The world has entered one of the most uncertain periods of modern history. Significant events such as wars, terrorist acts and natural disasters typically impact a limited geography and affect a relatively small number of people. Now, for the first time in living memory, we are experiencing a global emergency that will impact the entire planet. The COVID-19 pandemic puts us in an unparalleled situation that has the potential to affect our way of life for many years to come, with every economy likely to suffer significantly as a consequence.
You have to look back as far as World War II for an event that is remotely comparable to the current crisis. The 1930s/40s was a very different time and sport was still very much an amateur past-time compared with the professional nature of global sport in the 21st century. It is now a global network of interrelated economic and political interests, which had contributed to creating a multibillion-dollar industry. Following decades of exponential growth, COVID-19 looks likely to have a lasting impact on the global sports industry; the question remains, how much damage will be caused and how long will it take to recover.
Sport is embedded in the fabric of society and as such it will survive this pandemic. But can the industry carry on from where it left off after many months of disruption or will there be a reset driven by a broken commercial model?
While all sports have a slightly differing business model, most drive the lion-share of their revenue through broadcasting rights, sponsorship, merchandise, and ticket sales. The pandemic is having an impact on all of these revenue streams and may well continue to impact them for several years to come. With significant costs still remaining, it creates two major challenges: survival in short to medium term and understanding what the industry might look like once we are back to ‘business-as-usual’.
Some sectors remain optimistic that the lockdown measures will be a short-term glitch to business, with many, including the PGA TOUR and the Premier League, targeting a return to action from June, albeit behind-closed-doors. With significant commercial partnerships linked to the completion of competitions and minimum event guarantees, many leagues and rights holders are focused on trying to find ways to re-start as soon as possible. Other events such as the Olympics have been forced to postpone to 2021, which is a hugely costly exercise but offers some hope that Japan will be able to enjoy some value from their significant investment.
The more pessimistic scenario is the prospect of limited or no live sport for the remainder of the 2020 calendar, a scenario that many respected industry figures such as World Rugby Chairman, Sir Bill Beaumont believe is possible. Whilst the top tier sports will survive, there is a real threat that many of the less commercially established sports will experience significant hardship. It is difficult to predict what this will mean long term; however, a period of commercial uncertainty will have a lasting impact on both the professional formats as well as growth in participation.
It is hard to predict the scale of the damage that this pandemic will cause to the global economy, what we can predict is that any prolonged period of economic instability will impact sport hugely. Recent research by sports agency Two Circles suggests that only 54% of live sports events will take place in 2020, which will result in a $60 billion revenue loss to the sports industry. Assessing the impact of the loss of revenue in 2020 and the potential for reduced revenues over the next few years will test the current model and how much sport will need to change to survive in the new post-COVID world.
Could 2020 be the start of a great reset of the global sports economy?
If we are going to see a restart in live sport this year, a significant amount of it will likely be played behind closed doors. This means a substantial decrease in the match day revenues for many of the big sports. In the Premier League the bigger clubs could see losses of up to £80m should fans be excluded from stadiums for the rest of this year. For a lot of teams operating in the minor sports, match day income is critical to their ability to trade, so the impact of extended social distancing periods could be catastrophic.
Whilst many sponsors have publicly committed to standing by their current contracts, the long-term impact on the global sponsorship market is likely to be significant. With a global economic crisis looming, there will be increased pressure on marketing budgets in every sector. This will particularly impact sports organisations that rely on local SME’s to make up the bulk of their corporate sponsors. Businesses will need to continue to market themselves during this period; however, we know that sponsorship can be a difficult marketing tool to justify.
Broadcasters are also struggling, with the likes of Sky Sports and BT Sport allowing customers to pause their subscriptions. Any long-term economic downturn is sure to take its toll as people struggle to justify the discretionary spend on subscriptions. This loss of income puts huge pressure on the broadcasters to postpone rights payments until live sport resumes, which in the context of the Premier League could result in a loss of up to £1 billion should they abandon the 2019/20 season. The bigger question will be whether this results in a reset in the value of broadcast rights over the next few years.
When you look at these combined and imagine a prolonged period of global economic uncertainty, the most likely scenario will involve a contraction in the size of the sports market. Revenues from all areas will be under pressure, which will inevitably have an impact on budgets. In football, transfer fees will be severely impacted, as well as player wages. Formula One has been looking at budget controls for years and may now be forced to implement these far below the levels that have been discussed in recent years.
Sports properties will need to be creative to evolve their commercial models to fit with the new age. The current crisis has forced some of the more traditional rights holders to implement changes that would normally have taken years to establish. Large players in the traditional sporting industries have been putting much greater emphasis on the development of esport competition to keep fans engaged. Formula One has launched Virtual Grand Prix with celebrities racing current F1 Drivers, and NASCAR has similarly unveiled the eNASCAR iRacing Pro Invitational Series. There is potential that this surge in popularity for esports can be harnessed by traditional rights holders and provide a significant revenue stream moving into the future.
The new normal may also see the broadcast landscape in sport shift, with the likes of Netflix and Amazon, who have established themselves in the live sport market over the last few years, taking advantage of this difficult period for traditional linear broadcasters. We may also see rights holder owned OTT platforms grow, as sports look to maximise their commercial value by taking greater ownership of their audience.
There will inevitably be a profound change in all aspects of life and society as a result of COVID-19. Many would suggest that the sports industry has grown out of proportion and that the trajectory of this growth is unsustainable in the long-term. Amid the economic instability and uncertainty created by the current pandemic, there is the chance of a significant reset in the global sports economy, which could allow the industry to re-emerge stronger.
With the emergence of sport as an attractive asset class, this reset presents opportunities for new capital to be deployed in the market. As we enter the post-COVID age, there will be a surge in sports businesses seeking third-party investment to begin the repair and rebuild process. The key for investors will be to understand the pre-COVID fundamentals and assess how these must evolve moving forwards.
Broad experience and knowledge of the sports industry and investment strategy will be essential to navigating these uncertain times. With over 100 years of collective experience in sports business, working across some of the world’s biggest sports properties, ORIGIN can play an effective role in navigating the new terrain. Success will be achieved by being able to re-assess the business models of sports organisations and implementing the change strategies required to succeed.
Whilst the whole sports industry is currently feeling the pain of this unprecedented global event, there is an exciting future for the sport world beyond it.