The collapse of ISL and its parent company ISMM has exposed major flaws in the sports marketing industry. Whether or not ISMM does go to the wall, it is likely to make agencies re-examine their strategies.
Shockwaves have rippled through the sports marketing industry at news of the imminent collapse of International Sports Media and Marketing Group (ISMM).
Reputed to be the world's second largest sporting group, ISMM is waiting for a Swiss court to make a final ruling on whether to declare the company bankrupt. Though its future now looks bleak -- reports indicate ISMM needs $300m ([pound]208m) just to settle its debts -- the company's plight has at least given the sports industry a wake-up call.
M&C Saatchi sponsorship chief executive Matthew Patten says: 'ISMM is part of the fabric of the business of sponsorship sales. What has happened is of very serious concern for those judging the temperature and fitness of the sports business as a whole.'
Sports marketing agency ISL, part of ISMM Group, is the reason for the company's collapse. It broke the bank when it guaranteed the Association of Tennis Professionals (ATP) $1.2bn ([pound]788m) over ten years for the marketing, broadcasting and licensing rights to the men's tennis championships. But it is understood that ISL has failed to raise the required amount and at the beginning of the month it was reported that the sports marketing agency was trying to break the deal by paying the ATP between $150 and $160m ([pound]111m).
ISL has other major problems. It is being sued for $100m ([pound]69m) by Championship Auto Racing Teams (CART), the US equivalent of Formula One, after terminating its marketing agreement with them in February. ISL claimed there had been 'numerous breaches' of the contract and a legal battle looms on the horizon.
ISL is also believed to owe Uefa [pound]10m in unpaid merchandising revenues for Euro 2000.
Tie-ups with its various sponsors and sporting bodies are in chaos. The most high profile of these is the 2002 World Cup, which is being jointly held in Korea and Japan. ISL also owns global marketing rights and worldwide television rights (excluding Europe and the US) for the 2002 and 2006 World Cups.
Fifa, football's world governing body, could face marketing the tournament itself for the first time if the court's decision does not go in ISMM's favour. It was confirmed last week that ISL had sacked Patrick Magyer, who was running the 2002 World Cup's promotional campaign.
ISMM's future is likely to be decided in one of three ways. A potential suitor could come and bail it out. Latest rumours suggest that Canal Plus, the French cable TV company which is part of Vivendi Universal, is interested. There is also speculation that ISMM could sell the rights to one or more of its properties. A third possibility is that rivals will let ISMM go to the wall, leaving them in a position to pick up contracts at a deflated price.
Karen Earl director of consulting Tim Crow says: 'The demise of ISMM highlights the fact that the economy of sports businesses is the same as in the real world.'
He adds: There is no doubt the situation at ISL has sent a shudder through companies which are buying rights to make profits.'
ISL's troubles stem from a high-risk and aggressive strategy that involved the company stretching its business interests beyond selling TV rights, the company's traditional role, to the major sporting events.
Just as IMG's strength was built on athlete management and Octagon on consultancy and event management, ISL's strength was the close relationship it forged with organisations such as the International Olympic Committee, Fifa and Uefa. ISL has sold TV and sponsorship rights for the past five Olympics, the past four World Cups, as well as the Euro 96 and 2000 tournaments.
But that influence has now started to fade. As one chairman of a major sports consultants association says: 'You can sell anyone the World Cup. But men's tennis, which is very much a second-tier tournament, is not as easy.'
He adds: 'ISL has made the mistake that many other lesser companies make. It is making guarantees at a time when rights fees in many areas are contentious and dangerous.'
Indeed, ISL has been described by one marketer as a 'sales house' that understands the art of selling television rights but not that of sports sponsorship.
Many say that a company such as Octagon has a far greater understanding of brands because it has an agency background.
An ex-employee of Octagon believes ISL is 'arrogant' and 'lacks empathy'. He says: 'ISL was after very big contracts, big rights and big commissions -- but once it had secured them, it thought the job was done. It just paid lip-service to the back-up services.'
ISL's thinking behind the ATP contract was to get the majority of the money through sponsorship and not television tights, preferring to sell television rights to cable and pay-per-view channels, where it believed it would get higher revenues.
As one sports marketer says: 'Its business plan was two-thirds sponsorship and one-third television.
'But audiences for non-terrestrial channels are far smaller than terrestrial channels, making it unattractive for sponsors. Effectively it has shot itself in the foot.'
Octagon has also had a tough time of late. It bought Brands Hatch for more than [pound]100m, hoping to redevelop the track as an alternative sporting venue for Formula One. But the plan was scuppered after the Department for the Environment and the Regions turned its application down.
Then, last December, it announced a deal with the British Racing Drivers' Club, granting it a 15-year lease to manage the Silverstone circuit in Northamptonshire.
The future of that deal, which involved a $60m ([pound]42.8m) investment to upgrade the Silverstone circuit in order to continue hosting Grands Prix, is uncertain after Trade and Industry Secretary Stephen Byers said it raised competition concerns 'in respect of the market for the provision of motor racing and related activities.'
It seems likely that rights holders will have to change the way they negotiate their deals with the media and marketing agencies.
Although it is easy to understand why major sporting events such as the World Cup command astronomical fees, it is a lot less easy to justify the greed of minor properties.
The sports marketing industry has never been so competitive, and the demise of ISL may not have an adverse affect on the industry. But it is certain to make players within the industry analyse the price structure more seriously.
