This article was first published in the June 2014 international edition of Accounting and Business magazine.
While all eyes were fixed on Spain captain Iker Casillas as he lifted the World Cup trophy in Johannesburg in 2010, little thought was given as to the tournament’s profitability – yet it would later be confirmed as the most lucrative in FIFA’s history.
This came as a surprise to many. From the outset it was seen by many observers as a massive gamble to take the World Cup to Africa for the first time.
Ahead of the tournament, many experts predicted that world football governing body FIFA – which owns the rights to the World Cup – would make a loss on it, in contrast to the large profits generated in Germany in 2006.
But it turned out that the off-field results were just as healthy as those of Spain on the field.
FIFA president Sepp Blatter had faced strong opposition to handing the event to South Africa. He understandably reacted to the release of the figures, saying: ‘I am the happiest man. It is a huge, huge financial success. I’m a happy president because such financial results come at the end of a four-year period when people said I was going against the world.’
FIFA can be classified as a non-profit organisation, based in Switzerland, but one with a highly commercial outlook. One indicator of this is that it has its own range of FIFA-branded merchandise. The organisation’s status allows it to enjoy a tax-free lifestyle, though this also obliges it to spend its ‘profits’ on fulfilling its football objectives.
This is probably why FIFA does not describe the surplus from World Cup events as profit, but as a ‘result’ to be added to reserves in order to insulate the organisation from any unexpected events that may arise.
FIFA accounts since the 2010 tournament have revealed that total revenues for the World Cup over a four-year cycle from 2007 to 2010 had increased to $4.2bn – a rise of more than 50% on the previous four-year cycle. The resulting healthy surplus of $631m allowed FIFA to increase its cash reserves to a record level of $1.3bn.
Franco Carraro, FIFA’s chairman of the internal audit committee, says: ‘While equity of over a billion dollars seems high, it is necessary as the financial risks exceed it many times over.’
The World Cup has allowed FIFA to build up its reserves since 2001, when it nearly went bankrupt following the collapse of a television partner – the reserve pool was $76m in 2003. However, these reserves are not expected to grow much higher than current levels over the next few years, according to officials.
The pool is needed to protect FIFA from a financial shock such as the cancellation of a tournament. Almost all contracts with commercial partners are related to the event, so FIFA has to have insurance.
However, since 9/11, it has been practically impossible to fully cover the risk; its current $650m policy covers only the cost of postponing and/or relocating the 2014 World Cup tournament in the event of natural disaster, war or act of terrorism. The tournament’s cancellation would not be fully covered by the insurance and the difference would have to be made up from FIFA’s own reserves, so the caution is very understandable.
After all, the World Cup provides FIFA with the vast majority of its revenue and profits. The last World Cup generated 87% of FIFA’s turnover in the 2007–2010 cycle.
FIFA’s biggest revenue stream is the sale of TV rights, which hit $2.4bn for the 2010 World Cup. In the US the Walt Disney Company (which owns ABC and ESPN) and Univision paid a combined $425m for exclusive broadcasting rights for the 2010 and 2014 tournaments – three times the combined bids from the previous round of bids.
In turn, TV companies continue to be attracted despite the massive and increasing outlays. According to official FIFA figures, the cumulative TV audience for the World Cup in South Africa was 26 billion viewers, making the tournament the world’s most watched sporting event ever. Moreover, these figures are expected to continue to rise as more viewers emerge in developing nations that have improved access to TVs.
Austin Houlihan, a senior consultant in the Sports Business Group at Deloitte, adds: ‘We see no signs that the premium sports-rights value bubble is about to burst; rights fees for live content to premium properties will continue to grow. Premium live sport delivers large audiences, typically characterised by an attractive demographic profile. It drives subscriptions and generates advertising for broadcasters, particularly in an increasingly altered media landscape.
In some cases, premium sports broadcast-rights fees have been insulated from wider economic pressures by multi-year contracts.
‘Television and premium sports are well matched for each other: at the highest level, sport is great unscripted live drama for television.
Constant advances in technology are also leading to ever more sophisticated, compelling ways in which sports can be portrayed.’
FIFA also raised $1.1bn in marketing revenue and sponsorship rights from the 2010 World Cup – the second largest source of revenues.
The profits of exclusivity
This figure has continued to grow following the 2002 World Cup, when FIFA decided to explore the possibility of offering fewer, more exclusive sponsorship opportunities in the hopes of maximising potential revenue by offering a broader package of rights and a less cluttered environment to a small group of partners.
FIFA began to classify marketing partners into three categories (partner, sponsor and national supporter), a move that has substantially boosted the World Cup pot – revenues have almost doubled since the change.
The World Cup generated $584m in sponsorship and marketing revenue during the 1999-2002 period, according to IEG Sponsorship Report, a respected authority on sports sponsorship.
Partners effectively own international rights to a broad range of FIFA activities as well as exclusive marketing assets. The six partners for the 2014 World Cup are Adidas (responsible for the official tournament ball, called the Brazuca), Coca-Cola, Emirates, Hyundai/KIA Motors, Sony and Visa, paying an annual fee between around $24m and $44m for the privilege.
The eight sponsors, including the likes of McDonald’s, Castrol, Johnson & Johnson and Budweiser, pay between $10m and $25m a year over the same period, but their rights are limited to the World Cup. The lowest tier, national supporters, pay around $4.5m to $7m a year, with rights only in the host country.
The director of a company that sponsored a national football team at the 2010 World Cup reveals a fascinating snapshot into the selling power of the World Cup. He says: ‘We sold as many units during the four weeks of the 2010 World Cup as we did in whole of the rest of the year – that is the effect the World Cup can have.’
Eelco van der Noll, head of global sports and entertainment for Anheuser-Busch InBev, will be in charge of the Budweiser and Brahma brands during the World Cup. He readily admits the World Cup is the biggest platform imaginable.
He adds: ‘The challenge for every sponsor in Brazil is how to use the World Cup to amplify their brand. Off the pitch, we want to be the most recognisable, active, meaningful sponsor for everyone who is the legal drinking age and above. We want to enhance the experience of the consumers beyond the viewing of the games. The World Cup is a huge opportunity for any sponsor.’
FIFA’s financial report for 2013 reveal how this year’s tournament is likely to perform. The largest source of income in 2013 was ‘event-related’ revenues, reported at just over $1.2bn, or 88% of total income. Some $630m of that came from the sale of TV rights, which were almost entirely for the 2014 FIFA World Cup ($601m).
The second-biggest event-related revenue figure, $413m, came from marketing rights – again predominantly for the 2014 event ($404m).
Other operating income was $83m, or 6% of total revenue, mainly from brand licensing ($58m).
Whichever nation lifts the World Cup trophy in July, the event itself – and, by definition, FIFA – is likely to be confirmed as the big winner off the pitch.
Alex Miller, journalist