Seinfeld Winner’s Curse

I keep wanting to believe that the economics of Hollywood are not irrational, that the business of making movies and television is just a difficult one, and that any business in which you’re dependent upon the vagaries of public taste is a hard one in which to consistently generate profits. But then something like last week’s auction of the rerun rights to Seinfeld takes place, and I’m driven to the irresistible conclusion: These people are nuts.

After a dizzying bidding war involving four major bidders, cable station TBS paid–depending on who you believe–somewhere between $120 and $180 million for the rights to air the 180 Seinfeld episodes on cable for four years beginning in the year 2002. That works out to somewhere between $700,000 and $1 million an episode. Now, Seinfeld is the most popular program in the history of syndication, and it was a huge hit on network TV. But no matter how you look at the economics of this deal, they don’t add up.

In the first place, although the 11 PM Seinfeld aired on Channel 11 in New York City has consistently beaten the 11 o’clock news on other stations, the audience for the show is still very small relative even to the weakest network sitcom. As a result, it’s safe to say that TBS’ ad rates for the show will be significantly less than $1 million an episode, and a chunk of that will be paid to Columbia TriStar, which owns the show, as well as to the various cable systems. More importantly, TBS did not win exclusive rights to the show, which is currently airing in syndication in 200 markets. At some point, the law of diminishing returns must apply, even to Seinfeld. So TBS has spent more than $100 million for a show that viewers will be able to see every day on their local station.

There’s also the question of the cost of capital. When we hear $120 million, we think: Well, add up all the advertising revenue, multiply by four years, and subtract $120 million. If the number is positive, then the deal was a good one. But what you actually have to do is compare the return on the Seinfeld investment with the possible returns on other investments. Directing capital to Seinfeld means not directing it somewhere else, or it means raising that capital in a way that necessarily costs money. In either case, looking at the deal just in terms of potential revenue is meaningless.

In the end, the acquisition seems like an excellent example of what economist Richard Thaler terms “the winner’s curse.” In any auction, the average bid will be below the fair value of the item being auctioned off, because people in general are risk averse. But the winning bid will be above the fair value, because people overestimate the difference the item will make. The phenomenon is about as well documented as any in the behavioral-finance literature, and suggests a general rule for Hollywood: Next time there’s an auction, just walk away.