When sports are cancelled or postponed for reasons beyond our control, just who pays? As regards the mega media deals between networks and leagues that aren’t being fulfilled, who is responsible? The answer might surprise you.
The NBA halted all games on March 12 and all sports followed the lead of Adam Silver shortly thereafter. For college fans, not only did the NCAA cancel all remaining spring sports, they quickly cancelled that rite of spring we affectionately call March Madness. Gone are the usual 3.7 million brackets submitted by basketball fans everywhere. More significantly, gone is the $800 million the NCAA receives from the networks, like CBS and ESPN, by far its largest revenue source for funding year-round endeavors. The Tokyo Olympics have been postponed for a year. NBC Universal paid $1 billion for broadcast rights - the cornerstone of their summer schedule and the gem in their advertising revenue stream – and they must be feeling flu-like symptoms right now.
We are hearing the term “force majeure” quite frequently, a term usually ascribed to commodity outcomes (of which we have been on the wrong side of a few too many times). In short, force majeure declarations are part of any contractual obligations where one side, for an exceptional and unforeseen reason, declares that they cannot or will not fulfill their contract with the other party. Think of a war, strike, riot, crime, plague, or an event described by the legal term “act of God.” In recent times, think of Hurricane Katrina or the Libyan Civil War.
The NBA’s collective bargaining agreement includes a force majeure clause that allows the league to garnish player wages or even to cancel the labor deal entirely if an event, such as an epidemic or act of war, forces a long-term suspension of play.
Since force majeure is standard in almost all contracts, with all the cancellations and delays of future sporting events, one begs the question: just how does a canceled television/media contract work anyway? Are the networks on the hook for the entire amount? Is the league or association obligated to repay any funds they have received to date and compensate their broadcast partner for damages?
The Sports Professor recently interviewed Doug Perlman, a sports media rights expert, Founder/CEO of Sports Media Advisors,former NHL executive and past president at IMG Media, to get the answer to just who is responsible when God cancels sports. His message was clear and to the point as to who is responsible for media contracts that aren’t fulfilled: “It depends.”
Doug has been on both sides of media deals, representing the content provider and the content distributor, and what he stated was that all contracts are unique in some sense and much depends on the relationship between the leagues and the networks. Assuming a good working relationship, there are plenty of options on contract fulfillment when there is a stoppage. The most common remedies are: 1) Payments might be stretched over the entire life of the contract instead of during the current time frame 2) Pro rata rebates based on not just how much time has elapsed but also a weighting of the importance of games. For example, the NBA is about 80% done with the regular season but the playoffs carry much more weight from a ratings perspective. 3) Arbitration if the two sides cannot reach a deal (this is the case with any force majeure claim).
According to Perlman, it really becomes a question of collaborative vs contractual relationship and he indicated that most networks and league partners have a very good working, collaborative relationship. One thing he made very clear was that while the various network partners are consulted, the decision to cancel or postpone clearly belongs to the leagues.
COVID-19 has had a devastating impact globally. From the loss of life to the way we interact with each other, the virus has proven to truly be life-altering. From an economic perspective, the results are equally as sobering as every industry is impacted. Airlines, auto manufacturers, hotels, and energy companies hang on by a thread. With over 150 million Americans being told to stay at home and countries like India, England, and others enduring national stay-at-home orders, what a great time to be a network with a robust portfolio of live non-scripted content, like sports. Yet, the best networks can do now is strategically promote the re-broadcast of some of the greatest sporting events of all time and wait just like the rest of us. When the curve flattens, the world starts up again, and sports resume, it will be interesting to see the financial damage done to networks and leagues from lost revenue and unfulfilled contracts. When God cancels sports, who pays? Clearly, that depends.
This appeared in Forbes on March 25, 2020.