The Future of European Football. Beautiful Game, Terrible Business
In 2009, UEFA found that half of 665 European clubs suffered losses, with 20% of those in financial danger. Moreover, only 5 out of the 20 teams in the English Premier League managed to have a profitable 2021–22 season, according to SwissRamble:
- Manchester City (€49M) [Champions]
- Brentford (€35M) [13th place]
- Brighton (€28M) [9th place]
- West Ham (€14M) [7th place]
- Liverpool (€8M) [Runner-up]
And this is not anything new in this industry. Traditionally, decision-making in European football clubs has been driven toward buying wins rather than securing profit. That is, clubs incurred huge costs — mostly from transfer fees — that were not backed by their annual revenue to attract the best talent. The wealthiest owners could inject more funds from their personal wealth into their clubs to support this process, but smaller clubs were struggling to keep up and remain competitive.
Note: the correlation between expenditure and performance might seem quite intuitive, but further inspection of the data reveals something interesting: the amount spent on wages is a better predictor of performance than transfer fees. I’ll leave this topic for another occasion.
That 2009 study marked the origin of the UEFA Financial Fair Play rules, which through the years have shifted into the current financial sustainability regulations, established in June 2022. In summary:
- A club’s loss can’t exceed €60M, measured over the last three years.
- Wages, transfers, and agent fees can’t surpass 70 percent of the club’s revenue, over a calendar year.
- No overdue payables, to protect creditors.
Keep in mind that these rules are intended to strengthen the financial health of European football and not the competitiveness in the sport — hence why “Fair Play” was eventually dropped from the name. To better understand why European football clubs have been a bad business (at least on paper), let’s run a quick comparison against the very profitable American sports industry.
The Economics of American and European Sports
Mindset
As I mentioned, traditionally football clubs have been run with the sole goal of winning, no matter the cost. Decision-makers in the organization usually don’t have a business background: coaches and sporting directors are mostly retired players. This, combined with the fact that some owners treat their clubs as pet projects for networking gives way to sloppy decision-making.
On the other hand, American teams are run differently: while they do care about winning, they are very much profit-oriented. Nonetheless, they do run in a completely different environment, with a series of rules designed to protect them and incentivize this focus — that is our next point.
Environment
Sports organizations in the US obey a set of strict financial restrictions, i.e. salary caps, budget limitations, and equal distribution of revenue among league members. However, they are also very well protected: there is no relegation system and new franchises need to follow a large set of rules to make sure they don’t pose a threat to other existing franchises. Finally, teams with the poorest performance are compensated with the first picks of the following draft — rookie athletes come mostly from college teams instead of academies.
On the other hand, European football does not help competition in domestic leagues. Risky financial practice is a positive feedback loop: spending more money translates into better performance, which awards a bigger share of the revenue. At the same time, poor performance is heavily penalized, not only with smaller revenue but also with the possibility of relegation. This is not to say that relegation is a bad thing – we’ll discuss that in a bit. But even if you do well in a season, you’ll have to increase expenditure to stay competitive, and to support it you need to perform well, you get the point.
Audience and geography
Association football’s audience is more diverse, spread across different countries with their own languages, cultures, and competitions that are usually broadcast at the same time. That means part of the potential revenue you can get from the wide spectator base is harder to get, as each domestic league serves as a substitute for the others.
In the US, all fans speak the same language, live in the same country, and focus almost entirely on the one Major League — and NCAA competitions — particular to each sport.
Value
In Forbes’ “World’s 50 Most Valuable Sports Teams 2022” list we can find only 7 football clubs, with the top ones being Real Madrid at #13 and Barcelona at #15 — if you’re wondering about who sits in #14, it’s Las Vegas Raiders, the NFL team with the second worst winning percentage in the last 20 years (.360).
This environment is what makes American teams naturally more valuable:
- They can generate positive, less volatile cash flows.
- Their place in their respective Major League is ensured.
- Having a small number of approved and protected franchises means greater value.
- Teams have better chances of competing.
Changing The Beautiful Game
Now, it wouldn’t be feasible for UEFA to copy all of these factors. Implementing fixed salary caps could drive quality players out of the conference to other leagues where they can throw a big bag of money at their faces with no problem (like Saudi Arabia or China) — although you could argue if this is actually a threat to the Big Five or not.
Secondly, relegation just makes sense in this system of leagues and divisions, as it:
- Keeps the hierarchy among the different tiers.
- Gives clubs in lower tiers a good incentive to perform better.
- Adds more stakes to the game (therefore great entertainment value).
Lastly, there is no way any of the big clubs in Europe could agree to equally split broadcasting revenue with other members in their domestic league. The power dynamic between these clubs and UEFA is very interesting, as we witnessed in that “European Super League” episode led by Real Madrid president Florentino Pérez, in an attempt to mimic this environment that we are talking about.
However, there are two things that are changing, and that can help European football clubs become a better business in the long run.
The first we already mentioned: financial sustainability regulations. Their limits are relative to each team’s ability to generate revenue, which means bigger clubs still have an advantage — as we said, increasing competition is not their goal here. However, setting a limit to any team’s expenditure does change things in terms of valuation and squad building.
Clubs will increase their value
Financial sustainability regulations will help stabilize cash flows, reduce volatility, and therefore increase value even if a club is not constantly generating profit.
Develop young talent
Clubs need to focus on developing quality academy players to save costs and perhaps resell them at their peak value for profit. Big clubs tend to pay huge fees to recruit young up-and-coming stars from other clubs specialized in this procedure— such as Benfica, Ajax or Porto — instead of doing it themselves. Paying millions for players that young has proven to be an unwise decision. As Stefan Szymanski and Simon Kuper point out in Soccernomics, there are not enough historical performances/data to back their worth.
Developing trust-worthy academy players is not only cheaper, but it also makes for great stories such as Valencia’s Javi Guerra and Diego López, with their late appearances in the 2022–23 season to save the club from relegation.
Long-term planning
Besides trusting the process of developing young talent in the long run, signing senior players on longer contracts will reduce their annual costs in the books through player amortization. That means the registered expenditure for that player each year will be divided by the length of the contract.
For example, Real Madrid will pay a total of €134 million to sign Jude Bellingham on a six-year deal. That’ll look like 134/6 = 22.3 million euros each year on their financial statements.
The second factor that is changing is the ownership of the clubs. American investors are noticing football as an undervalued and growing industry. As of June 2023, 8 out of 20 teams in the English Premier League have American owners (or at least a majority stake), and some of them also own franchises in the US — like John W. Henry, the main owner of Liverpool and the Red Sox. With some changes, they can turn football into a very profitable industry. Nevertheless, it is not clear if this is really good or bad for the sport itself (or at least the “romantic” aspect of it).
The point is that football clubs are now being presented with new business management concepts — from data analytics to simple HR procedures — that they can use not only to sell more and maximize profit but to optimize performance as well.
Hacking the market
Some institutions have taken advantage of the inefficiencies of the transfer market in the past, such as Olympique Lyonnais under president Jean-Michel Aulas, leading to their undisputed dominance of the Ligue 1 in the early 2000s. Their strategies shed light on talents like Karim Benzema, Michael Essien, and Eric Abidal, buying them cheap and selling them for exorbitant fees.
Fun fact: In April 2008, Forbes ranked Lyon as the 13th most valuable football team in the world.
Currently, few teams know how to properly read and exploit the vast amount of data out there. Brentford — one of the teams mentioned at the beginning of this article— is known for their Moneyball approach to signing players. It is no wonder since owner Matthew Benham is well-known in the world of statistical research and sports betting.
This is a very extensive topic and one particularly interesting to me, so I’ll expand on this in upcoming articles.
What Is Going To Happen
I can’t predict exactly what the future of football as an industry will be. But based on all this information I can give a brief opinion on what I think and hope is going to happen.
I believe clubs are inevitably headed toward wider use of data analytics. Most clubs already apply analytics to optimize their athlete’s nutrition, training, recovery, and even sleep. But they’ll have to start expanding their analytics department to include ticket sales, scouting, advanced facilities management, etc. Additionally, managers have to take a deep look at their organizations to realize what other common business practices are missing. You’d be surprised how poorly developed HR is in many football clubs.
In my opinion, it’s only a matter of time before football clubs reach their full business potential, as profit-oriented investors join, learn the game and gain influence. The main concern for romantics is if these investors care about the game at all. But then again, how many current owners do?
