Part 2 — The five key challenges football faces today
1. Challenges with operating profitability
Although the European football market contracted by 13% in 2019/20 with overall revenues falling by €3.7 billion to €25.2 billion, revenues have bounced back post COVID. During the pandemic, clubs did an admirable job of controlling wage costs, although the bargaining power of the world’s best players means that these costs are likely to rise in the future. For as long as there is no pan-European or global wage cap, I believe that the best route to improving operating profitability is by creating more, and more diversified, streams of (ideally recurring) revenue.
Revenues. During the pandemic, total revenue generated by clubs from the ‘big five’ leagues across Europe fell by 11% to €15.1B. This overall drop in revenues was largely due to the COVID related requirement to play matches behind closed doors and rebate payments to broadcasters. The need to diversify revenue streams was present even before the pandemic and it focused primarily on the embrace of digital technology. Although the return of fans to stadiums has eased some of the immediate revenue related pressures, the longer term impact of the pandemic has been a broader recognition of the need to accelerate the creation of new income streams. This is especially pertinent given that the largest source of Premier League clubs’ revenue, broadcasting rights, has remained at current per annum values domestically for the forthcoming three-year cycle; and because overseas growth is also now proving harder to achieve in most markets. This inability to grow overseas is related to proactive steps being taken by other leagues e.g. investigating collective approaches to the sale of broadcasting rights for « secondary » leagues; and the growth of fundamentally unscalable arbitrage-based business models, used by continental European clubs such as Sporting Lisbon and Ajax, that focus on the sourcing, development and subsequent resale of players from lower cost regions such as South America or other former colonies.
Wage costs. The relatively fixed nature of wages in the short term combined with the drop in revenues during COVID led to an unsurprising increase in wage to revenue ratios for the season 2019/20. Both the Premier League (73%) and Ligue 1 (89%) posted their highest ever ratios with La Liga, Serie A and Bundesliga reporting their highest for over 15 years. Behind this immediate headline though, is a potentially more interesting development. In aggregate, clubs across the ‘big five’ managed to almost halt recent wage increases that have been a feature of the last decade with only a handful of exceptions. Serie A reported an 8% decline in wage costs while the other ‘big five’ reported increases of between 0.4% and 4%. However the underlying factors that explain superstar wage effects (productivity, greater awareness thanks to technology and « known familiarity ») all suggest that the restraint shown just before and during COVID is the exception rather than the rule.
Operating profitability. Deloitte noted that in 2019/20 the Premier League recorded the lowest combined operating profit since the start of the century (1999/00) due to a combination of wage cost growth and significant reductions in revenue driven by COVID-19. Operating profits of the Bundesliga dropped by 45% from €394m to €215m in 2019/20 (its lowest level since 2011/12), and in Spain profits fell by 60% from €455m to €183m in the same period. In Italy, Serie A clubs’ combined operating losses significantly worsened in 2019/20, from €17m to €274m, their worst result since 2001/02. In France, Ligue 1 clubs reported their thirteenth consecutive year of combined operating losses, which increased to €575m in 2019/20.
The table below gives a short summary of the financial performance of different leagues in 2019/20 compared to 2018/19.
As much as COVID has had a significant impact as of the 2019/2020 season, a more gradual trend of declining profitability was already underway. The current tensions related in particular to broadcasting revenues, combined with the upward pressure on wage costs, suggest that if nothing changes, then the pressure on operating margins is likely to continue in the future.
2. The sporting dominance by a small number of clubs
The disturbing financial performance noted above is exacerbated by the fact that a smaller number of richer clubs are dominating football’s top competitions such as the English Premier League and the UEFA Champions League. This polarisation risks devaluing football’s broader value proposition; something that may ultimately cause a reduction in the size of its overall TAM.
The economic dominance of the « big six » in the Premier League is clear; these clubs account for 58% of total revenues and 78% of all commercial revenues. In 2019/20, the largest commercial revenue generator outside the big six (Everton, £76m) earned £66m less than the smallest of the big six on this measure (Arsenal, £142m). A similar phenomenon can be witnessed at the European level with a small number of English and Spanish teams dominating the finals of UEFA Champions League finals in recent years. Understandably, these top clubs leverage their financial dominance to invest into playing squads to help ensure their ongoing sporting dominance.
Once established, this dominance by a minority is hard for other clubs to break given the current organisation and reward structure of the business of football. This is especially true if any aspiring club, in the face of the revenue challenges mentioned earlier, wishes to maintain a degree of financial responsibility. The almost oligopolistic correlation between the ability to generate revenue and sporting performance is a concern for the long term health of the game because it risks leading to both a shrinking of the pool of teams that can compete effectively, as well as inviting potential problems related to « sports-washing » and an associated misappropriation of the game and its values.
Such dominance by a few is likely to have two key consequences. Firstly a greater number of « second class » clubs meaning more imbalanced and less interesting domestic competitions (as measured in terms of the numbers of live spectators and TV viewers); leagues such as those in Portugal, Holland, Belgium or Scotland are perfect examples of this. And secondly, a potential long term reduction in the size of the TAM for what has become a sub optimal product i.e. fewer people are prepared to pay to watch games that present little sporting interest, or buy other related offerings such as merchandise or food and drink on match days.
I believe that current efforts to address these imbalances in domestic competitions e.g. by reducing the number of teams in top divisions such as in France, are misguided. Not only do they not address the underlying cause of this dominance by a small number of clubs, but worse, they actually serve to reduce the size of the addressable market for football. This paper contends that any solution should focus on expanding the scope of football and making the pie bigger, (without simply adding yet more games); not making clubs fight each other for a larger slice of a stable or shrinking pie.
3. The underperformance of « product football »
A greater number of games that solicit less spectator interest is only one problem that football faces. Successful businesses offer products and services that create value for customers for which they are willing to pay. This paper contends that the value created via the current offering of most football clubs is not compelling enough for a sufficient number of fans to enable clubs to achieve financial sustainability. This is reflected by things such as the 35% drop in participation in football in the UK in the period 2016 to 2021. This sub section examines exactly what fans want and how football clubs’ current offerings underperform compared to other alternatives people have for their leisure time and discretionary income.
I believe that there are three primary reasons why customers (i.e. fans) choose to buy what football clubs offer.
Entertainment. The most basic reason why fans go to football matches is entertainment; i.e. the action of providing or being provided with amusement or enjoyment. People can entertain themselves or be entertained. For this discussion, we are clearly more concerned with the latter of these two options.
Escapism. An arguably deeper reason for supporting football clubs is that of escapism. Escapism is the tendency to seek distraction and relief from unpleasant realities, especially by seeking entertainment or engaging in fantasy. It can have both negative and positive connotations. In the context of this discussion, it is assumed that escapism is related to supporters living vicariously through the successes and failures of their team and its players.
Belonging. Belonging is a widely used but loosely defined term. In general usage, it has two broad meanings. The first is social. This defines belonging as attachment to a particular social group. The social group can vary in size and scale from the family or local community to the nation or transnational community. The second meaning is spatial. This defines belonging as attachment to a particular place. The place can also vary in size and scale, from the home to the state.
The three value curves below illustrate that clubs today consistently underperform competing offerings across key elements of value.
The entertainment value provided by football clubs looks most similar to that of concerts, but their core value proposition struggles to provide a product of predictably high quality. They are also unable to provide many options as regards on-demand consumption — matches are scheduled in advance on particular days.
There are many other recognised options for escapism that are more affordable than football. Football’s ability to provide hope for its fans is tempered by its innate ability to deliver just as well on despair and disappointment.
Many older football stadiums, often in the heart of towns and cities, provide excellent sensory appeal and spatial belonging. Football’s ability to social belonging and a connection with other fans is often negated by its ability to sow, at times violent, division with fans of opposing clubs. This aggressive disconnection is something that is witnessed less frequently in other professional sports. The greater participatory nature of travel and organised religion offers people more accessible opportunities for self transcendence.
Football has traditionally sought to deliver to its fans on three key fronts, but increasingly, it is falling short on all of them leading to a greater number of « non customers ». Unfortunately this increase in the number of non customers is being made worse by another problem, that of the resurgence of racism and violence in football stadiums across Europe.
4. The resurgence of racism and violence
Over the course of the recently completed 2020/21 season there have been numerous cases of racist abuse often from anonymous social media accounts, but at times on the pitch and in stadium too e.g. the disgraceful abuse of England’s black penalty takers after the final of the 2020 UEFA European Championships. This problem is not confined to the Premier League — in France the 2021/22 season was marred by numerous violent incidents throughout the course of the competition, and the finale of the professional season on the 29th May 2022 was a violent pitch invasion at St. Etienne after their relegation to Ligue 2 in a game against Auxerre.
A number of initiatives have been put in place at all levels of the game. For example, FIFA have created a new human rights and anti-discrimination department and a “three-step procedure” at their tournaments to empower referees to go as far as to abandon a match in case of discriminatory incidents. UEFA have introduced its #EqualGame campaign to promote its vision that everyone should be able to enjoy football, regardless of whom they are, where they are from or how they play the game. English football’s primary equality and inclusion organisation is Kick It Out, and the Premier League and Championship have additional initiatives as well.
However despite all these efforts and associated social media boycotts and coach placement schemes, it is generally accepted that they have not yet been effective in delivering sufficient progress. Whilst tolerance, racism and equality are undoubtedly complex topics that go beyond football, the net result is that football is experiencing an increase in the number of « non customers ». Put simply, this resurgence of racism and violence deters people from going to football matches and participating in the game more generally.
5. A potential window of opportunity for PE investment is closing
The pandemic resulted in acute cashflow problems and rising pressure on key stakeholders in football including team owners, leagues and governments. These financial challenges led to a greater alignment between the ambitions of PE funds, which tend to make extensive use of debt financing to purchase companies, and the needs of key stakeholders in professional football. Discussions have happened with both clubs and leagues. Each type of discussions has distinctively different characteristics.
The economic performance of a football club is more uncertain than the performance of a league or a competition because a club’s revenue currently depends on its sporting results. This is especially true in Europe, unlike the US, where relegation is the norm. It is worth noting that despite clubs being the subject of approaches from PE firms in England, Italy, Germany and Spain, only a small number of investments by institutional investors have actually been completed. Furthermore these investments have typically been limited to traditional institutional lending rather than the purchase of equity stakes; e.g. Sixth Street’s partial funding of the renovations of the Bernabeu stadium. These investments have not always seen great success e.g. King St Capital and Bordeaux. It is worth noting however that Sixth Street’s recent purchase of 10% of Barcelona’s future individual broadcasting rights might mark a change in the future nature of PE investing in clubs, at least for those clubs that are already dominant today.
On the other hand, PE investments in leagues are typically more media focused than sports oriented. For leagues, the focus is on improving the value of the product and the monetisation of the content. In the case of Serie A and the Bundesliga, a recent proposed investment was in return for a stake, and some level of control over, the league’s commercial rights; while the proposed investment in La Liga was focused on their technology services unit, La Liga Tech. In France, Ligue 1 has taken steps to prepare itself for potential investment through the creation of a commercial subsidiary for the national professional league (LFP).
As of today, the economic models of leagues and competitions tends to be more profitable for PE funds than those of clubs, although it is suggested that there are three key reasons why PE has not managed to achieve a greater footprint within football.
Firstly, in an industry that has traditionally shied away from the quantifiable and where clubs are often considered as “trophy assets”, there is reluctance to include non-sporting investors who want to improve financial returns in decision making that could alter sporting factors.
Secondly, historically league bodies have been delegated responsibility to maximise the value derived from commercial rights. The majority of this revenue generated is distributed back to clubs, and a small portion is retained centrally by the league to cover running costs. Private equity investment introduces a third stakeholder to share in revenue generated, and a majority of actors are yet to accept private equity entry into commercial rights ownership.
Finally, numerous stakeholders look at the impact of PE in professional rugby. That makes them nervous about the potentially distorting effects on the game that might arise as a result of PE funds building an equity stake in football. Whereas media rights have undoubtedly distorted the game, the thinking is that at least media companies are not required to achieve some form of financial exit within the lifetime of a given fund.
On the other hand, although the current geo-political and economic environment is putting PE’s traditional model of debt financing under stress, the ability of funds to improve operating profitability in multiple sectors, especially those generating significant cash flows, is unquestionable. Not only can PE help clubs address both their short term financial cashflow needs, they can also help bring management, technical, financial and human capital to clubs to enable them achieve a medium to long term transformation of their business models.
On balance, I believe that with the right safeguards in place, notably in terms of board representation, desired holding periods and transitions back to public markets; the involvement of PE in football represents an important transformation opportunity for football. Whilst PE investment is not essential for a transformation to a platform centric business model, it could be a quick catalyst which, if done correctly, could help break the link between sporting success and financial returns. Any such involvement could be managed at either a league or a club level, but with many of the big five leagues recently or currently in the process of finalising or negotiating the next cycle of their respective broadcast rights deals, the immediate potential window for private equity entry may be closing, especially if clubs and leagues agree deals close to existing rights values. The closing of this window of opportunity to bring professional investors and managers to the table could turn out to be particularly problematic for football if clubs subsequently lack the money to finance, and skills to perform, a much needed transformation of their business models.
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