23rd August 2019

Blog – 25th May 2019

25th May 2019

A series of recent articles and presentations suggest that the world is increasingly waking up to the serious financial problem permeating through the world of football, which we first warned about back in 2016 with our first release of ‘We’re So Rich It’s Unbelievable! The Illusion of Wealth Within Football’.

Earlier in the week, Javier Tebas, head of Spanish football’s La Liga for the past six years, stated:

“There are clubs who could not care less what their real incomes are when they want to sign a player because they receive incomes from a state. It forces other clubs into an economic situation which is really living on the edge. It skews the balance of the entire European football structure. This is no longer sport. This is no longer an industry. It becomes more like a toy, the plaything of a state. And when it’s a plaything, kids start playing with other kids. You end up ruining the entire system.”

Central to our consulting work is establishing whether a given industry is attractive or not from an economic perspective.  In other words, does the “average participant” within said industry cover all of the costs of doing business or not?  In this, we often try to understand why value destruction in, for example, airlines is so different to value creation in, say, real estate development or supermarket retailing.  Core to this endeavour is the economic profit metric – an approach rooted in the work of Adam Smith and Alfred Marshall and one that includes ALL of the costs of doing business. 

Partly out of curiosity but also because we are fans of the game, we applied the metric (net operating profit after tax less a charge for ALL the capital used by the club) to several leading Premier League clubs in late 2016.  Almost immediately we were stuck by four things:

  1. The challenged profile of value creation over time – the clubs had a 1-in-5 chance of covering all of the costs of doing business over an 8-year analysis period
  2. Revenue increases (mainly from TV rights income) were inflating on a scale that other industrial sectors could only dream of
  3. A European League, despite our inherent reservations, looked inevitable due to the poor economic performance of the leading clubs
  4. That the economic performance of one of the key broadcasters had deteriorated significantly

Subsequently, and largely as a result of supporter feedback and enthusiasm, we expanded our analysis to include all Premier League clubs that had participated in the division from 2009 onwards. Our work revealed a very difficult economic profile for the other 14 Premier League participants and a very serious outlook for clubs competing in the lower divisions.  

The report generated extensive media coverage and some very welcome feedback, including that from the Finance Director of one famous South of England football club who contacted us and said, “At last somebody has finally understood how ridiculous and challenging the world of football finance actually is.” 

Of course, as we have found in our consulting work, when presented with an alternative perspective to the more established narrative there is frequently an understandable but an almost expected hostile reaction. In fact, one nationally-recognised sports journalist wrote to us in 2017 in a somewhat distressed state…and we quote;

….my view is your report is in the main, scaremongering nonsense using a metric not especially applicable to football. From Talksport it was clear you had little to no understanding on the dynamics or history of the European breakaway situation or its (lack of) chances of happening. Yet your press release is still chock full or statements about six or seven clubs breaking away and financial doom…

My issue is not really that you are selling – or trying to sell, literally – something with no real-world application, for £325 a pop. if people are credulous enough to swallow, more fool them. It’s that aside from a farcical misunderstanding about how clubs are run, supposed to be run, and operate in their role as actual clubs (ie not for profit), you’re saying absolutely nothing new citing City and Chelsea as effectively subsidised by rich owners.

This is a story now 14 years old …. I could go on. We’ll have to agree to disagree. I simply don’t buy your analysis, or your credibility to put it forward in respect to football. I could go on … but I’m even boring myself now!

And yet we find the 24th May 2019 edition of The Times reporting on football’s cash crisis (Football League clubs lost £388m last season as cash crisis is revealed) as well as the increasing threat of a European Super League (The European Super League is an existential threat to domestic football). 

Furthermore, in November 2018, Der Spiegel reported on 62 million e-mails whereby the top 5 English clubs (Tottenham Hotspur was not involved) had been actively discussing a breakaway league going back as far as the beginning of 2016.

As for our reports, they have been purchased by some of the world’s leading consultancy companies and investment banks along with high-net worth individuals and their family offices, particularly those located in the USA.

Indeed, our media list continues to grow as the world continues to learn about the core themes in play. Consequently, we are encouraged that there is a healthy and growing appetite for our work.

Unfortunately, the threats to the game that we first highlighted in 2016 are now sadly becoming increasingly evident. Our ‘scaremongering nonsense’ will sadly have plenty of resonance in Bolton, Bury, Sunderland and numerous other locations where the local football club has found itself struggling for survival.

Unless the relevant authorities take appropriate action, we believe the misery will continue. Our next edition of ‘We’re So Rich It’s Unbelievable! The Illusion of Wealth Within Football’ will be released in June. It will reveal some further and highly disturbing trends concerning the economic performance of the Premier League clubs and their potential effects on football as a whole. It does not make for happy reading.

With the domestic TV revenue trend in negative territory and an increasing emphasis on international rights with a bigger share for the larger clubs (yes, we also got both elements right in that we said the domestic TV deal increases were unsustainable but also that the top clubs needed to find new and increasing revenue streams because their economic profit performance trends were so poor), the so-called ‘Big 6’ are starting to turn the screw on the others with very damaging effects.

But, as some keep trying to remind us (see above), clubs are not meant to be run for profit. To our mind such a view confuses or conflates two things – the governing objective of the business (or club) and the mode of measurement (economic profit).  We accept that football clubs have a wider social dimension, but they can only sustain their community function over the longer term if they are covering ALL of the costs of doing business.

Furthermore, to those who don’t accept our view and believe that the clubs should be run “at a loss”, then by implication what is an acceptable degree of value destruction? In almost three years, nobody has come forward with a vaguely credible answer.  

So, it gives us no pleasure to say ‘we told you so’ nor does it fill us with joy to say that there is more pain to come but it is evident that the economic profit metric has revealed significantly more detail and insight than the commonly-used financial measures of pre-tax or EBITDA and will continue to do so.

The economic profit data clearly points towards an impending financial crunch.

You have been warned…. again.