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The Economist, August 02, 2008

The value of sport to other kinds of business

ON ARRIVAL at the gleaming new Terminal 3 of Beijing airport, you may be greeted by China?s most famous sportsmen: Mr Yao, the basketball player, and Liu Xiang, who won gold in the 110-metre hurdles in Athens. They are not there in person, of course, but beam from advertisements for Visa, "the only card accepted at the Beijing 2008 Olympic games".

The credit-card company is one of the Olympics? 12 leading sponsors, which between them have paid $866m for a four-year association covering the Turin winter games in 2006 as well as the games in Beijing due to start next week. That is about $200m more than the previous set of deals, for Salt Lake City and Athens, which involved 11 companies. Few events enable companies to reach so many people around the world—even though sponsors are not allowed to put their names on advertisements at Olympic venues.

Teams and individuals have plenty of sponsors too: Mr Woods?s talent and image are worth many millions. But events have the edge. Back a team, says Michael Stirling of Global Sponsors, a consultancy, and you may risk alienating opposing fans. If an individual sports star behaves badly, he or she may damage your brand.

There are only two "marquee-property" events on the planet, says Antonio Lucio, Visa?s chief marketing officer: the FIFA World Cup and the Olympics. He is delighted to have both of them. Indeed, the ruckus caused by the defection of FIFA, football?s world governing body, from MasterCard to Visa is one measure of the importance companies place on sponsorship deals. MasterCard sued FIFA. Last year it accepted $90m in compensation.

These days it might cost ?150m to sponsor the UEFA Champions League, the club championship of European football, for three years, or as much as $70m to back a Formula One (F1) team for a season. And all that buys is the right to use the name of an event, a team or an organisation. "Activation"—promotions, competitions, television advertising during breaks, corporate hospitality and so forth—might multiply the sponsor?s budget two or three times over, and it is vital. "In sponsorship it?s not what you have, it?s what you do with it," says Joe Tripodi, chief marketing officer of Coca-Cola. "It?s all about activation."

Fortunately the costs of activation can be shared. Mr Tripodi points out that the efforts of bottlers and retailers, who also stand to gain from the sale of more fizzy drinks, can increase spending on activation to perhaps ten times the initial outlay. A similar multiplier effect applies in the credit-card business. Card-issuing banks carry out their own promotions, such as running direct-mail campaigns or competitions among bank tellers.

The sums spent on the biggest sponsorships now have to be justified at board level, says Nick Massey, chief executive of Octagon, a sports-marketing firm. They are comparable with the cost of building a new factory, or even buying another company (see chart 4 on the previous page).

Sponsorship is still dwarfed by advertising: WPP estimates that global spending on all forms of sponsorship amounted to $38 billion last year, against $449 billion on advertising. But sponsorship is growing fast, rising by 11% a year for the past decade, according to Lesa Ukman, chairman of IEG, a consultancy that is part of WPP. Deborah Hughes, head of global sponsorships at MasterCard, says that sport accounts for 85% of the credit-card company?s sponsorship budget.

There are three main reasons why companies find it worth their while to sponsor sport. First, says David Wheldon, Vodafone?s global brand director, "the emotional connection with people is what is valuable." So Vodafone has put its name on Manchester United?s shirts in the past and is now the main sponsor of the McLaren F1 team—although, after three years, the company is ending its association with the UEFA Champions League. "Delighted with it," says Mr Wheldon, but "we looked hard at whether it?s giving us a balanced portfolio." Vodafone is swapping football for music: the mobile phone has become to the rock concert of the 21st century what the cigarette lighter was in the 1970s. Others are sticking with sport.

Second, sport can help solve an old problem with advertising: companies know that half the money they spend on it is wasted, but they don?t know which half. Sport can reach the right people, sometimes with remarkable accuracy. Sir Allen Stanford, the eponymous head of an American wealth-management firm, has for many years used sporting events to woo the rich people he has identified as potential clients. His company backs yacht races, polo matches and golf tournaments at which its financial advisers can get to know the people they are after. Within a few weeks of such an event, he says, he knows his return on the investment.

Sir Allen likens his method to using a rifle rather than a shotgun. Not all companies can take such precise aim, but Sean Jefferson, chief executive of MindShare Performance, WPP?s sport and entertainment consultancy, says it is "a very efficient way of reaching upmarket men", a group marketers consider difficult and expensive to hunt down. Advertising during the biggest sporting events is pricey. The cost of a 30-second television slot during this year?s Super Bowl was $2.7m, and Mr Jefferson says the UEFA Champions League final is becoming a European equivalent. But 60% of upmarket men actively avoid ads: advertisers must pay to be first in a break if they want a chance of catching such people. Sponsorship can get them there.

Third, rights holders have realised that they own something scarce, and are doing their best to make it scarcer still. All around the sports industry you hear the same motto: less is more. With fewer sponsors, valuable properties become more exclusive and the price of being associated with them can be driven up.

In this respect, the Olympic sponsors may be getting a bargain. By recent standards, a group of 12 is on the large side. FIFA, for example, has cut the number of official World Cup "partners" from 15 to six. In cricket, the Indian Premier League decided from the outset that it would limit the number of sponsors. "If you restrict supply, you drive up price," says Andrew Wildblood of IMG, a leading sports, entertainment and media company, who worked with the Indian cricket authorities in setting up the league.

The sums involved make it increasingly important to spend wisely, both on acquiring a property and on activation. Properties have to be chosen carefully. If they do not earn a return or have served their purpose, they must be dropped. And the return on sponsorship has to be measured as accurately as art and science allow.

In choosing what to sponsor, marketing executives often aim to match the event to the image of their brand. Coca-Cola (the drink, rather than the firm) has what Mr Tripodi calls "a ubiquity strategy". The company?s other brands get more tailoring. Coke Zero is aimed at a young, male clientele, hence its association with NASCAR. Diet Coke, which feels a little more female, is linked with the Oscars. Sprite, a lemonade with an "edgier, more urban" image, at least in North America, has a tie-up with the NBA. Some sponsors even create events in their own image. Red Bull, a drinks brand, is presenting air races in nine cities around the world this year; Nike, a sportswear firm, is holding 10km road races in 25 cities at the end of August.

Sponsorship can also be used to shift perceptions of a brand. Ms Ukman points to BNP Paribas, a big French bank and a leading sponsor of tennis. Hoping to attract more young customers, the bank teamed up with Sony PlayStation to create a virtual tournament during the French Open in 2005, 2006 and 2007. The final 64 players went to Roland Garros, home of the Open, to fight out the last few rounds.

Geographical factors also play a part. Ms Hughes at MasterCard says that sponsoring the Mumbai Indians, one of the teams in the IPL, was a natural choice because Mumbai is India?s financial capital. Conversely, Vodafone is dropping its sponsorship of the Derby, a classic British horse race, because it reckons it is probably as well known in Britain as it can be. Visa, says Mr Lucio, found that the Rugby World Cup did not give it the global reach it was looking for: football and the Olympics bring in customers from more countries.

Marketing executives and agencies say that measuring the return on sponsorship has become much more accurate in recent years. Broadly, it can be divided into two parts: the value of simply having the company?s name put in front of more people, mainly on television; and the effect on sales. The first of these is the fuzzier part. In essence, companies track how long their logos or names are on screen—when, say, their perimeter boards are caught on camera. Then they work out how much it would cost to buy that amount of advertising time. To that sum, they apply a deep discount factor, perhaps 90%: after all, the viewers are not really watching the perimeter boards but the match. The resulting number is the company?s estimate of what the exposure is worth.

The second, more accurate part depends largely on how much activation companies do and how good at it they are. The degree of precision has increased, especially for companies close to consumers. A fizzy-drinks firm or a credit-card company, after many years of sponsorships and activation programmes, has a pretty good idea of the extra sales such things will generate. For example, if the promotion involves a special display near the front of a shop, "they will know what the value of the display will be," says Mr Massey. "That is very quantifiable, and will allow them to achieve their return on investment." With so much money at stake, the sums have to be right.