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05/04/2020
The problem that professional sporting leagues in Australia are facing today can be simply stated. It is the same problem hitting thousands of businesses across the economy. Competition organisers and clubs are experiencing a decrease in their revenues on a scale they could never have imagined.
Winter sports, scheduled to be playing now, are feeling an immediate impact. Without a game there is no broadcast revenue – and revenue from attendance, membership and poker machines has largely disappeared. The Australian Football League (AFL), National Rugby League (NRL) and Super Rugby are already losing large amounts of money. For now at least, the A-League and National Basketball League (NBL), where the seasons were almost completed, are less affected.
All competitions, however, will suffer should restrictions on attending sporting events continue through summer. COVID-19 is likely to continue to affect sports after it is under control – play may restart, but revenue will not bounce back. Many fans will be recovering from income losses and some sponsors may have gone broke or will be struggling and unable to afford to spend as much on marketing. As a result, broadcasters, expecting less advertising revenue, will pay less for broadcast rights.
A decrease in revenue is never a good thing for a business, but in sport it is a really bad thing. The objective of professional sporting clubs in Australia is to win. To achieve that objective, most follow a simple business model: spend everything you earn plus whatever the bank will loan you.
This model makes clubs vulnerable (think of being balanced so close to the edge of a cliff that the slightest breath of air will knock you over). Many of a club’s costs, such as staff and player salaries, are locked in, and most clubs owe money to banks. Even a small decrease in revenue is therefore highly damaging.
The inevitable consequence of lower revenue is that competitions and clubs will need to adjust to restore balance with spending. How big the adjustment needs to be and how quickly it needs to be made will depend on several factors. First, there is the size of decrease in revenue, which in turn depends on how long the disruption to competitions lasts. For example, the amount of revenue the AFL and NRL lose will be reduced significantly if they are able to get back on the park in 2020, compared to missing the rest of the season.
Second, the size of nest egg possessed by competitions matters. For example, the AFL has cushioned the blow to its revenue by borrowing against Marvel Stadium. That money needs to be paid back, but the repayment can happen over a longer period, hence allowing adjustment to be less severe.
It is possible to envisage three scenarios for adjustment. The first scenario is minimal adjustment. Clubs will need to take steps such as decreasing their spending on coaches and other personnel and reducing the size of player lists. Players themselves may need to take longer-term pay cuts and the competition organiser as well will need to run a streamlined operation. In this scenario, the competition will proceed with the same number of clubs much as it did before. My guess is that this will be what happens in the AFL.
The second scenario is major adjustment, where some clubs go out of existence or need to merge – or maybe get sold to private owners. This type of adjustment would happen if clubs are in dire financial straits and the league is unable to help them out. Clubs folding would then instigate a further sequence of adjustments, such as working out how to redistribute players from those clubs to the rest of the competition. Whether any competition gets to this stage will depend on how much revenue they lose, but it doesn’t seem impossible to imagine this scenario happening in the NRL or A-League.
The third scenario is cataclysmic adjustment: the league goes out of existence. I can’t see this happening. Not because I don’t think a league could go broke because of COVID-19, but because I think the federal and state governments would intervene. For the same reasons as governments want to protect other businesses, I think this would be fair enough, but it would have to be done carefully and in the interests of taxpayers. Who knows? Maybe we will see a nationalised NRL with the Prime Minister running his beloved Cronulla Sharks!
Winter sports, scheduled to be playing now, are feeling an immediate impact. Without a game there is no broadcast revenue – and revenue from attendance, membership and poker machines has largely disappeared. The Australian Football League (AFL), National Rugby League (NRL) and Super Rugby are already losing large amounts of money. For now at least, the A-League and National Basketball League (NBL), where the seasons were almost completed, are less affected.
All competitions, however, will suffer should restrictions on attending sporting events continue through summer. COVID-19 is likely to continue to affect sports after it is under control – play may restart, but revenue will not bounce back. Many fans will be recovering from income losses and some sponsors may have gone broke or will be struggling and unable to afford to spend as much on marketing. As a result, broadcasters, expecting less advertising revenue, will pay less for broadcast rights.
A decrease in revenue is never a good thing for a business, but in sport it is a really bad thing. The objective of professional sporting clubs in Australia is to win. To achieve that objective, most follow a simple business model: spend everything you earn plus whatever the bank will loan you.
This model makes clubs vulnerable (think of being balanced so close to the edge of a cliff that the slightest breath of air will knock you over). Many of a club’s costs, such as staff and player salaries, are locked in, and most clubs owe money to banks. Even a small decrease in revenue is therefore highly damaging.
The inevitable consequence of lower revenue is that competitions and clubs will need to adjust to restore balance with spending. How big the adjustment needs to be and how quickly it needs to be made will depend on several factors. First, there is the size of decrease in revenue, which in turn depends on how long the disruption to competitions lasts. For example, the amount of revenue the AFL and NRL lose will be reduced significantly if they are able to get back on the park in 2020, compared to missing the rest of the season.
Second, the size of nest egg possessed by competitions matters. For example, the AFL has cushioned the blow to its revenue by borrowing against Marvel Stadium. That money needs to be paid back, but the repayment can happen over a longer period, hence allowing adjustment to be less severe.
It is possible to envisage three scenarios for adjustment. The first scenario is minimal adjustment. Clubs will need to take steps such as decreasing their spending on coaches and other personnel and reducing the size of player lists. Players themselves may need to take longer-term pay cuts and the competition organiser as well will need to run a streamlined operation. In this scenario, the competition will proceed with the same number of clubs much as it did before. My guess is that this will be what happens in the AFL.
The second scenario is major adjustment, where some clubs go out of existence or need to merge – or maybe get sold to private owners. This type of adjustment would happen if clubs are in dire financial straits and the league is unable to help them out. Clubs folding would then instigate a further sequence of adjustments, such as working out how to redistribute players from those clubs to the rest of the competition. Whether any competition gets to this stage will depend on how much revenue they lose, but it doesn’t seem impossible to imagine this scenario happening in the NRL or A-League.
The third scenario is cataclysmic adjustment: the league goes out of existence. I can’t see this happening. Not because I don’t think a league could go broke because of COVID-19, but because I think the federal and state governments would intervene. For the same reasons as governments want to protect other businesses, I think this would be fair enough, but it would have to be done carefully and in the interests of taxpayers. Who knows? Maybe we will see a nationalised NRL with the Prime Minister running his beloved Cronulla Sharks!