A company, say, a sport clothing company, eyes a talent in a particular sport and offers him a sponsorship contract. With all eyes on him as he parades around in their shoes and shirts, their sales will naturally increase, which is desirable for the company. Included in the contract is an agreement that the sponsor will pay him a princely bonus should he win this or that competition in a specified period of time.
The sponsor may not want to have the responsibility of actually paying out such a hefty bonus themselves, so they make a deal with another company which specializes in covering the "risk" that the athlete may very well win the competition.
This company works out the odds of the athlete winning the event and charges the sponsor a premium, which is really a small percentage of the total winnings offered to the athlete.
It reminds me of insurance companies—you pay them a yearly premium so that in the [highly] unlikely event that your house burns down, they will hand you a cheque many many times the amount of the actual premium, so you can get your life back again. Except that if your house does burn down, they must first investigate the circumstances surrounding the loss, before they go forking out any money.
Interestingly, a Texan company underwrote the risk of Lance Armstrong's winning the Tour de France four more years in a row, after he had already won twice in a row. The total prize money offered to the cyclist was US$9,500,000.00 with the sponsor paying a premium of US$420,000.00 for the company to cover the risk. Armstrong actually won five more times.
This book is another fine read. It is written by a respected sports journalist and provides a good insight into what goes on behind the scenes in the cycling world.
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4 comments:
so did the Texas company win or lose money on Lance?
they had to pay the bonus money that was stipulated in the contract.
and did that result in a net loss for them or not? why would they keep insuring him if he was costing them so much? i don't get it.
the company was approached by Tailwind Sports, the owner of the team. Tailwind wanted to offer him bonuses if he won four more consecutive times.
the offer was so-and-so million for winning in 2001, so-and-so million for 2002 and 2003 and then a whopping five million if he won again in 2004.
that was the entire agreement. so they approached the company to cover the risk. the Texan company calculated the odds of his winning in a streak like that and agreed to cover the risk for Tailwind Sports. so the total figure was huge.
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