8th October 2020
Netflix is currently running an excellent mini-series about the NASA Challenger space shuttle disaster of January1986 when, shortly after take-off, the spacecraft exploded resulting in the tragic deaths of all seven crew members including the first ‘ordinary’ citizen in space, schoolteacher Christa McAuliffe.
Due to weather and technical difficulties, the launch was delayed but eventually took place in the coldest temperatures ever recorded up to that point during a shuttle launch sequence. The resulting investigation found that the rubber rings (O-rings) which sealed the joints between the various sections of the booster rockets became brittle at low temperatures and did not return to their original levels of elasticity when subsequently warmed. Consequently, a deadly escape of solid rocket fuel ignited and thus violently disabled the spacecraft.
The shocking element in all of this, apart from the deaths of seven very capable individuals, is that the problem with the O-rings was not new nor unknown. Indeed, the manufacturer of the booster rockets and NASA held a conference call the night before the fateful launch to debate whether or not to send the vehicle and crew into space as the outside temperature dropped. Concerns from the booster manufacturer were raised about the O-rings and the cold but NASA pushed back on these concerns, mindful of a failing launch schedule and the potential PR issues if another delay or cancellation were to occur. Perhaps an example of the “sunk cost effect” affecting the overall decision-making process?
The process NASA deployed to reach the fateful decision to launch was not wholly based on an assessment of what could go wrong and the associated risks but mainly on what was going right and the associated benefits. In other words, if it hadn’t happened before, why should it happen now? And the consensus in the ‘room’ was that there was just not enough hard evidence or data to say that there would be a catastrophic failure.
The rest is, unfortunately, history.
This kind of thinking is not that unusual. If you consider your car, it is the sum of many moving parts, some of which will be operating at less than optimal performance due to wear and tear and perhaps a sub-standard manufacturing process depending on the type and origin of the part(s) in question, but the important thing is that your car still runs and gets you from A to B. There is not enough hard evidence from the current performance of your car to tell you that it will fail but there is a very manageable risk that it might.
Arguably, we encountered a similar thought process with the EFL in 2017 when we warned of impending club failures as a result ofour analysis based primarily on an extended sequence of club economic profit data. Of course, we could not say when clubs would fail but we did say that clubs will fail, which some have sadly done so since. Indeed, the public response from the EFL was that no club had been through an insolvency process for several years. Therefore, the EFL had erroneously decided that as nothing was going wrong, by inference, that must mean that everything is going right.
Of course, we knew back then that plenty was going wrong and even more so presently as crowds continue to be banned from football matches. As a result clubs are pleading poverty. Indeed, the current impasse between the Premier League, the EFL and its clubs and the Government is intriguing but worrying.
There is no shortage of theories and suggestions regarding what should be done. The common consensus is that the lower leagues in the EFL, ie Leagues One and Two, do need some form of financial assistance if the current ban on crowds is to remain for the foreseeable future particularlyagainst the backdrop of a rising national infection rate and more deaths due to Covid-19.
In addition, the problem is somewhat confused by an increasing number of Championship clubs spendingmore in salaries than they receive in revenues (14 in 2018-19). Here too recent reports in the media point to increasing financial distress and calls for assistance. Amongst the Championship club owners is the Coates family which is behind one of the most successful and profitable betting set-ups on the planet. A few other billionaires can also be found in England’s second tier of football…
The Government and the Parliamentary committee for Digital, Communications, Media and Sport believe that the Premier League clubs should redistribute some of their ‘wealth’ to those clubs in need. On one level this is a laudable notionbut unfortunately this is the same Premier League that has achieved economic losses of over £2.7bn since 2009 and achieved a pre- COVID-19 record economic loss in 2018-19 of £599.54m. When viewed through that lens – where is the wealth to distribute?
More recently, the Government has been under pressure to do ‘something’ by various groups and talking heads given the increasing reliance of the smaller football clubs on a matchday revenue stream that for now no longer exists due to actions taken by the same Government. One highly prominent and vocal figure in this chain of demands is Damian Collins MP who just so happens to be the former Chair of the Digital, Communications, Media and Sports Select Committee.
When Mr Collins was Chair of said committee, we wrote to him in 2017 and again in 2018 to express our concerns about the state of the game and the strong warning signals that our data was giving regarding the health of clubs and their leagues. We did not receive a reply in either case. Yet he has emerged, and in our view somewhat opportunistically, bemoaning the intransigence of the current Government in the matter of football’s financial plight.
If he had engaged with us when he had the chance, he could have perhaps set the wheels in motion for reform ahead of time. But we take the lack of response to be a strong indicator that nothing was going wrong in the minds of the politicians regarding football at that time. Only in 2019 when Bury and Bolton Wanderers had already endured their respective financial difficulties did Mr Collins enter the field of play. By then, of course, it was way too late.
The Government, it would appear, does not care for the minutiae of football financials given its direct approach in dealing with the Premier League. Indeed, Project Restart (the initiative to restart the 2019-20 season without crowds but with free-to-air TV broadcasts) was conditional on the Premier League providing support to clubs inthe lower divisions. Months later and a number of leaks and comments are only just starting to filter out regarding potential caveats and conditions for providing such funds. No such thing as a free transfer of money.
Is it a coincidence that on the day that the international summer transfer window closed with £1.2bn in purchases and £419m in player sales resulting in the second-highest net spend ever of £805m by Premier League clubs was also the day that an open letter was published by the Premier League, the EFL and other football bodies imploring the Government to rescind the crowd-banning order?
Be under no illusion that there is a PR battle of wits taking place with arguably the Premier League presenting itself as an unwilling victim whilst at the same time hoovering up talent at some cost.
For those more cynically minded, one might think that it would suit the Premier League clubs to do nothing thereby forcing some of the lower league clubs to enter administration. For those that do survive, one inevitable step is an EFL-wide salary cap. This plays directly into the Premier League’s hands in that the clubs will not have to offer such large pay deals to up and coming talent from the lower leagues.
The second step is that the longer the distress lasts, the more likely talent will be for sale at a lower price. Do keep an eye on the domestic transfer window up to 16th October as those Premier League clubs still active in the market will be driving down prices with their impoverished lower league counterparts, which will no doubt see a sale as a temporary but welcome relief.
And yet there is more pressure on the lower leagues from the senior division. Very recently, a senior figure from Manchester City suggested that the way forward for further Premier League investment/funding is the dreaded B-Team scheme whereby a Premier League club takes a controlling share in a lower league club in order to nurture and provide talent for the senior-level operation.
With this type of structure in place, out go the traditions of the original entity and along with it any notion of a competitive and able footballing ethos. The lower leagues will become a subsidiary layer in the organograms of sporting holding companies such as City Football Group and investment houses seeking to get a piece of the action as asset prices continue to fall.
In our view, the debate about B-Teams would be largely irrelevant if the EFL had been allowed to regulate its clubs to a minimum financial break-even point on an annual basis. As it is, Championship clubs have achieved economic losses of -£1.5bn from a revenue of £3.3bn between 2015-19. Masters of misfortune par excellence, non?
However, the end-result is very likely to be that the local leagues simply become nurseries for what will inevitably be the Euro Super League sides.
In 2018, we announced that the demise of the Premier League had already started.
American investors had already made their mark at Arsenal, Liverpool and Manchester United. It seemed obvious (and still is) to us that the increasing Americanisation of football would continue, leading to a structural shift towards something more familiar to them rather than us.
The Premier League’s domestic TV rights are American owned with the exception of BT, although that too is rumoured to be in the sights of a number of US-based telco and investment companies.
The Premier League has the same number of American-owned clubs as it does UK-owned (5) although Burnley, as we understand it, is presently undergoing a sale to the American investment house ALK Capital. That would reduce the UK contingent to 4 – Brighton & Hove Albion, Newcastle United, Tottenham Hotspur and West Ham United – and increase the number of American-owned clubs to 6 – Arsenal, Burnley, Crystal Palace, Fulham, Liverpool and Manchester United.
Little wonder, then, that the traditions of English football can be so easily cast aside amidst the debate about B-Teams when the senior division is becoming increasingly international in make-up and outlook.
The Premier League clubs are not immune to the current financial pressures exerted by Covid-19 but they could have better insulated themselves by adopting a more focussed and value-based approach to overall strategy and financial management. Even so, there is a sense that the changes which we envisaged a few years as directed by the economic profit data are starting to happen and not in a good way. We never said that the process and outcome would be a pleasant one.
Time is not on anyone’s side here apart from, perhaps, the Premier League itself. The Championship clubs are rumoured to be taking a tax holiday in protest at the Government’s failure to provide funding, which did drop our jaws when you consider that HMRC is the most prolific originator of investigations and winding-up orders concerning football clubs. Obviously, provocation does not compute in the mind of a Championship club owner.
Returning to our initial theme, the evidence from our perspective was always there in that something would eventually go wrong. Whether football will react appropriately and change its ways remains to be seen but in adversity there is opportunity.
As the late Christa McAuliffe once said, ‘Reach for it. Push yourself as far as you can.’
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