstars if the Pavilion wants to earn $45,000 after20 percent tax and expects the show to have an average ticket price of $36.29? Assume, including 25 percent comp tickets, the show is expected to be a sell-out.

c) Independent of (a) and (b), what is the maximum per capita fee that the Pavilion can pay the KFBS Allstars, whose concert is expected to be a sellout, if the Pavilion wants to earn $ 180,000 after20 percent tax from an average ticket price of $33 per ticket? (zero comp tickets can be assumed)

5. Examining the Concessions contract - see exhibit 3 where costs for concessions for all events in 2020 were reported along with the attendance at each of the events.

a) Using regression estimate the cost equation for concessions for 2020.

b) Compare the results of variable and fixed costs as indicated in your equation with the contract for concessions in Exhibit 2.

c) Make a recommendation as to whether Coastal should handle concessions in house (results for 2020) or outsource to the provider in the contract shown in Exhibit 2.

6. Problems with the parking - in 2022 Coastal finds out that its parking lot needs extensive repairs. It can be done in sections so that only one quarter will be unusable at a time but must find a solution for for additional parking for big concerts.They find two possibilities - one is close by so that event goers can walk to the venue easily - this can be rented for $2,000 for each event needed but one month notice must be given to rent it.A second option is further away and is only available to rent for the entire year for $15,000. This location would require the operating of transportation between the site and the venue when used for events. A local transportation company is willing to provide shuttle service to and from the venue for $400 per event.

a) Analyze the costs and profitability between the two parking options if Coastal continues to charge for parking consistent with Exhibit 2. You will need to make some assumptions so make those clear.

b) How would your analysis change if you could rent out spots in the further parking lot for hourly parking when it is not being used for events? Explain what information you would need and how you would apply it.

c) Besides your estimated costs, what other considerations might you use in making this decision?

EXHIBIT 1 ALLTEL Pavilion Stage and Seating The Pavilion can accommodate 20,000 fans with 7,000 reserved seats directly in front of the stage (covered seating in sections 1 through 9 and VIP seating) and another 13,000 on the spacious lawn. It has 73 theater~style VIP boxes that can accommodate 4, 6, or 8 people. In addition to positioning for prime viewing, patrons in VIP boxes also enj ov amenities such as wait staff service at their seats, personalized parking, and exclusive membership to the VIP Bar & Grill. Directly in front of sections 4, 5, 8, and 9 is seating with an elevated floor that provides excellent views of the stage for patrons with disabilities and additional seating for the hearing or visuallyr impaired. Reserved, Covered Seating