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Depending on large TV deals pose systemic risks

What kind of leadership does football in Australia require? (Photo by Paul Barkley/LookPro)
Roar Guru
21st August, 2015
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1384 Reads

There are interesting times ahead for sports fans and chattering classes as the $2.5 billion AFL deal and the $925 million-plus NRL deal and their structures are dissected.

It is also interesting to consider what the implications will be for football when the time comes to negotiate the next TV deal.

Fellow amateur writers on The Roar go as far as to state: “For football, this extra money would be immeasurably useful in keeping A-League clubs in the black, improving youth development and growing women’s and grassroots football.”

“During his tenure, Gallop has been widely regarded by most football fans as a huge step up from his predecessors… But after all of this positivity, the game would appear to be losing ground on its rivals – at least in a financial sense.”

It’s understandable in the growth focused world that many will fall into the trap of ‘bigger is better’.

This isn’t necessarily the case, instead for football it is worth recognising the fact that its youthful competitions (the A-League and FFA Cup) are the newest and leanest in the country. They are also the most lacking in bloated complexity, which is a blessing as we look into the future.

Indeed, the fact that actually pushed David Gallop ahead was belatedly introducing the FFA Cup, about five years after it should have been introduced when the FFA was busy focusing its energy on a controversial World Cup hosting bid. It means his legacy is effectively assured.

Firstly, it is worth observing that for all the respectable income derived from ticket sales, sponsorship and other facets of sports business, broadcast rights account for the major share of income.

This is all well and good and will fund projects and subsidy programs for the given sport – not to mention an increase in costs as the players negotiate a sizeable share of revenue flowing into the given sport.

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Secondly, this serves to increase the complexity and bloat the structure, with the underlying cost structure of the sport becoming fundamentally higher. This works well as long as income keeps rising and all facets of the game are experiencing inflation and each successive TV deal is larger than the previous one.

However, if this pattern of continuous growth cannot continue this causes problems – existential problems.

From this perspective it is important to consider that the AFL and NRL are streamlined competitions and organisations in mature growth stages, being funded by similarly large industry organisations in mature growth stages.

As such, there is an argument that far from being in an almighty strong position as the size of the recent TV deals suggest they are actually the most susceptible to systemic risk.

Looking back to the impact on the lower tier of England’s Football League at the collapse of broadcaster ITV digital serves as a good case study.

So while astonishingly high TV broadcast deals may pave the way for many useful sounding programs, it needs to be understood they are also a potential source of systemic risk. The higher the share of income TV broadcast revenue represents for a given sport, the higher the systemic risk they also potentially represent.

Great care then needs to be ensured that the high upswing in revenue does not lead to an upswing in costs that would be crippling if the proverbial tap is turned off. This is part of the reason why I recently wrote an article arguing for restraint on adjusting the fundamental structure of the A-League salary cap.

Looking at the structural order of things, the AFL and NRL command the highest broadcast revenue, but both sports are Australian focused and channelled into what is effectively a single competition each focused on one tier (the professional league tier).

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Football on the other hand is effectively spread across many niche competitions. It attracts less TV broadcast revenue but it has the most comprehensive spread of market penetration ranging from potent grassroots presence right up to a prominent national team competing effectively in international competition.

Looking ahead it is useful to consider trends in the media industry. That is to say there is a trend of segmentation occurring as technology and consumption trends change based upon mobile devices including laptops, tablets and smartphones.

Add to this the consideration of global economic conditions, which have been uncertain ever since the 2008 financial crisis. Australia weathered this period relatively well thanks to the demand for mineral resources by China but there is the prospect that deflationary pressures on commodities will have a recessionary impact.

This ultimately impacts upon discretionary spending like, for example, subscriptions to cable TV providers and the advertising revenue of free-to-air networks.

As a football fan I’m very much happy that our sport is segmented across many tiers and competitions, as it means that it is better disposed to being in tune with the future nature of the media industry.

Additional to that, risk is not only compartmentalised but each segment can be tuned to reinforce each other.

One reason I have praised the introduction of the FFA Cup is that it turns each aspect of the football fraternity (the grassroots and the professional tier) toward each other in a self-reinforcing dynamic.

This is also why I have stated that strength of interest is more important than the scale of interest in terms of ensuring recession resiliency of a sport.

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As a Melbourne Victory fan it was very heartening to see that the team have already surpassed last season’s total of 21,000 season ticket holders with just under two months still to run following their championship season.

A similarly good example can be seen with Western Sydney Wanderers, despite a disastrous season they have managed to effectively retain their season ticket base.

In both cases speed of uptake is the key measure, which is as important as the end size.

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