As we sit in awe of Real Madrid as they continue to spend enormous amounts of money on new footballing talent the money side of the game is becoming ever more overwhelming.
I am an Economics student and have just finished my first year of a three year degree, in January I wrote a paper based on the question seen above. Bearing in mind the recent tax changes to the higher earners in this country, who will now pay 50% tax, and the recent Real Madrid spending spree all of which happened after the paper was submitted, so the effects of these could not have been taken into account, however below I have posted my paper. I think its quite interesting to know about the financial future of the game as it clearly will have an effect on the football we see. Anyway here it is, I'm interested to know what your thoughts are:
Football, referred to by many as the beautiful game has been around for centuries, however in the last twenty to thirty years the financial face of the game has changed dramatically. From the first domestic league created in England, 1888 which consisted of just 12 teams, to the current system in place which consists of four professional leagues, and hundreds of semi professional leagues, the cultural grip football has on the world is immense, with over 26 billion of us worldwide tuning in to the last world cup final. As technology continues to improve, the demand to watch football continues to increase as more people have access to the facilities to watch football matches. With such a high demand to watch football, football clubs can now demand money from these broadcasting companies to show their team in action. Since the creation of the Premier League which was founded off the back of a lucrative TV deal with BSkyB which bought the rights to show Premier League matches for five years for an estimated 191Million, a rise of 150 million on the previous deal. TV rights have continued to jump lucratively, mainly due to the huge demand, which in turn increased the amount spent on transfer fees significantly and also the amount in wages the clubs paid also significantly increased. The money pumped into the Premier League through these television company’s reached over a billion pounds in 2004, the Premier League has done nothing but boom, dividing a wedge in wealth between itself and other European countries, and their own lower domestic leagues. However with the current financial crisis will the Premier League continue to experience growth is another matter.
The first thing to consider is how much revenue a football club gets from home match days. This would include ticket sales and any other stadium revenue gained through any other service the club offers, for example food and drink. With the current financial crisis in full swing and recessions hitting countries all over the world people are naturally spending less money, and the first place they will cut spending is on leisure activities such as going to football matches. This means football clubs can expect a decline in revenue from match days, how much this will affect a football club will depend on how much of a percentage a clubs annual turnover is gained from match days. If this percentage is significant enough clubs may start to experience financial difficulties. This doesn’t seem to be as true for the premier league clubs as I have already talked about the lucrative TV deals for the clubs involved, with a reported minimum £30 million paid to the club that finished bottom. However it is still obviously significant with Manchester United making 52% more from their fans than TV. However for the smaller clubs outside the premier league these TV deals are not there. Therefore there is a greater emphasis on match day revenue as it seems more important in funding the day to day running of the club. There is no evidence to suggest however that despite the financial problems, attendances are going down (Apendix1). One possible explanation for this is the lag experienced in Football Ticket sales, as Season Tickets and corporate boxes are often paid for before a season starts, this is where clubs may start to see a downturn in revenue, but it would not become necessarily apparent until the new season began. According to Professor Cannon, CEO of Ideopolis International Ltd believes “Season ticket numbers will probably be down by about 10 percent, but renewals will be down by at least 15 or 20 percent.”
The immediate effects are clearly felt by the smaller clubs, primarily those outside the premier league. This illustrates the financial gap between the clubs within the divisions; promotion into the Premier League in 2007 was worth an estimated £35million in extra revenue to each club. Therefore, clubs that fall out of the Premier League will be extremely vulnerable during these difficult financial times as significant drops in match day and television income can be crippling for a football club. This can be seen in the case of Leicester who have seen most of their squad sold off, which in turn has learnt to difficulties on the pitch, a down turn in attendances and further financial problems ultimately leading to being put into administration. With all this money in the Premier League however, why are clubs that have been in it find such financial difficulties when leaving it, surely with such a dramatic level of income you will have considerable funds to secure the financial future of your football club? Apparently not so, which leads me to believe clubs being in premier league have the expectation of earning much more so naturally expand and increase their costs.
One alarming statistic that came out of the Deloitte Football Financial Review was that in the year 2008 total wages in the premier league exceed £1 billion. On average a clubs wage/turnover percentage stood at 63%. In the same year the total revenue generated by the premier league was £1.8 billion; however £1 billion of this was generated by 6 out of the 20 Premier League Clubs. After player transfers and all the other running costs of running a football most clubs are actually running at a loss, therefore a significant amount of debt is being built up. It is hard not to see the link with banking industry, as they seem to have gone through a similar “bubble.” In the case of the banks business was booming, so they took more risks with their money, over exerting themselves on the expectance of continual growth. Problem is if something holts that growth, in the case of the banks, the collapse of the property market, or in the case of the premiership, the current financial crisis. In 2006-2007 the debt level in the premier league reached £2.4 billion and with the foreign influx to the premier league also suggests most of this debt could be foreign debt, and due to the weakness of the pound recently, would make this debt even more expensive to service.
To conclude by relying on such massive turnovers and continuing to take on more debt, we could have our first premier league club in history to fall insolvent. However with no immediate solid evidence a decline in revenues is imminent clubs will continue to expand, but I am a firm believer that the premier league bubble has to burst at some stage, and with such a high wage to turnover percentage, increasing debt and further reliance on attracting these huge turnovers it maybe sooner rather than later.
Graphs and bibliography available if you really want to take it that far...
I am an Economics student and have just finished my first year of a three year degree, in January I wrote a paper based on the question seen above. Bearing in mind the recent tax changes to the higher earners in this country, who will now pay 50% tax, and the recent Real Madrid spending spree all of which happened after the paper was submitted, so the effects of these could not have been taken into account, however below I have posted my paper. I think its quite interesting to know about the financial future of the game as it clearly will have an effect on the football we see. Anyway here it is, I'm interested to know what your thoughts are:
To What Extent have domestic English football clubs been affected by the current financial crisis?
Football, referred to by many as the beautiful game has been around for centuries, however in the last twenty to thirty years the financial face of the game has changed dramatically. From the first domestic league created in England, 1888 which consisted of just 12 teams, to the current system in place which consists of four professional leagues, and hundreds of semi professional leagues, the cultural grip football has on the world is immense, with over 26 billion of us worldwide tuning in to the last world cup final. As technology continues to improve, the demand to watch football continues to increase as more people have access to the facilities to watch football matches. With such a high demand to watch football, football clubs can now demand money from these broadcasting companies to show their team in action. Since the creation of the Premier League which was founded off the back of a lucrative TV deal with BSkyB which bought the rights to show Premier League matches for five years for an estimated 191Million, a rise of 150 million on the previous deal. TV rights have continued to jump lucratively, mainly due to the huge demand, which in turn increased the amount spent on transfer fees significantly and also the amount in wages the clubs paid also significantly increased. The money pumped into the Premier League through these television company’s reached over a billion pounds in 2004, the Premier League has done nothing but boom, dividing a wedge in wealth between itself and other European countries, and their own lower domestic leagues. However with the current financial crisis will the Premier League continue to experience growth is another matter.
The first thing to consider is how much revenue a football club gets from home match days. This would include ticket sales and any other stadium revenue gained through any other service the club offers, for example food and drink. With the current financial crisis in full swing and recessions hitting countries all over the world people are naturally spending less money, and the first place they will cut spending is on leisure activities such as going to football matches. This means football clubs can expect a decline in revenue from match days, how much this will affect a football club will depend on how much of a percentage a clubs annual turnover is gained from match days. If this percentage is significant enough clubs may start to experience financial difficulties. This doesn’t seem to be as true for the premier league clubs as I have already talked about the lucrative TV deals for the clubs involved, with a reported minimum £30 million paid to the club that finished bottom. However it is still obviously significant with Manchester United making 52% more from their fans than TV. However for the smaller clubs outside the premier league these TV deals are not there. Therefore there is a greater emphasis on match day revenue as it seems more important in funding the day to day running of the club. There is no evidence to suggest however that despite the financial problems, attendances are going down (Apendix1). One possible explanation for this is the lag experienced in Football Ticket sales, as Season Tickets and corporate boxes are often paid for before a season starts, this is where clubs may start to see a downturn in revenue, but it would not become necessarily apparent until the new season began. According to Professor Cannon, CEO of Ideopolis International Ltd believes “Season ticket numbers will probably be down by about 10 percent, but renewals will be down by at least 15 or 20 percent.”
The immediate effects are clearly felt by the smaller clubs, primarily those outside the premier league. This illustrates the financial gap between the clubs within the divisions; promotion into the Premier League in 2007 was worth an estimated £35million in extra revenue to each club. Therefore, clubs that fall out of the Premier League will be extremely vulnerable during these difficult financial times as significant drops in match day and television income can be crippling for a football club. This can be seen in the case of Leicester who have seen most of their squad sold off, which in turn has learnt to difficulties on the pitch, a down turn in attendances and further financial problems ultimately leading to being put into administration. With all this money in the Premier League however, why are clubs that have been in it find such financial difficulties when leaving it, surely with such a dramatic level of income you will have considerable funds to secure the financial future of your football club? Apparently not so, which leads me to believe clubs being in premier league have the expectation of earning much more so naturally expand and increase their costs.
One alarming statistic that came out of the Deloitte Football Financial Review was that in the year 2008 total wages in the premier league exceed £1 billion. On average a clubs wage/turnover percentage stood at 63%. In the same year the total revenue generated by the premier league was £1.8 billion; however £1 billion of this was generated by 6 out of the 20 Premier League Clubs. After player transfers and all the other running costs of running a football most clubs are actually running at a loss, therefore a significant amount of debt is being built up. It is hard not to see the link with banking industry, as they seem to have gone through a similar “bubble.” In the case of the banks business was booming, so they took more risks with their money, over exerting themselves on the expectance of continual growth. Problem is if something holts that growth, in the case of the banks, the collapse of the property market, or in the case of the premiership, the current financial crisis. In 2006-2007 the debt level in the premier league reached £2.4 billion and with the foreign influx to the premier league also suggests most of this debt could be foreign debt, and due to the weakness of the pound recently, would make this debt even more expensive to service.
To conclude by relying on such massive turnovers and continuing to take on more debt, we could have our first premier league club in history to fall insolvent. However with no immediate solid evidence a decline in revenues is imminent clubs will continue to expand, but I am a firm believer that the premier league bubble has to burst at some stage, and with such a high wage to turnover percentage, increasing debt and further reliance on attracting these huge turnovers it maybe sooner rather than later.
Graphs and bibliography available if you really want to take it that far...