The Business of Football

We often look in awe at the huge amounts of money spent in football with transfers taking place – James Rodriguez, Luis Suarez - All huge money moves. With players like Ibrahimovich, Christiano Ronaldo, Lionel Messi, Torres and Yaya Toure being paid close to or above £8 million annually in wages, they are numbers that most of us can only dream of making in a lifetime. When we look at average salaries at top clubs like Barcelona, Madrid, Manchester City and Chelsea crossing the £4 Million mark we wonder where all the money comes from? How do teams afford it? Can this actually be sustainable for the clubs? If not, then how are they running? Let’s have a look at some of the basics that go into football finance.

The income streams:

The most basic and a large source of revenue for any club are the earnings from tickets sold on matchdays. This traditionally was the largest source of income for clubs up to the end of the 1990s. However, over the past decade, the revenue through broadcasting, i.e. money received by clubs from matches televised has become the largest source of income. Currently, almost 50% of club generated revenues is accounted for through broadcasting, especially for clubs playing in the Champion’s League. In the English Domestic League, revenues through broadcasting alone crossed the £1 billion mark in the 2009/10 season. Another source of income for clubs is money received from sponsorship deals and a small amount of income is seen through commercial activities like merchandise and the clubs’ visitor centre.

The outflow and ratio:

A major amount of money spent by clubs is on wages. Wages include salaries given to the players, manager, staff, board members and everyone associated with the club. Ideally, wages should amount to 50% of the total revenue that a club generates. However, over the past decade, due to rising investments by club owners and demand from players these costs have crossed 70% of the revenue in top division clubs in the EPL. Clubs also spend money on infrastructure like stadium development, soccer schools and other activities. £3.5 billion has been invested by clubs in the English domestic League over the past 20 years on infrastructure.

Other Factors:

Player transfers could have a positive or negative impact on revenues. If the amount of money from selling players is greater than from buying in a particular year, then transfer fees contribute to revenues generated. The transfer spending also includes fees paid to agents, which accounts for more than 30% of transfer spending in the English top division. Clubs often take loans from owners and other financial institutions for infrastructure development and to buy players. Interest is paid by the club on these financial transactions on a regular basis and contributes to outflow of money. Often, players are bought on loan like Lukaku playing at West Bromwich Albion on loan from Chelsea resulting in expenditure. Some clubs, to generate revenue, enlist on the stock exchange like Manchester United has done on the New York Stock Exchange.

Interlinkages:

All the factors discussed are intricately interlinked and have a direct or indirect effect on each other. For example, a club would spend money on infrastructure to develop and existing stadium and increase the seating capacity. Although this is expenditure for the club, it ensures higher income through matchday tickets in the future. Money spent on transfers, through buying players, would in most cases, result in teams finishing higher in the table. For example, Tottenham spent over £140 Million over two seasons from 2007 to 2009 in transfers and as a result finished in the top four in the EPL in the 2009/10 season qualifying for the Champions’ League. This boosted their revenue to £120 Million in 2010, up by 6% from the 2008/09 season including an increase of £6.8 Million revenue through broadcasting, which can be associated partly to the extra matches, played in the Champions’ League.

The Business Perspective:

Although the business of football was initially envisioned on the basis of a ‘Profit Maximization Model’, the recent trends show otherwise with the inflow of large amounts of money into EPL clubs the likes of Manchester City and Chelsea, through equity invested by owners. Other teams have been driven to work on a compromised sustainable non-profit model, while the top teams have only silverware in mind. The clubs playing at the bottom of the Premier League table are still trying to work on churning out profits. In 2010 only 9 of the 20 clubs showed a positive bank balance. Although the English domestic league (consisting of 92 clubs) has shown an outstanding pace of growth, where revenues have increased from £263 million in the start year of 1992/93 to £2.9 billion in 2010/11, the operating margins have fallen from 16% to less than 3%.

With these trends of clubs pumping in money to maintain table position leaving them with negative balance sheets at the end of the season, it shows the extent of change in the outlook of football as a business. With the UEFA Financial Fair Play working its way, it still remains to be seen how these clubs will balance sustained business models and maintain their trophy focus.