David Owen: What if Pyeongchang 2018 Olympics Get Canceled?

The tensions over North Korea make this a point worth considering, even if the Games at present seem much more likely to go ahead than not to.

I had hoped that IOC experts would walk me through potential repercussions, with the help of recent financial accounts.

Unfortunately – and I have to say unusually – they have been particularly unhelpful on this, telling me: “We are not considering the worst case scenario right now.”*

I will leave you to judge whether that is a sensible position.

So I have had to try and work things out for myself with the aid of the 2014 and 2015 accounts.

First, how much revenue might be lost?

Well, the biggest potential hit would be income from broadcasting rights revenue which, in the absence of anything to broadcast, would I presume have to be almost entirely reimbursed.

When last I looked into this a couple of years ago, broadcast income for the entire 2017-20 quadrennium – encompassing both Pyeongchang 2018 and Tokyo 2020 – was projected to reach about $4.5 billion.

As a rule of thumb, the Winter Games generally accounts for up to one-third of TV revenue in each four-year cycle.

NBC agreed a figure of $963 million for 2018 for the key US market six years ago. Let’s estimate the overall total at $1.4 billion.

Some reimbursement of the IOC’s TOP worldwide sponsorship partners, who are expecting to use Pyeongchang 2018 to boost their brands, would presumably also be necessary.

It is more difficult to quantify this, partly because much of the value of each individual sponsorship contract comes from the provision of value-in-kind (VIK) products and services rather than hard cash, and partly because the overall sum that TOP will generate in 2017-20 is hard to pin down accurately.

Timo Lumme, the IOC’s managing director of television and marketing services, hinted to me in 2015 that TOP could conceivably generate $2 billion in the cycle in question. It was clear though that this was a top-end projection and I suspect that the final figure will turn out to be rather less.

The IOC accounts for 2014 – the year of Sochi – put TOP program revenue at $309 million. Let us postulate that this might be on course to rise to $450 million in 2018, but that only a proportion of this sum would be reimbursable, since quite a chunk is VIK and since TOP sponsors could be said to have derived some benefit from their five-ring association in the first half of the cycle even if Pyeongchang were cancelled.

The 2014 accounts also indicate that the IOC received more than $112 million in royalties from the local Organizing Committee’s marketing program. I would anticipate, however, that Pyeongchang will not raise anything like as much as Sochi’s $1.19 billion in domestic sponsorship. So even if cancellation put such income in jeopardy, we would be talking about a significantly smaller sum.

On the expenditure side, the 2014 accounts put Olympic Games broadcasting costs for the IOC at just under $255 million.

It seems reasonable to imagine that if Pyeongchang 2018 were canceled, the bulk of the equivalent expenditure earmarked for Korea would not actually be incurred.

Indeed, while it might seem convenient for my mathematics, I would think that the savings on this score might well cancel out potential losses from reimbursing disappointed sponsors.

If I am right, that would make the $1.4 billion in potentially lost TV revenues overwhelmingly the most important financial consequence of any decision not to stage the 2018 Winter Games, at least for the IOC.

Loss of revenue on this scale would cause much wailing and gnashing of teeth in Olympic-land, we may be sure.

There are, though, other things to take into account – such as insurance.

This is an area where some IOC input would have been particularly helpful, but, in the absence of information to the contrary, I would assume that Lausanne has invested in some level of cancellation insurance for Pyeongchang.

In 2012, an insurance premium of $13.46 million was paid and, when I approached them in 2013, the IOC explained that the policy would have paid $800 million in compensation for broadcasting rights fees it would not have received had London 2012 been called off.

The insurance premium for cancellation of the 2014 Games was itemized in the 2014 accounts at $7.57 million, that is to say 56 percent of the London fee. If it guaranteed 56 percent of the London cover, and if a similar policy has been taken out for Pyeongchang, that might lead one to suppose that around $450 million of potentially lost 2018 revenues might be made good by the IOC’s insurers.

That would still, seemingly, leave a hole of somewhere in the region of $950 million.

That would be a disaster for most sports bodies. However, the IOC has been enjoying good financial times for a number of years now. And during these years of plenty, it has had the good sense to squirrel money away for a rainy day.

There is, for example, something called the Olympic Foundation portfolio whose purpose, as explained in the accounts, is to “cover the operating expenses of the IOC over an Olympiad in which no Games were held.”

At December 31, 2015, this contained just under $833 million, mainly in bonds and equity. This just happens to be almost exactly four times the $207.8 million cost in 2015 of the IOC’s operating expenditures, including the Olympic Channel and culture and heritage operations.

So I think we can assume that $420 million of any shortfall (enough for two years’ operating expenditures) would be made good from that – even if the IOC would then be faced with the medium-term issue of rebuilding the fund.

That leaves approximately $530 million, the vast majority of which would be destined, under normal circumstances, for distribution around the Movement to National Olympic Committees (NOCs), International Sports Federations (IFs) and the Pyeongchang Organizing Committee.

Around $100 million a year, the accounts indicate, goes out under the Olympic Solidarity program. Here too a $200 million reserve fund was established post-London 2012, since as Sheikh Ahmad Al-Fahad Al-Sabah, chairman of the Olympic Solidarity Commission, sagely observed in 2013: “Nobody knows what will happen in the next four years.”

Assuming that is still in place – and Olympic Solidarity’s financial assets were shown at $322.8 million at end-December 2015 in the IOC accounts – it could be drawn down to ensure that Solidarity payments remained at expected levels in the run-up to Tokyo 2020 in the event of a Pyeongchang 2018 cancellation.

The remaining $300 million or so of missing revenue would, I think, cause considerable headaches, but not an existential threat to the IOC.

While there would be scope for negotiations to change the overall picture, the likeliest upshot of such a shortfall would, I think, be that NOCs and winter IFs would have to make do with smaller distribution payments in the event of a Pyeongchang cancellation than they would otherwise expect.

Net distributable revenues post-Sochi, after various deductions, amounted to just under $600 million. While the calculations are complex and multi-faceted, one could see this rising to around the $700 million mark if Pyeongchang went off okay.

Dock $300 million from that and, all else being equal, you would be looking at a cut in distributions of around 40 percent. Having said that, even if my various suppositions turned out to be on the money, there look to be a variety of ways and means of distributing the pain differently.

Perhaps the IOC would forgo some of its share of the distribution; perhaps summer IFs would be prevailed upon to absorb part of the shortfall.

Pain and uncertainty, inevitably, there would be. However, if the immediate hole left from cancellation of 50 percent of the IOC’s quadrennial mega-event program really were restricted to $300 million, then the body would deserve a bit of credit for its contingency planning.

*For the sake of completeness, I felt I should include the full text of the reply the IOC sent me, prefaced with “here is what we can tell you”. It reads as follows:

“The IOC is watching the situation in the Korean peninsula and the region very closely. We are being informed first-hand about what is happening there. We are aware of the existing political tensions and we are sure that these issues will be addressed in the United Nations resolution concerning the Olympic truce which will be tabled in autumn this year at the UN general assembly. We are not considering the worst case scenario right now. It is our goal and our responsibility to do everything to ensure a safe running of these Olympic Winter Games in Pyeongchang.”

By David Owen

Republished with permission from insidethegames.biz.