Impact of Hosting the Olympics

2016-08-01-1470024501-2875993-RioOlympicsThe past several months have been extremely disheartening due to the countless acts of violence and terror that has wreaked havoc across the entire world. An event like the 31st Olympiad, in Rio de Janeiro, brings hopefulness to the world as we set aside our political, religious and other differing beliefs to come together and stand behind the athletes that represent our countries. With all the optimism that surrounds the Olympics, it’s surprising to think that only a few cities offer final bids to host the games each election period. For these 2016 Games, Rio, Chicago, Madrid and Tokyo were the only cities that offered final bids. With the extensive media coverage, publicity and millions of tourist that travel to the Games, it begs the question as to why more cities are not clamoring to host the Olympics?

There is no doubt that the Olympic Games brings national pride to citizens of the host city. However, the underlying fact is that hosting the Olympic Games is an extremely risky megaproject that most cities want to avoid. Since the first modern Olympics held in Athens back in 1896, the cost for hosting the Games has increased exponentially. In today’s dollars, the post-war 1948 London Olympics cost $30 million. From there, the budgets continued to grow until the 1976 Games when Montreal spent $1.5 billion that took 30 years to pay off and almost bankrupted the city. Fast forward to Rio, and the Olympics are expected to cost roughly $12 billion, but could end up costing as much as $20 billion.

Not only are the actual costs of the event astonishing, but the maintenance costs for these Olympic venues after the Games have ended are a burden on the host city. Most of these venues are built specifically for the Olympics. Once the Games have finished, the city has to find ways to utilize these venues to help offset the cost. For example, the Bird’s Nest stadium built for the Beijing Games cost the city $480 million dollars to build. The city is currently looking for a regular tenant, but while it searches, the city has to front the $11 million annual maintenance costs.

The host city does generate revenue from the Games which helps offset some of the costs. Cities receive a portion of the media rights and sponsorship income generated by the International Olympic Committee (IOC). In addition, cities will generate revenue from local sponsorships and ticket sales. An economist from Smith College in Massachusetts estimates that the Olympic Games will generate about $4-5 billion in revenue from these four sources. The remaining funds have to be generated from local and national governments. Any overrun in budget falls on the host city. Since 1960, the average budget overrun is a staggering 179%.

The cities that submit proposals to the IOC understand the risks that are associated with hosting the Olympics. Essentially, they are writing a blank check to fund the infrastructure and security demanded by the IOC. Just because a city hosts the Olympics, doesn’t mean the city will always incur years’ worth of debt. Although past statistics are not favorable, studies show that some hosts experience a positive effect on their economy. The 1992 Barcelona Games may be the most successful in the last several decades. Although Barcelona blew their budget by 400%, the long-term benefits have far exceeded expectations.

When Rio was awarded the Olympics nearly 8 years ago, the country’s economy was thriving. Since then, the country has experienced political turmoil and a suffering economy. The infrastructure and security improvements described in Brazil’s proposal to the IOC were delayed due to the country’s widespread instability. Like Barcelona, Brazil hopes that the newly completed infrastructure and increased publicity will help boost their economy by attracting future tourist and global and local businesses. Once the games have finished, it will be essential for Rio to utilize the infrastructure to help offset the long-term costs.

As great as the Olympic Games are to watch and experience, it’s amazing that the IOC puts this type of pressure on the host city. Unfortunately, there is no indication that the program will change. For the time being, we applaud those cities that volunteer to host this great event. Even with the negativity that has surrounded Rio the last several months, the 2016 Rio Games have been a great success and we hope that these Games will bring a boost to the Brazilian economy and well-being.

Going for the Gold in London

London OlympicsThe Olympics open in London on Wednesday, July 27th. You won’t see any sponsor logos on the athletes or in the stadium. Similarly, in ancient Greece there we no logos on clothing either. Of course, back then, the competitors were naked.

Even so, the Olympics today are big business. 

Eleven global companies have paid almost $1 billion for their four year commitment (2009-2012) as a top Olympic partner (“TOP”). There is only one TOP sponsor for each commercial category. Coca-Cola for soft drinks, Visa for credit cards, McDonald’s for fast food and so on. Unable to advertise inside, the sponsors must advertise outside, by way of posters and packaging and every other platform available. So every sponsor links their advertising back to the Olympics. The International Olympic Committee (“IOC”) has made a policy against “crass commercialism” and the result is worldwide advertising by the TOPs of the upcoming Olympics. What a fantastic deal for the IOC. And, it must be working for the TOPs as well- many have been doing this for 25 years or more years and fees are up 10.5% in this quadrennium.

London OlympicsThe IOC has raised almost $5 billion in sponsorship and broadcasting rights for 2010 Vancouver and 2012 London. Broadcasters have paid $3.9 billion for television rights. NBC Universal has paid $1.2 billion for the rights to the London games. According to the Economist, to date, NBC has sold $950 million in advertising and will undoubtedly sell more ads at the last minute. Add in the cost of cameras, computers, and communication and they are expected lose $200 million. Not to worry. NBC will be paying $4.4 billion for the games from 2014 to 2020. NBC’s plan is to make big inroads on ESPN. Of course, they will be fighting time zone differences and many Olympic sports that don’t interest Americans. However, there will be 3,500 hours of coverage, many online, this year. Get your smart phones ready.

Lastly, London will invest almost $15 billion to be the host. They’ve invested heavily in a new Olympic Park, a grand Velodrome and a new $400 million aquatic center. They’ve built roads and spent billions on revamping and revitalizing parts of East London. David Cameron, Britain’s prime minister, has promised a return of $20 billion. If he is right, it will be a rarity for most modern day Olympics hosts. However, Britain, alone among recent hosts, has focused on “legacy.” The Olympic Stadium will hold 80,000 during the games but will be dismantled afterward to hold 25,000. Many sites are temporary venues that can be dismantled and reused afterwards. It’s a tough time. The British economy is currently in a recession and Cameron hopes that the Olympics will boost GDP by .2% in the third quarter. London has had the wettest summer in recent history. The hoped-for tourist boom doesn’t seem to be happening. Finally, due to the congestion, London employers have been encouraged to send their employees home for two weeks and work from home. Ultimately, there may little impact on the UK’s GDP, but at least London employees can spend some time on the couch watching their telly.