What is the Future of Sport?
Will the effects of the pandemic force a change in sports teams’ business operations?
There is no doubt that the COVID-19 pandemic has affected the world of sports. After being locked out of stadiums since March, fans are only now starting to return back to football stadiums, that too in limited capacities. Though it seems as if clubs the size of Liverpool and Manchester United have the financial capabilities to survive, some clubs are not as fortunate.
Smaller clubs (particularly those in English Football League) have been hit disproportionately by the pandemic. A substantial amount of their cash inflows come from matchday revenue and with fans not being allowed into stadiums, revenues have decreased substantially. This is evidence that football cannot survive going any longer without supporters — especially for clubs who rely so heavily on fans for financial support.
But it is not just the clubs that have been impacted, players have too. In June of 2020, around 1400 players across the English Football League (EFL) were out of contract. Offering these players new contracts to retain them is not all that simple. It is becoming increasingly difficult for smaller clubs to offer new contracts to players given the hit to their revenues. As a result, there could be an increasing number of players left without a club. For these players, there is then a very difficult choice. Does the player find a new job to help support their family? Or do they stay at home to protect their family’s health? Whatever the decision, there will be an increase in the number of players dropping the sport altogether.
This could cause a depression in the market as there will be fewer players available for teams to sign. However, a depression may have its benefits, especially for lower league clubs. Smaller clubs looking to retain players will benefit as the cumulative value of the transfer market will decrease, giving clubs in negotiations with players the possibility of offering lighter contracts.
With average salaries of more than £3m per year, it seems that players in the English Premier League (England’s highest professional league) are immune to the financial implications of the coronavirus. However, their counterparts in Leagues One and Two are not as lucky.
A lot of these players rely on paycheque-to-paycheque and cannot afford to miss even one. But with clubs struggling to offer players higher contracts, this is where a player must make the difficult choice mentioned above. 39-year-old Neal Bishop is just one of the many examples of players that have had to make this tough choice. After beginning his youth career with Middlesbrough in their youth system, Bishop went on to play for Notts County, Barnet, Blackpool among a few other teams before arriving at Mansfield. At the end of the 2019–20 season, he was released.
Bishop had an offer from the club, but with lower-league clubs struggling due to the financial implications of the pandemic, chose to hang up his boots and draw a close on his playing career.
“I’m probably relieved I’m at this stage of my career now rather than the beginning or middle because I just can’t see the money being around” he told BBC East Midlands Today.
And with the effects of the coronavirus expected to be felt for many years to come, it does not seem like the money will come around soon, consequently expecting to change football below the Championship for a long time.
What is The Way Out?
It is important to note that the effects of the pandemic have extended far beyond into the world of sport. Deemed the 3 big American sports leagues, the National Basketball Association (NBA), National Football League (NFL) and Major League Baseball (MLB) are facing a fall in revenue of $13 billion. The effects of the pandemic are being felt in India too.
“Sport bodies have never been put under the same level of financial pressure as they have in the past year” — Manoj Badale, lead owner of the Rajasthan Royals (a cricket franchise in the Indian Premier League)
And in France, Mediapro, the rights-holder to top-division football, withheld its payment of €172m ($209m) to the league, seeking to renegotiate its contract as France Ligue 1 (the premier division of football in France) ended the season prematurely, crowning Paris Saint-Germain as champions.
However, waiting for such an opportunity are private equity groups. There have been deals in the past which have shown the profitability of the sports industry.
A landmark deal occurred in 2006 where CVC Capital Partners, purchased Formula 1, the business that runs grand-prix motor racing for a total sum of $2 billion. During the group’s ten-year ownership of the business, Formula 1 added races in more locations in an attempt to increase viewership beyond just Europe. It also negotiated bigger broadcasting deals and increased the fees it charged racing tracks to hold their races. When CVC finally sold their majority stake in the business in 2017, the deal gave the business a valuation of $8 billion, proving just how profitable the sports industry could be.
There are 4 main attractions that entice private-equity investors to become involved in the world of sports. First, there are big matches. These events are one of the few events that fans make time to watch live. Consequently, in-game advertising is sought by many firms looking to advertise to fans. This increases the value of broadcasting rights. The most famous example of this being the domestic rights for the English Premier League (EPL). In the early 1990s, domestic rights for EPL games were £600,000 a game. 25 years later, domestic rights have risen to more than £10m a match.
Secondly, sports are high profile, meaning they give investors access to greater networks and opportunities to have greater social impacts. For example, a franchise bringing in large amounts of money may satisfy financial objectives for a group of investors but entering the world of sports and engaging with top-tier teams is much more beneficial as investors have more networking opportunities as well as opportunities to impact the people and communities surrounding these teams. This benefits investors seeking to build networks for long-term ventures but also those looking to improve their social responsibility and maintain a positive public perception.
It also gives investors opportunities to build businesses allowing them to create experiences for fans such as fantasy teams, betting venues and behind-the-scenes access to the team they support.
Lastly, it would appear that private equity groups will be able to run such clubs better.
Some clubs may have been bought as “trophy assets” by people with limited knowledge of sports management. With the emergence of technology in the 21st century, leagues and clubs have begun to expand and diversify. Consequently, it is of paramount importance that their owners must do the same. It is more important now than ever that owners have greater financial support and broader skills to allow them to compete with other clubs. Some of these clubs need a team greater than just an individual. They require ownership groups that understand the media, broadcasting rights as well as opportunities for growth and player development.
With private-equity firms comes increased knowledge of success. This can be seen through RedBird, (who bought a majority share in French football club Toulouse) and CVC (who expanded into Premiership Rugby). They focused on investing in stadiums and hospitality as well as changing the “fan experience”. This results in more opportunities to spend money at games but also forces clubs to reflect on their image. Now, clubs are starting to consider themselves as entertainment businesses compared to just sports teams, in an attempt to protect themselves against further disruptions to match-day and broadcasting revenue. We can definitely expect to see more digital content such as the Amazon and Netflix-produced documentaries on the Chicago Bulls and Manchester City, as a means to keep fans engaged.
But with this opportunity comes a great risk. Supporters of a team are desperate for success, but resistant to change, a problem for investors. Thus, it is of paramount importance that fans are heard and understood in the transition process. An example of this being when Fenway Sports Group (FSG) bought Liverpool FC in 2010. The change in ownership allowed for increased capital to purchase better players, finance improvements in the stadium and greater knowledge of commercial transactions, ultimately allowing the club to win the Champions League in 2019 and the Premier League in 2020. However, angered fans forced ownership to backtrack on proposed increases to ticket prices as well as use of the British government’s furlough scheme to pay staff that were not working.
The development of technology has made globalization easier than ever. Hence, there are more opportunities for ownership groups worldwide to take the step into the global sports industry. There will be vast changes, however. Prices of games will increase, improving facilities in the process. Composition and timings of major tournaments will definitely be up for review as well.
But in order for there to be such long-term growth, short-term survival is essential. A bailout must allow smaller clubs to stabilize themselves and prepare for further financial implications. Though beyond that, private equity investors may be the solution to the financial problems being experienced by clubs in lower divisions.
