2nd September 2014 by Shaun Richards
Last night at 11pm British Summer Time the latest transfer window for the UK football premiership closed. I would say slammed shut but in fact some deals such as the move of the England international Danny Welbeck to Arsenal had not yet been completed. Actually I also recall the former Stoke City and Crystal Palace manager Tony Pulis informing listeners on BBC Radio FiveLive that he had done deals past the deadline and told the Football Association that they had lost the fax. So we already have in inkling as to the murky nature of much of this but let us press on by examining the scale of this year’s spending. From the BBC.
Premier League clubs have spent £835m on new players during the summer transfer window, having broken their previous record of £630m set last year.
Analysis from Deloitte shows that of the money spent, £530m has gone overseas, £240m to Premier League clubs and £65m to Football League teams.
From this we learn that some of the money (£305 million) is recycled within the English game but only some 8% goes as a boost to lower league clubs. There are some £530 million of imports which must have provided a least a little boost for the Euro and a nudge downwards for the UK Pound. However there is of course offsetting traffic as for example Luis Suarez went in the reverse direction.
Also there has been quite a surge in the amount of spending as it was up some 33% on last year which itself was a record. Indeed if we look back we see that as recently as 2010 the spending in the summer transfer window was a mere £365 million with the real acceleration in amounts coming in the last two transfer windows. If we go back a decade there has been an extraordinary transformation as in 2004 only £215 million was spent.
Oh and 2014 as a whole will be a record year as the transfer window exceeded the total for all of 2013.
What about wages?
This is perhaps the most murky area of all. But a problem that faces the wider UK economy where wage growth has been weak and stagnant does not apply to premiership football. From the Telegraph.
Colombian (Radamel Falcao) will become the best paid player in the Premier League after United agree to meet his £265,000 per week wages.
There is always some doubt about these matters ( some report £200,000) but there is no doubt that he is on an extraordinary amount of money. In this instance as his was a loan deal the wages were the largest amount as they will soon pass the fee of £6 million but in many transfers the implied cost of the wages is often as much as the headline fee itself especially as the clubs are usually keen to tie the player to longer-term contracts. For example Chelsea paid £32 million for Eden Hazard but if the £185,000 a week estimate for his wages is accurate then the five-year deal commited them to another £48 million in subsequent wages.
There is another side to the wages largesse which is that if a player loses form his club find themselves saddled with a wages liability. Not only can this be expensive in itself they will count towards the football financial fair play rules, although mind you there is not much sign of fair play in the numbers above. Accordingly Manchester United ended up paying Nani’s wages at Sporting Lisbon (not far off £5 million a year) and Chelsea got very little money for Fernando Torres but removed around £150,000 a week from their wages bill.
Players can find themselves becalmed if their form dips. For example the media were alive with rumours about a transfer away from Manchester United for former England international Tom Cleverly. Then we saw Aston Villa and Everton refuse to pay the wages he wanted which were reported as £80,000 per week. So he will see out his contract at Manchester United at least until the next transfer window.
If you are wondering what the average wage is in the English Premiership then Deloitte have done some calculations.
The escalation of wage costs (to an average salary of £1.6m in 2012/13) makes being a Premier League footballer ever more desirable.
Oh and if we return to the subject of loan deals at what point did what look like temporary transfer fees emerge?
How can this be afforded?
We are regularly regalled with stories of football clubs being saddled with debt so how do they afford this? Well a large clue is shown below from Deloitte.
Last season the average Premier League club received around £25m more in central broadcast distributions than they did in 2012/13,
Such growth has seen estimates of revenue for the clubs in the Premiership to push much higher.
Premier League clubs’ revenue for 2013/14 is estimated at £3,240m (up 28%) – a significant projected uplift of £715m largely driven by the first season of the new broadcast deals, allied with continued strong commercial growth at the biggest clubs.
There remains a big boost to finances from qualifying for the Champions League.
UEFA distributions to those four clubs for their participation in the Champions League averaged £28m per club.
But the main driver of improved revenues has been television.
Domestic broadcast deals, largely relating to BSkyB and BT Sport for the live television rights, will generate around £3.4 billion over the three seasons from 2013/14 (up about 60% on the previous cycle). Overseas broadcast rights covering over 200 territories will generate around £2.2 billion (up over 50% on the previous cycle).
Actually the English Premiership does see some fair play as each club gets a chunk of the money accompanied by an extra payment depending on how high it finished in the league last season. So for example champions Manchester City would have got £93 million last year whilst Cardiff City who held up the table received £58 million. Compared to Spain where the majority of the money goes to just two clubs (Real Madrid and Barcelona) this is surprisingly equitable and one of the reasons the league has maintained a high level of competitiveness. Another way of expressing the rise in broadcast income is that 2012/13 champions Manchester United received £61 million for so doing which is only slighly more than Cardiff City received the next season for coming last.
What about the season-ticket holder?
This is an awkward issue as the bean counters who run football clubs have spotted that matchday revenues through gate receipts and programme sales are declining in relative importance. If we look at Arsenal football club we see one that should have strong matchday revenue via its high ticket prices and 60,000 seat stadium. But its interim report to November 2013 shows that broadcasting revenue at £52 million was more than matchday at £45 million and that commercial revenues at £38.4 million were rising fast too. The situation at other clubs will be worse and often much worse in terms of the importance of match-day revenue which is fast declining. For example Evrton football club declared revenues of £86.4 million in its 2013 accounts of which only £17.5 million came from gate receipts I fear for what this may portend.
Also as I consider the Everton turnover of £86.4 million I note that they have just spent £28 million on a single player which shows a lot of confidence in future revenues as well as in current manager Roberto Martinez.
Conventional economics tells us that companies and businesses are run for a profit motive, and indeed set out to maximise profit levels. Applying this to an English Premiership where profits are so rare and total debts are around £2.5 billion sees the economic car have an immediate crash! As soon as a football club has more revenue it is spent and sometimes they spend more than the increase. Accordingly they exist as a large salary generating system where the business model is one where payments of salaries are maximised. We get headlines in the media about players and sometimes managers salaries but I have no doubt that there are plenty of managers (in the business and not football sense) and directors who are doing very nicely out of this thank you. So we have one model which exists to pay salaries. In an irony of the times it is one area of the UK economy that exhibits strong nominal and real wage growth, the catch is that only a few benefit.
I have thought at various stages that the Glazer family at Manchester United have operated in a fashion to make profits for themselves out of the club. That certainly seemed to be the case and up to now they have benefited but the recent transfer fee splurge (around £150 million this summer alone) and associated rise in wage costs means that they too are gambling on revenue rises in the future.
There is another model similar to this but based on an owner who either is or becomes a fan. Football seems to get even hardened money men to change motives in the way that Mike Ashley for example has backed Newcastle United. Maybe a profit will be made in the end if revenues continue to soar but as likely is that at least some of these are operating a business model of the sugar daddy type.
Of course if revenues surge again then all of the business models will look as if they have aimed at profits. The catch is that business revenues seldom remain on an exponential path forever and busts tend to follow booms.