Introduction to Football Finance

My name is Stephen Morrow, Senior Lecturer in Sports Finance here at the University of Stirling. Today I’m going to introduce you to some of the issues around football finance. We’re going to look at where football clubs generate their income from, how football clubs spend that income, and what the consequences and implications are for their financial performance and their profitability. That’s going to lead us into consideration of financial regulation of football, with a specific interest in UEFA’s Financial Fair Play regulations.

We’ll then take a brief look at some of the ownership and governance issues in football clubs, and finally we’ll conclude by looking at the challenges to the established European order of football, with a particular focus on the Chinese Super League. The last 25 years or so have seen an extraordinary transformation in the business and revenues of elite professional football throughout Europe. According to UEFA, club income for 2015 had reached a record aggregate level of 16.9 billion euros, while European club revenues have grown every year over the last two decades at an average rate of 9.3%.

This level of growth is quite extraordinary, particularly given this is quite a mature industry and, more importantly, that this has taken place at a time when European economic growth of only 1.5% per annum has been recorded over the last 25 year period. As has been well-documented, media rights have acted as the catalyst for the transformation of professional football. Here, the English Premier League, the EPL, has led the way. Its three year domestic rights deal with Sky and BT, which began in 2016 to 2017, is worth 5.1 billion pounds, a 70% increase on the previous deal, which was in turn a 71% increase on the one before that.

In addition, the EPL will generate a further 3 billion pounds, approximately, from overseas rights. And that’s going to increase, too, with a new Chinese deal kicking in from 2019 to 2020. Continued growth in broadcasting income is apparent in other major countries, too, most notably Germany. But it’s important to point out that such escalating media rights are not found in every country. For example, in Scotland, the current TV deal sees approximately 18 million pounds per annum shared among 12 clubs. The gap between big and small countries in terms of media income is now bigger than ever, and this also has a particularly marked impact on big clubs in small countries.

The challenges faced by clubs and countries out with the big five leagues are compounded by changes in the way in which competitions like UEFA Champions League operates and the way in which that competition is structured, which tends to prioritise the financial interests of big clubs in major TV markets.

In the biggest markets, media revenue is the biggest source of income. But as you can see in the chart, its importance varies from country to country.

One of the main attractions of this source of income is that it has few costs associated with it. They knew the income was available to clubs to spend almost as pure profit. One can contrast this with, say, merchandising income, which is high costs and therefore low margins. Historically, of course, it was gate receipts that were the biggest source of income. And while those are still an important source of income in countries like Scotland, their relative importance has lessened in other countries, like England. Other sources of income include sponsorship and merchandising revenue. On the expenditure side of the profit and loss count, it will come as no surprise that the major rate of expenditure is wages and salaries.

According to UEFA’s 2017 benchmarking report, wages for 2015 represent 63% of the net costs of European clubs. Club wages have grown at an annual equivalent rate of 10% over the last 20 years, compared with European economic growth of just 1.5% per annum over the same 20 year period. To pay high wages, you need to have high levels of income. It’s unsurprising, therefore, that the highest wages in absolute terms are paid in the EPL. With a total wage bill of about 2,690 million euros, it’s now double that of the next highest paying league, the Italian Serie A.

UEFA’s benchmarking report suggests that the top-paying club, however, is Spanish club Barcelona, which pays 340 million euros, is its salary bill, followed by Real Madrid and then Chelsea and then a number of other English clubs.

More remarkable still is the burgeoning Chinese market. Last year, Argentinian internationalist Carlos Tevez signed for the Chinese Super League team, Shanghai Shenhua, for a contract worth a reputed 615,000 pounds per week, making him at that point the world’s highest-earning football player. But we have contrasts. The average wages and salaries costs of clubs in countries like Scotland, Denmark, and the Ukraine is between 7 and 8 million euros.

While the wages to the revenue percentage of 63% probably sounds quite high, it’s worth thinking about the fact that it’s, in fact, a lower percentage than most recent years. Indeed, it was the fact that wage costs were escalating even faster than revenues, resulting in widespread and substantial losses and high levels of debt, that led UEFA to introduce its Financial Fair Play regulations in 2012. From the outside, football finance appeared to be something of a contradiction at that stage– an unparalleled income leading to unparalleled financial difficulties. But in fact, it’s perhaps less paradoxical than it first seems.

The question to focus on is, why do clubs invest so much in playing talent, both its acquisition and the associated salaries that go with that talent? Three related factors explain this. Firstly, structures. Football has a system of open leagues, sporting merit-based promotion and relegation and merit-based transnational competitions. Secondly, rewards. The elite level of European professional football, domestic and transnational, is characterised by ever higher levels of income. And thirdly, success factors. Putting this very simply, there is a clear link between wage spending and playing success. All other things being equal, the club with the highest wage bill wins the league more often than not.

[INAUDIBLE] this peculiar financial situation of rising revenues but diminishing financial performance was the introduction by UEFA, European football’s governing body, of Financial Fair Play regulations. Those were designed to try to improve the performance and the position of clubs. In a sense, they can be seen as a form of prescriptive financial management. The idea behind them was that clubs should be forced to live within their means, whereby they are matching the football-related expenditure with the football-related income. And that was achieved through the introduction of a rolling three year break even calculation.

While FFP does not take a position on particular ownership structures, something we’ll turn to later on, what it does do is it places restrictions on the way in which owners can invest in their clubs, limiting the opportunity for ex-post investment to cover losses. But also ex-ante investment is limited to particular activities, such as, for example, investing in a youth academy or facilities or community or social activities. Two things to note with Financial Fair Play. Firstly, it is not going to resolve all of football’s financial challenges. That said, the early signs are positive, with the evidence suggesting that salary growth is now matching, rather than exceeding, revenue. UEFA certainly sees grounds for optimism.

Secondly, it is not, and was never about, competitive balance or levelling the playing field. Indeed, one of the criticisms of FFP is that it’s likely to reinforce the status quo– that’s to say make it more difficult to find a way of challenging the existing dominant clubs. I mentioned earlier that there are markedly different ownership structures found in football clubs throughout the world. For example, clubs in countries like England, Scotland, and Italy have long been structured as companies. The initial motivation for the structure was quite rational– a desire to protect the founders and officers from a personal liability in the event of clubs developing unpayable debts, particularly as wages rose.

But its consequences have been far-reaching and continue to have major ramifications for clubs. Many British football clubs have a concentrated ownership structure. That is, companies are clubs that are owned by one or a small number of individuals. A local example of a small Scottish club with a structure is St. Johnstone FC, owned by the Brown family.

One thing that has changed in recent years for top English clubs is increasingly clubs’ dominant owners have come from overseas. For example, Roman Abramovich at Chelsea or Sheikh Mansour at Manchester City. For a long time, accepted wisdom in the business of football was the concentrated ownership model. The so-called benign dictator or benefactor model was the ideal ownership structure for a club. And what could be better than for one football club to be owned and managed by a wealthy business person, motivated not by profit but by non-financial objectives, such as sporting success?

There’s an old joke about football ownership and that the only way you can make a small fortune at owning a football club is to have started with a large fortune. But in truth, concentrated ownership is far from being an unproblematic structure, both for the individual clubs that have that ownership structure, but also for other clubs they are participating in the same league format. And for one thing, those organisations operate within a financial and sporting structure which is controlled by separate legal entities, such as Leaks. But that requires those clubs to have a degree of cooperation in the production of football matches and competitions and hence results in a degree of dependency, both financial and sporting, between those organisations.

And at the same time, of course, we know that just by its very nature, within sport and within football, there are many more losers than winners.

Hence in pursuit of sporting success, few clubs are uninfluenced by the behaviour and the decision making of their competitors, which, of course, then has implications for decisions they take and their own behaviour. But it’s also a risky structure, because dominant ownership– what that means is that the stability of a club is a function of the willingness and the ability of the owner to continue to fund the club. Now, that also has implications for accountability, not least in terms of the accountability to key stakeholders like supporters. In some other countries, clubs are structured as member-owned organisations or mutuals, whereby the shares of the club is effectively owned by the supporters. An example of that would be Barcelona.

A third approach is the hybrid structure found in Germany, where clubs are predominantly structured as companies but where control, 50% plus one of the voting rights, is retained by a club’s members.

In the UK in the last decade or so, there’s been some movement towards broader ownership structures, particularly among lower league clubs. Several clubs now have active supporter trusts set up to promote supporter ownership within football. The idea behind this is supporters pool their resources and take a share in their clubs as a way of seeking to strengthen their voice in the management and governance of that club. A few clubs in the UK also have a form of community or supporter ownership overall. One example would be Stirling Albion FC.

Another interesting example is Heart of Midlothian FC, which after a disastrous period of a single owner under Vladimir Romanov is now on a journey towards supporter ownership, which would see it become in a few years time the largest supporter owned club in the UK.

We’ve grown accustomed over the last couple of decades or so to a footballing landscape that is dominated by Europe. But it’s becoming ever more apparent that that landscape is being challenged by new markets that are emerging and that we might expect to see radical changes over the medium to long term. Nowhere is this more obvious than China. Keen to fulfil President Xi Jinping’s ambition to turn China into a football powerhouse, and supported by ready financing for acquisitions of overseas assets, Chinese entrepreneurs have embarked on an unprecedented buying spree of foreign clubs. Chinese investment has become increasingly common in foreign football clubs and now exceeds about $2 billion US dollars.

Chinese investors own or have shares in a number of clubs, including the two Milan giants AC and Internazionale, in Manchester City, in Lyon, in Aston Villa, and Athletico Madrid. Many of those buying clubs abroad are also investing big back home in China. You can think of it as a strategic investment. What investors are looking to do is to gain knowledge of how European football clubs operate and then particularly how they develop players, so that can be shared within the Chinese marketplace, the objective being to make the quality of players better, given that for a number of years the standard of Chinese performance on the pitch has been quite disappointing. Chinese money is evident also in the transfer market.

One only has to look at Oscar’s transfer in the summer of 2016 from Chelsea to Shanghai SIPG for a figure about 60 million pounds. That’s one example of that. Another example, of course, is the wages that are paid, and we’ve mentioned previously the very, very high level of wages earned by a player like Carlos Tevez when he moved to the Chinese Super League.

Football continues to be an extraordinary business. The levels of income have continued to grow and at the present time show no signs of diminishing. But there are challenges for the football business, too. There are challenges in the way in which income is distributed, in the equity between some of the bigger leagues and some of the smaller leagues. There are also challenges, too, in terms of the salaries that are paid to some of the higher profile players, as well as the leakages that [INAUDIBLE] the game to agents and others. There are also challenges, too, for the established European market in terms of the development of the Chinese marketplace.

A question that we could perhaps finish on is to ask the question, is football still the people’s game?