One day in early November, Pam Berg, Manager of the ALLTEL Pavilion, 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 the

ALLTEL Pavilion failed to earn the budgeted profit goal. This was the second year since
Ms. Berg assumed the manager’s position at the ALLTEL Pavilion. 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.

THE ALLTEL PAVILION FOR LIVE ENTERTAINMENT

The ALLTEL Pavilion in Raleigh, North Carolina (http://www.alltelpavilion.com/) 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 staff plan and
manage each season. SFX Entertainment Inc. (http://sfx- yes.liveonline.net/) operates
the pavilion. SFX 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.

ALLTEL Pavilion 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,
ALLTEL Pavilion 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” (ALLTEL Pavilion 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 the
ALLTEL Pavilion 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, 1999
ALLTEL 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.

In 1998, SFX Entertainment Inc. acquired Pace Entertainment Inc. The amphitheater
facility and its employees became part of SFX Entertainment Inc. Also, in 1999 SFX
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 of SFX is “One Company, One Mission.” Many
companies that are now owned by SFX were at one time bitter rivals in the concert-
promoting business. These companies now maintain good working relationships within
SFX. A key goal for SFX is for the net operating income of each of its holdings,
including the ALLTEL Pavilion, 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
perform- ing at ALLTEL 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 the
ALLTEL Pavilion 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 the ALLTEL Pavilion, but marketing
expendi- tures are carefully watched. For every show, the marketing budget is limited to
$20,000. For many shows it is difficult to stay within the budget, since the Pavilion
serves a five-market region consist- ing of Raleigh-Durham, Fayetteville, Wilmington,
Greensboro, and the Carolina Coast. Most of the marketing budget is spent on
advertising with radio, TV, and print 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 more ALLTEL Pavilion can
know about the fans, the more they know where to spend the $20,000.

SFX develops measures of performance and profitability for each advertising media, by
region. This type of analysis is important to the ALLTEL Pavilion 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 up 200 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 $160,000. 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 atten-

dance). On average, the total number of paid tickets per fixed-fee concert is 7,000.

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, ALLTEL Pavilion tries to reduce
nonartist costs. Nonartist costs at ALLTEL Pavilion 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 ($160,635) 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 consideration SFX’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 rev- enues 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 the ALLTEL Pavilion? 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:

a) How many tickets must the ALLTEL Pavilion sell to break even?

b) How many tickets must ALLTEL sell to earn $30,000 operating income after taxes,
assum- ing a 40 percent tax rate?

3. What should be the average ticket price for the KFBS concert if the fixed-pay fee is
$200,000 and the Pavilion expects to sell 7,000 tickets and wants to earn $30,000 after
40 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 after 40 percent tax and expects the show to have an
average ticket price of $22.12? Assume the show is expected to draw 6,000 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 after 40 percent tax and expects the show to have an
average ticket price of $22.12? 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 after 40 percent tax from an average ticket price of $22.12 per ticket?

5. What role does CVP analysis and operating leverage play in contract negotiations
with different types of performers (fixed-fee or per capita)?

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 78 theater-style VIP boxes that can accommodate
4, 6, or 8 people. In addition to positioning for prime viewing, patrons in VIP boxes also
enjoy 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 visually impaired.

EXHIBIT 2

Flash Repor t for the KFBS Allstars Concert The KFBS Allstars
ARTIST NAME
10310001
ACTIVITY/EVENT NUMBER
EVENT MONTH 7
EVENT DATE 7/31/04
Projected Sales (Number of Seats) A Seats 2,778
B Seats 2,845
C Seats 1,747
D Seats 881
TOTAL Number of Seats 8,251
Projected Ticket Price A Seats $36.29
B Seats $22.22
C Seats $11.31
D Seats $ 4.92
PROJECTED NET AFTER TAX $182,479
ADMISSIONS
AVG TIX PRICE NET OF TAX PER PAYING $22.12
PATRON
TALENT% 88.03%
GUARANTEE/TALENT COSTS $160,635
NUMBER OF PERFORMANCES 1
DROP COUNT (includes comp tickets) 10,349
Other Ticket-Related Revenue $24,010

FACILITY CHARGE
Per capita $2.91
SERVICE CHARGE $16,172
Per capita $1.96
REVENUE FROM TICKETING $222,673
Per capita $26.99
ANCILLARY REVENUES PARKING $19,767
Per capita $1.91
FOOD CONCESSION $79,273
Per capita $7.66
MERCHANDISE $36,428
Per capita $3.52
RENTALS $0.00
REVENUE FROM ANCILLARIES $135,468
Per capita $13.09
TOTAL REVENUE $358,141
Per capita $34.61
Other Direct Costs $4,448

PARKING CONTRACT
CONCESSION CONTRACT $43,356
MERCHANDISE CONTRACT $17,826
TOTAL DIRECT COSTS $226,265
Per capita $21.86
PERCENT OF SALES 63.2%
TOTAL REVENUE (from above) $358,141
TOTAL DIRECT COSTS (from above) $226,265
GROSS PROFIT $131,876
Operating Expenses $15,506

TOTAL PRODUCTION EXPENSE

TOTAL OPERATIONS EXPENSE $14,991
TOTAL OTHER VAR. EXPENSE $14,323
TOTAL ADVERTISING EXPENSE $20,030
TOTAL OPERATING EXP $64,850
Per capita $6.27
PERCENT OF SALES 18.1%
OPERATING INCOME $67,026
Per capita $6.48
PERCENT OF SALES 18.7%
Detail: Other Concert Variable Expense
Insurance Expense per $0.17
person
COGS—Concession per $0.35
person
COGS—Merchandise $1.12
Inventory per person
COGS—Parking per person $0.08
Other Variable Concert $0.02
Expense per person
TOTAL OTHER VARIABLE $14,323
EXPENSE