Innovative Hungarian Sports Marketing Program to Increase

Government Funding for Sports

Ph.D. thesis

Jnos Vczi

Semmelweis University
Educational and Sport Sciences

Supervisor: Dr. habil. Mihly Nyerges associate professor, CSc.

Official reviewers:

President of the final exam

committee:

Members of the final exam

committee:

Budapest
2010.
INTRODUCTION
Todays main coordination mechanism is the market (Kornai, 1986). Economic and market
logic are gaining ground also in the sports industry. The sports industry of developed market
economies saw major changes over the past few decades that have generated solvent demand
in both the spectator and leisure sports segments (Andrs, 2003, 2004). In modern societies,
rising sports consumption has increased the economic weight of spectator and leisure sports
(Guttman, 1978). The sports industry started to get commercialized in the 1980s when capital
was channelled to the sector for purposes other than prestige consumption (Dnes &
Misovicz, 1994). Elaborating on a statement by Chelladurai (1994), Srkzy (2002)
highlighted the following key factors of this commercialization process:
a value shift put post-materialistic and post-modern values in the forefront in western
countries with a mature sports market;
with the growth of leisure sports entire industries emerged to support mass
consumption;
sports was integrated into tourism;
the system of competitive sports no longer fit in the traditional, non-profit institutional
framework;
the construction of sports facilities turned into a profitable form of capital investment;
profit generation became the primary driver for sports events;
sports sponsorship grew to become one of the most profitable tools of marketing
communications (Kolah, 2006);
a framework was established for merchandizing and branding;
an organisational framework gradually emerged to help use money as capital and
manage sports as a profit-generating business.

According to Andrs (2003), the commercial operation of the sports industry is based on three
key aspects that help to evaluate the extent to which the sports industry can satisfy the criteria
of a profit-driven market. To evaluate the degree of commercialization of a nations sports
industry, the following three aspects need to be evaluated in a combined manner:
size of capital investment;
enforcement of a customer-oriented attitude in business services;
maturity of sports industry institutions and infrastructure.
OBJECTIVES
The problems of the Hungarian sports industry are too complex to confine their discussion to
funding. They are intertwined with individual and community (social) motivation,
psychological and sociological factors. Still, if you evaluate the implications of market logic
gaining ground in the sports industry, the conflicts of funding is the first area to evaluate. The
current situation requires cooperation between functional sectors, changes in the regulatory
framework, restructuring and the active involvement of the government in funding. Instead of
pseudo-economic reasoning, the sports industry needs concrete action to raise additional
funds. This study aims to propose innovative solutions for funding sports in Hungary. It seeks
to find ways to generate additional revenues to supplement currently available resources.
Some observers say market growth is limited by demand. Demand can be increased
through indirect incentives and benefits offered by the government. This study, however,
suggests a very different approach. In line with European trends, we believe that gambling
offers the key revenue stream to raise extra funds for the sports industry.
During our study it was not the goal to introduce and cover the entire Hungarian sport
financing system in a detailed, in depth analysis. Instead, the authors strived for introducing
the main components of sports funding and their interactions. The major goal was to identify
and solve particular problems in the area of funding of mostly Olympic sports federations.
The authors intended to change the financial structure of the Olympic preparation by the
introduction of excess funds of the described Olympic Lottery. This study outlines an
innovative funding component to be integrated in the system of government sports funding.

TRANSFORMATION OF THE HUNGARIAN SPORT INDUSTRY

The political and economic reforms in 1989/1990 had an inevitable negative impact on the
Hungarian sports industry (Fldesi, 1994, 1996; Srkzy, 2002). Currently, the communist
model is no longer operable, while the new profit-driven model does not yet work properly. In
Hungary, the market-based transformation of sports brought marginal results. In the wake of
political and economic changes, sports clubs faced critical funding problems. Many sports
clubs were closed down due to the termination of their supporting state owned organisation.
Junior sports were ignored, and student and campus (university and college) sports also
suffered a heavy blow (Bakonyi, 2003). Sports clubs and associations were not prepared for
autonomous financial management. State funds channelled to sports clubs and associations
were heavily reduced due to the dire financial state of the country. In the 1990s, the
government spent much less on sports in real terms than before. As no other sources of
funding were available, sports were increasingly shifted in the background.
The social and economic processes of the years after the reforms had a negative
impact on nearly all drivers of demand in the sports industry including available free time,
disposable income, cultural attitude, leisure preferences, diversity of supply. In this period, a
large portion of the population experienced a huge drop in income levels and the market
economy transition reduced the number of people who could actually afford to do any sports.
All these factors reduced solvent demand in the market of sports services. Hungary has a
significantly lower ratio of people doing regular sports than most countries in Europe. Based
on this ratio, Hungary is only in the middle league of CEE countries. Currently, only 16% of
Hungarys adult population does sports more or less regularly. Those who do sports for at
least 30 minutes two times a week account for only 9% of the 15 to 74 year-old age group
(Sport XXI National Sport Strategy, 2007).
Chronically underfunded competitive sports have been producing weaker and weaker
results in Hungary over the past two decades. Besides the limited sports budget, this is also
due to the fact that Hungary has had a preference for individual sports not so much popular in
the international scene but highly successful in Hungary since the 1970s. These sports
generally having a low marketing and media value include fencing, pentathlon, swimming,
wrestling, canoeing/kayaking (Urbn, 1997). As market powers gradually take over, it is
becoming clear that international competition is so strong even in traditionally successful
Hungarian sports that it is very difficult to achieve good international results with inefficient
funding based mostly on government subsidies. Hungarys sports industry faces a dilemma
both in terms of funding and management. It has to decide which model to follow in the
future.

Operational models in the sports industry

Andrs (2004) makes a distinction between two operating models in the sports industry. One
of them is the model in which sports are managed by the communist state (state sports model).
This model was clearly present in Eastern European countries including Hungary. In this
model, the state plays a key role in managing, operating and funding sports. Revenues come
from the state budget, and most sports clubs are affiliated to companies. After the reforms,
these parent companies no longer provided financial support to sports clubs. Sports facilities
were not re-privatised and profit-seeking new company owners did not want to maintain the
sport sponsorship practices of the old communist enterprises.
 The other operational model is the profit-driven model (market model). In this case,
most revenues come directly or indirectly form the corporate sector. The two operational
models are different not only in funding but also in their ownership structure. In the state
model, there is no real owner. As a result, spending is not limited by revenues, and operations
have soft budgetary constraints. In the market model, on the other hand, spending is limited
by revenues. The owner is interested in achieving a high return on his investment (ROI). The
two operating models are different also in terms of their operational framework. In the state
model, sports clubs are non-profit organizations, typically public associations, while in the
market model, for-profit sports ventures tend to have a business entity behind them (Kozma &
Nagy, 2003).

THE THEORY OF SPORTS FUNDING

Sports funding in developed countries is classified in the following categories in literature:
funding of individual sports and physical activity;
funding of the organizational framework of sports;
funding of the institutional framework of sports.

Similarly to economic research, sports industry research also tends to have macro, mezzo and
micro levels of analysis (Andrs 2003; Berkes, 2006). As this study focuses on the sports
industry as a whole, it is to be considered as a macro-level analysis.

The theory of sports services leisure sports and spectator sports

According to Dnes (2003), sports activities should be considered as services in the broad
sense of the word under which service users pay for sports. Based on the subject of the
exchange, sports services can be leisure or spectator sports services. In leisure sports, the
subject of the exchange is the opportunity to do sports or participate in sports. In this case, the
consumer pays to do sports him-/herself. In spectator sports, the subject of the exchange is
watching others doing sports. In this case, the consumer pays to enjoy the sight of others
doing sports. The term spectator sports refers to the subject of the exchange rather than any
spectacular sight. Sports activities be them leisure or spectator sports activities require
resources. Collecting these resources, that is the funding of sports activities from various
revenue streams can be described with the following formula:
Y=Ra+Rs+Rm+Rf+Rm+Rp, and Y Ci where

Y: total direct revenues collected by the owner of sports activity from the sports
activity
Ra: revenues from the people doing sports;
Rs: revenues from spectators watching others doing sports at the site of the sports
activity;
Rm: revenues from broadcasting the sports activity in the media;
Rf: fees paid by companies using the given sports activity as a marketing tool;
Rm: secondary revenues generated by the sports activity;
Rp: community support for the sports activity;
Ci: a cost factor (i) required for the sports activity;

The theory of sports services association-based and for-profit sports

Another factor to evaluate is the purpose of sports activities. Based on purpose, two types of
sports services exist. In the case of association-based sports a main purpose of sports can be to
maximize the benefit to athletes. Financial aspects are of secondary importance which means
there exists no or only a secondary profit interest associated with the sports activity. In the
case of for-profit sports, the main purpose is to maximize profit for the owner of the sports
activity or sports event. Here the financial aspects are of primary importance. Organizers of
the sports activity have the key mission to generate profit for the owners (Dnes, 2003). In a
competitive market economy, profit can be generated only if appropriate consumer value is
produced. That is, consumers are a special focus also in for-profit sports either as athletes or
as an audience, sponsors or a broadcasting company (Dnes, 1998; Kolah, 2006).

Funding models in the European Union

Political discussions about European sports often attribute a major importance to the so-called
European sports model. Given the diversity and complexity of sports structures in Europe,
however, it does not make sense to provide a common definition for a European sports
structure, sports management and sports funding model.
The European Sports Model is a transition between the liberal American and the state
controlled, bureaucratic Chinese sport models. It works by the application of several elements
and as it varies on a country level, the government institutions participate with different
intensity. Nevertheless, sports governing bodies and federations do play a significant part in
the management of the sport industry. The regional, county and local municipalities also have
a considerable influence on the system. In the EU countries, we can differentiate four basic
national sports systems:
Bureaucratic (France, Finland) where the government offices play an active role,
Missionary (Germany, Italy) where voluntary civilians have the dominant decision
making authority,
Entrepreneurial (United Kingdom) where the economic demand determines the work
of the system,
Social (Holland) where the sports industry is influenced by the collaboration of social
partners.
Sports funding activities of member states are not covered by EU regulations other than the
common rules of competition. The EU provides funds to sports development projects to a
limited extent and along well-defined objectives and principles (Walter, 2003; White Paper on
Sport, 2007).
As for EU documents, the White Paper on Sport published in 2007 has the most
relevance for sports funding. This document aimed to provide strategic guidance for the role
of sports in Europe, ensure more visibility for sports in European policy making and focus
public attention on the needs and special features of the industry. Besides the functions of
sports in socialization and cultural education, the detailed action plan named after Pierre de
Coubertin also dealt with economic and funding issues (White Paper on Sport, 2007).
According to the White Paper, EU member states use highly diverse methods in sports
funding. The sports budget comes mostly from national and local governments, gambling and
sponsorship, as well as from the contribution of private individuals (Walter, 2003). There is
no common funding practice at local governments, as both the methods and opportunities of
funding vary by community. The same applies to funding by business entities. There has been
no common methodology for surveys on the contribution of the sports industry to GDP in the
various European countries either. For this reason, the official documents of the European
Union include figures calculated based on different methodologies for different periods. A
study submitted during the Austrian presidency in 2006 indicates that sports in the broader
sense generated an added value of EUR 407 billion in 2004 which accounts for 3.7% of EU
GDP. In the same year, the European sports industry employed 15 million people or 5.4% of
European workforce. (Dimitrov et al., 2006). The national sports industry has revenues of
HUF 350 billion (EUR 1.7 billion; EUR 1 = HUF 300), and contributes 0.9% to GDP in
Hungary. The number of employees and self-employed working in the sports industry
amounts to over 23,000 which is 0.9% of Hungarian workforce (Sport XXI National Sport
Strategy, 2007).
In most EU countries the support of sports means the support of sport programs, sport
facilities and individuals. The allocation of state funds is done through the federations based
on a business or sport plan, and also on open (England, Finland) or directed (France)
tenders. Generally, sport federations are used to support sport programs and individual grants,
while the development of sport facilities in most countries is done by tenders. The allocation
of state funds is either administered by the ministry responsible for sports or its regional
offices (France, Finland), or else, independent state owned institutions (England) whose daily
work is not influenced directly by the state.
Although member states have little in common as regards sports funding, community
contribution (national/local government, gambling) plays a decisive role in all member states.
Official figures are available on the ratio of government funds in community sports financing.
In Western European countries, funds earmarked for sports purposes account for 0.05% to
0.25% of the annual national budget. In Hungary, the same ratio is around 0.25% to 0.30%.
However, the GDP contribution of Hungarys sports industry (0.7% to 1%) is strikingly low
compared to other EU member states (1.5% to 2.5%). Finland has the highest per capita
community sports funding level in the European union (over HUF 80,000 or EUR 267;
EUR 1 = HUF 300), while this amount is only HUF 30,000 (EUR 100; EUR 1 = HUF 300) in
Germany and France. In Hungary, per capita community sports funding amounts to HUF
6,000. In community sports funding, local governments have the highest share in nearly all
countries (e.g. Denmark, Germany, Italy and Sweden; Sport XXI National Sport Strategy,
2007).

The process of Hungarian sports funding

Today, government funds reach the sports industry via three channels. First, the government
provides funds to sports beneficiaries under a support contract. Second, a set percentage of
gambling revenues is allocated to various sports industry segments. The percentages set for
different types of gambling revenues are as follows:
50% of the gambling tax on bookmaker-type betting;
12% of the gambling tax on lottery games;
the gambling tax revenues on football pools needs to be spent on sports in compliance
with a separate legal regulation.
Third, the subsidy system includes some direct per capita subsidies (Srkzy, 2002).
The current institutional framework in which the national sports budget is allocated
(including public bodies, umbrella organizations, associations, public foundations) is
overstructured which means that money fails to reach the lower levels of the system. The
distribution mechanism is complicated and is based on multiple channels. Besides
underfunding, the situation is aggravated by inefficient resource management. National sports
federations have high operating and personnel costs accounting for 36% of their total
expenses. At some federations, this ratio exceeds even 60% or 80%!
To achieve real progress in the funding and professional quality of Hungarian sports,
a new funding approach has to be established to ensure long-term financial autonomy for the
sports industry. Sports funding needs to have a transparent, predictable and clear structure and
sports federations must become strategy-focused organisations. At every branch of sport, it is
the federations responsibility to develop and implement a strategy, develop the next
generation of athletes, manage championship systems, train the national team and enter it into
competitions. As a result, federations should also be closely involved in the efficient
distribution of government funds allocated to sports.
Hungarian sports will see a major improvement if the sports administration can
significantly increase the available funds. In line with European trends, the extra funds
required to increase the national sports budget should be obtained through boosting gambling
revenues.

The gambling market as a potential source of extra funds

Taxes, dues and fees on gambling and lottery services provided or licensed by the state play a
central role in the sports funding system of many member states. In the UK, Italy, Austria,
Denmark and Finland, the reinvestment of gambling revenues in sports has been regulated by
law for years. In England, for example, there is a special organization called Sport England
responsible for channelling gambling revenues to beneficiaries in an efficient and targeted
manner. Europe has four types of gambling resources suitable to be used in sports funding:
revenues from gambling services under close government control (e.g. in Austria,
Finland and Spain);
revenues from gambling services jointly controlled by the government and NGOs of
the sports community (e.g. in Denmark and Ireland);
revenues from gambling services controlled by the sports community (e.g. in Italy);
 use of gambling taxes for sports purposes via specific funds or foundations (e.g. in
Belgium, Slovenia and the UK).
The rate of gambling taxes varies between 0% and 55% and there is no common practice on
the percentage of tax receipt to be used for sports purposes. This percentage varies between
4% and 100% (Walter, 2003; Sport XXI National Sport Strategy, 2007).
In Hungary, the gambling market is dominated by Szerencsejtk Zrt., but its presence
in sports is far behind that of its counterparts in other EU countries. We believe that gambling
revenues should play a bigger role in sports funding.

METHODS
Due to the profile of the study we based the research methods on the work of Babbie (Babbie
1998). To understand the elements of the problem better, we first collected secondary data
and to collect primary data, structured interviews were applied. To gain secondary data the
authors employed press analysis, document analysis and international studies as well. By
using them, we could gain a more accurate picture of the international and Hungarian sports
funding structures. During our analysis seven structured interviews were conducted. Two way
moderated methods were used. One was responsible for the easiness and flow of information,
while the other for the recording of information during the talks. The conversation was built
around four major blocks: the crisis of transformation in Hungarian sports, the financial
systems of EU countries, the Hungarian sports financing, and the Olympic Lottery program.

RESULT
Can you make lottery players influence the way how gambling revenues are used? Should
players be allowed to have a say in how much gambling revenues are spent on sports and
which branches of sport are supported? Who are the players and what about their motives?
Are they motivated by the prizes, the joy of the game, entertainment, habit or the desire to test
regular lottery numbers?

Olympic lottery as a potential way to raise extra funds

We propose that a new product (Olympic lottery) be added to the portfolio of Szerencsejtk
Zrt. This way, substantial extra funds of over HUF 1 billion could be channelled to Hungarys
35 Olympic sports federations (including 28 summer and winter sports federations). Taxes
levied on the bets of a nationwide game involving a possibly public service network television
channel could be transferred to participating federations along the logic currently used to fund
them.
In weekly Olympic lottery drawings, 7 numbers would be drawn without replacement
from a set of numbers from 1 to 35 (representing the federations of the 35 Olympic sports).
Players could pick 7 out of 35 numbers of which a minimum of four right numbers would
make them eligible for a prize. They could select the branch of sport of their choice to provide
direct support to their favourite federation. This way, players could express their preferences,
enjoy the benefits of democracy and generate extra funds for their favourite federations.
Based on our calculations, if the ratio of Olympic lottery sales reaches an 8% share in
the total sales of Szerencsejtk Zrt., the company can collect about HUF 12,5 billion from
this game.
Revenues generated by Olympic lottery

Total Olympic lottery revenues would be subject to 12% gambling tax, and 36% of total
revenues would be the total prize money to be distributed among players. The gambling tax
payable on the estimated revenues of HUF 12,5 billion would total HUF 1.5 billion. This
amount could be transferred in full to support sports via two channels. 80% of the amount
would be channelled to the federations of drawn sports branches, while the outstanding 20%
would be distributed based on players preferences, that is, it would be paid to the preferred
federations.
 Distribution channels of the Olympic lotterys revenues

Unclaimed prizes would be entered into a second drawing. Here, the main prize could be a
ticket to a European or world championship or in the two years before the Olympics a
ticket to the upcoming Olympic Games. This way, the number of supporters travelling to
international tournaments can also be increased.

Arguments for introducing the Olympic lottery

The national budget will gain extra receipts through taxes collected under different
titles (personal income tax, tax on dividends, corporate income tax);
The Olympic lottery will generate extra revenues for Szerencsejtk Zrt., improve its
corporate image and give players a new game to play. Although Szerencsejtk Zrt.
has a fairly broad offering, it can use the Olympic lottery to diversify its activities and
replace underperforming games;
The 35 Olympic sports federations will get a predictable source of funds available
irrespective of the condition of the national budget ;
Players/gamblers can feel that through expressing their preferences they can have a
say in how their spending is distributed and can influence the amount channelled to
the various federations;
Olympic sports federations will also be incentivised because they can shape gambler
preferences through their results and events broadcast via television channels.
Federations participating in the game will have equal opportunities, although the final
result will be influenced by chance;
 As sports is a public issue, the public service television channel should be involved in
organizing the game. This way, the Olympic lottery will not be exposed to the pricing
mechanisms of commercial TV channels;
The publicity generated by lottery drawings will give increased media presence to
sponsoring companies;
In the initial phase, the 35 numbers will be allocated to sports federations in a series of
drawings broadcast by public service television during a period of 7 weeks. Every
time, 5 branches of sport will be introduced and assigned to a number in the lottery
ticket;
After this initial phase of 7 weeks, a one- or two-week technical break will follow to
allow Szerencsejtk Zrt. enough time to have lottery tickets printed and distributed.
After this, regular weekly drawings featuring famous athletes will take place;
This system is compliant with the strategic guidelines outlined in the ECs White
Paper.

CONCLUSION
Our suggestions were motivated by the desire to create a more predictable financial
environment for Hungarys cash-stripped sports industry and to comply with the ECs White
Paper. In the White Paper, the European Commission asked member states to propose a
sustainable long-term funding model for the European sports industry. To complement the
feedback received from member states, the Commission will prepare an independent study on
sports funding from public and private sources and the related progress.
A sports funding system similar to the above Olympic lottery model is in place in
England. In England, government funding for sports is based on funds allocated by the
Ministry of Education to school sports activities, the sports budget of the Department for
Cultural Media and Sport, and funds from the National Lottery Fund. Govermnent funds
including those from the National Lottery Fund are distributed by UK Sport and Sport
England. Since the mid-1990s, 28% of lottery revenues are channelled to a special fund called
the National Lottery Fund supporting cultural, national heritage and sports causes. Funding is
structured as follows: sports, national heritage and culture receive 16.6% each; while the
outstanding 50% is transferred to the so called Big Lottery Fund supporting not only sports,
culture and national heritage but also various charity causes. (The receipts of the Big Lottery
Fund are distributed in roughly the same way as the National Lottery Fund, but since the Big
Lottery Fund works more on a project basis, it is not possible to identify percentages).
(Walter, 2003).
Once introduced in the Hungarian market, the Olympic lottery concept could be sold
to other EU member states under a licence given that the economic value of sports is
increasingly created through intellectual rights, copyrights, commercial communication,
trademarks, image and media rights. The efficient enforcement of intellectual property rights
is an integral part of an increasingly global and dynamic sports industry.
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