Calculating the Risk Premium

This is a risky business. That's one of the reasons why shows are so profitable. There's a risk premium that exhibitors pay to show managers for the opportunity to engage with highly qualified buyers. Risk premium is defined as the extra reward paid for holding an investment with more perceived risk than a less risky one.

The exhibition-industry risk is three-fold. First, there's the possibility that no one shows up; second, that buyer quality will be low; and third, that exhibitors will not do a good job reaching attendees. Exhibitors pay show producers to take care of risks one and two. And they often also blame show producers for risk No. 3.

Event producers should be well rewarded with a high-risk premium as they have to invest heavily before the show even opens its doors. They book the space, sign hotel contracts, spend an average of $124,000 per show on attendee marketing (and often many times this amount), take out event-cancellation insurance, pay salaries, etc.

It could be argued that show producers should be raising their risk premium, that is, raising their prices even higher. Why? Because while the industry's traditional risks are still in force, there are a number of new risks to contend with today.

The traditional risks include unexpected weather-related disasters, transportation system breakdowns, economic factors, competition with other media for marketing dollars, the possibility of vendor and partner service problems, venue and hotel infrastructure and quality issues, and equipment failures and accidents.

Basically, these are the same risks that have been part of the business since the first shows were held in hotels, civic auditoriums and fairgrounds. They can be reduced to two questions: Will our vendors do what they said they'd do? And will anyone show up?

Then there's always the risk associated with the health of the industry covered by the show. The question is often put this way: How much better can shows be expected to perform than the overall growth of their industry sector?

Show producers should be raising their prices as they are taking on much more complexity and risk. What's more is that today's challenges are posing some of the industry's biggest opportunities as well.

Here are a few examples of prevalent risk factors show managers face:

• Faster marketing changes. Marketing trends and fads are changing faster than ever. Companies seem to be staying with shows and events and spending the same on exhibiting as last year. Tradeshows are holding their own, while other media are undergoing transformation.
• Stressed exhibitors. Exhibitors are getting squeezed unlike ever before as marketing dollars are shifted to the Internet. They're still expected to maintain grueling event schedules and handle more brands and more complexity, while manning their booths on the front lines. If exhibitors start to slip, their marketing and corporate managers may not pick them up.
• Lack of control over information and content. More flexible and powerful online media and content-development software is a great opportunity for shows, but also presents huge new risks. What if something funny, strange or worse is filmed at your show by an attendee, and the next thing you know, 12 million people in a two-week period have downloaded it?
• New entrants. Major new players with new business models or significant twists on old approaches in the convention and tradeshow business are actually quite rare. Private equity doesn't count, as these firms almost always hire industry veterans to run their show and media acquisitions.

What if a well-funded group from outside the events industry had a different take and business model? Who's the Wal-Mart of this industry? Who will invent the industry's equivalent of the iPod?

Future risks could include new event producer entrants that take a page from discounters in other industries and attempt to use both scale and lower prices than other shows. There are really no true discounters in the exhibition industry, and basically none with scale rates (although it could be argued that associations are actually discounters and don't charge market rates).

• Unpredictable Internet companies. Related to new entrants, what if a company like Google eventually started to work with events, as it has with magazine and newspaper publishers, to broker advertising via its online auction system? Google is now pursuing a partnership with 50 major newspapers to sell newspaper ad space. Other media brokering is also being discussed. According to the Wall Street Journal, Google expects to eventually have 1,000 people "working on its radio ad-brokering unit alone."

What if an online company set up deals with major show producers to broker exhibit space and sponsorships – and even sell conference access? Buying exhibit space and manning booths is a lot more complex than placing newspaper ads. But who would have thought Google would start to broker newspaper space and radio time?

• Shortage of management talent. The war for talent is heating up in most industries. According to the Corporate Executive Board, as cited in The Economist, 62 percent of senior human resources managers are worried about company-wide talent shortages.

Running major tradeshows has always been a specialized occupation held by a rather small group of people, who mainly grew up in the industry. More complexity and risk will only make finding top show management talent that much harder.

• Terrorism. When thinking about the potential impact of additional terrorist attacks on our shores, the only good news is that, of the shows that were still held in the third and fourth quarters of 2001 and into early 2002, attendance only dropped by 20 to 30 percent, and the rebound was sharp between 2002 and 2004. In retrospect, this industry was much more resilient than many observers (including me) thought it would be in the first year after Sept. 11, 2001.
• Future shock. The biggest risk may be in the unknown. There's also potential risk that events may experience what other media is experiencing. That is, getting caught in a strange transition period while traditional media and marketing migrate to the Internet. Other media, such as TV, radio and print still seem to be behind the shift.

A number of conferences and exhibitions are owned by media companies and associations with diverse services and divisions. How will a challenged media environment impact shows and conferences – especially if the economy continues to slow?

Profitable industries are usually strong industries, and the events business is healthy. Maybe this profitability will one day mean that this industry's biggest risk is in not taking more of them.

Like many of the complex issues the industry has to deal with, its risk premium is both an opportunity and a challenge.