BUSINESS BEHIND FOOTBALL

BUSINESS BEHIND FOOTBALL

August 18, 2018

Written By IZBATH TARIK

It is the month of August. While turning over the pages of a newspaper you suddenly come across a headline with letters in bold printed, “Neymar joins PSG for a world record 200 million Euros”. You remain astounded in disbelief, or not really. Because, you see such multimillion pound/euro transfers happening all the time since you are a passionate football follower like me. Nevertheless, you cannot but helplessly wonder where all these mammoth sums of money are coming from and going.

Opulent Owners. There are over 1500 billionaires in the world. Not all of them have made their pretty penny from innovative sources like Facebook and Tesla. Many of them have accumulated such humongous sums by bending laws and at times, breaking the laws. Investing in a reputed Football Club would be a fantastic window to input black money and filter out white money.

There is another group of billionaires who see a Football Club as a symbol of status. While a sizeable number of them enjoy the thrill of the game or find pleasure in splashing out their unending lumps of cash.

These tycoons acquire prospective clubs from Europe’s Top Leagues and invest heavily on them in a pursuit to transform them into European powerhouses.

The owner of Manchester City, Sheikh Mansour, purchased Manchester City as a display of status and affluence. However, Roman Abramovich had far stronger motives to buy Chelsea. His sources of unending wealth didn’t have the most transparent roots. He was one of the winners of Russian Oligarchy. Therefore, buying a European powerhouse not only increased his legitimacy, but also granted him residence in England and more perks a controversial billionaire would feast on.

Branded. Essentially every football club is more than a club. They are brands. Every brand has followers loyal to them. Similarly, every football club has supporters who breathe their club. It’s the supporters who pay for stadium tickets, merchandises and so on which make lion’s share of revenue contribution for every club. Even the end consumers of a club’s broadcasting revenues and sponsorship deals are the club’s supporters.

The revenues of every club can be divided into three broad segments: Matchday, broadcast and commercial.

Matchday revenues. typically comprise of ticket sales with in-stadium purchases that include food and refreshments. Different clubs operate with unique strategies when it comes to matchday revenues. Arsenal has the highest ticket price in England standing at a staggering sum of 2000 GBP for season ticket. On the flip side, ticket prices of the biggest club in Germany is just 150 Euros for the whole season. Clubs like Arsenal and Chelsea attract the rich Londoners at the financial capital of Europe. Nevertheless, Bayern Munich remain true to their supporters. They believe Football is for everyone irrespective of class.

The Stadium. Apart from strategies, the size and quality of stadium play a vital role in contributing to matchday revenues. Clubs like Chelsea and Tottenham are planning on moving to new stadiums. Barcelona has the biggest stadium in the world with a titanic seating capacity of over 99,000 spectators. England’s Wembley comes second with an incredible 90,000 accommodation. Like hotel’s occupancy rates, club’s attendance rate is a prime indicator of its financial success. Every club in the top tier of Europe’s top leagues try to maintain an attendance rate in upwards of 99% throughout the season.

Broadcasting revenue. for clubs from Europe’s top leagues are rising sharply. The surge is being driven by ever new channels of content distribution. Even a few years back broadcasting revenues were mostly driven by global television rights of top division leagues and European Competitions. European powerhouses go a step further and host their own TV channels. Clubs like Manchester United, Real Madrid and every other big name distribute content through their satellite and online TVs. Every club has their broadcasting revenues vary from year to year depending on their position in the league and performance in European cup competitions. For example, Manchester United had their broadcasting revenues jump from 107 GBP to 140 million from 2015 to 2016 upon qualification for Champions League.

Commercial revenue. sector of every European powerhouse has been surging like a shuttle for the last 10 years or so. Spanish elites, namely Real Madrid and Barcelona have almost 160 million followers on Social Media. They monetize these massive follower base through sponsorships, merchandising, product licensing and content.

The partnership of Chevrolet with Manchester United will cost almost $560 million over a period of 7 years. Apart from title sponsors, clubs have kit sponsors, sleeve sponsors (yes! you read that right) and all sorts of commercial partnerships with reputed brands willing to delve deep into their pockets.

Every loyal supporter collects jerseys of their favorite club after the commencement of new seasons. Owning original jersey grants bragging right among friends and peers. I am a loyal Chelsea supporter, I own a Chelsea branded key ring and jersey. These merchandises are sold all over the world through branded retail stores and E-commerce platforms. For Europe’s heartthrobs, merchandise and apparel revenues have tripled over the last 4 years.

Content. It is old news that mobile has become the prime medium for content consumption. It has been quite some time that content has been awarded the title of king. Football clubs have not been shy to monetize on this opportunity. Every Football Club starting from the likes of Real Madrid to the lowest in the league have conducted regular communications through all social media channels starting from Facebook to Instagram. They upload regular training session sneak peaks, transfer updates, match results etc. utilizing innovative tools like Instagram stories. This brings fans closer to the club. A fan sitting on the other side of the world in Bangladesh feels ever so close to his favorite club.

If you read the newspaper regularly you will know that transfer fees are soaring. To a finance geek it might even look like a bubble that is on its way to burst. To put it into context, in 1997 the record transfer fee was 28 million Euros for Brazilian phenomenon Ronaldo. Zinedine Zidane’s move from Juventus to Real Madrid cost 73.8 million Euros in 2001. Zidane’s record was broken by none other than arguably one of the best Players to have ever graced the football pitch, Cristiano Ronaldo. It cost 94 million Euros. In 2013, Gareth Bale broke the 100 million Euro barrier when he moved to Madrid. Nevertheless, recent rise in fees have been nothing short of rampant. Neymar is rumored to have cost Paris Saint Germain an astronomic 200 million Euros.

So where are these crazy sums of money coming from and where is it going? For starters, fans demand marquee signings. At the end of the day, a club is nothing without its fans. Therefore, clubs are always under pressure to deliver. These multimillion pound signings are mostly covered by owner’s investments and a club’s balance from operating revenue and transfers. According to historical data, more than half of the sum spent on transfers is recovered just by the player’s shirt sales. Therefore, when you see the big picture, it’s not as crazy as it looks.

How can we describe the business without elaborating the finance? The finances of every club are divided into two chunks, operational profit/losses and transfers. The operational part covers commercial, broadcasting and matchday revenues. Every club buys and sells players every season. The net income is the summation of their operating income and transfer balance. For the 2016-17 season Manchester United posted a 57 million GPB profit as against Chelsea’s 15.3 million GBP. As Monaco was the most profitable club in 2017 with a net positive balance of 286 million Euros. Nonetheless, it must be stated that clubs don’t focus much on profits. They focus on maximizing their enterprise value. Manchester United the world’s most valuable club towering at staggering enterprise value of 3.26 billion Euros. Real Madrid and Barcelona follow closely with 2.92 billion and 2.78 billion Euros respectively.

FIFA and FFP. Nonetheless, it must be accepted that FIFA lacks transparency and enough accountability. The recent formation of Financial Fair Play rules is a testament to that. Most clubs don’t even understand the implications of the rule. It was formulated to limit the “spend more than you earn” nature of clubs. To give an idea, more than half of all European Clubs has been reporting losses year on year. FFP has not had the desired impact though. Meanwhile a new term has been coined, ‘financial doping’. Here, sponsors pay more than the fair market value to clubs in order to comply with FFP regulations. It can be presumed that the sponsors seal some sort of controversial deal with the owning body. Then again, these are just speculations. If, FIFA sets a financial bar on all clubs it preserves the status quo, which means, smaller clubs cannot break into Europe’s elite. Therefore, the FFP rules and regulations are expected to change with time and inspire a better overall financial health of European Football.

Sumptuous Celebs. It is worth sharing that everyone in this industry make a fat pay cheque. The average salary in England’s top flight is above 2.6 million GBP annually. The highest paid footballer in the world, Lionel Messi racks up a gargantuan annual salary of $84 million. These are the numbers excluding sponsorships and endorsements. Big clubs attract bigger talents with wages too good to be true, moreover, it looks like a one-way street.

The Strategy. Sir Clive Woodward popularized a theory in the sporting industry, ‘marginal gains’. It stands for making small improvements year after year in all segments of the system. This has worked up till now. However, with costs associated with remaining at the top constantly rising to astronomical figures; the clubs need more than just marginal improvements.

Manchester United Claim to have 659 million fans all over the world. Chelsea claim they have 400 million fans throughout the globe. These are extraordinary numbers except for one fact. The clubs make zero revenue from most of their supporters. The clubs have done a fantastic job extracting every last penny from their broadcasting deals and matchday management. Nonetheless, if they plan on persisting at the top while maintaining healthy financials; the fans need to be monetized.

Bigger stadiums, better sponsorship deals won’t work anymore. The business model needs a paradigm shift. A shift through which every fan contributes to their beloved club’s wellbeing. The new strategy must not view digital disruptions as added costs, but opportunities to boost growth with leaps and bounds. Owing to the fact, if Manchester United and Chelsea can entertain and inspire their fans to spend just 1 pound each, their revenues will instantaneously double!

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