Flawed Success: The Broken Business of Football
football is a beautiful sport that brings in billions of dollars every year as the world's most popular sport there's been no shortage of controversy with the World Cup underway in Qatar the tournament has renewed attention on the governing bodies behind football that have dodged corruption and bribery charges for decades but the average fan isn't directly exposed to FIFA or UEFA instead most people learn and follow football at the player and Team level through European clubs like Liverpool and Manchester City and England Juventus and AC Milan in Italy or Barcelona and Real Madrid and Spain it's these private clubs that make the spectacle of football possible on the outside the biggest football club seem wildly successful they win trophies they pay high salaries they play on the biggest stages and they sign the best talent possible every transfer window that success appears to carry over commercially where these leading football clubs are international brands with loyal fan bases who religiously spend thousands every year on merchandise tickets and jerseys that aren't even designed to be reworn after a single game and it's not just bodies at the stadium these clubs make millions more through sponsorships television rights and competition prize money as these clubs achieve success on the field their brands off the field get stronger which grows their overall fan base and then fuels their monetization and revenue through tickets membership and merchandise the business of football clubs seems simple enough and with so many famous Elite clubs all over Europe This flywheel must work but in reality football clubs are businesses that are barely cash flow positive unprofitable and they continuously bankrupt themselves in order to sustain their on the field success they all cling to the hope that if they keep winning money will materialize in the future to offset their costs today or these clubs intentionally operate at losses year over year with a goal of one day flipping the team for billions in appreciation the reality is that whether they're run by corporations or Saudi sheikhs a successful football club simply put is an unprofitable one in this episode we'll look at the problematic business of football clubs through the financials of Manchester United Juventus and Barcelona and how it's only a matter of time before every successful football club is run by a rich oligarch looking for their latest passion project England is the most developed and lucrative football market today the English Premier League considered to be the most competitive and the highest level of professional football is the most watched Sports league around the world the Premier League is broadcasted to over 200 countries and watched by over 3 billion people every year which puts it at the same mark As the World Cup the difference is that the World Cup is an International Tournament played once every four years whereas the Premier League occurs every year in England in comparison the Super Bowl the biggest most visible Global event in American Sports pulls in 100 million viewers the high viewership of the Premier League not only drives brand interest but also attracts talented players who naturally want to play on the biggest stages and be paid top salaries as direct beneficiaries from all that ad spend within the Premier League are many successful clubs who all have their own history stadiums and famous players like Arsenal Chelsea and Liverpool but there is no English Club more iconic than Manchester United in the past 13 years Manchester United has aggressively seized every opportunity to generate as much money as possible even at the expense of its team investors not fans are the priority for Manchester United and the club has rewarded its owners and investors with tens of millions of dividends every year even as the team has underperformed and struggled on the pitch as long as money keeps flowing in the ownership and management don't seem to mind how poor the team is playing fans critics and former coaches have called out Manchester United as a commercial Club rather than a football club and for this very reason Manchester United provides a fascinating look into the ceiling or best case scenario of how far football clubs can go with their business model Manchester United is one of the most valuable football clubs in the world and iPod on the New York Stock Exchange in 2012. to this day it is one of the few football clubs that remains publicly listed available for both fans and the general public to invest in if you want to diversify your Investments whether it's shares in football clubs stocks ETFs crypto and even alternative assets like sports cards Fine Art retro video games today sponsor public.com wants to help they're an investment platform that helps people be better investors public.com is the only investing platform today where you can invest in emerging assets like Fine Art crypto and collectibles alongside traditional assets 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supporting modern MBA and making this episode possible Manchester United has nailed the flywheel tripling the club's revenue from 280 million pounds in 2009 to almost 600 million pounds in 2022 for football clubs there are three core income streams the first is Match Day Revenue which is money that comes from the tickets food and drinks sold at home games Match Day revenue for any club is a function of the number of games played at home the number of seats that are filled along with the price of tickets and concessions the better the team plays the more people willing to attend games and the higher the ticket prices get historically football clubs have been reliant on home games gate receipts and Concession sales in order to generate cash flow through the 2000s clubs are always looking for ways to either upgrade their Stadium experience to justify price increases or increase seating capacity to bring in more fans and more money but as we can see through Manchester United's financials Match Day Revenue has become less significant over time in 2009 and 2010 matchday sales made up 41 and 37 percent of Manchester United's Revenue fast forward to the early 2020s and match day Revenue contributes less than 20 percent of Revenue while the other two income streams have grown Match Day Revenue has understandably stagnated never going over 114 million pounds or below 90 million pounds in a single season but that's not for lack of trying Manchester United has actually the second largest stadium in England with a seating capacity for 70 000 people broadcast revenue on the other hand has grown consistently as streaming and television have made things only more lucrative over time for the clubs in the Premier League as television viewership has grown Advertiser bids have also intensified and broadcast Revenue overall has doubled going from 100 million pounds in 2009 to bring in 250 million pounds by 2022 for Manchester United it's the league Administration who negotiates the broadcast revenue on behalf of all the clubs that play in the Premier League TV networks bid every year for the rights to broadcast Premier League games and the league naturally defaults to the highest bidder Sky one of England's largest networks paid 2.3 billion pounds in 2013 for the rights to broadcast 116 Premier League games in a single season eight years later in 2021 sky is now paying 3.75 billion pounds to broadcast 128 Premier League games while there's Nuance in how the broadcast revenue is split amongst all the teams within the Premier League it mostly comes down to just staying in the league as long as the club and team isn't losing so many games as relegated to a lower division every Club in the Premier League including Manchester United is guaranteed a slice of the broadcast pie broadcast Revenue alone has accounted for 34 percent of Manchester United's Revenue since the late 2000s commercial revenue is where Manchester United has executed heads and shoulders above any other club in the world commercial revenue is revenue that's generated from limited time agreements that Manchester United as a club enters in privately with a separate company in exchange for cash Manchester United will allow this brand to associate itself with the club even if their Industries aren't related so whether it's promoting an airline a beverage a car or watch Manchester United will do it for a price and brands are also willing to pay the club with the belief that this increased visibility and Association will Elevate their own image and sales commercial Revenue has been Manchester United's fastest growing revenue quadrupling from 65 million pounds in 2009 to 260 million pounds by 2022 commercial Revenue used to account for only 24 percent of Revenue 13 years ago and now accounts for 44 of the club's Revenue the most visible spot is the Jersey from 2000 to 2006 Vodafone paid out 8 million pounds every year to Manchester United to sponsor the team's jerseys AI IG then paid out 14 million pounds a year for the next three years once that deal expired aeon shelled out 90 million pounds across four years to be the latest sponsor for Manchester United General Motors then sign on to be the next Jersey sponsor in 2014 paying out 70 million dollars in their first year to Manchester United and then increasing their payments by 2.1 percent every year to the club for the next eight years Manchester United has ruthlessly monetized every bit of real estate we're not just the training Jersey and the game Jersey have their own sponsors but also the sleeve of the jerseys a practice that the club popularized back in 2009 Manchester United signed Blockbuster commercial deals with not only Jersey sponsors but they've also done so with suppliers when Arsenal announced an eye-popping five-year 150 million pound deal with Puma for Puma to be the exclusive producers of their jerseys back in 2014 Manchester United blew that record out the water months later with a historic deal where Adidas would pay the club 750 million pounds over 10 years in football any space that can fit a logo is available at a price but its credit to Manchester United how the club has been able to consistently stir up bidding wars and close Landmark deals every time walking away multiple times richer than before the second layer here is that sponsors can be geographically segmented which allows the same atom or pixel to be monetized multiple times once at the global level and then once again at the regions in 2009 you wouldn't find Saudi Telecom Smirnoff Honda or Telecom Asia associated with Manchester United in the west but in the East you would have seen those sponsorships in those markets in 2009 Manchester United had 12 major Global sponsors and half a dozen Regional sponsors fast forward to 2022 Manchester United today boasts over 20 Global sponsors and dozens of regional sponsors in Industries as diverse as wine bathroom fixtures and crackers in the late 2000s there was some rationale as to why Brands would be so eager to throw so much money at this particular football club at the time Manchester United was unrivaled as the most successful English Club of all time having won the Premier League a record 12 times and having never finished lower than third place in a single season Manchester United's popularity over the decades wasn't just because of its winning results under coach Sir Alex Ferguson but also due to the world-class Talent at Harvard like David Beckham Ryan Giggs Cristiano Ronaldo and Wayne Rooney many of these famous players started out as unproven homegrown teenagers who were nurtured and developed into Superstars at Manchester United this strengthens the club's 4 which then in turn drives Brands to commit boatloads of money under the belief that the club will continue to dominate on and off the field for generations to come the reason why Manchester United and football clubs in general love commercial Revenue so much is because these deals are huge predictable guaranteed payouts that are locked in for multiple years compared to match day revenue or broadcast Revenue Manchester United incurs no variable costs or overhead to collect commercial Revenue once the deal is signed and agreed beyond that upfront legal cost the money just comes flowing in at high margins regardless of how the team actually performs on the field over the years Manchester United's on the field product has actually gotten worse and worse with the team finishing outside of the top four in the Premier League five times out of the past 10 years if we Mark the years where Manchester United was at its least competitive and the team netted its worst results there was no loss to commercial Revenue as the payouts still continued to flow in in 2013 Manchester United finished seventh place in the Premier League its worst ever domestic placement and was criticized for playing uninspiring football yet in the same year the club's commercial Revenue skyrocketed from 120 million pounds to 152 million pounds in 2015 and 2016 even when fans lashed out at the poor play and the club finished fifth and sixth place in back-to-back years commercial Revenue still grew growing from 195 million pounds to 268 million pounds thanks to its Blockbuster deal with Adidas TeamViewer is now Manchester United's latest Jersey sponsor after signing a five-year 230 35 million pound agreement in 2021 but even as TeamViewer stock has crashed and its company Executives have revolted and spoken out against the sponsorship deal as an unnecessary expense the German software company is actually stuck they're unable to pull out of the sponsorship deal from Manchester United who's a football club that has every intention to collect no matter how poorly the team might be playing or how bad the finances are for its sponsor despite the growth in broadcasts and Commercial Revenue even if we add up all the sponsorship deals the 10 years at 750 million pounds the five years at 235 million pounds along with all the sales web jerseys tickets merchandise all of those combined are still not enough to pay for player salaries the biggest operating expense for every football club is player salaries while commercial Revenue has grown 12 percent year over year player salaries have actually grown in line and at a higher basis over the same time frame even with Adidas TeamViewer and a 24 million pound a year training Jersey sponsor commercial Revenue alone is not enough to offset the cost of players salaries Manchester United doesn't have to win everything but they also can't afford to be uncompetitive if the club loses fans to the point that they stop attending and watching the games Brands will notice and the lesson of Premium they'll be willing to pay for sponsorships even a big Club Can't Hide empty seats and stands or negative support sentiment for too long and if a club keeps losing their only real solution is to improve the on the field product by growing or buying Talent but where players ultimately come from make little difference in this overall equation even if the team develops its own talent that player will one day demand the same top salaries as his peers and the club will generally give in to make the player happy to keep the fans satisfied and to maintain an attractive on-the-field product for sponsors the ever-increasing operating expense of player compensation is unavoidable and often overlooked in this Revenue flywheel Manchester United's bottom line exposes just how tight and volatile the margins are for football clubs Manchester United's operating margin for the past 13 years hovers on average at nine percent with a median of 12 percent its actual profit margin over the same time frame sits on average at 0.68 percent with a median of two percent even if we omit the covid year of 2020 where Match Day Revenue went down to zero because fans weren't able to attend the games the average profit margin improves but barely to two percent on average with a median of three percent even the most successful football club in England is a low margin business that's trapped in this never-ending cycle where cash must be constantly reinvested back into the players to keep the team and product competitive without a competitive team on the field an attractive product commercial Revenue can't be sustained without expensive Stadium Renovations and expansions Match Day revenue is capped out as an income stream and broadcast Revenue while it's growing is still a ration slice of a shared pie if we travel down south going from the most successful Club in English football to the most successful Club in Italian football in Juventus the same problematic business model appears Syria ah the highest level of professional football in Italy is well known but it doesn't command the same International popularity and Global viewership as the Premier League as a result broadcast revenue is comparably lower for Italian clubs like Juventus as their TV rights just aren't worth as much while broadcast Revenue doesn't reach the same Heights for Juventus as it does with Manchester United it still accounts for nearly half of the club's Revenue since the late 2000s Juventus Stadium is also smaller than that of Manchester United with seating capacity for 40 000 fans with Less Butts and seats matchday revenue for Juventus since 2009 contributes on average just 10 percent of the club's Revenue Juventus has followed Manchester United's playbook in making high margin commercial Revenue its priority and also its fastest grow growing income stream commercial revenue for Juventus has quadrupled from 21 of Revenue in 2009 at 46 million euros to nearly 40 percent of Revenue in 2021 at nearly 170 million euros Juventus is an internationally recognized club that has won the most titles of any Italian Club yet it has never reached the Continental success Global appeal and off the field stardom of elite clubs like Real Madrid and Liverpool as a club Juventus has limited earnings potential simply by playing in Syria ah a league that has less popularity and less viewership than the Premier League to get Syria awe closer to the level of the Premier League would require many changes Italian clubs would need to collectively become more competitive they would need to attract and field world-class players to pull in viewers and they would have to pay salaries on par or above with the Premier League it's a chicken or the egg problem for the non-english football leagues that want to get to the lucrative levels of the Premier League these leagues simply can't make more money unless they grow their viewership but viewers won't come unless all the clubs in the league proactively spend more money on better players to improve their on the field product collectively you have to invest before you can make more but it's not an easy thing to convince 20 different teams in a league as most of those owners will probably feel like they've already put in far too much money into their football clubs for too low of a return to do even more juventus's commercial potential has long been constrained by its league and its commercial revenue stagnated from 2009 to 2014 but its continuous domestic success did pay off when Adidas came knocking in 2015 offering a six-year 140 million euro deal to replace Nike as their Jersey supplier the club's commercial Revenue skyrocketed 50 percent that same year yet juventus's management would make its biggest bet yet to grow commercial Revenue just three years later in 2018 when the club paid 116 million euros to acquire Cristiano Ronaldo while Ronaldo was passed his best as a 33 year old at the time the idea was that this Legendary player with global appeal would be as much a commercial investment as it was a sporting acquisition Ronaldo was seen as a game changer both on the field and off the field as his presence would bring not just more fans greater jersey sales more success in the Champions League more viewers to Syria ah but also Elevate the club's image and appeal to sponsors and unlock even greater commercial Revenue in Ronaldo's first year commercial revenue for Juventus grew 35 percent in 2018. months after his arrival Adidas Revisited their deal with improved terms for the club paying Juventus 360 million euros across seven years which was double the value of the initial deal they signed back in 2015. Jeep also
re-upped their Jersey sponsorship with Ronaldo's arrival increasing their annual payments to the club from 17 million to 45 million euros both commercial revenue and match day Revenue grew in the three seasons that Ronaldo played at Juventus from 2018 to 2020 as fans flocked to the stadium to watch the Superstar yet Ronaldo came at a cost that Juventus to this day has never been able to recover from the club essentially bankrupt itself in order to bring Ronaldo in and since covid the Italian Club has posted larger and larger losses Ronaldo's annual salary was 60 million Euros which single-handedly drove up total player compensation by 30 percent as its own operating expense to put into perspective as one individual in a team sport that requires 11 players on the field Ronaldo was paid more in a season than what Adidas or Jeep pay Juventus in a single year Juventus has had to rely on Capital injections from its parent company to keep the lights on and the team competitive in Ronaldo's departure cash is hard to come by for the Italian football club but it's easy to come by for its parent company exor a multi-billion dollar holding company that has Ferrari and Christian Louboutin in his portfolio unsurprisingly Juventus is now the subject of a criminal investigation for false accounting prosecutors allege that Juventus losses are significantly greater than what they've been reporting rumors are that Juventus issued payments under the table to players so that their salaries wouldn't look so high on the books the club also allegedly inflated the values of the players that it sold over the years in order to make the overall business look much healthier than what it really was this particular accounting problem doesn't exist at Manchester United because the English Club doesn't count player sales as Revenue with a problematic business model made even more Fragile with a generational bet in Cristiano Ronaldo it's not difficult to imagine how juventus's losses in 2021 the most money ever lost by an Italian Club in the history of the sport is actually greater than the 250 million euros that was reported when a club regularly buys world-class players to maintain their on-the-field success and drive Revenue that Talent generally comes at such a cost that no amount of sponsorships and Commercial deals can offset if we travel up north from Italy to Spain there is one team that has followed this Playbook to such an extreme that it's now on the edge of financial collapse Barcelona one of the most decorated football clubs in the world has lived Beyond its means for many years yet the club is now at a point where it's sold off 25 years of its future broadcasting revenue and other businesses to anyone who will pay in order to generate cash and finance player salaries Barcelona's Top Line is most similar to Manchester United match day Revenue has contributed on average 20 percent of the club's Revenue broadcast Revenue hovers at 30 percent and Commercial Revenue clocks in at 34 for the past 12 years but where Barcelona takes a cake is in its years of unchecked spending and player compensation the pressure to appease a fan base that has high expectations and to uphold a winning image meant bringing in the hottest players at every opportunity no matter the cost Barcelona's desperation for Marquee signings and on the field performance drove a cycle of undisciplined spending on bloated contracts above Market salaries and astronomical transfer fees whatever money it took to get players in the door while the fans loved every signing and the team improved on paper player compensation at the club reached untenable levels from 2014 to 2021 player compensation skyrocketed from 400 million euros to nearly 700 million euros every season 80 to 90 cents of every dollar that Barcelona generated from television broadcasts tickets jersey sales merchandise and sponsorships all went to paying players meaning that the club has had to dip into debt for the past eight straight seasons and counting to find the cash to keep the lights on but when you attend a Barcelona game these days you would have no idea how close the club is to financial collapse for the sake of keeping the money flowing the club has to keep up appearances and maintain the spectacle so that fans keep spending even if the on the field product no longer matches the club's historic reputation to see for myself I traveled to Barcelona to attend its Champions League match with Bayern Munich the best of Spain against the best of Germany for such a high profile matchup Barcelona charged 1950 euros for a single ticket at Midfield promising not just the best views but also VIP experience with complementary food and alcohol while regular fans lined up for their seats at the bleachers with metal gates VIP ticket holders like myself went through the fancy class entrances and marble floors greeted warmly by staff wearing suits we were given special wristbands and ushered to the Barcelona Museum where all the club's trophies were laid out alongside various food stands they served an endless stream of lukewarm Burgers unseasoned slices of roast beef cold wraps that tasted like the kind you would grab at a supermarket ha Saucy pasta some mysterious ravioli and even a station where they hand carved hamon for you the food can be best described as a 5 out of 10 that's on par with forgettable office catering most VIP holders seemed at peace with this with many cramming in as much food and drink as possible before the match started there was live music branded napkins a photo station and then the game was underway it was a roaring atmosphere and the VIP tickets certainly lived up to their pitch of having the best views in all of comp now you were close enough to the field to see every trick and dribble but also far enough to see the entire game unfold on either end you could hear the trash talking between the coaches and their dugouts the arguments with referees and the loud cheers coming in from all sections after the game the staff funneled US towards another private lounge with beer on tap desserts and game highlights what was most interesting was that Barcelona didn't seem to suffer from any shortage of fans to monetize if anything it seemed like the club couldn't monetize fast enough whether it was at the stadium that night or at stores all over the city all of them had been sold out of the Classic Home Jersey for months the only jerseys available were the less appealing gray away jersey or last year's jerseys which many people were still buying for 90 to 120 euros at the stadium there were literally tens of thousands of fans who had paid hundreds of Euros for their seats and then hundreds more who had paid thousands of Euros for their seats like myself and just about everyone was wearing jerseys of the latest signings and carrying out bags of licensed memorabilia that they had purchased from the store it's not easy to imagine how much more Barcelona as a club could monetize its fan base a bigger and nicer Stadium could certainly seat more fans but ticket prices were already pretty high in consumption of the club's products and merchandise was already very noticeable how many more big name sponsorships a hundred Euro jerseys 2 000 Euro seats 25 Euro scarves and 10 euro mugs would you have to sell to turn a profit over half a billion dollars of player salaries even with a four-year 280 million euro deal with Spotify it's worrisome that Barcelona's Executives remain committed to The quote-unquote Virtuous cycle despite all the evidence that such a thing just doesn't exist just a few more trophies and a bigger Stadium they say and the revenue sponsorships and jersey sales will all flow in and make up for all these costs Barcelona became the first ever football club to surpass over a billion euros in Revenue in 2021 but much of that came from the club's wholesale liquidation of its business and its future rights to broadcast Revenue what's more troubling is that Barcelona's on the field product these days is terrible getting blown out three nothing with zero shots on goal for 90 minutes at home that night shows just how poor the on the field product is these days and how far the club has fallen from its winning ways despite investing record amounts of money and talent for the past eight seasons this is why the European Super League keeps coming up amongst the elite clubs in Spain Italy and England the core Club business model is simply so problematic that the only way to meaningfully drive more revenue is to Simply play more high profile High viewership games which will then in turn unlock more real estate more spend more television rights and more ad spots from sponsors since the idea of the super league is that it's an exclusive competition with only 20 of the top football clubs in the world as quote the best players the best teams every week that means there are fewer mouths to feed and every Club involved in this particular competition gets a generous slice of the pie this is in contrast to how the broadcast Revenue in the Premier League and champions league is split today where it's diluted across too many teams the minnows the Giants and the in-betweens to contribute enough for these big clubs to work with when a club is bankrolled by the fortunes and generosity of a billionaire owner it has no need to turn a profit or waste time pretending to be a business Manchester United Juventus and Barcelona three prestigious clubs and three very different countries have all faced the same pressure to win on the field for its fans and to somehow grow profits for shareholders if these clubs optimize for profitability and they cut back on player salaries and reduce operating expenses to turn profits the on the field product will suffer even more than it has fans and sponsors will have a harder time justifying their support for losing clubs when we look at Manchester City an oil Club who has spent Saudi fortunes to become the most successful English Club in recent history the club has posted losses in hundreds of millions of Euros in the past several years but their fans the owners the league and the average viewer doesn't care Manchester city is winning the team plays well and the club adds the yearly spectacle of the champions league and the Premier League so ultimately the question is what really matters most for the sport of football is it for clubs to be sustainable or is it about producing the most entertaining on the field product even if such a thing is only possible through billionaire owners with more money than time
2022-12-18 13:16
