The Beautiful Game and the Dismal Science: What football club should I buy?
Carson Yeung, a Hong Kong businessman, is a convicted money launderer. The Thai politician Thaksin Shinawatra was charged with corruption. Owen Oyston was sent to prison for rape. And Silvio Berlusconi has a 6,500-word Wikipedia article just on his “trials and allegations” alone. What do they have in common? They all used to be proud owners (or majority shareholders) of their own football clubs.
Not all owners are as conniving or dastardly as these gentlemen appear to be, but they tend not to be held in the highest regard by the fans (some might say they are the antithesis of the game). Owners would tend to seek profits and high shareholder value, even if that went against the interests of the fans in some form or other.
That aside, in the second installment of our series, this article feels like it would be an interesting exercise to explore the beautiful game from the perspective of the owners, to see their motives behind club ownership and whether they in fact seek a good return on investment or simply wish for their club to succeed at the highest level by any means necessary.
The Premier League actually operates quite differently from businesses in other sectors.
Traditionally the principal method of earning revenue has been through match day ticket sales, but has since diversified greatly into income from sponsorships, sales of players, prize money from competitions, merchandise sales and, most notably nowadays, broadcasting rights.
The market for ticket sales is intriguing because, although there are many football clubs which all offer a similar product, club owners are able to charge, in effect, monopoly prices to the fans. This is because of the weak substitutability between each one due to the fierce loyalty football lovers have for their clubs (except that one person who supports whoever’s top of the league that year). However, although ticket prices have been rising steadily over the years, owners are not “bleeding the fans dry” as much as might be expected, given the working class origins of the fan base, as Liverpool found out. In the 2015-16 season, its owners Fenway Sports Group, headed by John W Henry, abandoned its proposal to charge as much as £77 for a ticket after a 77th minute walkout by fans in one of their home matches. In fact, match-day ticket sales only account for about one-fifth of total income for Premier league clubs, mainly thanks to prize money from the Premier League and TV broadcasting rights, ranging from around £100 million for the champions to around £66 million for finishing in last place.
Somewhat paradoxically, although in most fields of business large companies tend to earn higher profits than small ones, in football the opposite can be true. The pursuit of sporting success can in fact be detrimental to profit maximisation. There is only a small group of “elite” clubs who can afford to pay for the services of an equally small group of world-class players, meaning transfer fees and, subsequently, wages (see Part 1 for more details) become very high. This pulls up fees for the rest of the players, meaning these clubs operate with only a small profit margin or even a loss: Chelsea, for example, have a net debt of £1.1 billion and made a loss of £34 million in the 2014-15 season. The main reason why clubs like Chelsea can run losses like this is because these owners, who tend to be foreign investors who treat these ownerships more like vanity projects than an actual source of income, have made their billions elsewhere, so can afford to be relentless in their pursuit of sporting success at the expense of financial performance. However, with the widely-reported new £10 billion TV deal with Sky Sports and BT Sport for the next three seasons, clubs can afford to be more focused on sporting success at the expense of efficient cost controls and thus profits.
In spite of this, there are Premier League clubs which pride themselves on financial responsibility, particularly with regards to transfers of players. In the ten years following the change in stadium, Arsenal only spent a net amount of £71 million in order to use their retained earnings to pay for the new Emirates Stadium. In every one of those years, Arsenal was able to finish in the top four and qualify for the Champions League, so the pursuit of sporting success does not necessarily have to be opposed to good financial performance.
Manchester United is an interesting case, as it is the only Premier League club to be partly owned by shareholders on the New York Stock Exchange. Naturally their shareholders seek value maximisation, so the club’s mentality is perhaps geared more towards commercialisation than actual sporting success. Even though they failed to qualify for the Champions League last season, according to the Deloitte, they are expected to top the ‘Money League’ of clubs with the highest revenue with £500 million. Their business objective, according to their website, is to “increase revenue and profitability by expanding high growth businesses”. Their main methods are to “expand the portfolio of sponsors”, improve merchandising and the level of broadcasting. Although actually playing well is important, such a strong brand has been created that over 50% of their revenue last season was through commercial means.
Overall, the success of a football club (in the Premier League) approximately follows these steps. A successful club usually originates in an old, big city. Owing to the large population there is high demand, so ticket sales and therefore income are high. That income is invested in the club through better infrastructure and better players, so it would typically win matches and trophies. This attracts more broadcasting exposure (domestically and internationally), resulting in greater income. This means the number of prospective sponsors rises, meaning even more income. All of this should create a virtuous circle so only a select group of “elite” clubs will be able to compete for the best players and for silverware.
Having a very wealthy foreign investor own a particular club should essentially speed up the process. Take Manchester City for example. Before Sheikh Mansour of the UAE bought the club in 2008, it had very little to no domestic or international reputation. Since the takeover, the club spent almost £780 million just on transfer fees and has won six major trophies, becoming the sixth most valuable football club according to Forbes. This strategy proved to be a success with Chelsea as well in recent history, at least on the sporting front. However, this model has not been so successful for the likes of Queens Park Rangers, where its overspending, excessive loans, debt and a wage bill which was 85% of its turnover in 2014/15 still could not result in a more than a last place league position. The culture which has been created across the league is very much based on instant success, by signing expensive, ready-made talent and promptly sacking the manager should the club encounter a poor run of form.
It should be expected that, because 16 of the top 30 revenue earners are in the Premier League, they would be expected to perform well on the European stage. In the last five seasons, only once did an English team make the final and the semi-final three times. Why is that? Well, the answer to that might have something to do with the ownership structure. Real Madrid, Barcelona and Bayern Munich, three of the most successful and wealthiest clubs in recent history, are all majority-owned by the fans, of which there are many. Of course sponsorship and broadcasting play a major part in revenue-earning, but the fans love their clubs have long-term interests in ensuring that sporting success is the primary objective. They elect their president and all other major decisions are passed through them. The German Bundesliga takes this further by having the “50+1” law which means, barring a few exceptions, all the clubs must have its members have a controlling stake in their clubs. This is good for the fans, as they have low ticket prices, very high attendance and a strong emphasis on developing young talent, and the clubs’ boards realise and accept this culture. Although revenue is generally not as high as in the Premier League, the business structure is such that they perform better on the national and international stage. The contrasting ownership structures in England and Germany are such that the primary consumers, the fans, view the Premier League clubs and their owners less favourably.
So, what can we take away from all of this? Premier League clubs are owned by small groups of private investors who, together with wealthy sponsors and broadcasters, make the league the highest revenue-earner in the world, but can create large losses. This has created a high-spending culture and an increased emphasis on commercialisation to create sporting success, sometimes to the detriment of the fans. This structure can be very different and sometimes more successful on the sporting front in different countries. This article’s answer to our first question is this: if you’re planning on becoming a millionaire, first become a billionaire and then own a Premier league football club.