Financial Ramifications Of Coronavirus Canceling Tokyo Olympics Would Be ‘Massive’

As recently as mid-March, the International Olympic Committee (IOC) and Japanese organizers were still reticent to postpone the 2020 Games for the continued spread of the novel coronavirus, let alone cancel Tokyo altogether. Finally, as national Olympic committees began announcing they would pull their athletes from a Games staged in 2020, on March 24 organizers agreed to postpone the Games until 2021.

But without an aggressive timeline for releasing a COVID-19 vaccine, suggests Japan Medical Association (JMA) president Yoshitake Yokokura, it’s possible the next Olympics staged aren’t in Tokyo at all, but in Beijing for the 2022 Winter Games.

“Unless an effective vaccine is developed, I expect hosting the Olympics will be difficult,” Yokokura said in a media briefing Tuesday.

On Tuesday, Tokyo organizing committee president Yoshiro Mori said in an interview with Japanese daily Nikkan Sports that if the Games cannot go off in the summer of 2021 as planned, they would be “scrapped” rather than delayed any further.

Postponement carries its own set of ramifications, already expected to add $2.7 billion to Japan’s costs. The tally of expenses sunk into Tokyo’s preparation have varied, with the most recent estimate before postponement at $12.6 billion. But Japan’s National Audit Board has estimated the real cost could be nearly double that, at $22.3 billion.

However, canceling the Games outright—which has only happened three times, during World War I (1916) and World War II (1940, 1944)—would have “massive” ramifications for all the stakeholders involved, from governing bodies to sponsors to broadcasters.

“The Summer Olympics are that much bigger than the Winter Olympics,” says Rick Burton, former USOC chief marketing officer and Syracuse’s David Falk professor of sport management. “To potentially lose them, it’s massive in terms of the ramifications for what I’m calling the property organizations, the ones that sell rights: the IOC, the Tokyo organizing committee, the national governing bodies, the international federations and the National Olympic committees.”

Olympic financing (and, on the other end, revenue sharing) is an elaborate web of interconnected entities. For the expenditure side the equation, explains Michael Payne, who served as the IOC marketing director for 20 years and is now an Olympic sponsor strategist, there are four different buckets among which costs are distributed.

One bucket, absorbed by the host country, is the cost of actually staging the games and running the organizing committee. The cost, which normally varies between $3 and $4 billion for a Summer Games (but which some nations, including London 2012, Barcelona 1992 and, reportedly, Tokyo 2021, far exceed), is nearly always fully funded by marketing commercial ticketing programs.

The capital cost of building the sports facilities is the second bucket, absorbed by the government at the national, regional or city level. The third is the capital cost of the supporting infrastructure—upgrading the airport, building new roads. And the fourth bucket is security, another state cost.

In terms of revenue, explains Payne, there’s the key stream—television rights—which are managed and negotiated by the IOC, with benefits distributed to the organizing committee, the 206 national Olympic committees around the world and the 33 international sports federations. The second revenue source is long-term international sponsorship, like Coca-Cola
KO
and Alibaba
BABA
and Visa.

The third revenue source is local sponsorship, run by the host country’s organizing committee. “The Japanese program has been by far the most successful Olympic marketing program ever, with 40 or 50 local partners generating more than $3 billion,” says Payne.

The fourth source of Olympic revenue is, of course, ticketing. Japan was forecasting approximately $1 billion in ticketing. “Obviously, if the games don’t take place,” says Payne, “you don’t get your ticketing revenue.”

Of those stakeholders, the Tokyo organizing committee has done “all of the heavy lifting,” says Payne. “The real investment, building all the venues, that’s all done.” At this late stage, “80 to 90 percent of the organizing committee’s costs have already been spent, and they don’t have to be repeated.”

So while the additional costs to postpone for a year are “not insignificant” for Tokyo organizers, Payne says, it’s a relatively manageable percentage relative to overall costs. If the Games are canceled outright, those costs are “spent and sunk.”

The IOC has carried insurance for the Games failing to take place since at least the early ’80s, says Payne. With the Cold War boycotts that threatened the 1980 Moscow Games, the IOC secured coverage for the 1984 Los Angeles Olympics and has ever since, taking out approximately $800 million in protection in each Summer Games against its $1 billion investment, per Reuters.

On a media call Tuesday, Tokyo 2020 CEO Toshiro Muto acknowledged that Tokyo organizers have taken out “several” insurance policies. “But whether the postponement of the games qualifies as an event that is covered is not clear yet,” Muto said.

However, cashing in on those policies could prove difficult. Robin Cohen, principal and head of U.S. trial firm McKool Smith’s Insurance Recovery practice group, says that her firm has already seen insurers arguing the policy’s exclusions apply more broadly than as actually written in order to avoid their coverage obligations arising from the COVID-19 pandemic.

“Because of the large amount at stake, there will be many hurdles that the insurers will force the Olympic organizers to go through to collect on their insurance policies,” says Cohen. Olympic organizers must prove the sustained losses and that those specific losses were caused by the insured risk. Depending on the terms of the policy, Cohen says, additional issues will arise in proving the cause of the loss was not the result of some risk excluded by a provision in the policy.

If Olympic organizers do sustain or expect to sustain a loss, they must also closely follow the requirements in the insurance policy to file a claim. “Many insurance policies purport to require as a condition of coverage that notice be provided ‘immediately’ in these situations and then follow up with substantiation of the loss within a specific number of days,” says Cohen.

Cancellation, then, would create a logistical nightmare for all stakeholders looking to recoup losses. It would also very likely change the way policies for sporting events are written moving forward.

For broadcasters, NBC loses an estimated $1.2 billion in ad revenue due to postponement alone.

On the sponsor side, explains Burton, “Even if your insurance gave you 100 percent return, you’re still not getting a return on investment that is a positive. At best you’re getting a return on investment that is a zero, and of course you still had to pay for the insurance and lots of other ancillary costs that are not going to be captured by insurance.”

Then, of course, there are the athletes who are the lifeblood of the Games. More than other professional athletes, Olympians are uniquely dependent upon sponsor support to fund everything from training to traveling to qualifiers. Some sponsors, such as Visa and Toyota, have assured athletes they will extend their sponsorships into 2021. Others have told athletes they’ll need to pay back fees if the Games were canceled.

“I’ve been really lucky to have some amazing sponsors and partnerships throughout this journey. Toyota has been amazing to me and it’s such a family dynamic,” says Team USA Olympic hopeful skateboarder  Jordyn Barratt.

But the consequences of a canceled Tokyo Games go far beyond the financial.

“If you don’t stage the games at all, you don’t get any of the legacy benefit, rebranding the nation, presenting a different image,” Payne points out. Those intangible benefits, of crucial cultural and social importance for the decades following the Games, are lost.

“Australia used the Sydney 2000 Games to push tourism, to show that Australia was accessible,” says Burton. “China used the 2008 Summer Games as a coming out party, welcoming the West to really see China for what it was, which was this massive economic power.

“Tokyo and Japan have a massive investment here, and they just never imagined this. Japanese leaders were so hoping these Games were going to drive the economy but also social perceptions; this was going to be a point of massive pride for Japanese citizens because they were going to showcase their country.”

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