30 Nov 21
The rise in the scale and value of cryptocurrencies and blockchain technology in the last decade has been extraordinary. An industry which did not exist 15 years ago is now worth trillions of dollars to the global economy. For the sports industry, whose commercial directors have been trying to plug the gaps left by Covid as well as planning for the inevitable demise of gambling sponsorship, this is a bandwagon not to be missed.
The opportunity appears to be a perfect match. Crypto companies are competing for credibility, loyalty and brand awareness, and sport sponsorship is possibly unique in its ability to deliver on each of these elements. In addition, as rightsholders pivot towards a more digital and data-based offering, crypto partners have the expertise to help navigate and exploit this space.
Therefore, it is no surprise that we have seen a glut of high-profile crypto sponsorships. However, in the last few weeks we have seen two very different sides to the “crypto coin”. Whilst the crypto.com arena deal in Los Angeles appears to be a statement deal for the new sector pouring a reported US $700 million into the LA Lakers’ coffers, deals this side of the pond have not been so successful. Both Manchester City and FC Barcelona have faced embarrassment and ridicule for hastily exiting their own crypto sponsorships with partners who did not quite stack up.
Whilst the last few weeks have demonstrated the extremes when it comes to crypto sponsorship, much of the hysteria is unnecessary. Every new partner in all industries present challenges and risks to a rights holder. The key is to make sure that a few simple steps are taken to protect the benefits and minimise the risks before welcoming a new partner into the fold.
The first step is always due diligence. Depending on the value of the deal, this may be basic company searches and internet research or, if the quantum justifies, hiring professionals. As industry veteran Giles Morgan eloquently explains in his “Captain’s Broadside” a rightsholder’s reputation is critical to its value. An association with the wrong partner can dramatically and sometimes irreversibly damage a property. The “Waste Management” Phoenix Open is, neither crap nor sh*t, yet it’s regularly described in those terms despite being one of the best attended events on the PGA Tour. As for Mike Ashley’s ownership of Newcastle FC, arguably he never recovered from the ill-fated shirt sponsorship with Wonga which to many epitomised what their owner “was all about”.
The second element of due diligence is of course the financial due diligence. Whether this is undertaken in house with publicly available search tools or involves hiring professionals, it is critical to understand whether the intended partner is actually good for the money
Once you are comfortable that they are reputable and able to pay the fees, the next question is will they pay? If they are based in an off-shore jurisdiction or are not well established, however tight and beautifully drafted the contract, it may be very difficult to actually enforce it. In that scenario, a rightsholder is well within their rights to require various financial protections to minimise the risk of non-payment. These might include parent guarantees, letters of credit, use of escrow accounts, agents for service on shore or heavily frontloaded payment schedules. All of these protections should be accompanied by the ability to withhold or suspend rights if the partner is in default.
Paying in Cryptocurrency
A crypto partner will generally want to reduce the cash element of any deal as much as possible. The starting point is that any deviation from a straight cash deal is a risk for the rightsholder and a benefit for the crypto partner. With that in mind, if accepting crypto currency is on the table, a significant premium should be built in to mitigate both the liquidity and the volatility risk. That risk can be further reduced by working with an agency to hedge currency risk.
Deals can be further complicated with the use of digital tokens and fan wallets. Even if these are simply seen as icing on the cake for rightsholders, care needs to be taken. Fan frustration with digital wallets may be an additional reputational risk. However, if digital tokens or value-in-kind is provided it may create an unexpected financial liability. Tax on those rights could mean it costs a rightsholder to receive a benefit it doesn’t actually want.
As with any new sector or partner that is not well known to the rightsholder, a little more care at the contracting stage is needed. Protections around reputation, partner activities and services, ethics and compliance need to be robust, as should be the termination rights accompanying them.
Given the speed in which this world moves, a rights holder should also be looking to ensure as narrow an exclusive sector as possible to avoid precluding other opportunities.
It is always a delicate balance between closing a deal as quickly as possible to ensure it’s not lost and negotiating all the elements to make it as risk free as possible. In our view, if taking the above steps put a crypto partner off, it might just be that they are more likely to be a 3key Technology (Man City’s ex partner) than a Crypto.com…and that’s a loss you can well afford.