Adam Hodge | Rights-holders and sponsors must talk to mitigate peak pandemic pain

Adam Hodge, Octagon’s head of planning & strategy for APAC, asks how rights-holders can ‘make good’ the loss of value felt by their sponsors

The ongoing shutdown of most sports around the world is having a massive and immediate impact on teams and leagues, but the full force of the Covid-19 crisis is still to be felt.

The impact of Covid-19 is likely to be more acute in Australia where there are far fewer privately-owned teams with access to cashed-up franchise owners or forward-looking private investor injections.

The ‘member-owned’ or ‘league HQ-operated’ structure of the major Australian sports including AFL, NRL (partly), cricket, and rugby union, coupled with the limited reserves these teams have for a time like this, means they will feel the pain of this crisis quickly.

While standing down admin staff (which almost all have done) and seeking player pay cuts are reasonable internal cost controls, the much bigger lever is on the revenue side of the equation.

Most teams and leagues have three key sources of income. Typically, the largest is broadcast rights, paid by TV and – increasingly – over-the-top streaming media partners. This is typically followed by membership and ticket sales revenue, and then sponsorship rounds out the list.

But with broadcast revenues centrally controlled by the leagues and ticket sales no longer relevant (with no games being played) it’s really memberships and sponsorship revenue that is within the direct control of the clubs.

And both are now reliant on the goodwill of these supporters – individual members who are often being asked to ‘stick with their clubs’ at this difficult time and corporate sponsors whose investments are under extreme pressure.

While the appeal to individual members is often made in emotional terms and positioned as the ‘right thing to do’ as a loyal member, the conversations with corporations aren’t as emotionally charged.

These are businesses after all, and while sponsorship heads often talk about the passion their brand feels for a club, its fans and players, the reality is that the partnership is a commercial one.

With rights payments typically paid on a quarterly basis, there are many conversations between marketing and finance departments right now asking why they are paying fees if they are getting much less back than they have agreed?

Larger sponsors who can weather the current situation are no doubt factoring into their thinking the possible negative PR if they were to withdraw or reduce financial support for their partners at this difficult time, while smaller sponsors (often family businesses who themselves are laying off staff and struggling to pay bills) don’t have that luxury.

The latter may already have had that hard conversation with their partner club or league, however our experience is that larger sponsors are more likely to be calculating the financial impact that the Covid-19 crisis is having on the value of their deal in preparation for that conversation at a future date.

Most sponsorship agreements follow a pretty linear path on this topic. Where an adverse event (sometimes called a diminished value event) occurs that impacts the value received by a partner, there is usually either an agreed formula to calculate that financial loss, or at least a process by which the parties are to come together to negotiate in good faith.

Typically, this is then followed by language that talks to this loss being ‘made good’ either by additional assets being offered, a cash refund or a combination of the two. It may also be an option for parties to agree to an extension of the current partnership term at no additional fee to allow for this ‘make good’ to occur later. There are of course usually force majeure clauses that may or may not come into play in a case like this which also needs consideration.

But assuming there is a ‘make good’ to be delivered, the issue then becomes how?

Given that no club or league has infinite additional sponsorship assets sitting on their shelves waiting to be handed out – and many sponsors would challenge the ‘like for like’ value of such dusty shelf assets anyway, how does a rights-holder seek to make all of their partners whole at a time when they have little to offer by way of the most valuable line items?

Sure, good partners will be fair and reasonable as far as they can (spare a thought for these men and women as they get increasing pressure from the CFO on that topic) but the reality is that with each week that goes by with games not being played, TV audiences not being reached and stadiums being empty a larger and larger debt is being accrued. And sponsors aren’t likely to just write this off when we come out the other side of this.

At Octagon, we are advising our clients right across the globe on this matter daily and helping them calculate and track lost value on an ongoing basis. Not to weaponise nor even necessarily claim right now, but to help them quantify a clear accounting trail to inform conversations later. And, most importantly, we are advising these brand-side clients to make their rights-holder partners aware of this process. Not as a warning shot, but as a flag to begin immediate mitigation strategies, lest they acquire a growing debt to their sponsors that becomes impossible to repay in the future.

It’s smart business for both parties to be meeting right now to discuss often-creative and proactive mitigation strategies to offset this loss. Be it the creation of new assets that can be delivered in a Covid-19 world, the trading of assets between partners where possible or in the case of a brand we work with in the US, considering actually extending an existing deal early – with terms that ensure both the ongoing support of the rights-holder now and appropriately re-calculated and preferential rates into the future that make the brand whole over time.

And having an expert third party in these conversations can be very helpful to both parties. For the brands to seek an independent valuation of the scale of their loss and for rights-holders to assist in the creation of new assets and commercial mitigation strategies at a time when many have furloughed staff and are under immense pressure to do much more specialist work with fewer experts to do it.

This is NOT the time for partners to stick their heads in the sand and hope this issue will go away. This IS the time to test how real the partnership is. So often in our industry we hear brands and rights-holders waxing lyrical about how they don’t ‘do sponsorship’ they ‘create partnerships’. Well it’s times like now that these claims will be put to the ultimate test. And the REAL partners will be the ones who not only survive this pandemic, but come out the other side with an even stronger bond.