Gunnar Karnath, Co-CEO of line+circle: The future of sports marketing is digital

From the German Bundesliga to FIFA and, from there, co-founding his own business, the company line+circle, Gunnar Karnath discusses the opportunities that digital brings to the sports and esports industries, as well as the need for a new generation of specialized lawyers that understand the new, digital business models

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Tell our readers a bit about yourself and your professional journey to-date.

I am a lawyer and very early had the dream to work in sports – an area that I feel truly passionate about. This gave me the opportunity to combine what I have studied with the subject matter of sports and to put that in a professional plan. During my legal training, I joined a sports rights’ agency called “Sportfive”, which brought me into the sports’ marketing business. After that, I joined the legal department of the German Bundesliga and, ever since, I have been active in both the sponsorship and the media rights’ distribution side of things. I then got a position at FIFA’s commercial team where I stayed for 5 years and focused on sponsorship sales and marketing issues and had the opportunity to negotiate sponsorship deals around the world.

After 5 years, I joined the strategy department within FIFA’s marketing division and soon after I was part of the team  to build FIFA’s digital marketing department, which did not exist before. That was 1,5 years ago before the World Cup in Russia, in 2018. The focus then (which is partly my focus today) was to look at the digital side of sponsorship, the digital media rights’ distribution models, business development cases and opportunities with social media platforms and, from a FIFA perspective, building commercial relationships by leveraging the FIFA brand vis a vis the powerful digital companies around the world (Facebook, Twitter, Google etc.). After having spent a few years in traditional sports marketing, I realized that the future of the sports marketing and sports media world is digital – as is the case for many industries.

With Henri Gisler, my counter-part at FIFA’s digital lead agency, at the time when we built FIFA’s digital marketing department, we decided to open our own business, “line+circle”, and to occupy this area with the experience we have obtained together and the use cases we were able to realize in our relationship between FIFA and the agency. Our combined background, expertise and experience allows us bridge the traditional sports marketing world with modern digital exploitation models. Henri is more on the creative side, an expert in digital marketing, whereas I am more on the business/legal side.

It is interesting to note that there are a few industries where the understanding of law is as important as it is in the sports business. The reason being that the commercial side of sports is predominantly about rights, be it association rights or media rights. Which is why in many leading positions, in sports organizations and agencies, you will actually find lawyers, who have been able to combine their legal base and knowledge with the business side of things.

Could you describe the traditional business model of a sports event?

At the heart of the traditional business model lies the sports event and the entity organizing it. The objective is to generate revenues, on the basis of two core pillars: the marketing and the TV pillar. The marketing pillar traditionally includes sponsorship, ticketing and merchandising. TV rights often represent the most important source of income whereas their value ultimately depends on the size of the sport in question.

Looking at the future, you can now see a third, digital revenue pillar being born – it remains to be seen if it will be considered a standalone revenue stream. Within the industry, all rightsholders are looking at this new revenue stream emanating from digital – what can be monetized, what are the opportunities, both on the sponsorship and the media rights distribution side.

The traditional model is facing problems and the digital pillar might be taking an important position in the general business model in sports. It is interesting that the advertising budgets around a competition like the FIFA World Cup, are no longer allocated (as they were in Brazil World Cup in 2014, for instance) to traditional TV advertising but they are rather invested digitally, with the social media platforms. That is putting the TV broadcasters in a difficult position because they are losing their main income streams themselves and this will have a knock-on effect in the sports industry as we will see declining fees for traditional premium TV rights.  With the raise of streaming and OTT platforms traditional linear television is losing influence and importance and may disappear at some stage.  One of the few media products that will still enjoy relevance –  even in traditional TV – is live sports.

And how does it work with the assignment of rights?

You usually have an entity that holds centrally all relevant commercial rights. Let’s take a football league as an example. The stakeholders involved are players, clubs and the league. Normally every club that is organizing a home match in their own stadium is the natural owner of any relevant commercial rights pertaining to that event. They assign the TV related rights to their respective league and they need to reflect that in their labor agreements with players. And then the league is authorized on behalf of all clubs to centrally sell the TV rights and, depending on the relationship between the league and the clubs, certain marketing rights across the globe.

What are the benefits of sponsors going digital?

Sponsors are looking for a more integrated way on how sponsorship should be activated – they want to become part of the storytelling of clubs and leagues.

As is the case in the traditional sponsorship world, sponsors are looking for brand exposure. The new trend which will prevail, in my opinion, is that sponsors are looking for a more integrated way on how sponsorship should be activated – they want to become part of the storytelling of clubs and leagues. They want to tap into the rights holder’s audience and benefit from their authenticity.

I would say that there is less focus on direct brand and logo exposure and more on the audience – they want to see if the audience fits the brand and its objectives. So, data is becoming more and more important. When data comes into play, performance marketing is the next step that you will try to introduce and establish. Performance marketing in this context means that clubs and leagues create content with the digital media houses, which in turn generates the value for sponsors to tap into and reach an audience which, initially, they could not have or build themselves. The audience is, therefore, very important.

For the first time digital allows sponsors to see who exactly they can and want to reach and define their geographical and demographical target audience. Sponsors are starting to look into performance marketing models, they are demanding measurability and ROI (e.g. brand impressions, brand uplift, change perception of the brand, sales).

By activating their sponsorship digitally and setting up the whole analytics and tracking in the background, they can actually see how effective the sponsorship has been – it is measurable. Digital sponsorship gives a brand the tool to justify the investment and, accordingly, the measurability gives the rightsholder the opportunity to prove why a sponsorship may be particularly attractive.

At the core of a typical digital sponsorship model we find rightsholders who tell their stories digitally and then create branded content with the sponsor, by integrating the sponsor in such content, in a subtle, non-intrusive manner.

From a contractual, rights’ package perspective, there are different commercial models in the market, the most common of which is based on defining a certain media value as a digital asset. Branded content campaigns among other dedicated digital assets is one of the ways of how such a media value could be recouped. With the digital exploitation of sports’ events there is a huge new dimension of additional exposure which is not exploited today.

What influence does digital have in the media rights distribution?

I would say that a set of new players have entered the stage. Until a few years ago, there were only the TV broadcaster that would buy the right to a FIFA world cup (which, from a FIFA perspective, would be the main vehicle to tell the narrative of the tournament and to take the tournament to the world). Now with digital, probably the most comparative digital player to the traditional TV companies are the OTT (Over the Top) platforms, such as Amazon Prime, DAZN, ElevenSports, as well social media platforms (such as Facebook) that are starting to buy sports rights and are turning into digital broadcasters. Streaming does then provide new opportunities: it can be much more interactive in how sports competition is consumed – as opposed to static TV feeds.

With this OTT technology, rightsholders are starting to take control of their own distribution, going direct to consumer (DTC) and and operating their own OTT platforms.

Very interestingly, the CEO of the English Premier League has officially and publicly said, a few months ago, that they are looking into a mixed model: they will still license their TV rights to the big broadcasters in specific territories but, at the same time, in certain territories they will do their distribution themselves. So, in the latter case, they will move away completely from the safe harbor model and will run their own technical solution, set a price to subscribe, run advertising against that content as a broadcaster or they will only allow sponsors to be part of the platform – always DTC.

What are the key business & legal aspects that you consider when negotiating a sponsorship and a media rights agreement?

At the core of sponsorship agreements, you have a licensing deal: you are licensing your trademarks to a commercial entity, allowing them to use such marks in a certain manner. In doing so, you give them the right to associate themselves with your event. Therefore, you need to define the rights package, what is your product, how it can be used, put a price tag on the rights you license to the sponsor.

Since exclusivity is the main asset that you sell, it is very important to define it in your agreement. Exclusivity means that you define a certain product category, in relation to which the sponsor is the only one that can use the marks of the competition.

Let’s take the example of Coca-Cola as a sponsor of a football league. They will enter into a sponsorship agreement and define a certain product category to be part of the scope of exclusivity – for example, non-alcoholic beverages. This means that any right that the sponsor is granted can be used in relation to such product category and in relation to certain brands, i.e. different Coca-Cola brands. Then of course they must define the territory, for example global or certain countries.

From a sponsor perspective, I would always look at how am I allowed to exploit those rights and where in terms of platforms as well as any limitations which the rights holder imposes on the sponsor. And from a rightsholder perspective, I would make sure that I retain control in any intellectual property in the set of event related marks which I license out and how they are being used, that approval processes are in place, etc.

On a legal side, elements that you will see in such agreements include strong rights’ protection measures, to ensure that the exclusivity is being respected, as well as an IP clause ensuring that the marks licensed are registered and protected as best as possible.

With regards to media rights agreements, the key elements include scope exclusivity, the definition of the of the actual media product and the territory where such media rights can be exploited. Furthermore, in the media rights context, rights protection is more about overspill and that you protect the territory in relation to which the relevant broadcaster enjoys exclusivity and, then, what I always do is look at: are the means of distributing the content or the media product defined? Are there any restrictions which could have a knock-on effect on the broadcaster to refinance the media product? For instance, can they go social? Can they show highlight clips on social media? Are there any limitations in commercializing the content?

What are the key differences between the traditional (offline) and digital sponsorship and media rights deals?

The more digital you go, the greater is the risk that you lose control over your IP and the stronger the measures have to be in your agreements.

The more digital you go, the greater is the risk that you lose control over your IP and the stronger the measures have to be in your agreements. Rightsholders, such as FIFA, have departments that focus solely on brand protection, online & offline and (when it comes to sponsors) on site, during events. On the media rights side there are people in charge of rights’ management and anti-piracy, they screen the internet 24/7 to protect the media rights licensees, using image recognition for instance, to check for unauthorized streams or whether unauthorized content is being used.

It is important to have strong and solid measures in place to ensure your rights are protected. To that end rightsholders need to establish relationships with social media platforms directly. The possibilities for media rights in the digital environment are endless. From a rightsholder perspective you must be very clear on what you want to allow your broadcasters to do digitally, you must have exact knowledge of what the advertising formats are and which ones are the most suitable.

Once you go social, if you are distributing content through a social media platform, this works on the basis of the specific platform terms (e.g. Facebook), which are very hard to negotiate. For example, if you license content out to CNN, allowing them to use certain content pieces (e.g. the highlight program) on social media, then CNN operates on the basis of the social media platform’s relevant terms and conditions. And if such terms are touching upon IP or licensing, there is a considerable risk of losing control over your IP.

In the esports industry, are there any significant differences compared to the traditional model for sponsorship and media rights agreements?

In essence the model is similar: an esports event and an entity that owns the event or the commercial rights. However, the question of who owns the rights is a bit more complicated, compared to the traditional model.

Esports is less regulated and you have a different set of stakeholders sitting at the table. There is one stakeholder that in traditional sports does not exist: the publisher, i.e. the entity producing the relevant game usually holding 100% of the IP in that game, which probably has the strongest position at the table. By contrast, in traditional sports nobody owns, for example, football. That is very important in order to understand why the commercial set-up in esports is very different. You have players, teams that are starting to build up, leagues that are running the competitions – but, essentially, they all depend on the publisher.

When a team or the league has found a sponsor, we would look at it very similarly as in a traditional sport: What kind of rights are available, in which territories, other sponsors, product categories etc.

Traditional sports players have different ways of monetizing their personality and their image rights compared to esports players. The main difference is that the traditional player, e.g. Cristiano Ronaldo, can sell image rights not in his capacity as a Juventus Turin player and a as a Portugal national team player (because such rights are with the respective teams), but in relation to himself as a personality. An esports player makes money primarily from streams. They open up an account on Twitch and start selling advertising on the content they create and stream, becoming content traders themselves and monetizing their audience on the platform.

This is an opportunity that Ronaldo doesn’t have – he cannot create and monetize football content, unless it is private. This leads to a situation where the bigger players in esports are usually in a stronger position, compared to an average football player, to market and monetize themselves.

As a general principle, in esports you either have a publisher with total control on his own events and sole ownership of the IP, or you have both a publisher and another entity organizing an esports competition, using the license of a publisher. The latter scenario might be a bit more complex and the publisher must ensure that the license is provided on the basis of certain regulations to ensure a consistent level of quality – once this is settled between publisher and event organizer the system is, in essence, similar to the traditional model.

You mentioned at the INTA Conference that micro-influencers and niche topics are the trend. What do you generally think about influencer marketing in the sports and esports industry?

The use of influencers from a rightsholders’ perspective serves mainly to grow your brand and competition. Rightsholders are trying to reach this younger generation that is spending time on smart phones, following their respective huge influencers because it is part of the media content they consume today – sports is just another product, so these two worlds need to be combined. And the best way is to reach them on social.

This is the reason why traditional and often very skeptical organizations have to tap into this world. They can either choose a few big influencers or go to niche, very authentic influencers that really stand for something. Regardless if the rightsholder goes with a big or smaller influencer, many rightsholder have embraced influencers as part of their marketing mix to grow their fan base by converting the younger generation into followers of their sport.  At the end of the day it is all about the fan, without fans any sport will die.

From a sponsor’s perspective it is also a good opportunity to include influencers in their activation mix. If a sponsor is producing content for their audience, they can obviously make use of an influencer to tell their story and tap into the influencer’s audience and grow credibility. This is how an influencer monetizes and generates revenue. At the end of the day it can be said that influencers are also brands and turn into something like a rightsholders themselves.

What are the implications of the Covid-19 pandemic on the sponsorship agreements and media rights deals?

The sponsorship is not just another commercial deal. Once the ink has dried the relationship should turn into a partnership – only then a sponsorship will be successful.

There is an ongoing discussion on whether the pandemic actually constitutes an event of force majeure, which appears not to be as clear as many lawyers thought. You might say that the pandemic as such should be a force majeure event. However, is it force majeure if an event is being disallowed by public authorities as a precautionary  measure?

And, subsequently, is there anything in the agreement that regulates force majeure? If yes, the next question is what are the implications that have been agreed – because obviously they can vary. I have seen agreements where, for example, in such an event they agreed a pro rata reduction of fee.

From a media rights perspective it is quite clear: if  –  for example – match day 27 is not being played, match day 27 has not been delivered and the licensee will not be prepared to pay for it. Sponsors obviously depend on the program being live and the onsite exposure that they have. Therefore, if the event is cancelled or postponed, they will either hold back payments, which is a disaster for smaller clubs, or seek compensation in the form of additional, new rights.

As a matter of fact, with one of our clients we discussed the idea of creating digital assets that could compensate for a loss of rights, by using archive material and the access to players, to create content that is being published within the media house.

In the world of sponsorship, partnership is very important. Although the discussion when the sponsorship agreement is being negotiated can get heated, at the end of the day it’s not just another commercial deal. Once the ink has dried the relationship should turn into a partnership – only then a sponsorship will be successful. In difficult times like these, parties must seek a mutually beneficial solution. We have witnessed a lot of solidarity from sponsors that have decided to support clubs. If you go to courts with the sponsor, I think the relationship is done.

Force majeure clauses must always be part of a sponsorship agreement. From now on, there will probably be a dedicated clause for pandemics and I believe that there will be huge discussions as to the exact implications, who is taking the risk and financial losses – this will definitely complicate the negotiations.

Would you say that the digital exploitation models we have been discussing about require a “new generation” of specialized lawyers? How would you describe the ideal lawyer in this context?

The answer is yes. You can see that organizations are either recruiting people that are specialized in this field or in external firms, such as ours, there’s expertise being outsourced and bought from the relevant stakeholders. I think that our discussion has also shown that it is a new world, it is technical, changing every day and you need lawyers that have a certain understanding of the new technology and the mechanics, of how the new models of distribution and exploitation can be monetized, what is the new business model behind it, how does digital advertising work, and how do rightsholders try to protect IP in the digital sphere.

There are new risks that come into play, but you will need lawyers that can translate them into scenarios and prepare business decisions. You need agile, talented people that understand this new business and are willing to learn every day.