The Money Game
QUAZI ZULQUARNAIN ISLAM puts football's finances under a microscope
LESS than a day after Andres Iniesta brought to a close a month-long festival of flag-waving with a thumping strike past Maarten Steklenburg, most hard-core football fans were already looking forward to the next season of club football.
After all, the daily drudgery of a club is the real thing, as anyone worth his salt will tell you. And so as Spain triumphed in one of the most atypical World Cup's in recent memory, others such as the English were looking ahead to the start of the Premier League season.
England's shocking exit to Germany had left them licking their wounds. But, as always, there was a saving grace. We have the Premier League, they parroted and as everyone knows, that's undoubtedly the "best league in the world." But the key question is: Is it really? While this is a debate that can never be won on football grounds, it should be rather more straightforward from a financial perspective.
Or so you think.
For starters, the Premier League, contrary to popular belief, is not the most profitable league in the world. That honour, hold your horses, belongs to the Bundesliga whose operating profits of 172 million euros dwarf the Premier League's haul of 93 million euros. However, what has to be considered is that this is partly due to the pound's deterioration against the euro, and most fans should not be unduly worried.
Especially since when you take combined revenues of the clubs in the Premier League into question, the Premier League figure of 2,326 million euros is still much higher than all other football leagues: Bundesliga 1,575 million euros, La Liga 1,501 million euros and Serie A 1,494 million euros.
But despite these apparent riches, there is a growing feeling that the good times in the Premier League are coming to an end. The concern is that football is not immune to market forces, where every boom is inevitably followed by a bust.
However, despite operating in the harshest economic climate, the Premier League bubble defiantly refuses to burst. And the reason that football has not been as badly affected as other industries in this climate is down to its enduring appeal.
The reality is that people love football and will spend considerable sums to follow their team, be it through attending matches, watching games on television, or buying the club's merchandise. In that way football "consumers" are inherently different from regular consumers. And football as a "product" is different from any other product.
In general circumstances, if you were not satisfied with a product, you would cease to purchase it. In the case of football, this almost never happens, as community ties and undying support for your club triumphs emphatically over petty win/loss records. This is why live football continues to attract large audiences on television and this is especially true of Premier League football, whose frenetic style appeals in this media age of low attention span.
The Premier League's business model is simple, but highly effective. According to it own annual report, it aims to "monetise the global interest in the Premier League and distribute revenue equitably and responsibly." Stripped of jargon, this means exploiting its broadcasting rights for as much as possible. In other words, the sky is the limit.
But this is where it gets tricky. In order to achieve this aim, the 20 member clubs of the Premier League formed a company called The Football Association Premier League Limited. So it is critical to remember that when we talk about Premier League finances we have to be careful to distinguish between the clubs' aggregate revenue and the revenue of the Premier League company, which excludes streams like match day revenue, clubs' commercial revenue, and TV money from the Champions League.
Now, looking into the accounts of the FA Premier League Limited, there is no sign of the gravy train slowing down. The company's turnover just recently exceeded £1 billion for the first time in its 17-season history.
Indeed, the turnover has grown by a very impressive 70% in the last four years, which has helped drive the Premier League's winning cycle: revenue growth, recruitment of the best players, top quality football, and further revenue growth.
But one thing, and one thing above all has been the driver for this massive success: television or more specifically, television money. Right off the bat, television has played a significant role in the Premier League, as money from TV rights was behind its creation in 1992 when the top clubs broke away from the Football League. And television money continues to be the driving force in its growth and hence priorities.
Broadcasting revenue is now the biggest element of revenue at Premier League clubs, contributing almost half of their turnover (49%). This is much needed when you consider that match day revenue growth has effectively stalled (up only 2% in 2009), while commercial revenue is also starting to feel the effects of the recession and actually fell 1% last year.
In contrast, the growth in payments secured for the Premier League TV rights has been nothing short of astonishing from the initial 304 million pound 5-year deal in 1992 to the 3.6 billion pound total payments that are scheduled to commence next season. To make that spectacular progress even clearer: on a season basis, the original deal was worth 60 million pounds, while the latest brings in 1.2 billion pounds.
And that is just for the domestic deal. This really is an impressive performance for the Premier League's wheeler-dealers, but there is a growing awareness that the home market is nearing saturation, hence the mounting focus on overseas rights.
And if you think that the increase in the price paid for domestic rights is striking, get a load of the growth in the overseas market. Every time the rights are re-negotiated, the fees more or less double, with the latest agreement generating 1.4 billion pounds compared to 625 million pounds in the previous three-year cycle and 325 million pounds the time before that.
In fact, the extraordinary globalisation of the Premier League could make English football perhaps the first world sport to earn more money from supporters abroad than at home. Foreign rights already account for 44% of the total and it would be no surprise if they overtake domestic rights in the near future.
Revenue increases have been particularly remarkable in the Middle East and Asia, where interest has been bolstered by teams taking part in pre-season tours in locations like Malaysia, Thailand, Hong Kong, and China.
There are, however, downsides to this expansion overseas, chief among which is that it makes it more likely that kick-off times will be changed to suit fans abroad, so there will be more lunchtime matches that can then be screened during the evening in the Far East.
So for even an outsider looking in, it is easy to understand why television is important to the Premier League, but that begets the
question: Why is football good business for television?
Intuitively we understand that football attracts viewers, but if you look at Sky's subscriber figures, it becomes very evident why football is central to their business model. Of the satellite company's nine million customers, around five million of them pay for the sports package, earning Sky some 2.5
billion pounds a year.
So TV is certainly the jewel in the Premier League's revenue crown. And vice-versa. But therein lies the crux of the problem. Although football has managed to maintain and even increase its viewership over the past few years, in these days of multi-media with countless entertainment possibilities, television viewing figures are declining across the board.
So what is to say that this will not happen with football as well?
It is a valid question, but one that will be answered by the usual cliché; football (and the Premier League) is not really like any other product. It has a unique marketing appeal.
Which is why brands such as Nike, Budweiser, Lucozade Sport and Wrigleys flock to provide sponsorship. This makes perfect commercial sense to any organisation. If you are a serious brand player, the Premier League the only thing on the planet that gives you a quarter of the world's population every week.
However, not everything is rosy in the Premier League's garden and there are flaws in the business model. Deloitte has recently pointed out the "imbalance between revenue and costs." 14 of the 20 clubs in the Premier League are running at a loss and combined operating profits fell last year, mainly due to rampant wage inflation with the crucial wages to turnover increasing to 67% -- a record high. Compare this to the Bundesliga, who pay less than 50% of their revenue in wages and you can see how far the Premier League is spiraling out of control.
And that is not all. Combined net debt has also climbed to a steep 3.3 billion pounds; a record high. And even more worryingly, attendances have continued to decline over the past two seasons, even though grounds are still about 90% full. In terms of figures, last season La Liga attracted an average of 28,478 fans, Ligue 1 (France) 21,034, Serie A 25,304, and the Premier League 35,592. These figures are then all dwarfed by the Bundesliga's average of 41,904.
But to say that the Premier League has stuck its head in the sand would be an untruth. It is not immune to the concerns over the sustainability of its business model. In November 2008, it launched a strategic review and already a number of recommendations have found their way to the fore.
Most highlighted amongst them have been the calls for a 39th game, which would have meant ten extra games played across the world. The thinking behind it is logical -- since the greatest income is derived from television customers, why not give them a real taste of things by taking the game to them? This was however soon shot down as a blatant money-making attempt with many arguing that it would destroy the competition's integrity.
And this is only the most projected of the suggestions. There was also the idea of holding a play-off game for the fourth Champions League spot and the idea of having a two-tier Premier League with 18 teams in each, has also been mooted.
While none of these ideas, will probably see the light of day, this flurry of activity to diversify revenue streams suggests that the Premier League is facing a threat to their dominance.
So what are these threats?
The biggest undoubtedly is customers, or more specifically, their fickle-mindedness. Although it has been stated numerous times through the course of this article that football is usually immune from the market forces that can affect other products, it is safe to assume that the Premier League would face huge difficulties if, say, their revenue streams from TV dried up.
And this can be a realistic possibility since the Premier League as a product has been slightly devalued over the past few years. Big stars who once adorned the league, like Cristiano Ronaldo, chose to ply their trade elsewhere and there have hardly been any adequate replacements.
Tie this in with the significant evidence that fans in emerging markets attach themselves more to a player than a team and hence would then follow the fortunes of his chosen star, and you can hear the alarm bells ring. The Premier League stands to lose some of its gloss and consequently customers.
Finally, illegal streams of football matches have become very widespread on the internet, so much so that a report compiled for sports rights owners last year concluded that "digital piracy is one of the most important threats today." The Premier League, instead of embracing this technology has decided to hire a firm to issue lawsuits (much like the music industry). What can't be denied though, is that viewing habits of young people are definitely changing and it would thus be wiser to adopt a more progressive attitude to this profound change, instead of throwing all the eggs into television's basket.
Given these challenges, consider now that hypothetically, Sky hits financial difficulties. It is improbable but not impossible and just recently Mediapro, the company who holds the rights for La Liga games filed for bankruptcy. Thus, in the event that Sky ran into trouble, they would be willing to pay less to secure football rights. The clubs would hence earn less revenue and would look automatically to cut back on their biggest expense; wages. However, in the prevailing scenario, players taking wage cuts looks an altogether far-fetched possibility. This fact is made all the more alarming since the Premier League, as aforementioned, pays out 67% of its revenue in players' wages.
Unfortunately, the only other possibility is that clubs would strive to compensate any TV shortfall by increasing their revenue in other areas, which could mean asking fans to pay higher ticket prices. But ticket prices in England are already higher than the rest of Europe. And suffice to say, that would not be a very popular choice, and may even put a threat to that seemingly indefatigable trait that shows that football is judged by entirely different laws than other products.
Finally, the other possibility that rears itself is that more and more clubs would then go in search for their own sugar daddies, a la Portsmouth and West Ham. And if recent evidence is anything to go by, then we might be faced with an even bigger mess on our hands.
So increasingly, there are calls for regulation and monitoring of football clubs and the business of the Premier League as a whole.
But then you have the free-market school of thought, which continues to state that we should let the free market run unfettered. It states that in every free market, companies go bust. Similarly, not every club can succeed both on and off the field. If the Portsmouths of this world are victims of the system, then so be it.
But that is not how it works. Football clubs are very different to companies and there is so much more than business interests tied in with the death of a club.
In that, the crucial problem with football is that is the results often turn out to be skewed (some would call this the beauty of the game). So while a business can sell 100 products or 998 products --- in football you either win/qualify or neither. And often there is a fine line in between. This means that potentially 20 million pounds could be at stake from one own goal two minutes into injury time on the last day of the season.
It's akin to doing your financial planning with your computer connected to a roulette wheel.
In the end, making assumptions about the future in football can be similarly dangerous, as the game is highly volatile. While the financial future of a "normal" business can at least be considered in the context of a usually stable market -- and even then, the financial implications of being slightly worse than a competitor aren't usually disastrous -- the financial future of football clubs is contingent on the ability of one team of 11 to kick a glorified pig's bladder into a net more times than another team.
So, in the words of the old song: It's not that easy.
Quazi Zulquarnain Islam is a football journalist.