The new substitutes in sports sponsorship

Sports sponsorship has undergone a significant transformation in recent years, with brands and sponsors seeking more comprehensive marketing and branding experiences. This has led to large sponsorship deals, such as Nike's endorsement deal with LeBron James, and an increasingly crowded advertising space of multiple sponsors for one athlete or team.

Yet, recent trends in sponsorship are seeing a reduction in sponsorship from traditional alcohol and gambling firms, and a move towards more unconventional sponsors, such as cryptocurrency companies.

In recent years, the reduction in the number of alcohol and gambling sponsors involved in sports has reflected a trend towards responsible advertising and potentially acted as a precursor to recent shifts in both legislation and an indication of further self-regulation from sporting bodies. This has been indicative of the changing attitudes of both consumers towards these industries and their association with sports. With a growing emphasis on health and wellness, many sporting brands are no longer comfortable associating with products that are considered harmful to people's health, both physical and mental.

In have stepped others, including cryptocurrency firms. These companies offer a new and untapped market for sports organizations, and their sponsorship can provide a new source of revenue and a unique marketing opportunity through associated fan engagement such as NFTs.

However, as a relatively new and untested industry in the advertising world, it brings a high degree of risk and uncertainty. The recent collapse of FTX (a U.S. cryptocurrency company), which is still under investigation, highlights this. This has led to cancelled sponsorship or financial loss for several brands and individuals including Naomi Osaka, Steph Curry, Tom Brady, Miami Heath and the Golden State Warriors. Some of these individuals are also investors or more significantly, from a legal perspective, Brand Ambassadors. Any association with investments that have not performed well could impact the brand’s ongoing reputation value for other partners as well as opening themselves up to further legal claims.

Additionally, non-payment of promised sponsorship funds from Digitalbits to football clubs shows that the appetite across sporting brands and individuals to partner with crypto companies may not always bring with it reliability.

These examples highlight the need for sports organisations to carefully consider the risks associated with sponsorship and fan engagement deals from such companies, and to carefully choose sponsors that align with their values and those of their fans.

In addition to the risks associated with sponsorship payments, there are also other risks associated with sponsoring cryptocurrency firms, such as possibility of frauds and scams tarnishing a sports brand’s reputation. Also, there’s the possibility of legal action from the association or promotion of fan engagement material. This could be much more significant, with financial services regulations being more stringently applied in several territories.

These types of risks are not unique to cryptocurrency firms and sponsorship failure through non-payment or insolvency regularly hits sporting brands. Further examples include:

• XL Leisure Group, which sponsored West Ham United Football Club in the English Premier League. The collapse of XL resulted in the loss of its sponsorship, which was a significant financial loss for the club.
• The sponsorship of stadiums has been common in the US, often with long length naming rights. Perhaps the most famous example is Enron Field. The deal was done in 1999 with Enron going into bankruptcy two years later, leading to the Houston Astros buying back the naming rights for $2.1 million.
• Even amateur sport can be hit by these issues. The Varsity Match, the annual rugby game between the UK’s Oxford and Cambridge Universities, had Lehman Brothers as sponsors up until its bankruptcy in 2008.

Managing the risks associated with sports sponsorship

If you’re a sports organization aiming to mitigate these risks and make informed sponsorship decisions, we suggest you consider the following six points:

1. Thorough research and due diligence: Before entering into any sponsorship agreement, you should thoroughly research and understand the cryptocurrency industry and the potential sponsor. This will help ensure you are aware of any potential risks and are making informed decisions.
2. Alignment with values and mission: The sponsorship should align with the values and mission of your organization and its fans. Sports organizations should choose sponsors that share their values and will not damage their reputation or cause negative brand associations.
3. Financial stability: The financial stability of the sponsor should be considered. Be aware of any potential red flags, such as late filing of accounts, payment delays and adverse movements in the company’s financials, and assess the sponsor's ability to fulfil their obligations under the sponsorship agreement.
4. Legal compliance: You should be aware of any legal issues that may arise from a sponsoring cryptocurrency firm, such as restrictions on advertising and marketing, and ensure that the sponsorship agreement follows all relevant laws and regulations.
5. Flexibility in the sponsorship agreement: The sponsorship agreement should provide for flexibility in case of changes in the market or the financial stability of the sponsor. This will help ensure that you are protected in case the sponsor goes bankrupt or experiences financial difficulties.
6. Consideration of trade credit insurance: This offers a form of financial protection that protects a business from potential losses incurred because of non-payment by its sponsors. This protection not only helps safeguard the organization's cash flow but also maintains operational continuity and stability. Furthermore, by conducting credit checks on potential sponsors before entering into agreements and implementing credit control measures to manage credit risk, trade credit insurance can help improve credit management practices.

Conclusion

Sponsorship deals bring significant benefits to sports organizations. But, it is important to choose the right sponsor and be aware of the risks associated with sponsorship associations beyond the immediate financial elements on non or late payment.

Author

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Karl Sawyer

TMT Industry Leader, GB

email Email phone +44 20 3124 6367

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