Rapha Roadmap, chapter 7: Generating revenue outside of sponsorship
Unlike most other sports, which are contested in large stadiums, pro cycling is played out on the open road. While this allows fans the excitement of being right in the middle of the action, it robs the sport of virtually any means of deriving fan-based revenue – charging for tickets. As a result, pro cycling is almost entirely dependent upon external sponsorships for its financial survival. And therein lies the root of many of the sport’s challenges. In Chapter 7 of the Rapha Report, we examine the central and critical issue of sponsorship in cycling. Please send us your thoughts at email@example.com.
Among the most obvious differences between cycling and almost all other sports is its venue. Most other sports are played in stadiums or closed circuits, where owners or organizers sell tickets and charge admission, creating a revenue stream that supports the sport. Athletes, teams, organizers and even governing bodies regularly share in the profits, directly or indirectly through the creation of an expectation that the spectacle is worth paying for. Yet along 200 kilometers of roads, there is no gate fee. The very nature of traditional road racing means that this source of revenue has not been available. For this and other reasons outlined below, cycling has always wrestled with massive financial challenges.
Throughout its history, this has made the sport almost totally dependent on commercial sponsorship for its financial viability. A privately distributed report by Repucom, a marketing firm, described the sport’s revenue streams as being derived primarily from air time, with approximately $2.1 billion realized in total advertising value, although the exact revenues for the sport’s key race organizers like Amaury Sport Organisation (ASO) are difficult to extrapolate because these are private, family-owned ventures. That figure is also a hugely unrealistic way of valuing the sport, since it is based on how much it would cost to these sponsors to buy a similar amount of commercial airtime, at the rates dictated by the TV channels. Estimates of media rights value around events and professional value in teams are also difficult to present with any intellectual confidence. With that in mind, even the most generous approximations of the value of professional cycling yield a number in the hundreds of millions, compared to the multi-billion dollar valuations of single properties or franchises in others major sports (see accompanying charts).
The sponsorship-revenue model has created a series of significant problems for growing professional cycling and ultimately imposed a natural ceiling on making money in the sport. Historically, elite cycling is only as valuable as the sponsors it can attract. The key challenges to fan engagement imposed by the sponsorship model are:
• The creation of an additional barrier to loyalty, where the sport’s growth is linked to the public perception of the brands, companies or organizations that secure sponsorship of professional cycling’s largest assets. Title sponsorship in particular, which can see world-class athletes riding under the banner of sovereign wealth funds, major media conglomerates or obscure financial services, may act as a disincentive to fans supporting specific teams or attending events.
• The short-term nature of investment, with the financial future of athletes, teams and events partly or wholly reliant on poorly monitored sponsorship return on investment of the ongoing charity of a handful of cycling fans with control of significant marketing budgets.
• The disparity in investment focus between teams and events, with the former regularly proving more appealing to sponsors than the latter. This in turn creates vast inequality between World Tour teams and significant under-investment in the development of compelling events and races.
• The reliance on specific people for continued sponsorship of major professional cycling teams or events, creating a risk that the departure of key individuals from specific lynchpin roles could see withdrawal of major sponsors from the sport and subsequent collapse of careers or calendars.
This unstable financial atmosphere has led to a state of perpetual economic uncertainty that affects those in the sport and discourages new investment. There are numerous examples. Belkin, which took over the sponsorship of the Rabobank team in 2014, rapidly exited the sport in just one year due to its lack of a truly global market reach. In 2016, two more major sponsors and patrons of pro cycling left the World Tour. One was the Swiss financial services firm IAM Investments. Its team owner and longtime pro cycling supporter, Michel Thetaz, cited rising costs and the inability to secure a secondary sponsor as primary reasons for ending his involvement in the sport. The level of investment did not match the returns.
The other, the Tinkoff Bank cycling team’s eponymous owner and controversial figure, Oleg Tinkov, spent nearly all of 2016 burning bridges between his team, the World Tour, ASO, and the UCI by giving multiple interview statements and Twitter messages describing the unprofessional state of the sport’s economics, its unprepared business managers, and his take on both the leadership of the UCI and the owners of ASO. He cited the inability to build the value of his team as a property or a franchise and sell that at a profit, due to the closed nature of the sport’s economics and dependence on sponsorship funds. A similar fate almost befell Cannondale-Drapac towards the end of the 2017 season, when the team sought to fill a multi-million dollar funding shortfall. The modern history of professional cycling, from the widespread introduction of title sponsorship at the elite level in the mid 1960s, has been marked by teams with short lifespans regardless of sporting success, due in large part to the sponsorship model.
Races come and go, sponsors sign up only to disappear a year or two later, and team managers must constantly focus on the hunt for new funding. Teams with limited budgets or marginal results appear and disappear. Riders, staff and management face insecurity about whether their team will survive. The uncertainty, turnover and underlying sense of financial anxiety was described by several top racers in their tell-all accounts of their careers, with many interviewees for this research claiming the same volatility creates an environment that makes doping more attractive. Cycling must explore and develop new ways to generate revenue around both live events and its broadcast content. It must also develop stronger means of attracting and retaining more global and dependable sponsors and, over the longer-term, it must find creative new ways of diversifying itself away from this historical dependence on sponsorships in a bid to increase stability and allow fans to engage with a more predictable roster of teams and events.
Ultimately, professional cycling must reduce its reliance on sponsorship as a primary revenue stream, prioritizing reforms that introduce alternate incomes and recognizing that increasing the fanbase is the most important economic driver of the sport. Research suggests there must be a complete shift in economic priority, away from the acquisition and retainment of title sponsors and towards engaging and monetizing new audiences. Any sponsorship model that remains should be built on ensuring better return on investment with more engaging and prolific media content, better options for activation and more strategic use of cycling’s fundamental values to reach new audiences. The sport should prioritize building alternate revenue streams above reforms of the economic structure, including revenue shares or franchise models. Organizers should seek to collect gate fees for professional cycling, and broadcast media should include subscription and premium content options. Reform should be based on greater review of economic conduct, including better promotion within the industry of new opportunities and risks. Reform should be based on the principle that fans are willing to pay for sport, even cycling.
These principles for reform could help the sport to become more financially stable and economically self-sustaining, and in turn allow it to build a larger market share of the global sporting audience. They could support and build upon each other, making cycling more attractive to sponsors, and improving the financial strength and viability of the sport. In this section, we examine how some of these important changes can begin to occur.
Estimating value in professional cycling
Each year, Forbes releases a list of the 50 most valuable sports franchises in the world, although the use of the word ‘valuable’ is misleading – Forbes calculates the price of teams, assigning a dollar figure that should be within spitting distance of the cost of owning teams outright. To generate this figure, Forbes analyses assets held by the teams, merchandise and media revenue, gate receipts, EBITDA, and other hard-to-gauge factors such as liquidity and market momentum.
These calculations are famously difficult to verify, and this is mostly down to the quality of information: ownership transactions are infrequent, geographic differences are hard to account for, and the guesswork behind the earnings of private companies makes the figures unreliable. Add to this that the market is skewed by the premium that buyers are willing to pay for the privilege of owning a sports team, and the picture becomes quite murky.
Of course, performing these calculations on cycling teams is further confounded by the idiosyncrasies of the sport. There are no gate receipts for cycling teams, no assets such as stadia that hold equity, and limited access to broadcasting revenues. Despite this, some interviewees argue that cycling sponsorship is historically undervalued. He points to three areas of under-realized value: the trend for younger audiences to participate in sports and their ‘orbiting cultures’, which cycling teams are poised to exploit; the opportunity for sponsors to create meaningful content about the sport, with high levels of access to the sport’s stars; and that sponsors are effectively making an ad buy within the sport – which is presumably more effective than an ignorable TV ad.
A comparison between the economics of professional cycling and other potential sports reveals some of the ways that cycling teams could become more valuable after reforms to the sport. Teams are almost solely reliant on title sponsor revenue for their operating budgets, making them inherently unstable, and therefore less valuable. Establishing a system in which teams shared a portion of media revenue, enjoyed better opportunities for content creation and market activation, and changed their merchandise strategy, teams would both become more valuable and reduce their reliance on title sponsors.
So: where would cycling teams rank in relation to Forbes’ list of the 50 most valuable sports teams? A thorough calculation of cycling team values would consider media value, media reach, fan engagement and interest, fan demographics, and competition, but a rough approximation of this figure can be found by expressing a team’s value as a function of revenue.
The revenue multiples found in the Forbes list range between 2x and 4.3x. To apply a revenue multiple to cycling teams means making some key assumptions, including: that teams have been historically undervalued, as argued by Jonathan Vaughters; that teams would have higher potential values if they had access to more revenue streams; and that niche sports teams are better value than major sports teams because buyers put less of a prestige premium on ownership. In an attempt to provide some context to the value of professional cycling, research for the Rapha Roadmap took a similar approach to estimating value of current World Tour teams. These estimates, compared with estimates as to the media rights values of cycling’s premier events available elsewhere, start to create a general picture of the total value of the sport. The accuracy of this picture remains, without better sharing of information, a major challenge for the sport in planning and measuring growth.
There are many ways in which cycling can develop other means of generating revenue. Creation of a new and more sustainable league structure would itself create opportunities for developing new revenue sources, but even without these structural changes, cycling could begin to evolve into the 21st century in terms of media content and distribution rights, and develop other new sources of revenue to carry it forward.
Our proposed restructure of calendar and team organization enables many new revenue sources, including broader merchandising rights, diversified VIP experiences and associated ticket fees. The model could also include larger fees charged to start and finish towns in the major stage races because of increased marketing value, event and season winners’ jerseys, and so on. It could also include official bicycles, clothing or equipment lines (as well as official beverages, lead vehicles, and other co-marketed products), hospitality events at the start and finish lines, “fantasy camps,” co-branded public rides and Gran Fondos, and other parallel-participation events associated with a professional race as well as digital integration with platforms like Zwift. Some of these fringe opportunities are already being explored by event organizers and teams. The addition of more considered tourism and hospitality options around major World Tour events have been seen and it is expected these will become more prolific in the coming years.
There are considerable opportunities to aggressively market a range of services and products around a well-paced sporting calendar, some of which are already being exploited in the sport. For example, the popular Etape du Tour event, which features a private citizen ride of the Queen Stage of each year’s Tour de France, typically sells out quickly and generates significant revenue. The Hamburg Cyclassic, Cape Argus Tour, and Ronde van Vlaanderen sportifs each attract more than 16,000 paying riders, while the Paris-Roubaix, Dolomiti Stars, and Ride London events also regularly sell out with several thousands of riders in each. As suggested above, any reform of the calendar and format of professional bike racing should seek to build on these opportunities for mass-start public participation rides with greater access to the elite ranks of the sport. Triathlon, marathon and Iron Man have already made significant progress in this regard and are reaping the rewards with major expansion in the Far East and elsewhere and supplementing traditional sponsorship revenue with associated merchandise.
Efforts have also been made to diversify revenue around live events. Whilst there are intrinsic challenges in collecting gate fees from road cycling, there are opportunities for a semi-ticketed model that could generate significant revenue around professional racing and have not been widely exploited. The introduction of finishing circuits in traditional events, city center circuits in major Grand Tours or criterium and hill climb series’ all present opportunities for gated and ticketed spectator access. Some events, such as the Colorado Classic, have demonstrated the potential for gate fees at bike races to form a significant revenue stream and adding value to sponsorship and broadcast pitches. Further exploitation of tiered ticketing, season-long access passes or festival-style event organization could reveal a host of diverse revenue streams available to stakeholders in the sport.
The power of merchandise
Major sports and sports enterprises earn billions of dollars from official merchandise. Much of this merchandise is created by simply creating a brand association, licensing manufacturers to produce the official products, and prominently featuring teams and star players in marketing campaigns. Again, there is much that pro cycling can learn from other sports, particularly when it comes to leveraging the appeal of sports brightest stars. Other useful case studies can be found in the ‘played on the road’ sports such as marathons, Iron Man triathlon, and XTERRA™ off-road triathlon. The merchandise of these sports is pitched as a badge of honor and identity, and celebrates the participatory nature of these events. The money generated from official merchandise may never contribute a large percentage of a cycling team’s or event’s bottom line, but it can form an important part of a diversified revenue stream, as well as an opportunity to build brand identity and awareness.
As well as key structural challenges in the economics of professional cycling, there is a relatively unsophisticated model of sponsorship pitching and fulfillment compared to other sports, with little shared expertise and few established measures on return of investment. Each of the above potential areas of reform – from the calendar to team organization, athlete presentation to broadcast evolution, media distribution to alternative revenue streams – present additional sponsorship opportunities that could be exploited with better development of models for sponsorship engagement. In each, an experienced sports marketing team could identify, approach and engage with potential new global sponsors and key sponsor programs could be put in place, similar to The Olympic Partners (TOP) Program of the Olympic Games, wherein key international companies are given exclusive global marketing rights in their designated product category for a certain period of time – for example, the exclusive airline or sports drink company of a newly structured calendar, team or content stream.
There will also be valuable new advertising opportunities associated with new events, awards, and new prizes proposed above. It is important to note here that there are very few global companies with a marketing budget large enough to vie for sponsorship rights at events of similar size to the Olympics. There are also complexities in media and brand management that are introduced when sponsorship is encouraged at individual, team, event and series levels. But that said, these revenue opportunities exist and it is incumbent on rights holders to do more to use them to grow engagement in cycling.
It is believed that professional cycling attracts one of the wealthiest, most educated and environmentally-aware audiences of any televised sport, particularly in its emerging markets in North America, Britain, Australia and parts of Asia. There are many product and service providers seeking exposure to that demographic – healthcare companies, providers of natural foods or nutritional supplements, tourism companies, communications and technology companies, for example. These sponsors must be made more aware of the great and largely untapped opportunities in cycling and the sport should seek to associate itself with their audiences in turn.
Cycling sponsorships can be effective at developing brand recognition, at a low cost per impression, but how that brand recognition is converted into brand equity determines whether a sponsor considers the investment worthwhile and historically the sport has been poor at demonstrating to these sectors how it will achieve that conversion. There are, however, new opportunities afforded by the aforementioned technological advances that have not yet been routinely introduced in the broadcast and presentation of cycling. Television delivery and streaming technologies mentioned earlier could be leveraged to promote impulse product buys, for example, and the delivery of specific content to better targeted consumers opens new potential to brand partnerships. Similar relationships could be sought where appropriate between episodic content creation by individual athletes and teams and complementary brands and organizations far more regularly.
The sport also needs to better understand and respond to the viewing habits and interests of modern sports fans. It must create appropriate measurements and indicators to better understand the value of sponsorship and guide its economic activities in this environment. In the past, cycling sponsorship assumptions, metrics and reports have been inaccurate and oversimplified; here again cycling must learn from more sophisticated sports. Sponsorship feedback can be directly measured through consumer interaction and polls, which can help to quantify brand awareness and effectiveness of a marketing campaign. Longitudinally, a change in the sales of a product or service which is the direct focus of a cycling sponsorship can also provide a measurement. Garmin, for example, has effectively used its sponsorship in cycling to increase brand awareness for its wearable and fitness GPS devices, which helped it to increase sales in that product category by 32% in 2015 to US $189 million.
Professional cycling’s opportunity for an unrivaled range of hospitality, networking opportunities and tourism, outlined above, also presents an additional chance for greater business-to-business marketing that could enhance the sponsorship proposition. In expanding in this area, the sport could create opportunities for sponsors to realize greater value from their investments, in turn encouraging them to make longer-term commitments forged through their participation in the sport. In addition, and contrary to most other sports, a high percentage of cycling fans actually ride a bike. This has huge implications, particularly for endemic sponsors – firms that are selling bikes, components, equipment and apparel actually used by professional cyclists. It also cross-pollinates huge opportunities for companies in the healthcare, financial services, and professional services domains who seek to build high-dollar business relationships with new and existing clients, many of whom are fans and enthusiastic cyclists.