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How the Olympics "Rule 40" Change Could Help Under Armour Inc Surge

By Bradley Seth McNew – Jul 27, 2016 at 7:55PM

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This hard-fought rule change has opened the door for non-sponsors to still get a marketing payoff during the Olympic games, which could have major implications for Under Armour's international business.

Rio de Janeiro. Image Source: Getty Images

The Summer Olympics in Rio are just a few days away. Large companies like Nike (NKE -0.65%) that have long been official partners of the Olympics, paying millions of dollars for the exclusive opportunity to attach their logo to the athletes during the competitions, are preparing to get a return on that investment during the 16-day event. But thanks to a change in the controversial "Rule 40", now brands that aren't official paid sponsors can also benefit from the games' marketing potential, giving smaller companies such as Under Armour (UAA 0.21%) (UA 0.59%) a major opportunity.

The "Rule 40" fight

The 40th rule of the International Olympic Committee's (IOC) regulations limits the use of Olympic intellectual property by non-official sponsors during the "blackout" period starting a few days before the games and ending a few days after, or July 27 to Aug. 24. During that time, non-sponsors have been forbidden from marketing any athletes competing in the Olympics, including even mentioning their names. The same goes for the athlete, meaning that even after a win, the athlete couldn't send a "thank you" message to his or her sponsor on public social media if that partner isn't a sponsor of the games. The punishment could be as severe as disqualifying the athlete. 

Many athletes and advocates have fought the rule in recent years, saying that it harms an Olympic athlete's ability to see much financial reward for his or her hard work aside from the paltry sum they get from their National Olympic Committee for qualifying. This is especially true in those sports that don't have high profile leagues as basketball players have, for example, with the NBA. 

The IOC heard these arguments and in 2015 implemented a change to Rule 40 that now allows companies that aren't Olympic sponsors to continue marketing their athletes during the games. This change eliminates the blackout period, though there are still many limitations, such as the restrictions on using intellectual property including the word "Olympics" or even words like "summer", depending on the context. 

The United States Olympic Committee took this rule change a step further and forced non-sponsor brands to submit a waiver request and proposed marketing plans by Jan. 27 for approval (by which time very few athletes had officially been named to Team USA), and the approved advertisements had to start running continuously by March 27 to be eligible to be played during the Olympics. 

This is still a very strict and limiting rule, but even with all of these hurdles, Under Armour could still see a major boost from this new change. 

World-champion swimmer and Under Armour athlete Michael Phelps. Image Source: Under Armour

A new marketing opportunity 

In early March, Under Armour released a video of swimmer Michael Phelps, already a four-time Olympian with 22 Olympic medals and an Under Armour athlete since 2010. The video features Phelps training while the song "Last Goodbye" by the Kills plays in the background and ends with Phelps standing before flashing cameras. No overt Olympic reference or intellectual property is used, but the message of Michael Phelps using Under Armour training gear while preparing for this fifth and final Olympics is obvious. 

Before the Rule 40 change, Under Armour would have had to stop showing the ad this week and throughout the blackout period. Now, the company can continue to use this marketing campaign, and others like it such as this one featuring Team USA Gymnastics, throughout the games. 

The potential international sales boost

The small amount of marketing power given to non-sponsor brands could have significant implications. For Under Armour, this represents a great opportunity to speed up international sales growth. Olympic fans all over the world will tune in to watch the games, with an estimated 3.6 billion viewers this summer. Those viewers could see an athlete like Michael Phelps win a medal, and thanks to the Rule 40 change, they could then see Under Armour's corresponding ads on TV or social media immediately.  

International sales are one area where Under Armour still has an incredible runway for growth. Even though international sales grew 69% in 2015 year-over-year, they still made up just 11% of total sales for the company, compared with about 54% for Nike during the same period. 

This summer, look for Under Armour athletes to make a big showing at the games and for the company itself to capitalize on that as much as possible now that it actually has the ability to do so. If it's successful, third and fourth quarter earnings this year should show even more international expansion.

Seth McNew owns shares of Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Nike and Under Armour (A Shares). The Motley Fool owns shares of Under Armour (C Shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Under Armour (A Shares) Stock Quote
Under Armour (A Shares)
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Under Armour (C Shares)
$8.48 (0.59%) $0.05
Nike Stock Quote
$105.96 (-0.65%) $0.69

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