Orginally Written: February 2014
Football reached its nadir in the 1980s. Gate attendances declined to historic lows as football became a social ghetto beset by hooliganism, financial troubles and dilapidated stadiums, and marred by the horrific tragedies of Heysel, Bradford and Hillsborough. The beautiful game had become the national shame. The future prospects were bleak and many football pundits, business analysts and social commentators predicted the demise of the professional football industry. The world was changing as the high-tech computer age unfolded, generating profound social and cultural changes in its wake. Football as a mass spectator sport looked increasingly to be nothing more than a historical artefact.
How wrong were the prophets of doom. Wind the clock forward a decade or so and the global passion for the beautiful game has been rekindled as intense as ever. In England gate attendances are back to levels last seen in the early 1970s. Double-digit annual revenue growth has been the norm. The FA Premier League is a billion-pound industry and Manchester United may be the biggest pro sports team in the world with an estimated global fan base of around 50 million. The FIFA World Cup Finals every four years can lay claim to being the biggest global event. The demand for football in the Far East, particularly with the opening of the Chinese market, remains far from satiated and offers considerable revenue potential in the next few years.
The reasons for football’s renewal are many fold. In England the boom coincided with the creation of the FA Premier League and the live TV coverage provided by BSkyB. BSkyB has grown to a dominant position in the subscription TV market in the UK by using Premiership football as a battering ram to get mass adoption of new technology – initially its satellite system in competition with terrestrial and cable alternatives, then subsequently engineering the switch to a digital platform. The fortunes of the football economy have become inextricably linked with the competitive conditions in the media and advertising industry. Competition between platforms pushed up the value of all sports rights, not just the premium rights such as the Premiership and the Champions League but also the secondary rights for less popular leagues and tournaments. But the recent shakeout in the media industry has reduced competition for TV rights, severely reducing the value of secondary rights. Football is now highly sensitive to external shocks in the media industry such as the global downturn in the advertising market after September 11. Football clubs have always had to contend with volatile revenue streams due to the results-sensitivity of fan expenditure. The high dependency on the media market has further exacerbated the boom-and-bust volatility of the football industry.
Football clubs have revolutionised their commercial operations particularly those clubs that have listed on the stock market. Clubs no longer rely on the “shirts” to run both the football and commercial operations. “Suits” with appropriate commercial and financial expertise have been hired from other consumer service industries. Clubs are adopting best-practice marketing techniques such as CRM. Fans are loyalists who will support their club come what may but that only creates the potential for economic value. No fans, no value. But clubs must work hard to translate fan loyalty into revenue streams. Stadium development has been absolutely crucial to allow clubs to maximise the return from their fan and corporate markets. Southampton is an excellent example of how a club can achieve structured growth combining infrastructure investment, commercial development and sound financial planning.
But despite the high revenue growth of football clubs, the financial position of all but a very few clubs remains highly precarious. Indeed it is a testament to fan loyalty that so few clubs have gone out of business despite the high level of financial distress. In some ways clubs remain essentially unchanged from their very foundation. Professional football clubs have always been cost-driven operations continually seeking funds to bridge the gap between player costs and club revenues. The very nature of professional team sports creates an arm’s race in which teams continually chase after a limited supply of elite playing talent forcing up player wages and transfer fees. In football the advent of Bosman free agency in the mid-1990s represented a fundamental shift of bargaining power in favour of the star players. Just as had happened in the North American major leagues in the previous two decades and even earlier in the movie industry with the ending of the studio system, free agency meant that most of the incremental value created by football was captured by the players and their agents. The “prune-juice effect” as Alan Sugar, the former Spurs chairman, put it so graphically. The stock markets quickly learnt that clubs were still cash-burners and share prices plummeted. The traditional capital markets became no-go areas for football.
Player power showed up the essential weaknesses in the football business model. If sporting targets dominate with little consideration for the principles of sound finance, clubs inevitably over extend themselves with non-sustainable wage levels and excessive debt obligations. If sporting success is not achieved and maintained, a vicious circle of decline kicks in with clubs forced into fire sales of their best talent to restore financial order but of course it is the “dog chasing its tail” syndrome. Player sales are likely to further undermine sporting and financial performance. Relegation for many financially distressed clubs necessitates administration. Leeds United is the most high profile example of what happens when a financially imprudent dash for glory goes wrong.
The football industry has attracted considerable financial innovation in recent years. Securitisation and player sale-and-leaseback arrangements have between them brought over £500 million into the English Premiership since the mid-1990s. Why so much financial innovation? The reason is quite simple. New investors want to be protected from excessive risk exposure. Player sale-and-leaseback arrangements with a credit insurance wrap allowed banks to continue lending to football clubs but without any additional risk exposure. Securitisation gives bondholders preferential rights over designated revenue flows as well as the asset security provided by the club’s stadium. Financial innovation in football has been as much driven by management weakness as commercial strength.
So what of the future? Football will survive and prosper. The current retrenchment is a case of short-term pain for long-term gain. Clubs are bringing their cost structures more into line with their revenue streams. Performance-related pay is becoming more of a reality for players as clubs try to reduce their levels of operational gearing. Contracts with basic wages linked to divisional status are now more of a norm and will significantly lessen the financial distress consequent on relegation. Greater use of short-term loan signings and renewed emphasis of youth development are also helping bring a degree of financial stability to clubs. Football finance is not rocket science. The difficulty is trying to balance football passion with financial prudence. The buck ultimately stops with club chairmen who sign the cheques. As reality football replaces fantasy football in the boardrooms, clubs are recognising that the long-term costs of failure outweigh the short-term gains from sporting success. A successful football club requires the shirts and suits to work together. The beautiful game will continue to thrive as long as clubs aspire for the dream of sporting success and strive to avoid the nightmare of financial crisis.
Case Study 1
Southampton: Structured Growth
Southampton’s major Premiership achievement has been to retain its top flight status despite its commercial operation being severely constrained by the Dell, an antiquated 15,000-capacity stadium with virtually no corporate facilities. Indeed since returning to the top division in 1978 Southampton has regularly performed Houdini-like miracles often on the last day of the season to escape relegation. A new stadium was absolutely vital if Southampton was to generate the revenue streams required to reposition as a mid-/upper-Premiership club rather than relegation strugglers. In August 2001 Southampton opened the new St Mary’s stadium with a capacity of 32,500. Average attendances have doubled and corporate hospitality revenue streams have grown exponentially. The new stadium development was largely funded by a 25-year £25 million private placement secured on ticket and corporate hospitality revenue streams. The investment makes commercial sense and is sound financially – borrow long to spend long. Southampton has reaped the rewards on the pitch of its off-the-field prudence. Last season saw the club reach the FA Cup final and qualify for the UEFA Cup.
Case Study 2
Leeds United: The Dash for Glory Leeds United, under the chairmanship of Peter Ridsdale, sought to establish itself as a major force in European football. The long-term foundations for playing success had been laid a decade earlier with the creation of a football academy to develop young talent. By the late 1990s Leeds United had an outstanding crop of home-grown talent. The club also spent heavily in the transfer market mainly financed by a player sale-and-leaseback arrangement. Sporting success followed with regular top-five finishes in the Premiership and reaching the semi-finals of the UEFA Cup and Champions League in successive seasons. But that marked the high point. Failure to qualify for the Champions League in the following seasons left Leeds United with non-sustainable levels of wage costs and debt servicing particularly since there had been little long-term investment in the stadium infrastructure to enhance the revenue streams. Faced with the lack of Champions League football, the prudent course of action would have been retrenchment. Instead the directors chose to continue chasing the dream with more transfer spending and higher wage costs financed by a £60 million securitisation deal – borrowing long to spend short. When further sporting success continued to elude the team, the club had to engage in a massive fire sale of players just to survive. Relegation and administration beckon. Leeds United represents the classic case of the triumph of vanity over sanity in the world of football.
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