How Cricket Australia should auction broadcast TV rights.
Cricket Australia (CA) is currently looking at how best to sell TV broadcast rights in 2013. The contract will be worth many hundreds of millions if not billions of dollars to CA, so investing some time investigating alternatives to the traditional sales approach can potentially result in a significant uplift of the sale proceeds.
Channel 9 is the incumbent and has been for a very long time, but their contract will expire early next year and the other TV broadcasters (Channel 7, Channel 10, Foxtel and the telcos) are interested in bidding for the rights. The market is competitive and therefore CA should investigate if a custom designed online auction platform might deliver superior results compared to the traditional manual sealed bid tender and one on one negotiation process.
How would CA auction cricket broadcast rights ? For starters they would not use eBay or one of the other consumer auction providers, they would need a customized high stakes auction platform designed specifically for CA.
If we had the job of designing the CA high stakes online auction then this would be our approach:
We would start by understanding the objective of the auction, what is CA trying to achieve. At first glance the answer seems obvious, maximize the proceeds from the rights to broadcast this incredibly popular sport in Australia. This might be the primary objective, but CA might have a number of secondary objectives like maintaining a strong relationship with Channel 9 who has supported cricket broadcast for over 30years, or their secondary objective could be to align themselves with a successful TV station that is doing well in the ratings etc. So the highest bid might not be the only consideration, but it is a good starting point for our auction design.
We would start by understanding the objective of the auction, what is CA trying to achieve. At first glance the answer seems obvious, maximize the proceeds from the rights to broadcast this incredibly popular sport in Australia. This might be the primary objective, but CA might have a number of secondary objectives like maintaining a strong relationship with Channel 9 who has supported cricket broadcast for over 30years, or their secondary objective could be to align themselves with a successful TV station that is doing well in the ratings etc. So the highest bid might not be the only consideration, but it is a good starting point for our auction design.
So now we have some understanding of the objective, the question is can we use an online auction platform that is custom designed for CA, or is this deal too big, complex, and strategic to use an online auction ? To answer this we look at the trend around the world, where more and more government agencies and large corporates are using online auctions to sell high value resources. For example the US Gov used an online auction to sell close to $20B worth of spectrum in one of the biggest online auctions ever, and in Australia BHP Billiton used an online auction to sell a large shipment of diamonds. Victorian Forestry agency (Vicforests) has been using an auction platform that we custom designed for them in 2005. Also, Consolidated Bulk Handling CBH in WA sells port capacity for the 10M tonne annual wheat export using a customized auction platform that we delivered about 3 years ago, and Viterra will soon join them in South Australia. Further the Department of Climate Change DCC will use an online auction platform to auction carbon permits starting next year. CA would be in very good company if they decided to use a purpose build online auction platform to sell these valuable rights.
This is how our design team would approach the design of a customised CA high stakes auction platform.
This is how our design team would approach the design of a customised CA high stakes auction platform.
Firstly, we would look at how to define the lots so that all bidders can get exactly what they want. It seems back to front to start with the bidders and not CA, but at the end of the day if CA wants to maximise proceeds then the bidders need to be the big winners. This is a very important concept and one that most auction providers fail to grasp to the detriment of the seller. In summary, the key to good high stakes auction design is to give the bidders exactly what they want and no other selling mechanism can do this more effectively and efficiently than a well designed online auction with dynamic feedback. Giving bidders what they want means for example that you don't pre-bundle lots in a way that you think will be most attractive to the bidders, you will get it wrong as each bidder will value different combinations of lots in a private way. Our rule in auction design is where possible let the market decide, make the process fair and transparent and as expressive as possible for the bidders with continuous feedback after each bid so all parties trust the feedback and can respond accordingly, then get out of the way.
For CA we would create a separate lot for each year of a multi-year contract i.e. 5 year contract would be 5 periods. With an online platform CA could auction the rights every year, rather than all upfront, with very little incremental costs once the system is setup, but that is a discussion for another time. We would ask CA, is there anything wrong with say Channel 9 having the test cricket contract for broadcast TV in 2013 and Channel 7 then having that same contract in 2014? There may be some administrative issues with this approach, but if CA gets an extra 20M is it not worth the inconvenience. Or maybe the bidders will bid higher if it is a 5 year contract, rather than 5 x 1 year contracts. Who knows, a well designed auction will sort out the detail of what is the most valuable bundle for each format and broadcast medium. We would also have a separate lot for each format of the game i.e. test matches, one day cricket, and the popular big bash 20/20 format. Finally, a separate lot for each broadcast medium i.e. free to air TV, cable TV and online (in the future maybe mobile would be a separate lot). That makes a total of 5 x 3 x 3 = 45 lots in all that have to be allocated to the highest bidder.
We would auction these lots in a simultaneous format over multiple rounds of bidding. This format is termed a Simultaneous Multi-Round Auction (SMRA) for the auction theorists. For the practical people, this means each lot is effectively a separate auction that has its own unique winner, but all the lots are auctioned simultaneously so the bidders can see what each lot is priced at any time, and can switch their bidding between lots if one gets too expensive. This ability to move their bids around is a critical design feature of the SMRA that helps to maximize efficiency of the allocation and therefore the revenue to the seller. An activity rule requires each bidder to bid at least once in each round to stay active, so there is continuous activity and not all the bidding is left until the last minute. The advantage of this approach, other than avoiding winners being decided by who sneaks a bid in the last moment, is that the bidders are continuously getting price feedback from the market (how much other bidders value each lot) and they can respond by shifting their bidding around from one round to the next. If for example broadcast test cricket in 2013 gets too expensive in round 6 then Channel 7 can switch to broadcast test cricket in 2014 or one day cricket in 2013 etc. In the other auctions platforms that we run there is a significant amount of shifting from round to round as bidders learn from the market and shift their bids to lots where they can be more competitive. This is what we term efficient allocation and goes to the heart of good auction design that delivers superior results for the bidders and the seller.
Though the lots are auctioned simultaneously, it does not mean that the best solution is to award each lot separately (cherry picked result) as the bidders might be prepared to bid much higher if they can be assured of getting a package or bundle of lots e.g. if the stations can secure much higher ad rates for multi-year ad sponsorship deals then they would bid a premium for a multi-year contract.
Given that many of the CA lots are complementary, we would allow package or combinatorial bids. This means the bidders can create high value packages (unique to each bidder) and submit conditional all or nothing bids. eg. Channel 7 might submit an all or nothing bid for test cricket across all broadcast medium for the 5 years, and Telstra might have a package bid for online across all formats for five years. The problem of finding the highest revenue award configuration quickly becomes very complex as bidders create a number of overlapping packages. As the bundling or packaging becomes more complicated it would take hours for a person to solve using a spreadsheet and that is why a manual tender evaluation process would stop at one round of bids without giving bidders feedback to improve their bids, and simply declare an interim winner before starting face to face negotiations i.e. exclude the other bidders from the negotiation. Our system solves these type of combinatorial or packaging problems in less than a second and then gives all the losing bidders feedback on how they need to improve their bids to match the leaders. This means that non-winning bidders can either increase their bid or shift to a better value lot. The auction rounds stop when the bidders stop bidding, not when the clock stops.
The real power of our proprietary combinatorial auction mechanism is that we have patented the feedback mechanism so bidders can learn and respond after each bid. Other combinatorial auction providers, mainly in the US, either don't give any feedback i.e. the bids are sealed, or they give general feedback at the start of each round, not a target price to match the leader after each bid.
Finally, not all the bidders are the same. Even if Channel 7 and Channel 9 bid exactly the same amount in the auction then CA might still have a preference to stick with the incumbent for various reasons. Or CA might want to consider other non-price factors in the award decision, such as complex share of advertising arrangements. For example, Channel 9 might be offering 10% of all future revenue, and Channel 7 might only offer 7%. Clearly in this example, Channel 9 will generate more revenue for CA (assuming both stations can generate the same total ad revenue) even if they both bid exactly the same amount for the actual broadcast rights. We term this a multi-attribute auction, as attributes other than price must be factored into the award decision. Other attributes for the CA auction might include contract specific terms and conditions specified by each bidder, and payment terms. If for example Channel 10 is happy to pay for five years upfront, then their bid of $700M is worth more to CA than an identical bid of $700M from Channel 9 that is only prepared to pay a year in advance. Incorporating attributes other than price is common in most of the high stakes auction platforms that we have designed and operate.
In summary we are confident that CA could sell broadcast rights using a custom designed high stakes online auction using technology developed by Tradeslot Pty Ltd www.tradeslot.com, and that CA would make significantly more money if they did.
Finally, not all the bidders are the same. Even if Channel 7 and Channel 9 bid exactly the same amount in the auction then CA might still have a preference to stick with the incumbent for various reasons. Or CA might want to consider other non-price factors in the award decision, such as complex share of advertising arrangements. For example, Channel 9 might be offering 10% of all future revenue, and Channel 7 might only offer 7%. Clearly in this example, Channel 9 will generate more revenue for CA (assuming both stations can generate the same total ad revenue) even if they both bid exactly the same amount for the actual broadcast rights. We term this a multi-attribute auction, as attributes other than price must be factored into the award decision. Other attributes for the CA auction might include contract specific terms and conditions specified by each bidder, and payment terms. If for example Channel 10 is happy to pay for five years upfront, then their bid of $700M is worth more to CA than an identical bid of $700M from Channel 9 that is only prepared to pay a year in advance. Incorporating attributes other than price is common in most of the high stakes auction platforms that we have designed and operate.
In summary we are confident that CA could sell broadcast rights using a custom designed high stakes online auction using technology developed by Tradeslot Pty Ltd www.tradeslot.com, and that CA would make significantly more money if they did.
Anthony Du Preez and Jesco d'Alquen are directors of Tradeslot Pty Ltd an Australian based high stakes online auction provider, with an office just around the corner from the famous MCG. The Tradeslot auction technology is proven and has been used by Victorian Forestry (www.vicforests.com.au) to auction timber rights to sawmills in Victoria. Vicforests auctions have been running since 2005, delivering greater than 20% lift on over $500M of timber sales. Consolidated Bulk Handling (CBH) also uses the Tradeslot auction platform to sell port capacity rights for the annual 10 million tonne Western Australia wheat harvest.
