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The cancellation of mass gatherings was one of the earliest measures implemented to combat the spread of COVID-19 – and that meant the sport and entertainment industry was one of the first and most severely hit. It has left rights holders contending with the financial implications of large and possibly complete reductions in revenue streams through decreased earnings in broadcast rights, sponsorship payments and match day operations. The financial sponsors that supply them are also faced with own reduced revenues and an increased focus on conserving cash. 

As a result, the typical ‘partnership’ between rights holders and sponsoring corporates is now under increased friction. While one struggles with the ceasing of matches and events, the other is hit by a lack of brand exposure otherwise expected in return for its payments. In Europe, what stands at stake for rights holders is the €30.7 billion (European Sponsorship Association. “ESA Sponsorship Market Overview 2020”) paid by corporates for sponsorship rights on an annual basis. But for sponsors, the loss of return on this payment is potentially far greater. 

Recent industry surveys have highlighted the potential differences in opinion between rights holders and sponsors concerning loss mitigation measures. A US-based survey conducted in April established that 31 percent of sponsors expect pro-rated agreements and refunds, whereas only 11 percent of rights holders saw the same. Additionally, 64 percent of rights holders believe [sponsors] will make up all lost exposure but only 45 percent of sponsors agree (IEG. “IEG Outlook 2020: Forecasting the Future of the Sponsorship Industry”). 

What should sponsors be considering while discussing existing agreements with rights holders?

While the legal position may release parties from having to fulfil contractual obligations, there remains a commercial negotiation to be had. We would initially urge resolution discussions to be in a manner consistent with the ‘partnership’ relationship. However, as the magnitude of loss grows, sponsors may consider renegotiation to regain part of the value lost through lack of exposure. 

Be it cancellation or postponement of a one-off event or season, or an event within a multi-year partnership, sponsors and rights holders will view the value impact on sponsorship differently. At one extreme, the rights holder may believe that no actual loss is incurred due to the sponsor’s continued ability to activate the partnership outside of the live event occurring. Alternatively, the rights holder may apply a linear rights fee adjustment based on the time remaining on the agreement. However, sponsors understand the impacts follow a non-linear relationship, which depends on factors such as activation time span, seasonality or view frequency. Further, they perceive the sponsorship association to impact far beyond the period for which the rights are contractually held. 

Consequently, going into negotiations equipped with a strong fact base and being able to articulate losses is crucial. Leveraging independent return analysis can take some of the challenge out of these discussions and can also be a useful tool for both parties to find non-financial methods to reach amicable solutions (e.g. providing rights expansions to counter the loss of exposure). 

However, it is vital to ensure that any potential adjustments offered by the rights holder, accurately compensate for the loss of return that occurs, and not just media exposure. An expansion in rights within differing channels (e.g. digital), although capable of counterbalancing lost live exposure, does not equate to the same returns or value generated for a sponsor at actual revenue level. Not considering impacts of this nature will lead to unsatisfactory outcomes for both parties. Numerous agency approaches based on equivalent media spend would not capture this distinction. This highlights the flaws in such approaches and the strength of the value-based models we apply.  

How should sponsors maximise their return in this uncertain environment?

Now may be the time to carry out detailed analysis of the value and effectiveness of sponsorship properties. Existing budget previously allocated for activations, agencies and people might be repurposed or remixed to differing mediums. 

The decision of which mediums to allocate budget and focus to for your specific sponsorship property can be effectively modelled through scenario analysis. Thereby optimising cash use in advance, maximising value from the agreement in place and facilitating internal budgetary discussions. 

Additional internal emphasis on strategic spend and ROI should be expected. And sponsorship teams should also be prepared to answer these key questions:

  1. Which properties in my sponsorship portfolio are performing and which are not?
  2. How can I optimise the impact of my activation budget and which channels should I be allocating it to?
  3. How does the return of my sponsorship rights compare to other mediums in our marketing mix?

What are the learnings and how can sponsors better protect themselves in future with their agreements?

The crisis has highlighted the issues that exist in applying the current term-based approach commonly used in sponsorship agreements. Structuring contracts around value (not time) and linking performance to payment would alleviate many of the points of dispute that will result from this period of disruption. An opportunity exists for the industry to modernise and enhance its partnerships in a mutually beneficial way by moving to a model supported by return-based metrics. Both parties stand to benefit under this approach, as an increase in sponsorship effectiveness for the sponsor would lead to more significant payments for the rights holder.  

Conclusion: embed sound evaluation processes

To answer the questions throughout, the crucial need for return to be at the heart of any partnership is strongly evident. With this in mind, and during this downtime in activations, sponsors should embed sound evaluation processes to help magnify the long-term impact of their sponsorship properties and prepare them for upcoming changes and challenges. This will enable them to realise strong lasting returns upon the much-anticipated recommencement of live sport and entertainment, along with recapturing the value lost from this disruption.

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Head of Sport & Entertainment Valuations

KPMG in the UK

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