Sports Sponsorships: Another Bubble Burst?

Sunday, February 1, 2009 - 01:00

2008 will be remembered (not too fondly) as the year the housing bubble and the credit bubble burst. One casualty of these bubbles bursting and the resulting global recession has been a decline in corporate sports sponsorships. As a result, the sports bubble may be the next to burst, adversely affecting the sports stars and teams we root for.

Corporate sports sponsorships are declining rapidly, particularly in industries hardest hit by the credit crisis, such as the automobile and financial services industries. According to data from the sponsorship agency IEG, global sports sponsorships doubled in the past ten years to about $30 billion annually. These dollars have caused stars such as Tiger Woods, David Beckham, and even lesser known sports personalities to become rich and famous. This massive spending has also enabled sports teams and leagues to realize tremendous profits, as well as fuel the creation, development and expansion of new sports leagues and teams. Due to declining sports sponsorships, many of these new leagues and teams will not survive.

Some of the biggest players in the sports sponsorship industry, such as General Motors, Honda, Wachovia and Merrill Lynch, have suffered severe financial losses from the economic downturn, and in some cases are no longer in business. In these situations, these companies are under huge pressure to cut costs, and marketing budgets (in particular sports sponsorships) are often the first to be cut. These sponsorships are viewed as excessive when a company is losing billions of dollars, laying off employees and asking for a government bailout. For example, General Motors has announced that it is slashing its promotional budget by 20 percent and one of the most well-known casualties is its $7 million annual sponsorship of Tiger Woods. General Motors has also terminated its sponsorship deals with a number of major league baseball teams. NASCAR and Formula One motor racing, which are heavily dependent on sponsorships, particularly in the automobile sector, have been especially hard hit. Approximately one-third of financing of Formula One teams comes from corporate sponsorships. Honda walked away from its sponsorship of Formula One in December ending a 44-year involvement. A number of NASCAR teams have folded or merged together due to a declining number of sponsors. Once these dollars are gone they are difficult to replace, especially in a declining economy, with the net effect being a significant cut-back in the operations of the business.

Sports teams and leagues have also been affected by the declining sponsorship dollars (other than the New York Yankees, who seem to be in their own universe). The National Football League announced this month that it will fall at least $50 million short of its projected revenue for this fiscal year, and as a result the NFL (viewed as one of the most profitable and well-run sports leagues) has laid off more than 10 percent of its employees. Newer leagues are even more vulnerable. The Arena Football League, which has been in existence for 22 years, announced recently that it is suspending its 2009 season and will undergo a corporate restructuring to become more financially secure for future years.

One of the factors in the decline in sports sponsorships is that the benefits of such sponsorships are difficult to quantify for the sponsor, even in good financial times. When times are good, sports sponsorship is an opportunity for building a reputation (i.e., brand), as well as generating high-level corporate entertainment, such as a sponsor's hospitality tent at a golf tournament. A company's name and logo displayed on signage at sports arenas, on uniforms and during TV broadcasts provides tremendous exposure of the company's brand. Free tickets and other access to sports teams and players that often accompany a sponsorship can be used as an incentive to employees or as an inducement to clients, governmental officials and suppliers. However, the benefit to a company's bottom line is difficult to measure, and these incentives are even harder to justify during a recession when the company is cutting jobs and losing business.

Since many sports sponsorship deals are multi-year contracts that may not expire for a number of years (by when, hopefully, the economy will rebound), existing sponsorship deals are generally secure and sponsorship dollars will not dry up immediately. However, for individuals, teams or leagues looking for new contracts, the future is ominous. Sponsors are hesitant to enter into longer term deals and will certainly pay less for the sponsorship.

The risk for the sports industry and those who follow it is that a collapse in sports sponsorships could cause a downward spiral similar to the housing and credit bubbles. For example, television broadcasters who rely heavily on advertising may be forced to stop bidding so aggressively for the rights to broadcast sporting events. These broadcast fees, together with sponsorships, make up a significant source of revenue for sports teams and leagues, so a substantial decline in these amounts would adversely affect the industry. Team owners are also feeling the squeeze personally, as the financial crisis has put a dent in their portfolios, and in the case of the owner of the New York Mets, Fred Wilpon, who invested a large portion of his wealth with his childhood friend, Bernard Madoff, such investments have been lost. In addition, media groups such as the Tribune Company, owner of the Chicago Cubs, have recently filed for bankruptcy. Teams that are unable to offer the highest salaries will be unable to attract the best players and without the best players, teams will have difficulty winning. Losing teams will have a more difficult time attracting sponsors. It is a vicious cycle that is bound to have a lasting effect on how the sports industry has been operating during this sports bubble, which could be the next bubble to burst.

Please email the author at jsolomon@gibbonslaw.com with questions about this article.

Jordan S. Solomon, is Counsel at Gibbons P.C. and focuses his practice on corporate, banking, real estate, entertainment and sports law.