Arsenal News » 2010 » February » 21

You don’t know what you’re doing

By Phil Gregory.

If you haven’t already read Tony’s cracking piece on football finance that went up on Monday, I’d recommend it before you read any further.

As a humble second year economics student, I’d like to share with you some of the insights my studies have given me in regards to the current financial circus that is the English Premier League.

In economics, we usually assume that the owners of a company (in our case, a football club) look to  make the most money they can. This makes sense: companies look to reduce costs and out-compete their rivals, bringing benefits to their consumers (you and I) as well as rewarding themselves with the profits.

This has to be adjusted slightly when applied to football, where there are two conflicting objectives: profit and glory. Clubs can be profitable, but they often seek to spend beyond their means in the pursuit of glory, either with the help of a wealthy owner (Chelsea, City, Villa) or racking up debt (Portsmouth, Everton, Hull). It’s the whole idea of a profit versus glory tradeoff: in order to challenge for the big prizes, you must have the best players, and to get these you have to pay the biggest wages.

City illustrate this well. Under Pearce they were involved in relegation fights in his last couple of seasons. In comes, Shinawatra, and they buy the midtable players of the world, the Petrovs, the Elanos and the Benjanis. This investment was a fair sum, but not bankbreaking, and yet it yielded a significant move up the table. Lets say roughly £50million bought them a midtable position.

Under Hughes, a significant investment saw them spend significant sums on purchasing players considered some of the best in their positions in the league: the Adebayors, the Barrys, the Bridges. These players are pushing them them into contention for the Champions League places. A vast sum is spent (circa £200million on transfer fees alone) for only a few more places up the league table.

Next however, they will seek to challenge for the title. Compared to the previous outlay on players, this will undoubtedly be the most expensive. Who do you buy to improve significantly on Barry, Toure and Adebayor? You’re looking at Fabregas, Iniesta, Alonso, Puyol, Fabiano etc. Each one of them would require a truly vast transfer fee to even remotely tempt their owners to sell. Yet in terms of points gained compared to money spent, this would be the least “efficient” of the three phases I have divided City’s development up into.

It is this short-term  method of thinking that dominates the English Premier League and ensures most of the clubs are loss making, not an issue with football itself as an industry damned to be lossmaking. City are the most extreme example, but to lesser degrees, Everton and Villa seek to spend beyond their means to compete, while other clubs such as Hull and Wigan  spent big and gambled to get into the lucrative “top twenty”  Some believe this is how a football club “should be”, indeed a comment on this site was of the opinion that a football club can never be profitable and successful. I disagree.

A football club is in an incredibly advantageous position as a money-making machine. A true fan never changes their team, it is part of their  DNA. How many could say the same about the supermarket they shop at? If Tesco raised prices 60% over five years, would you still shop there? No. And yet Manceshter United still sell out Old Trafford  despite doing the football equivalent of this. (though the season ticket waiting list isn’t too lengthy).

Match attendance is almost completely unrelated to ticket price – much more important is the importance of the game, the quality on display etc.

This is but one example of how successful clubs can be a moneymaking machine. Ticket prices could rise year on year (up to a point) and STILL the ground would be full. Factor in the enormous merchandising market: the clubs have the sole (legal) right to sell their teams shirt, and a captive market sell it to, so why are these clubs loss making?

Lets have a look at West Ham, a club stricken with debt. Gross incompetence amongst the fools running the club would be my call. Negligence in regards to transfer dealings: just look at the injury history of some of the players they bought BEFORE they joined West Ham… why take that gamble?  The wages paid for average players; sheer insanity. While a wish to strengthen the playing staff with the spectre of relegation looming a few years ago (aside: how well that has worked given their current situation) I can vaguely empathise with a willingness to spend to avoid relegation, but many of the players brought in were wholly unsuitable.

And then there is the dire mismanagement of the commercial side of the club (the side that anyone with a business background should be able to make very profitable given the loyalty of fans). Check the link at the bottom of the article for more information on this.

Or there is the well-publicised chronic mismanagement of MUFC. While leveraged debt is made out to be the devil, in various industries it is not necessarily the curse it is is made out to be in football. Few businessmen have the money to buy a football club outright; they require a loan, and this is secured on the club/business they purchase.

The mismanagement comes in regards to the PIK debt: this meant that the loan’s interest rate was very much a burden, and if United ceased to grow in value faster than the loan debt grew… you know the rest. One they couldn’t secure “safe” loans – it says a lot when you are borrowing from hedge funds and not banks – the stakes rose, and thr Glazer’s should have rethought their plans.

But even given the current situation, if the Glazers weren’t so blindly short-termist they could come out of the situation much better off, and with a better name too. Instead of asset stripping the club, instead of plundering “management fees” from the coffers, put every spare penny into paying down the debt. The debt is enormous, but so is United’s moneymaking ability.

If the American’s weren’t so intent on lining their own bank accounts, they more than likely could have paid the interest bill. Pay the interest bill, and the debt stops growing, and you pay the same (not more) interest every year. The onerous debt suddenly becomes sustainable, and ceases to grow. God fordid, they could take a leaf out of our book and pay it down year on year if they came into some money.

Alex Ferguson may be fuming at the situation, but he is part of the problem. By consistently bending to the selling clubs demands (see the excessive fees for Nani, Anderson, Tosic and in particular Berbatov) and paying over the odds, he undermines his bargaining position, therefore guaranteeing he will get ripped off next time. Compare this to our own Arsène who refused to meet Zenit’s demands and got us a Russian genius for £12million. Being “stingy” and “stubborn” does have its benefits, D and G squad!

So how do I believe football should be? I truly believe football clubs can be (and should be) self-sustaining businesses, but you must always take into account it is a football club too. Raise ticket prices and charge £2.50 for a cup of tea if people will pay it. Make a profit. And then put it into the managers war chest. Run the club like any other business: cut costs wherever possible, but instead of lining the pockets of the owners, reinvest the funds in the playing staff or put it aside for a rainy day, stadium expansion etc.

This way, a club can still strive for trophies but within its means. An ever-expanding income results in increased profits, which in turn are invested into the team.

Naturally, however, this model can be outspent by the sugar daddy owner. Stamford Bridge may be a shoebox compared to the Emirates, but if Abramovich is going to convert his debt into equity every 12 months, a sustainably run club will be unable to keep up. We refuse to accept performance enhancing drugs (don’t we Rio), and yet we allow clubs to be pumped full of £50 notes?

Step in new regulations. My suggestions:

A strengthened Fit and Proper Persons Test (as it stands, the criteria are foolishly lax given the rollcall of criminals that own or have owned English Clubs). I’ll leave it to the lawyers to write the smallprint here.

Improved accounting – Clubs’ parent companies must produce accounts to English standards, not according to the standards of whatever tax haven they happen to reside in. Tottenham Hotspur, I’m looking at you.

Increased regulation – Nothing too stringent, I believe in the market, but the market requires certain supports. Clubs must prove an ability to be sustainable in the event of relegation (Newcastle’s “we’re too big to go down so won’t bother with relegation wage cut clauses” comes to mind) or unexpected success (Pompey’s bonuses for winning the FA Cup were more than the money the cup run made the club according the David James).

All this together would, in my opinion, do much to avoid the current glut of financial crises at clubs.  Better ownership regulation ensures clubs are run by people who actually know what they are doing, tighter regulation ensures basic precautions are taken and improved accounting means problems can be recognised before a club sells the bulk of their playing staff.

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UNTOLD RUMOURS of an ECONOMIC NATURE

A hidden microphone inside the executive lounge at the KGB headquarters in Fulham has revealed the conversation that the Abramovich team had with the footballers at the club.   After warning them that their current behaviour had to stop, the mic picked up this…

“What sort of behaviour boss?”

“Whoring and money grabbing and speeding in your car”

“Who does that boss?”

“I’m not going to bandy names with you, you turgid little pip squeak.”

“Well can I ask a question boss?”

“If you must!”

“Is buying stocks and shares from people ok?”

“Of course it is.  I am talking about picking up bints in clubs and racing your car at 150mph in a build up area contrary to section 23 of the Road Traffic Act.”

“Is it ok to pay them less than the shares are worth?”

“Yes if they want to sell, of course, but don’t bother me with this minuscule detail, I am talking about having it off with a fellow player’s bit of stuff on the side.”

“So if my henchmen were to go round offering poor innocent people 5p for oil and gas shares worth £500 each and so build up a near monopoly for myself, so that I could hold the whole country and indeed much of the west to ransom over oil and gas supplies for years to come would that be ok would it boss?”

At this point there was the sound of shouting, chairs being smashed and a considerable amount of noise that sounded like a fist fight.  Then we lost connection.

Elsewhere…

The origin of humour in football: Eddie Hapgood, Football Legend

Magritte and the Champions League

Why did Arsenal move to Highbury, and not somewhere else?

The Porto Free Kick – the Ref’s point of view

FA Forget to Shut the Stable Door

Arsenal in 1910 – the complete story in the most wonderful book about Arsenal ever written by anyone, ever, honest, I am not kidding you.

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Untold Arsenal is edited by Tony Attwood, and written by guest writers.  If you would like to contribute, please send an article to Tony@hamilton-house.com.  Articles should be presented in Word, and should be in keeping with the style and ethos of this web site and its proclaimed view-point.

All content is (c) 2010 authors and Untold Arsenal.  If quoting please mention Untold Arsenal and give the web site address (URL).

Postscript: It’s bloody snowing again in the midlands.