The Rise Of Digital Enterprise

WILMETTE, Ill. — The end of the year is almost here. This is when the racing industry reflects on the past months and the season ahead. 

On-track performance is benchmarked by championships, trophies and driver evaluations. Away from the venue, financial operations are evaluated by the balance in the checkbook.

The economy has been under strain due to lingering effects of the pandemic. Shutdowns, supply-chain issues and reduced fan capacity had impacts.

Much to its credit, the sports industry pivoted and made adjustments in an effort to find a new level of normalcy.  There were revenue declines, but the financial assistance program and deep pocketed leagues and owners made up the shortfall as they worked through the challenges.

Sports is a unique business, existing in a protective bubble. Even during challenging times, fans could be counted on to buy tickets and keep television audience ratings strong, thus drawing top dollar from advertisers.

Parts of the current economic environment seem to be bursting part of the bubble. Advertising revenue is strained, corporate boxes and season packages are down.

This begs the question, are the economics of the sports industry shifting or can they be immune from a tilting landscape. It’s difficult to imagine they would suffer similarly to conventional industries. 

The growth of sports has been real. Rising team values, sizeable media agreements and increased salaries are key indicators. These fortunes are closely linked to corporations and wealthy individuals who have the ability to pay.

The primary way for businesses to become involved is through advertising and sponsorship. They view this as an opportunity to raise brand awareness and differentiate themselves from the competition. The sports industry is the ultimate competition. 

The rise of digital enterprise in sports has been meteoric. This asset class viewed sports as key to developing awareness and a pillar for legitimacy. 

Digital opportunities have brought many positive aspects. It allows fans to connect in a socially distant world and engage in collectible memorabilia such as non-fungible tokens (NFTs).

Although few and far between, we are starting to see business failures and bankruptcies enter the sports industry. 

If a company is under financial duress and can’t pay off its debt, it can appeal to the bankruptcy court for protection from creditors with a Chapter 11 filing. This will allow a firm time to reorganize and develop a plan that will continue to operate going forward.

If a company files bankruptcy, it has the ability to stop sponsorship and advertising payments. Sports properties that entered into these agreements have various legal remedies but the process is lengthy and chance for repayment almost non-existent.

Digital sponsorship of sports went big time. Sports properties including leagues, teams, players, venues and events were recipients.

For some, all good things must come to an end. This has been way too familiar in the sectors of the digital space. Volatility is almost normal. The declining stock market and rising interest rates have acerbated the situation.

The dramatic fall of cryptocurrency exchange FTX is the most recent example. The organization failed to find a buyer, suffered a liquidity crunch and filed for bankruptcy protection. Others that ended up in the same boat included Crypto.com and Voyer Digital.

FTX spent heavily on sports sponsorships including arena naming rights, league and team jersey patches and digital collectible partnerships. They had deals in motorsports with Formula 1 and the Mercedes team. Branding was immediately removed from the car.

Despite the explosion of interest in digital assets, sports has to remain conscious of the risks that any new technology brings.

The value of digital assets can be volatile and despite the phenomenal growth and fall, the legal and regulatory landscape is still uncertain.

The lack of stability in this area will require sports to adopt arrangements that present a hedge or a contingency plan.

This story appeared in the Dec. 28 edition of the SPEED SPORT Insider.