Walnut Creek Amphitheater Case: Strategy and CVP

Analysis1
One day in early November, Pam Berg, Manager of the Walnut Creek
Amphitheater, 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
Walnut Creek Amphitheater failed to earn the budgeted profit goal. This
was the second year since Ms. Berg assumed the managers position at the
Walnut Creek Amphitheater. 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 WALNUT CREEK AMPHITHEATER FOR LIVE ENTERTAINMENT
The Walnut Creek Amphitheater is an outdoor pavilion in Raleigh,
North Carolina 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 yearround staff plan 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.
The Walnut Creek Amphitheater 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, the
Walnut Creek Amphitheater staged shows by the Dave Matthews Band,
Toby Keith, Coldplay, Drake, Tim McGraw, Aerosmith, James Taylor, Blink
182, Matchbox 20, Mary J. Blige, and many other national, regional, and
local artists. The Pavilion claims, There isnt 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. Exhibit 1 shows the stage and
seating of the amphitheater.
History/Development
1 Adapted from a case originally written by Edward Blocher and Kung H. Chen. Please do
not quote or distribute. Revised September 2016.

The city of Raleigh and Pace Entertainment Company of Houston,

Texas jointly built the Walnut Creek Amphitheater in 1991. Pace
Entertainment and Cellar Door Inc. of Raleigh, NC had the initial contract
to manage the pavilion. Hardees 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. The venue
had gone through several names including the ALLTEL Pavilion and the
Time Warner Cable Music Pavilion, named after different sponsors, until
reverting back to the Walnut Creek Amphitheater in 2013.
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 Live Nation
Entertainment Inc. Also, in 1999 Live 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. In 2005, Clear Channel
Entertainment was spun off in 2005 to form Live Nation, and merged with
Ticketmaster in 2009 to form Live Nation Entertainment. Since its
inception, Live Nation has become the largest concert promoter in the
world.
The Pavilion competes with the RBC Center at North Carolina State
University in Raleigh (NCSU), the Dean Smith Activities Center at The
University of North Carolina in Chapel Hill, NC (UNC), and the Verizon
Wireless Amphitheater in Charlotte, NC, among others. In contrast to the
facilities at NCSU and UNC that offer only indoor events, Walnut Creek
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 at Walnut Creek will discuss with Cellar Door
Venues, Inc. (which is a subsidiary of Live Nation) and the amphitheater the
possibility of performing at the venue, and look at the open dates. Upon
reaching an agreement. Cellar Door, on behalf of Walnut Creek, 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 Walnut
Creek Amphitheater has a pleasant experience and that the mission of the
company is clearly seen by everyone that a concert ... its 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 Walnut Creek
Amphitheater, but marketing expenditures 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 Walnut Creek 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, 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 Walnut Creek Amphitheater can know about the
fans, the more they know where to spend the $20,000.
Live Nation develops measures of performance and profitability for
each advertising medium, by region. This type of analysis is important to
the Walnut Creek Amphitheater 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
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confident of a high level of attendance. In contrast, the artist paid a fixedfee is guaranteed the same fee whether 100 or 20,000 people attend (the
capacity of Walnut Creek is approximately 20,000 attendance). 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 fixedfee shows. One method Walnut Creek uses in addition to advertising is to
distribute "comp" tickets (comp tickets are free tickets distributed
throughout the community) to build interest in Walnut Creek 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, Walnut Creek
Amphitheater tries to reduce nonartist costs. Nonartist costs at Walnut
Creek Amphitheater 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 DMSB All-Stars Concert
Exhibit 2 is a mock flash report for an illustrative fixed-fee show, the
DMSB All-Stars. A flash report is a projection of costs and revenues for a
scheduled concert. The guarantee/talent cost ($160,635) is the amount the
DMSB All-Stars 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 Live
Nations national and regional pricing policies, prices of comparable
venues, and Walnut Creeks 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
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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 DMSB All-Stars event, and other variable expenses. These
are then added to the direct costs for concessions, merchandise, parking,
and insurance to determine total operating expenses.

EXHIBIT 1
Walnut Creek Amphitheater Stage and Seating
The amphitheater 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 theaterstyle 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 staffservice 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 Report for the DMSB All-Stars Concert
The DMSB Allstars
10310001
7
7/31/15

ARTIST NAME
ACTIVITY/EVENT NUMBER
EVENT MONTH
EVENT DATE
Projected Sales (Number of Seats)
A Seats
B Seats
C Seats
D Seats
TOTAL Number of Seats

2,778
2,845
1,747
881
8,251

Projected Ticket Price

A Seats
B Seats
C Seats
D Seats

$36.29
$22.22
$11.31
$4.92

AVG TICKET PRICE NET OF TAX PER PAYING PATRON

NUMBER OF PERFORMANCES
DROP COUNT (total of expected ticket sales and
complementary tickets)

$22.12
1
10,349

PROJECTED NET AFTER TAX ADMISSIONS (ticket sales)

Other Ticket-Related Revenue
FACILITY CHARGE
Per capita
SERVICE CHARGE
Per capita
REVENUE FROM TICKET SALES AND OTHER TICKETRELATED
Per capita

$222,673
$26.99

ANCILLARY CUSTOMER REVENUES

PARKING
Per capita
FOOD CONCESSION
Per capita
MERCHANDISE
Per capita
RENTALS
REVENUE FROM ANCILLARIES
Per capita

$19,767
$1.91
$79,273
$7.66
$36,428
$3.52
$0
$135,468
$13.09

$182,479
$24,010
$2.91
$16,172
$1.96

$358,141
$34.61

TOTAL REVENUE
Per capita

EXHIBIT 2 (continued)

GUARANTEE/TALENT COSTS
Other Direct Costs
PARKING CONTRACT
CONCESSION CONTRACT
MERCHANDISE CONTRACT
TOTAL DIRECT COSTS
Per capita

TOTAL REVENUE (from above)

TOTAL DIRECT COSTS (from above)
GROSS PROFIT

$160,
635
$4,44
8
$43,3
56
$17,8
26
$226,
265
$21.8
6
$358,
141
$226,
265
$131,
876

Operating Expenses
TOTAL PRODUCTION EXPENSE
TOTAL OPERATIONS EXPENSE
TOTAL OTHER VAR. EXPENSE*
TOTAL ADVERTISING EXPENSE
TOTAL OPERATING EXP
Per capita
OPERATING INCOME
Per capita
PERCENT OF SALES

$15,5
06
$14,9
91
$14,3
23
$20,0
30
$64,8
50
$6.27
$67,0
26
$6.48
18.70
%

*Detail: Other Concert Variable

Expense
Insurance Expense per person

$0.17

Concession per person

Merchandise Inventory per person
Parking per person
Miscellaneous Variable Concert
Expense per person
Per capita
TOTAL OTHER VARIABLE EXPENSE

10

$0.35
$1.12
$0.08
$0.02
$1.74
$14,3
23

Recommended Discussion Questions:

1. Complete two selected cost-volume-profit analyses for the show
illustrated in Exhibit 2, the DMSB All-Stars:
a) How many tickets must the Walnut Creek Amphitheater sell to break
even?
b) How many tickets must Walnut Creek sell to earn $50,000 in
operating income?
2. What should be the average ticket price for the DMSB concert if the
fixed-pay fee is $200,000 and Walnut Creek expects to sell 7,000 tickets
and wants to earn $50,000?
3. Negotiating the fee for the DMSB All-Stars: fixed-pay or per capita
contracts?
a) What is the maximum fixed fee that Walnut Creek can pay the DMSB
All-Stars if Walnut Creek wants to earn $75,000 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 Walnut Creek can pay the DMSB
All-Stars if Walnut Creek wants to earn $75,000 and expects the show
to have an average ticket price of $22.12? Assume, including 25
percent comp tickets, that the show is expected to be a sell-out.
c) Independent of (a) and (b), what is the maximum per capita fee that
Walnut Creek can pay the DMSB All-Stars, whose concert is expected
to be a sellout, if Walnut Creek wants to earn $300,000 from an
average ticket price of $22.12 per ticket?
4. What role does CVP analysis and operating leverage play in contract
negotiations with different types of performers (fixed-fee or per capita)?

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