Quote of the Week

The Economist this week takes a look at the attempts to formulate new rules in order to avoid future financial crashes similar to the one in 2008. The conclusion is that there is no archetype of success. Apart from the obvious one:

“What firms need is a culture of excellence – but that is like saying all football teams should be Manchester United.”

Hypocrite of the Week: Roman Abramovich

I couldn’t have made this story up if I tried to. It’s too ridiculous. It seems that Uefa president Michel Platini wants to impose a rule that would force all Champions League entrants to balance their books by 2012. And that one of the main backers of this scheme is Chelsea owner Roman Abramovich.

I’m not too keen on the idea in the first place, but I suppose you could make an argument for limiting the spending or borrowing by clubs. But for Abramovich to push for this kind of rule is hypocrisy in the extreme.

The over-spending that he now wants to curb is exactly the kind that he himself has been practising ever since he took over Chelsea in 2003.  Since then Chelsea have amassed losses of about £700m. The most recent accounts show a loss of £67.5m. The intention at Chelsea is to break even within the next couple of years and then to start making profit. While trying to stop any other club from following their example.

And how about this: Chelsea chief executive Peter Kenyon welcomes the idea and is quoted as saying “I don’t think anyone could disagree with the broad principle”. Well, it certainly isn’t a “broad principle” that has been close to the hearts of Abramovich and Kenyon. Until now.

Glazers likely to push for European league

At the press conference ahead of Arsenal’s CL-qualifier against Celtic Arsene Wenger predicted that a European league will be formed within ten years. I believe he’s probably right, and that the United board would be happy to see such a development.

The main reason is that the commercial possibilities are too tempting to resist, as a European league is likely to significantly increase the revenues of the leading clubs. These clubs today make quite a lot of money from the Champions League (about £40m to the winners), but this would be dwarfed by the potential income, particularly media rights, from a European league. The most likely participants from England are the big four; United, Liverpool, Chelsea and Arsenal. Maybe City could spend themselves into this group.

Officially United are satisfied with the present situation. This is a wise stance in order not to create unnecessary conflicts with UEFA and the Premier League. But in reality the Glazers are most likely working behind the scenes to create such a league sooner rather than later. Again the simple reason is financial. All clubs would like to make more money, but the debt situation puts United under more pressure than most to increase revenues. And a European league would fit perfectly into the “development of club media rights” that is one of the Glazers key strategies.

Premier League clubs face difficult transfer window

The transfer window doesn’t officially open until Wednesday but of course a lot of activity is already underway. The early signs are that the top Premier League clubs are finding it difficult to lure stars from Italy, Spain and Germany. United (Ronaldo, Tevez), Arsenal (Adebayor) and Liverpool (Mascherano, Alonso) are all in danger of losing, or have already lost, star players and are apparently finding it difficult to replace them. While Chelsea are reported to have made a number of unsuccessful recruitment attempts (Pato, Villa). The only exception is City, whose bottomless pockets enable them not only to pay high transfer fees but also offer ridiculous pay-packets such as the reported £200,000 per week after tax to Samuel Eto’o.

The reason for these difficulties is not that the PL is less attractive from a sporting perspective. Remember three out of four semi-finalists in the CL were English. Instead the problem is that the PL is financially less competitive than a year ago.

This is partly because Real Madrid have gone bananas, but also and more fundamentally because of the fall of the pound. Even though the pound has strengthened against the euro in recent months, it is still 11 percent weaker than it was a year ago. This makes it more expensive for British clubs to buy players from euro-countries, and also to pay their wages. Furthermore, the tax rate on high earners (anyone earning more than £150,000 a year) was raised in the latest government budget, meaning that top players (or indeed any first team player) earn more after tax in Spain or Italy compared to England.

This might very well be the summer when the tide turns and more top players move away from rather than towards England. Let’s hope I’m wrong.

The Tevez-Glazer Connection

It seems likely that Carlos Tevez will leave United at the end of the season. I believe that this to a large extent is a sign that the Glazer family is tightening the purse strings.

There are a number of good reasons why Tevez should stay. He’s a class player who has greatly contributed to our success in his two seasons at United. He’s also worshipped by the fans for his attitude on the pitch. And the fee under consideration is believed to be “just” £22m.

But the combination of a huge and rising debt and a global recession probably makes it very tempting for the board to increase profits by limiting spending on transfers. This explains why David Gill is apparently haggling with Kia Joorabchian over the fee, even though it was agreed on in the deal made in 2007.

On the other hand one wonders whether any real negotiations are taking place. It doesn’t make much sense for Joorabchian to consider lowering the price to United if he believes he could sell Tevez for £22m or more to another club. Which he probably does and could. Indeed, if Real, Liverpool and City are lining up to sign Tevez it would be in Joorabchians interest NOT to close a deal with United. This is also exactly the reason why Joorabchian might want to spread rumours about lots of other clubs being interested, or encourage Tevez to tell the media that he’s “unhappy” at the way he’s treated. Sometimes it’s difficult to try to read between the lines.

How to solve a debt crisis in four easy(?) steps

As I’ve pointed out in a previous post, the huge and rising debt they took on to finance the takeover mean that the Glazers need United to continue to generate a strong cash flow, while the total value of the club must also increase significantly. To achieve this they’ve designed a strategy consisting of four “key elements”:

1. Maintaining playing success
2. Treating fans as customers
3. Leveraging the global brand
4. Developing club media rights

Let’s have a closer look at each of these four points, the chances of success and the risks involved.

1. United have now enjoyed more or less continous sporting success for the last 16 or so years. To simplify it, the basis of this success has been the leadership of Sir Alex Ferguson in combination with a willingness from the board to provide money to enable him to sign and retain the best players. On both these counts the coming few years involve big risks.

To replace Ferguson is the biggest decision facing the present board. The best they can hope for is that results don’t deteriorate under the new manager.  In reality it’s likely that the successor will not be able to match Freguson’s achievements (who could?) regardless of whether the board choose to play safe but short-term (Hiddink or Capello), go for a younger version of Fergie (Moyes) or, as I hope, pick the controversial but very humble Mourinho.

Until recently I’ve not been worried as to the board’s willingness to continue to finance big-money signings, such as Rooney, Ferdinand and Berbatov. It simply seemed good business sense for the Glazers to continue this policy. But then I read an article about their American football team the Tampa Bay Buccaneers where they have released a number of key players and been outbid for the signatures of several new ones. The Buccaneers now have more of the salary cap unspent than any other club in the league. A recipe for sporting success? The Tampa Bay fans are unimpressed. In 2007 there was a 145 000(!) waiting list for season tickets, now the list has disappeared and anyone who wants a season ticket can buy one.

2. Treating fans as customers is probably a euphemism for trying to squeeze as much money out of us as possible. This makes sense from a short-term business perspective.  Demand for tickets at Old Trafford is much higher than supply, meaning that ticket prices could be raised (as indeed they have been for next season) without attendances dropping. Longer-term I’m not so sure. You tend to get an awful lot more loyalty from “fans” than from “customers”.

3. The United brand is very strong globally, and much of the potential to make money from this is probably as yet untapped.  But four years after the takeover I don’t really see any signs that the club is progressing along this route any faster than under the previous owners. This could be just ignorance on my part. Maybe these activities are much more visible in China and elsewhere.

4. To increase revenue from media rights could happen in two ways. Either by an increase in total demand for English and/or European football, or by United taking a larger part of total revenues. After many years of strong growth in interest from television networks, I find it a bit hard to expect continued strong growth.

The Glazers are probably mainly looking to points 3 and 4 to generate significant increases in revenue. But they hadn’t reckoned with the present severe global recession that will, at the very least, slow down any progress. I believe that Malcolm Glazer and his sons are quite worried at the moment. It remains to be seen in what way this might affect the area of most importance to the “customers”; the playing success. A first indication might be found in United’s activity, or lack of, in the transfer market this summer.

Oh my Darling, oh my Darling

Now and again I come across a sentence that reminds me why I love newspapers. This is from an article by Jonathan Freedland in the Guardian last Thursday:

To see Alistair Darling deliver his budget was like watching a man pushed from a sky-skraper window, falling calmly, even gracefully, as he somehow managed to remove his jacket, raise it above his head and tie it into a makeshift parachute. You couldn’t help but admire his ingenuity and optimism – but you still felt sure it was bound to end in a sticky mess.

I don’t know whether Mr Darling’s budget, or even the British economy, will end in a sticky mess, but one detail in the budget is bound to create at least a little bit of a mess for Manchester United and other PL clubs.

The budget included the imposition of a 50% tax rate on high earners (raised from 40%). Since a high earner is defined as anyone earning more than £150,000 a year, every first-team player in the PL falls into this category. This means that footballers will pay at least 5-10% more tax in Britain than in Spain, Italy and Germany.  For a player interested in how much his pay-packet contains after tax, moving to, or indeed staying in, England therefore becomes a little less attractive.

The tax-hike comes on top of the fall of the pound that has already weakend the clout of English clubs in the transfer market, and is a more severe problem. Maybe the transfer window this summer will be a little less exciting than it used to be.

The debt also rises

With the recession hitting Britain hard all Premier League clubs have lowered or frozen the prices for season-tickets for next season. With one notable exception; Manchester United. As announced this week, we are the only club to ask all season-ticket holders for more money.

The decision is easy to understand from a simple supply and demand calculation. Old Trafford is full for every league game, so demand exceeds supply. It’s difficult to assess by how much, but probably 5,000 or 10,000 more tickets could be sold if there were more seats. It’s therefore very likely that OT will again be full for every league game next season, despite the higher prices. Even so, other clubs in similar situations, such as Arsenal, Chelsea and Spurs, have chosen to freeze prices.

The price-hike is estimated to bring in an extra £1 million from PL-matches next season. This is a lot of money by most people’s standards, but peanuts in comparison to United’s total revenue. With regard to long-term customer relations you have to be careful to choose the right moment to raise prices, and I believe United got it wrong this time. For a relatively small financial benefit they have strengthened the perception that their strategy is all about squeezing as much money as possible out of the customers.

And maybe that’s exactly what the strategy has to be, considering the huge debts the Glazers took on to finance their take-over of the club. The gravity of the debt-situation was again highlighted by the recent publication of the annual reports of the companies through which the Glazer family controls United. Despite a record turnover and great sporting success, the parent company Red Football Joint Venture Ltd reported a pre-tax loss of £44.8 million. The group’s loans rose to £699 million, and will continue to rise for many years because £176 million of the loans are “Payment in Kind” where interest isn’t actually paid each year, but instead added to the debt.

In short this means that the Glazers need the club to continue to generate a strong cash flow, while at the same time the total value of the club must increase to match the continously rising debt. To this end the Glazers have designed a growth strategy consisting of four key elements. I will assess this strategy in my next post.

But whosoever hath not, from him shall be taken away

In a previous post I claimed that the global recession has, so far, had surprisingly little impact at the top level of English football. Move down a few steps on the ladder, however, and a rather different picture emerges. Lower-league and non-league clubs are increasingly feeling the pinch, and some reports even claim that as many as six clubs in League 1 and League 2 could go into administration within the next few weeks. Stockport County is one of the clubs believed to be on the brink of administration, with large debts to the Inland Revenue.

There are two main reasons why these clubs are more vulnerable to a general economic downturn than Manchester United, Arsenal et al. Firstly, lower-league and non-league football doesn’t appeal to a world-wide audience, making clubs more dependent on revenue in Britain where the downturn is more severe than in most other countries. Secondly, smaller clubs typically do not have the long contracts with sponsors and broadcasters that help soften the blow for the big clubs. According to the chairman of Merthyr Tydfil revenue from sponsorship and other sources has fallen from £9,000 a week to less than £1,000. A drop of about 90 percent!

To make matters worse attendances at matches are decreasing. Among the 18 clubs remaining in League 2 since last season the average attendance has dropped by 7,0 percent this season according to official statistics and Between the Lines calculations. The worst hit are Morecambe (-29,6%), Chester (-25,6) and Darlington (-23,0). Darlington announced its insolvency a few weeks ago, and is believed to be £5m in debt. Only four clubs; Bury, Brentford, Rochdale and Wycombe, have increased their average attendance. This is a negative sign even if it doesn’t necessarily mean that gate receipts have dropped as some clubs might have increased ticket prices. In combination with decreasing sponsorship, falling attendances is a serious problem for those clubs that have built too expensive squads and stadiums.

Financial problems at lower-league and non-league clubs are of course not unheard of, and I couldn’t say for sure that the present situation is much worse than normal. Still, the indications are that the recession is beginning to cause some serious damage among smaller clubs.

Thanks to twohundredpercent.net and footballeconomy.com for enlightening me on this subject.

Like the stream of gold and the Sky above

The global economic downturn has severly affected a number of owner’s of football clubs. West Ham’s Bjorgolfur Gudmundsson is on the brink of bankruptcy and Roman Abramovich at Chelsea is beginning to look like a bit of a skinflint after years of extravagant spending. Only the Abu Dhabi guys at City seem to have very deep pockets these days.

But to what extent will the recession hit the business of football itself, i.e. the revenues from gate receipts, television, sponsoring and other commercial activities? The surprising answer might be: Not very much.

At least, a number of events in recent weeks have pointed in that direction. The most important for United and other English clubs is that the Premier League secured a record television deal worth almost £1.8 billion (of which Sky will pay £1.62 billion) over three years, from 2010 to 2013. This is about 5 percent more than the previous deal.

This week’s edition of The Economist argues that leading sports have two big advantages that help them stand up to recession better than most. Firstly they are able to sell broadcasters and sponsors what they crave: lots of dedicated viewers. Secondly, a large part of the income is based on long-term contracts that help to lay a good base of revenue.

The hypothesis is backed by developments in other sports. In the auction to hire players to the Indian Premier League (cricket) that starts in April the prices increased compared to last year. The average price of television-advertising slots during the Super Bowl (american football) was even higher than in 2008.