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Can the sports industry survive the coronavirus shutdown?

By Murad Ahmed, Mark Di Stefano and Anna Nicolaou

Financial Times·

5 Apr, 2020 08:14 PM14 mins to read

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With events cancelled or postponed, revenue streams are drying up. Executives believe wider disruption lies ahead.

Martin Slumbers usually works from a wood-panelled room overlooking the 18th green of the Old Course at St Andrews in Scotland. The chief executive of the R & A, golf's governing body outside the US and Mexico, says his office was closed two weeks ago. The same goes for the ancient links, the first time this has happened since the second world war.

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Yet to fall off the calendar is The Open on July 16-19, one of the four annual golf "majors", which makes up the vast majority of the R & A's annual revenues of around £90m ($187m). Slumbers says all options are on the table for this year's tournament in Kent, England and the organisation has "rainy day reserves" to withstand the financial hit should it be forced to postpone or cancel the event.

But Slumbers — in common with sports administrators around the world — is also thinking further ahead. He is contemplating how to reduce expenses for future tournaments, such as installing a reduced number of grandstands for spectators or having fewer golfers compete. "The impact of this black swan event will make us think of how we manage the financial risk of The Open Championship," says Slumbers.

Sporting groups across the world are facing up to the same problems. With the help of big money television and branding deals, they have transformed games played recreationally for decades into multibillion-dollar enterprises. Leading athletes are protagonists in unscripted, unmissable dramas for thousands in stadiums or billions watching on screens. Sport is a uniting passion. And, until the coronavirus shutdown, a growing global market, with sales in sport services and related goods worth US$489bn ($832bn) in 2018.

Now the business model of many sports is under threat. While each one has different characteristics, most of their money is made in three ways: broadcasting deals, sponsorship contracts and "match day" income from tickets, hospitality and spending during events. These revenue streams are drying up.

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There is optimism in some quarters that the lockdown measures will be a short-term blip to business. But many sports executives believe there will be lasting disruption. The willingness of spectators to rush back to crowded stadiums will be tested. Many governing bodies are scrambling to reorganise calendars to ensure delayed tournaments take place later this year.

"[This] is the biggest disaster to hit the sports world in 75 years and the biggest challenge our business has ever faced," Simon Denyer, chief executive of the television and internet sports streaming group DAZN, wrote in an internal email to staff.

Greater changes await. Broadcasters are re-evaluating both the value of current deals and business models that are reliant on live sport to hold on to subscribers. Sponsors are slashing spending in response to an impending global recession. The pay packets of leading athletes will be depressed for months, if not years, to come.

The Uefa Champions League has been postponed. Photo / Getty Images

Even those imagining a glorious future have had ambitions overturned. Leeds United is top of the Championship, the second tier of English football, and well placed for promotion to the Premier League, the sport's most valuable domestic competition, where the club would earn an additional £150m in revenues. Instead, postponed fixtures have led the players to agree to pay cuts as they await games to restart.

"Imagine it for them, the players, coaches . . . they see the finish line, and this pandemic is stopping everything," says Leeds United owner Andrea Radrizzani. "We're all living and working on the edge."

Analysts caution that it is too early to calculate the damage to sport businesses. Consultancy KPMG predicts the "Big Five" football leagues and their member clubs in England, Spain, Germany, France and Italy face a collective hit of almost €4bn in lost broadcasting, sponsorship and match day revenue if the remaining games in their seasons are not completed.

Some are expected to cope with the cash crunch better than others. The organisers behind the Wimbledon tennis championships, cancelled this year, and the Tokyo Olympics, postponed until next summer, believe their insurance policies will recoup the vast majority of costs. But many football, rugby union and cricket clubs are among those to find their insurance arrangements do not cover pandemics.

The shutdown has already brought casualties: MSK Zilina, seven-time football champions of Slovakia, and USA Rugby, the sport's national governing body, are among those to declare bankruptcy in recent days. Industry executives say if social-distancing measures enforced in many countries continue for many more months, bigger franchises also face collapse.

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Many are responding by cutting costs. Even the world's two highest paid athletes, footballers Lionel Messi and Cristiano Ronaldo, have accepted pay cuts or wage deferrals alongside teammates at Spain's Barcelona and Italy's Juventus. English Premiership rugby clubs, Australian Rugby League teams and top NBA executives are among those to have slashed salaries in recent days. In England, leagues and clubs want players to accept temporary salary cuts. But the Professional Footballers' Association, the players' trade body, has so far rejected that call and instead sought a deferral of wages.

Bailouts are planned. Fifa, international football's governing body, wants to draw on its cash reserves of $2.7bn to create an emergency fund for clubs, national federations and governing bodies. Enders Analysis, the research group, says Europe's football teams, considered institutions in many cities and towns, are also likely to receive government assistance rather than be allowed to fail.

Lionel Messi, the world's highest-paid footballer, has taken a 70 per cent pay cut. Photo / AP

Brett Gosper, chief executive of World Rugby, the international governing body of rugby union, says it is working on a "Marshall Plan approach", wanting to borrow against its capital reserves worth between US$150-US$200m ($255-$340m) to backstop cash-strapped members.

"Obviously we don't have enough money to fund [rugby groups] to the level they are used to," he says. "But we certainly can relieve some unions in some cases which have high pressure points."

These efforts will not help emerging competitions, such as women's football in the US and UK, which have sought new investment to fund growth. And a generation of young athletes, unable to play and receive their first pay cheques, may be forced out of the game altogether.

Broadcasters find themselves with empty airtime to fill. Rather than NBA basketball playoffs in April and May, US sports network ESPN has been offering viewers cherry pit spitting, hamburger eating contests and a "national puppy day" marathon. In the week up to March 22, ESPN's primetime ratings were down 29 per cent compared to the previous week, according to Bernstein.

The current lack of live sport is exposing the business model of traditional TV companies such as Disney and WarnerMedia in the US; Sky and Discovery in Europe; beIN in the Middle East. Each has invested billions in sports media rights in the search for a rare asset in the age of Netflix: a show that is best watched live.

These companies recoup investment — and seek to turn a profit — by selling advertising alongside matches, asking consumers to pay for expensive subscriptions, or charging hefty fees to the cable companies that run their channels. This model has inflated the value of premium sports rights, and the industry's value as a whole.

In the US, the NBA in 2014 struck a nine-year TV contract with Disney and Time Warner totalling US$24bn ($40bn) — more than three times the value of its previous deal. Last year, the English Premier League, the world's most watched domestic football competition, revealed its domestic and international contracts will be worth £9.2bn ($19bn) between 2019 and 2022, an increase of around £1bn ($2bn) from the previous three years. Sports broadcasting rights contracts worldwide totalled US$49.5bn ($84bn) in 2018, according to SportsBusiness Consulting.

As coronavirus has become a worldwide problem, defending the value of broadcasting contracts has become critical. The Euro 2020 championships and Copa América, flagship national team tournaments in Europe and South America, due to be played in June have been postponed until next year. That is designed to allow domestic leagues to resume this summer to complete their seasons. Some leagues are contemplating quarantining some players to allow the resumption of matches as early as May but without spectators, sacrificing ticketing income to protect more valuable broadcast revenues.

• Covid19.govt.nz: The Government's official Covid-19 advisory website

Formula One, the global motor racing series, has called off Grands Prix in Australia, Bahrain, Vietnam, China, the Netherlands, Spain, Monaco and Azerbaijan so far. Even so, it is drawing up plans for a curtailed calendar of between 14 to 16 races to begin later this year, down from the scheduled 22. F1 executives believe this is enough to satisfy the broadcasting contracts worth around $565m in 2019, around 40 per cent of F1's overall revenues.

One former F1 adviser recommends caution, however, saying: "[There's] no way they will get that many races in."

Tricky negotiations have begun between sports leagues, broadcasters and advertisers on who foots the bill for lost coverage during the shutdown. Some discussions are friendly, as many TV companies do not want to jeopardise relationships and future deals.

Martin Slumbers: "The impact of this black swan event will make us think of how we manage the financial risk of The Open Championship". Photo / Getty Images

US broadcaster Turner has offered its advertisers a full refund on inventory they bought for the cancelled NCAA college basketball tournament, according to Michael Neuman, partner for Scout Sports & Entertainment, which manages US$900m ($1.6m) in sports assets for TV and digital advertising clients. The International Olympic Committee expects to roll over its global broadcast deals for the rearranged Tokyo games in July 2021.

But DAZN, which has paid hundreds of millions of dollars to stream football and boxing worldwide, has told some leagues it will not pay for games left unplayed, while deferring payments for future seasons. In France, beIN and Canal+ have paused payments due to organisers of Ligue 1 football because of the lack of games.

The absence of live sport is also accelerating a debate within media circles about the long-term future of funding models for big broadcasters. Digital groups like Amazon, which has acquired the UK rights to broadcast some Premier League football fixtures as well as ATP Tour tennis, have emerged as threats and are offering fans cheaper, more tailored packages.

Realising broadcasters will have less cash to spend on sports rights, some such as Germany's Bundesliga football league have paused upcoming media rights auctions. Industry executives say privately they are braced for the value of sports rights to fall, as TV companies count the cost of the shutdown.

In the UK, Sky has allowed households and pubs to pause their expensive sports subscriptions "until normality returned". Allowing customers to halt subscriptions will cost Sky £700m if accounts are paused for a period of four months, according to Enders Analysis. These pauses are leading to concern about the longevity of expensive subscription bundles that marry sport with other entertainment channels, at a time when viewers are slowly moving to a pay-per-event model.

"Broadcasters and sports like the Premier League have been locked into the hamster wheel of the big, fat bundle for a long time now," says one European football broadcasting executive. "[Customers are] going to get more and more impatient with being locked in."
In February, eMarketer predicted 28m American households will cancel their cable TV subscriptions by the end of this year. The research company now suggests the current crisis will trigger further falls. "All we can tell you is: the forecasts are outdated," says eMarketer analyst Ross Benes.

With finances under considerable strain from coronavirus, many sporting organisations want to adapt in order to withstand the next financial shock. World Rugby's Mr Gosper, says governing bodies may need to morph into regulators, closely monitor accounts of their members and enforce strict limits on spending.

Many competitions already have these measures, but there are calls to tighten existing regimes. Last year, F1 introduced a "cost cap", with no team allowed to spend more than US$175m, although this does not include items such as driver salaries and marketing budgets. While most racing teams never reach such a figure, the constructors that do — Mercedes, Red Bull and Ferrari — dominate the sport.

Zak Brown, chief executive of McLaren Racing, the F1 team, says the current crisis means it will be "irresponsible" not to reduce the cap further to US$100m, a move to ensure smaller teams survive the shutdown. That will be fought by the richest teams.

But Brown reckons all sports groupsmust face the reality of a poorer future. "I think the damage caused is going to [go] far beyond what has happened for four months," he says.
"This is going to change the world. When we get back to racing, I don't think everything simply picks up where we left off."

Buyers set to dictate terms of US$55bn endorsement market

Companies have spent big to be associated with athletes, teams and competitions. Global sports endorsement deals were worth US$55bn in 2019 according to Brandessence Market Research, which prior to the shutdown forecast that sports sponsorship market will grow to US$86.6bn by 2025.

That growth is now in doubt. As a global recession looms, companies are slashing their marketing budgets just to keep companies afloat. Big sports endorsers, such as Coca-Cola and Heineken, are among those cutting huge marketing budgets. GlobalData, a research group, predicts the near-bankrupt airline industry, which accounts for US$2.2bn in sports sponsorship, will scale back deals in an effort to hoard cash.

Brian Wieser, business intelligence head at GroupM, the WPP-owned agency, says that for advertisers who are looking to trim spending amid a global downturn, "here's some money that just freed up".

It may take time for this hit to be realised. Many sports sponsorship contracts are on multiyear terms, meaning sponsors are obliged to pay regardless of whether matches are played. However, these deals often include "force majeure" clauses that are yet to be tested and could relieve payment obligations.

Rory Stewart-Richardson, chief executive of Connexi, an online platform that works with football, rugby and cricket clubs to find corporate sponsorships, says clients are becoming flexible. Some are offering discounted endorsement deals for a year, hoping to renew endorsement contracts at a higher rate at a later date. Others are being forced to accept services from sponsors such as energy groups or banks, instead of simply cash lump sums.

"There will be a huge amount of unsold inventory which means it will be a buyers' market," he says.