Today I wish to discuss what is an extraordinary British and in particular English and Welsh (via Swansea and recently Cardiff) success story and its economic impact. I have looked at the economics of the UK football premiership before but the situation is fast-moving as boom follows boom which follows boom. Before we get to the numbers let me give you my idea of the economic model at play because it is not the conventional one of economic theory where businesses set out to maximise profits. Many of what are considered to be success stories are of clubs which have run a sequence of losses with some at times looking as if they are maximising loses! The only way you can argue that premiership football clubs are profit maximisers is to argue that owners and boards have a very long-term strategy and that they expected this extraordinary boom. This rather clashes with the half-life of a premiership manager these days does it not?
What is the economic model then?
There are two types of owner these days with the outright owner being personified by Roman Abramovich at Chelsea and the model based on debt as personified by the Glazer family at Manchester United. I find the history of the Glazer family to be quite extraordinary as they put Manchester United into penury in some senses as it sold its best player Ronaldo whilst piling debt upon the club. Fan dissatisfaction led to the creation of FC United. Yet the event which you might have thought would break them the credit crunch actually helped them as they refinanced much more cheaply. By then the football boom was underway and they are now often perceived to be financial geniuses.
The other side of the model is that costs which mostly represent player salaries have boomed even faster and added to this have become ever more assistants and coaches and what you might call “bottom patters”. This means that there is a managerial structure here on the other side where the business can be perceived as simple vehicles for the staff and mostly the players to drain the clubs of very penny it has. Actually often more than every penny it has! On such a model existence is success in itself if we define existence as remaining in the premiership and the profit maximisers are the players such that one might consider them to be the economic vehicle here.
Ironically much of a clubs activity is controlled by the manager who as I pointed out above has an increasingly short shelf-life. There is an exception to this which is Arsene Wenger at Arsenal but mostly managers are hired then fired quite quickly. A year ago Sporting Intelligence did a chart of longevity of managers and it is instructive to note that those in 2nd place (Alan Pardew) 3rd place (Sam Allardyce) and 5th place ( Paul Lambert) have since departed. Perhaps along this road the British concept of a manager morphed into the continental concept of a coach.
At the heart of all this is the concept of success. If we pin down this will of the wisp it mostly represents qualification for the further riches of the Champions League. Although for some clubs it is mere survival and input from the premiership Matrix style feed line. Others want enough success to make extra money but to avoid the poisoned chalice that Europa League qualification can bring.
Deloittes Report
Deloittes have followed the fortunes of English premiership football for over 20 years and here is their summary of the 2013/14 season.
England’s top division has passed the £3 billion revenue mark for the first time and widened the gap to its nearest rival, the Bundesliga, to over £1 billion. The Premier League now generates more revenue than La Liga and Serie A combined.
An extraordinary effort for a league with 20 clubs giving them an average of £150 million revenue although of course it is much more uneven than that! This has led to this situation.
This year changes that, with the Premier League reporting its first pre-tax profit since 1999.
According to Deloittes these are now” businesses capable of delivering consistent profits” whereas I wonder if the revenues rose so quickly they could not spend the money fast enough! Didn’t Manchester United then spend some £149 million as they tried to deal with the consequences of past under-investment?Actually this morning has illustrated my business model with James Milner turning down an apparent offer of £165,000 a week to go to Liverpool from Manchester City. He puts in a lot of work and seems a delightful lad but at the highest level falls short I think.
Mind you there is a potential moral hazard around Deloittes view of likely premiership profitability.
The Sports Business Group at Deloitte regularly provides assistance to parties looking to sell or acquire an English or European football club.
World Class Players?
Actually in a way the James Milner transfer and the possible transfer of Raheem Sterling pose a question which I have been wondering about for a while? Deloittes tell us this.
attracts some of the best coaches and playing talent from around the world
Whereas I wonder how many premiership players are truly world-class and would get into the stellar class at say Barcelona? Beyond Eden Hazard and Sergio Aguero what would you say? There is on the rank just below a few at Chelsea perhaps and David Silva and Wayne Rooney at the Manchester clubs but who else? Alexis Sanchez has shone at Arsenal but of course was considered surplus to requirements at Barca. Or yo put it another way.
2014/15 is the third consecutive season in which no Premier League team has featured in the UEFA Champions League final.
it is still the case that after both the 2012/13 and 2013/14 seasons the PFA Player of the Year ultimately left the Premier League for La Liga
More money is on its way
The 2013/14 season was not the half of it compared to what is on its way. Foreign and domestic fans who watch on television will be paying for this.
The next deals will commence in the 2016/17 season, with the value of the live domestic element already confirmed to be 70% higher than the current deal.
The exact amount of the foreign deals is not yet defined but according to Deloittes will make the total somewhere between £8 and £9 billion over the next 3 year cycle depending on how they go.
The exchange-rate is favourable
From a football point of view the strengthening of the UK Pound against the Euro makes the bargaining power of premiership football clubs higher. Each UK Pound goes further when it buys some 10% more than it did a year ago when expressed in Euros. Actually as recently as Monday but extraordinary moves in European bond yields have pushed it higher (“bundpocalypse” as the German 10 year yield which fell as low as 0.07% nearly touched 1% earlier today).
Also it reminds me that if football has a reserve currency it is an example where the Euro for once replaces the US Dollar.
A spending splurge this summer?
So a lack of world-class players has led to a Champions League slump for premiership clubs. The same clubs are now in this situation of having ever more money and a stronger currency meaning that Pink Floyd may be playing.
Money, it’s a gas
Grab that cash with both hands and make a stash
New car, caviar, four star daydream,
Think I’ll buy me a football team
Corruption?
There has been surprisingly little of this around the premiership.With the travails of FIFA and the resignation of Sepp Blatter this issue could hardly be more in the news. Perhaps the old habit of giving managers brown envelops stuffed full of cash stopped because with such large sums neither note denominations not envelopes are not large enough!
Comment
In many ways this story is an extraordinary success if looked at in economic terms. It provides quite a boost to UK economic output and the foreign television revenues boost exports. Of course the propensity to import foreign players means that imports are boosted too in a very British style version of economics. Also this is one area which has provided quite a boost to real wage growth. At this point what is not to like?
At a deeper level though we have the issue of how much of this is actual growth and how much is simple inflation? A given quality of player would have seen a surge in wages which hints much more at inflationary pressure. How can a player be worth £260,000 a week? I will leave that to the comments section for now.
Meanwhile we have the business model which is an odd mix of debt and maximising salaries as well as of course the influence of “hopes and dreams”. Some owners seem to go native to some extent like Roman Abramovich but others seem determined to never do so like Mike Ashley at Newcastle. One thing we can be sure of is that it has changed out of all recognition in only a short space of time.
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