4 Business Lessons from the Olympics

What's up, everyone. This is Alex Lieberman, Co-Founder and Executive Chairman of Morning Brew. Welcome back to the Founder's Journal, my personal audio diary where I give you, the business builder, the tools you need to think better in order to build better, whether that's building a business, a team, or a new product. Today, I'm talking about four lessons that we can learn as builders from looking at the business of the Olympics. The Olympics are a business, just like any other business, which means there are clear things you can take away from the games to help inform how you build your business. Let's hop into it.

So I've had the Olympic games in Tokyo on, in the background, a decent amount over the last several days. And I've been watching events when I'm taking a break or after work when I'm just trying to relax. Actually, yesterday at dinner, I watched the 200 meter breaststroke finals—a guy from my high school, Nick Fink, competed in that event. Unfortunately, he didn't finish with a podium spot, but it's pretty remarkable, you know, to go to a high school that had a graduating class of a 120 people, and one of those people was competing in the Olympics, so huge shout out to Nick for, you know, what I'm sure he has been a ton of sacrifice over several years to even make it to Tokyo.

And you know, something that's interesting that I've noticed about how I watched the games is I had this fascination with non-event content as much as the events themselves. You know, what I mean by that is I'm fascinated by footage of athletes in their hotels and the stories about the beds for athletes being made out of cardboard. I wondered to myself how much do the metals costs that are given to these incredible athletes when they make it to the podium. And as I see all of the stadiums and the media coverage, I can't help but wonder, "What's the business behind this thing?" It just seems like there's so much money going in and out of the games. So, that's what we're going to explore together today.

This is less like the episodes where, you know, I walked through my experiences building Morning Brew or the playbooks that I've built up as a professional, and more about letting my curiosity around the timely event guide us, and also finding business lessons that we can apply to our own careers as builders. So with that, I'm gonna start with a stat, and that stat is: 172%. Do you have any guesses what that number represents? I'll give you a second. That number is percentage over budget. Every Olympics, since 1960, has run over budget by 172% on average, and no Olympics, zero, zilch, has ever run under budget. 172%. That's like you telling your boss that you're going to spend $200 on a client dinner work, and instead of 200, you spend $344. The Olympics are the highest overrun on average of any mega-project in the world. Road projects have 20% overruns, bridge and tunnel projects have 34% overruns, train projects sit around 45%, and mega dams have 90% over runs. The Olympics is at 172%, nearly double things like the Hoover Dam? So, it's not even close. And while the average is a 172%, I think that the Olympics generally follow this power law rule, where there are a few infamous examples of host cities overspending ridiculous amounts on the games.

The craziest example is Montreal. 1976 Games, Montreal overspent its original budget by 720%, and the city spent the next 30 years paying off debt from those games, a lot of which was paid by taxpayers. And for a more relatable example, look no further than the Tokyo games going on right now. Back in 2013, when Tokyo was putting together its bid for the Olympics, it originally forecasted around $7.4 billion of cost for The Games, but today, officials say the true budget is somewhere around $15.4 billion and government auditors are actually projecting the total spent to be over $28 billion.

And this includes what I would say are $3.6 billion of costs that can be directly attributed to the pandemic. You have $2.8 billion of cost associated with postponing the games from the original date in July of 2020, as well as $800 million in ticket revenue that was lost because obviously Tokyo has now barred spectators from going into stadiums. Just think about that for a second. $28 billion of costs. We are talking about the GDP of Astonia and almost four times the projected cost of The Games—it's absolutely wild. So that's the headline. The headline of the Olympics is that the games cost a shit ton of money for host cities and host cities never spend what they say they're going to spend.

And that leads me to a few questions that I think are going to lead us to interesting insights. The first question: why can't host cities stay within budget, like why is it a 100% failure rate? The second question: why do host cities host the Olympics still, when it is so expensive to run?

What Can’t The Olympics Stay Within Budget?

So let's address the first question. Why can't the Olympics stay within budget? I think the biggest answer to this question is a lack of optionality. When you become a host city for the Olympic games, you forfeit basically all of your options to do things your way on your timeline. If the project isn't going well, you can't just throw in the towel and walk away.

There's actually been one city in the history of the Olympics that did walk away from the Olympics, but other than that never been done. If construction of stadiums is running behind schedule, you can't just delay the games. Instead, what happens is you throw money at the problem and make sure that things are complete on time. Being late isn't an option with the Olympics like other projects, like building sports stadiums or building roads. This takes away all opportunity to avoid throwing good money after bad money or prioritizing budget over your timeline. Here's a business example. You're recruiting for a roll and you find out your top candidate says they need to be paid two times what you are budgeting for the role.

You don't have to hire that candidate, you can keep the recruiting process going. In the Olympics, a host city doesn't have that luxury. Also, unlike other projects, say, in construction, host cities are literally legally obligated to cover the cost of overruns. They don't have an option. So if it costs more to build out a stadium or build out roads or build out housing for athletes, the only one that is responsible for footing the bill is the host city. Obviously there are certain trade-offs that you make when deciding to host an Olympics. But I think that this is a valuable reminder that maintaining and even growing your options when possible is always a smart move. This could range from understanding what your options are if you decide to quit your job to understanding your options if you launch a new product within your business and it ends up failing.

Now, the other reason host cities don't stay in budget, aside from losing all optionality, is incorrect expectation setting. We fixate on the costs of the Olympics, not just because they're massive, but because literally 100% of the time, the cost projections are wrong. To me, that's as much of an expectation setting problem as it is a cost problem. And this concept was described best in a paper that was written by some academics, that's called Regression to the Tale: Why The Olympics Blow Up. And what the paper's authors basically say is that The Games' budget is more like a minimum that will, without a doubt, go higher. They call this behavior Blank Check Syndrome, where in practice, what actually happens is the bid budget by a city is more like a down payment or a security deposit than it is a budget.

And then further installments will follow that will be written on the host cities blank check. It's a blank check because the host city has to pay for the cost of the Olympics, no matter what the cost is. Think about how much less focus would be on the cost of The Games if a host city's costs was framed as installments or a down payment with additional payments versus a budget. A budget we are trained to think of as something that sounds final, but history has proven that cost for the Olympics are not final. It's just a fact. And that takes me to the second question. Why do countries continue to bid on Olympics if they cost so much? And in a lot of cases, cost taxpayers of that city billions of dollars.

And by the way, this isn't just a question about the Olympics. You know, so often we see a venture backed startups dropping hundreds of thousands of dollars a month on a 40,000 square foot office, or Fortune 500 companies flying their executives and a fleet of jets. In the case of The Olympics, I think it comes down to three things why countries still hosts the games: poor incentives, poor attribution, and wishful thinking. The first is poor incentives. Countries get a ton of push from construction industry executives to bid on the games. And from their perspective, why wouldn't they? Construction executives get the chance at a massive payday if they can convince their city to host, and then they end up receiving billions of dollars of contracts to build facilities, transportation, and all of the other infrastructure that's associated with the Olympics.

On top of that, these construction executives will go out and hire consulting firms to do these economic impact studies that show how positive the Olympics could be for a host city long-term. Issue is, a lot of times these studies will be faulty and self-serving, which makes sense, because if a big consulting firm representing a construction company comes out and says that this is going to be wildly unprofitable for the host city, that consulting firm will effectively be blacklisted from doing these studies for Olympics and other big events moving forward. Consulting firms have no incentive to say it's a bad investment. So on one side, you have construction companies, trade unions, and consulting firms that are heavily incentivized to get the Olympics to their city, and on the other side, you have companies, governments, and citizens that couldn't be less incentivized to host the events.

Why Do Cities Still Host The Olympics?

You know, just using Tokyo as an example, 83% of people who live in Japan believe the Olympics should not take place in the country. That last sentence may have you thinking, well, how do we know The Olympic Games aren't long-term profitable for cities? We've only talked about costs, what about the revenues? Well part of the answer sits in just the fact that the numbers don't lie. Tokyo is going to cost $28 billion and it is projected to bring in $6.7 billion in revenue. Even in a world where revenue is off by a factor of a hundred percent—let's say it brings in $13.4 billion of revenue. It is still wildly unprofitable.

The 2008 Beijing games generated $3.6 billion on $40 billion in costs, and the 2012 summer games in London generated $5.2 billion in revenue with $18 billion in costs. And so that has me wondering if these data points are telling us that it is wildly unprofitable to host an Olympics, why do countries still choose to participate? I think the answer is it's an attribution challenge. So let's shift gears for a second to the world of marketing. In the world of marketing, we talked about generally two types of marketing: brand marketing and direct response marketing. Direct response marketing is all about spending dollars to get sales dollars immediately.

So when you see Casper or another direct to consumer brand advertising on Facebook, that's direct response. They are putting those advertising dollars in in hopes and expectations of getting revenue out. Then on the other side, you have brand marketing. Brand marketing is all about strengthening the perception of your brand, so that at some point in the future, consumers will pick you over a competitor. When you see Toyota advertise on TV, that's brand marketing. Toyota's expectation is not that the people who watched this commercial will then grab their computer and buy a car or immediately after watching, but the expectation is that this Toyota commercial will plant a seed in the brain of the consumer, and at some point in the future, when that consumer is deciding to buy a car, they will think of Toyota first.

I believe this is the same belief of many host countries, whether you're Tokyo, Beijing, or, or London, you believe that the largest global event will put your country more on the map and drive investment through tourism and exports for decades to come. But similar to brand marketing, attribution is hard. How are you going to know of a tourist's decision to visit Japan 10 years from now is the results of billions of dollars that you spent on the Olympics in 2021. You're not going to know. And without this hard data, I believe some countries, just like some companies, will take that leap of faith, investing in their brand today, believing it will pay massive dividends for years to come.

So, to wrap things up beyond watching some swimming, gymnastics, cycling, some archery, I think there's a ton we can learn from the economics of the Olympics. As we think about important lessons to help guide our own journeys at building careers and businesses. 

Business Lesson #1: Optionality is Key

The first is that optionality is key. Host cities spend so much because they cut off all optionality. They can't back out of the games and they are legally responsible for all costs that come up, no matter the cost. The more that you can create optionality in your career and in your business, the more that you have flexibility and can make changes as you gather more information. 

Business Lesson #2: Set Clear Expectations

The second is setting clear expectations is everything. Whether it's your boss, whether it's your direct report, whether it's your investors, a lot of the cost problem in the Olympics is an expectation setting problem. Budgets aren't really budgets, even though they call them budgets. They are down payments with blank checks that are filled out with whatever cost is necessary to have the games start on time. As you build your business or your career, there is nothing worse than sugarcoating expectations. Tell us how it is so you don't leave people surprised. 

Business Lesson #3: Incentives are Everything

The third lesson: incentives are everything. As you have seen a small minority of people involved in the Olympics have the incentive for the Olympics to happen in their country and their city. And they make sure they do everything in their power to win that bid, so they get billions of dollars of contracts. In your career and your company, you start to realize how you can predict someone's behavior based on their incentives, and it also makes you realize that you have to be so careful about the incentives that you set for others. If you misalign incentives, you can count on people acting rationally in a way that their incentives tell them to act. 

Business Lesson #4: Attribution Helps Decision-Making

The fourth and final lesson from the games: attribution helps decision-making. Decision-making is just factually harder when you can't attribute results to inaction. The Olympics suffers from the same brand marketing challenge that so many Fortune 500s experience. The more that you can drive measurable results when testing a new product or doing work for your boss, the more that it will be clear whether something succeeded or failed rather than living in the murky middle.

I Want to Hear From You

With that, I would love to hear from you. As I mentioned, last episode, this month has been the biggest month on the show—it's been a blowout month. I think we grew by 25, maybe 30% month over month. And what that means is we have tons of new listeners. So, whether you're a new listener to the show, or you're an old listener and just haven't written in yet, I would love to meet more members of the Founder's Journal community.

Send me an email at alex@morningbrew.com or DM me on Twitter @BusinessBarista. And tell me a little bit about yourself: where you live, where you work, why you decided to listen to this podcast and just to give a little extra incentive, if you email me or DM me, I will send you a funny selfie of myself when I respond to your message. As always, thank you so much for listening to Founder's Journal. And if you enjoyed, please let others know who you think would enjoy the show as well. Thanks again, and I'll catch you next episode.