Football Finance

By: Damon Aitken

Business is booming in the beautiful game. The recent summer transfer window took team spending to new heights with Paris St. Germain splashing out €222 million ($261 million) on 24-year-old Brazilian forward Neymar. Teams in the English Premier League had a net spend of 1.4 billion pounds; a staggering figure  even in the context of the largesse that has been present in the sport over the past 2 decades. Concepts  from accounting, economic, financial, and international relations theory such as amortization, revenue analysis, and soft power can shed light on why clubs are more successful than others and can spend these large sums.

These eye-grabbing fees are not paid all at once; instead they are amortized over the life of the player’s contract. Therefore, a club is not paying say $30 million at once; they are spreading out the cost so it could be $6 million per year for 5 years (the length of the contract). This is the standard for transfers and lets clubs manage large spending on a relatively sustainable basis. Amortization becomes even more key when analyzing player sales. If we take the example of the player above; selling him after two years leaves $18 million on the club accounts to be paid in the future. If he is sold for more than $18 million, the club will actually be making a profit since they are saving money on future wage and amortization payments. A player cannot be considered a simple employee as they are assets to the club. Balance sheets show players as capital assets and their wages as operating expenses of these assets. This makes sense since it has been shown how important on-pitch performance is for a club’s revenue performance.

The world of football finance is less transparent than in American sports; which have salary cap s and where every transaction is made public. Commonly-used valuation methods focus on profitable companies; but they are hard to apply to football clubs as clubs are not always profitable. A better measure of measuring profitability is using EBITDA (earnings before interest, depreciation, and amortization). Therefore, analysis of the valuations of football clubs focusses on revenue analysis.  There are 3 main forms of revenue for clubs: matchday revenue (ticket sales), TV rights revenue, and commercial revenue. In fact, spending as a percentage of revenue has remained around 15% since the 1990s; which implies that revenue has skyrocketed.

Matchday revenue is not a major component of club revenues anymore. Despite increased ticket prices, Premier League clubs only generated less than 20% of their revenue from ticket sales in the 2015-16 season. The German Bundesliga boasts the highest average attendances of any football league with 41,515 spectators on average during the 2016-17 season. This is mainly due to having the highest average stadium capacity. An increased focus on corporate matchday revenue has been a factor spurring the construction of modern stadiums that have more amenities such as corporate suites. Nevertheless, TV money is far more important to clubs in accruing revenue.

TV deals have skyrocketed in value over the past few decades. The Premier League was founded as an attempt to maximize TV revenue as an independent league that could negotiate its own deals. British broadcasters Sky and BT have been engaged in a bidding war over the lucrative rights to screen matches. They fund these acquisitions by charging increasing subscription fees and since then, it has proved itself to be profitable. International rights also command large fees as there is huge demand for the Premier League around the world. These contribute to the Premier League remaining ahead of its rivals in terms of revenue. The Premier League also distributes broadcast money on a collective basis; where small clubs are guaranteed a relatively large sum. In addition, international TV rights are equally divided among the 20 clubs. This is in contrast to Spain, where the division of revenue on a club-by-club basis has contributed to the Real Madrid-Barcelona duopoly (which Atlético Madrid only managed to break with smart investing and coaching).

One can ask why is the English Premier League so popular internationally? Many reasons exist; including the fact that having English as the language of the league makes it accessible to an international audiences. In addition, British broadcasters exported football around the world even before the Premier League and fanbases are particularly large in former Commonwealth countries.  In lower profile leagues, star players are harder to come by.  PSG had to find other ways to increase its global profile in a league where TV revenue is not so large. High-profile footballers such as Neymar also bring significant commercial clout. By signing Neymar, PSG showed that they could bring one of the most famous players in the world to a league that is often regarded as the weakest of Europe’s 5 big leagues. It is part of the Qatari owners’ attempts to establish Qatar as a leading soft power.

Clubs have also resorted to floating themselves on a stock exchange in order to raise funds but this has been discontinued by many clubs as prices remained stagnant. Stocks are not a good way to generate revenues for clubs for a number of reasons. The performance of clubs can fluctuate and it is not a guarantee that a club will consistently perform at the top of its league. In addition, many clubs do not generate profits; which means a lack of consistent dividends for shareholders. Therefore, clubs have not been able to attract significant investment on the stock market.

In a way, it is a cycle of large clubs generating massive revenues from prize and TV money allied to commercial revenues; who then in turn distribute the money to smaller teams through large transfer fees. Small clubs can use transfer fees to invest in themselves. Spillover effects are not distributed evenly but can boost the whole league if player transfers boost the global profile of the league. It will be interesting to measure the change in global interest in Ligue 1 after the first season with Neymar.

Economic happenings in countries spillover to domestic sports leagues. The declining value of the pound makes it harder for English clubs to buy from European rivals. In addition, the case of a hard Brexit could make the Premier League less competitive as increased immigration controls make buying top European players harder. In addition, football investment from specifically China and the oil-rich states of the Middle East can be seen as attempts to exert geopolitical soft power as they seek to increase their reputation and global influence. Seeing a country’s involvement in football can boost its profile among a truly global audience.

Though this global engagement and increased revenue have boosted revenue streams; the business side of football needs to continue to adapt and innovate. TV Viewership figures are decreasing in the age of streaming so TV companies will either have to adapt or clubs will have to find alternative ways of reaching paying fans. In addition, clubs need to take care by not alienating their fans in order to attract greater and greater revenue returns. Historically working- class clubs charging higher ticket prices are already facing backlashes from fans in England. Sustainable revenue growth must pay attention to fan needs and desires if clubs are to continue their stratospheric spending levels in the future.

 

Works Cited

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The Economist. (2017, August 12). Why the world’s best footballers are cheaper than they seem. Retrieved from https://www.economist.com/news/finance-and-economics/21726098-share-clubs-revenues-highest-transfer-fees-have-been-fairly-constant

Elder, R. (2017, June 15). The Premier League viewership dip bodes ill for live sports on TV. Retrieved from http://www.businessinsider.com/the-premier-league-viewership-dip-has-raised-doubts-about-live-sports-2017-6

Kazeem, Y. (2016, February 9). English soccer fans pay the most in Europe for ticket prices—now they’ve had enough. Retrieved from https://qz.com/612942/english-soccer-fans-pay-the-most-in-europe-for-ticket-prices-now-theyve-had-enough/

Morrow, S. (1996, December). Football Players as Human Assets. Measurement as the Critical Factor in Asset Recognition: A Case Study Investigation [Scholarly project]. In ResearchGate. Retrieved from https://www.researchgate.net/profile/Stephen_Morrow2/publication/235322474_Football_Players_as_Human_Assets_Measurement_as_the_Critical_Factor_in_Asset_Recognition_A_Case_Study_Investigation/links/5461ca6e0cf27487b452aea4/Football-Players-as-Human-Assets-Measurement-as-the-Critical-Factor-in-Asset-Recognition-A-Case-Study-Investigation.pdf

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