March 15, 2019 / 4:33 PM / 3 months ago

Breakingviews - Review: UK soccer’s crunching financial challenge

LONDON (Reuters Breakingviews) - On the face of it, the English Premier League is on a high. Millions of fans worldwide watch its matches every weekend, and its 20 member clubs generate as much revenue as their Spanish and Italian rivals combined. Half of the eight quarter finalists in this year’s UEFA Champions League are from England.

Premier League - Brighton & Hove Albion v Huddersfield Town

It may therefore sound alarmist to say the Premier League is financially precarious. Yet for club owners who shell out most of their turnover on player fees and wages, even the slightest sign of a slowdown causes heart palpitations. Add to that a vacant position as the league’s chief executive, and English soccer’s current predicament comes close to crisis territory.

Readers of “The Club”, Joshua Robinson and Jonathan Clegg’s new history of the competition, will notice the current predicament is eerily similar to the conditions that led to the league’s birth in the early 1990s. Another breakaway by top sides seems possible.

EARLY LEAD

Today the league is by far the world’s most popular, reaching a potential television audience of 4.7 billion people in 185 countries. Yet as recently as the start of the 1985-1986 season, even domestic fans couldn’t watch top-flight English soccer on TV. The sport was mired by fan violence, a bureaucracy which bound top clubs to the lower divisions, and incompetent owners unaware they were sitting on a goldmine.

Three visionary chairmen, the heroes of Robinson and Clegg’s book, were the exceptions. David Dein at Arsenal, Martin Edwards at Manchester United and Tottenham Hotspur’s Irving Scholar noticed that rights to show American football games sold for many multiples of English soccer matches. Cash-rich cable TV channels such as ESPN lured subscribers by promoting matches. Big teams shared the TV money, rather than spreading it across a vast sporting bureaucracy.

Dein and his peers refitted their stadia with bigger stands and U.S.-style executive boxes. Some dreamt up club mascots. By the early 1990s, they had formed a coalition willing to break away from the lower leagues and sell their games directly to TV. They found a sugar daddy in Rupert Murdoch, who needed exclusive content for his fledgling satellite operator, BSkyB. He agreed to pay 60 million pounds per season - almost six times the previous deal with broadcaster ITV.

SQUEAKY BUM TIME

Rights values soared as Sky’s subscribers grew and rivals joined the fray. By 2015, Murdoch and telecom operator BT agreed to pay a combined 1.7 billion pounds a season for the domestic TV rights. The bonanza made clubs multibillion-dollar enterprises: the equity value of the top 20 clubs rose by about 10,000 percent to 10 billion pounds between 1992 and 2018, on Clegg and Robinson’s figures, helped by free-spending owners like Chelsea’s Roman Abramovich. Player wages rocketed: Tottenham forward Harry Kane’s annual salary would have bought a controlling stake in his club in the 1980s.

The glory days came to an abrupt halt last year, when Sky reduced its annual outlay by 16 percent. Financially-motivated team owners can’t abide such stasis, since they make little profit from day-to-day operations. The Big Six - Manchester United, Manchester City, Arsenal, Chelsea, Liverpool and Tottenham -  on average produced an annualised return on invested capital of just 6 percent over the last three years, according to a Breakingviews analysis of club filings.

Owners therefore depend on rising equity values. Publicly-listed Manchester United trades on a multiple of about four times forward sales. To live up to such a lofty valuation, it must boost revenue at a much quicker rate than the humdrum 1.5 percent rise in 2018.

That means looking to China and America. The Big Six have hired scores of commercial managers and marketers to promote their brands and strike sponsorship deals overseas. Manchester United now has an official “mattress and pillow partner” and an “official global oil lubricant partner”, neither of which are based in Europe.

RAINY NIGHT IN STOKE

This raises a couple of problems. First, no one seems to want the tough job of negotiating the next round of TV rights in 2021: three TV executives have declined the vacant role of Premier League chief executive, according to news reports.

Second, the globalisation of soccer widens imbalances within the league. While fans from Vietnam to Canada happily watch Manchester City and Liverpool, they’re less interested in Burnley or Huddersfield Town. Yet the Premier League’s relatively egalitarian funding formula means no team can receive more than 1.8 times the amount of TV revenue received by the lowest earner. Spanish giants Barcelona last year took home 3.6 times more than La Liga’s bottom side.

The Big Six routinely raise the prospect of a breakaway to increase their bargaining power, Robinson and Clegg write. A modest option would be playing a few games in China each year. Alternatively, the top sides could join forces with the biggest European clubs to form their own super league. That might seem too dramatic. But as the history of the Premier League’s early years shows, English soccer tends to follow the money.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below