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The Changing Face of Football

By David Whitwell :  27/01/2010 :  Comments (16) :
There does seem to be a general feeling at the present time that various power shifts are occurring, particularly with regard to English football.

Issues in the global economy are now replicated in the business of football with clubs finally realising the expense of high debt. Over the last 10 years, clubs awakened to the possibility of raising further capital against future earnings — be it advances against TV revenues or future ticket sales. Pushing merchandising and corporate facilities to the masses to further increase revenue streams and cashing in on the global brand of the Premier League to secure top sponsorship deals.

All this in the race to firstly secure Premier League survival and secondly to chase the chalice of Champions League football. All the time it’s the players who have benefited with wages escalating beyond our wildest dreams as ordinary citizens.

The effect of this to English clubs was to be able to pay the highest transfer fees and wages to secure the best talent around.

However, today, the mechanism of raising capital through debt is exhausted, so the only means to pay transfer fees is through the generation of profit, a concept that is now becoming a realisation for our clubs.

Indeed, in his comments in the Daily Telegraph, David Moyes suggests that for the short-term future most clubs are likely to deal in the free transfer and loan markets and suggests that transfer fees are likely to drop.

From April 2010 onwards, individuals earning more than £150k a year will also now be taxed @ 50% and lose all personal allowances. The effect of this will make it extremely difficult for UK clubs to compete with their foreign counterparts when offering contracts to players.

So what does the mean to English football?

Revenues streams such as gate receipts, club merchandising, and corporate sales are unlikely to dwindle to any great extreme as these are generally from the match-going fan. Sky TV revenues could possibly fall but again, the interest in football in the UK alone would suggest that clubs can expect to gain significant income from TV deals; sponsorship in all likelihood would reduce as the brand of the Premier League diminishes. So in truth, I would expect revenues to remain relatively stable, the difficulty is more likely to be for clubs trying to increase revenue.

The effect of this is likely to be that clubs will spend the next few years trying to reduce debt to enable more capital to be available through profit, thus limiting transfer fees. Wages will in theory reduce as the higher earners are lured abroad and again clubs look to reduce the wage budget to further drive profits.

My guess is that at least domestically this will all lead to a more level playing field, excluding the equation of Man City & Chelsea.

So on to Everton. I think most of us are in agreement that we have one of the best playing squads for many years, many of which are on long-term contracts and young enough to serve us for the foreseeable future. Whilst not all, but again many of us believe we have one of the best managers in the league also on a long contract, we have a number of youth players coming through our system and have superb training facilities at Finch Farm.

We have substantial domestic support and have been operating (for the last 15 years!) within the financial constraints that many are now experiencing. So, if indeed events do transpire in this way, we could be reasonably optimistic for the future.

This is obviously a generalisation of events at large and quite difficult to put into words as there are many issues involved but I would be interested in the thoughts of fellow Evertonians.

Reader Comments

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Graham Holliday
1   Posted 27/01/2010 at 14:12

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Maybe... though if we are operating at the very extreme of our financial capacity then any kind of reduced income could tear us apart, surely?

I just hope that something is done about players (or more to the point) agents taking truck-loads of money out of the game.

Ordinary men pay bucket loads of cash to see already loaded men throw a paddy cos another already loaded man pushed him over... almost touching him in the face.

It’s farcical really...

.. yet somehow, I still can’t stop supporting my Everton... I think it helps that we have very few — if any — players in the squad that seem more motivated by greed than the love of the game. One reason that Shandy Andy was so maligned.

Come on Stevey, Louis — show us your true colours and sign on the dotted line.

COYB
Paddy Francis
2   Posted 27/01/2010 at 14:23

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I think you may be a little too quick to write off the days of using high leverage mechanisms to acquire control of companies.

Certainly in 2009, this was problematic but the evidence from the corporate world — see Cadburys/Kraft; BHPBilliton/Rio Tinto — is that debt-funded capital investment has not gone away and will boom again once bankers get their collective nerve back.

Moreover, although in some respects the Premier League may be a less attractive proposition (50% tax on high earners — although query whether high-net-worth individuals do not use a tax-avoidance mechanism such as setting up a limited company and paying themselves in company dividends), the overwhelming evidence points to the Premier League being the most popular and relevant league in the world.

Accordingly, the reality for clubs such as ours is that we must continue to punch above our weight simply in order to stay in the top half of the league. And doing exactly that is something that makes me proud to be an Evertonian.
Albert Dock
3   Posted 27/01/2010 at 14:24

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Historically you would have to guess that any high earners being tempted abroad would not be of the English variety.

With perhaps the exception of David Beckham (who took three months to learn how to say Hola), English players just can’t cut the mustard outside Blighty.

I recall a certain Mr Rush, formerly from a nearby parish, complaining that Italy was "just like a foreign country"...

While all sport is a suspension of belief, football is a suspension of all known economic laws.

Ever wondered how Real Madrid survive year after year? If you know the answer, tell the Spanish tax authorities because they don’t know either.
Mickey Dee
4   Posted 27/01/2010 at 14:38

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’However, today, the mechanism of raising capital through debt is exhausted’!!! Man U have just raised £500m via a bond issue that raises their debt above £700m. The days of football raising capital via equity instruments may be dead as investors are no longer willing to risk their own money in the precarious market that Premier League clubs operate in. This may well in part explain why BK is having trouble securing equity investment and is reluctant to sell to buyers he believes may lever the club out of existence, a real possibility for several Premier and Football League clubs.
Dave Whitwell
5   Posted 27/01/2010 at 15:22

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Mickey, I could be wrong but my understanding of the re-financing at Man Utd is purely to reduce the burden of financing costs currently reducing relatively healthy operating profits into net losses. I suspect very little of this will land in Ferguson's pocket by way of transfer funds, and more likely they will need to sell to increase their budget, as was the case with Ronaldo.
Mickey Dee
6   Posted 27/01/2010 at 15:35

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Dave, I think they are merely restructuring their debt. They are raising the bond at about 8% in order to settle pre-existing loans, some of which are reported to be at 16 to 20%.

The reason they have had to raise the bond is that banks gave their requests for loans a very wide berth.
Alan Kirwin
7   Posted 27/01/2010 at 14:34

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Very good article, David.

Football’s financial model is holed below the water line and has been for many years. It’s arguably inextricably linked to Sky’s entry to the football world.

One only has to examine the fundamentals to observe its absurdity. All EPL clubs now turn over vastly more than they did 16 years ago when the EPL started. Despite that fact, all but a handful are making losses, some ridiculously so, and some inhabit a world so removed from reality (e.g. Portsmouth) that it was only a matter of time before the £ shaped chickens came home to roost.

And it’s all down to one single thing. Players. The vast majority of these individuals have the intellect of a 14-year-old, the style of Jordan but the bank balance of a Rothschild. What utter nonsense. This single lunatic race for the "best" players has totally undermined the new wealth of football and fleeced the fans in the process.

Let’s take for example the case of John Terry. Captain of England (in itself ridiculous). This is a centre half of decent ability. But he’s a centre half, and that’s it. His other claim to fame is parking his Bentley in disabled bays (I say bays rather than bay, because he has on occasions parked it in 2 disabled bays). That’s one odious example of the morals and arrogance of the retards who receive all this cash.

Terry’s club has not posted an operating profit for as long as anyone can remember. In the last 5 years it has posted operating losses of about £500m. One can only gasp at the absurdity. If it was a business it would have been closed long ago.

No, the solution to football’s problems is a very simple one. Every football club has to operate on a sound footing, just like a normal business. A club should be allowed to spend no more than it earns, and ideally a bit less. Uefa, and Platini in particular, are doing precisely the right thing. The future of the game is at stake. The FA and the Premier League should look elsewhere for examples of how to behave and how to address the issue.

They might care to look at rugby for example, which I also follow. England won the World Cup in 2005 and came close in 2009. But, when you listen to senior professionals in that game, you detect two things. Firstly, they play for England for the shirt and for the country. Remuneration is an irrelevance. Secondly, they receive a fraction of the rewards of their footballing equivalents... but display 100 times more dedication, grace, magnanimity and maturity. And rugby clubs (I follow Harlequins) are a shining example to their footballing counterparts on good management and good relations.

Or the FA and EPL could look to Germany, where Bundesliga clubs have to be at least 50% owned by their fans, by statute. Imagine what that does for inclusivity and transparency. I wonder if there’s any correlation with the fact that Germany posts by far the highest gates of any European league. And, also strangely, their clubs usually carry little (and often zero) debt. It’s one reason why Bayern Munich is, by normal financial measurement, the richest club in the world. You simply subtract its debts from its value/assets. Bayern is valued at £500m and has ZERO debt. Man Utd fans will feel aggrieved. They used to be debt free until a "billionaire" rode into town and shafted them royally.

It would be useful if all those Evertonians who’ve been whinging for Kenwright to put his own money into the club (why?) or openly shouting for another sheikh to appear, could try seeing the wood for the trees. Football is slowly returning to the real world. There will be casualties along the way. But paradoxically, the way Everton has been run in recent times may prove its secret weapon in the long run.

Players are greedy tossers and need to be knocked down several pegs. Especially the John Terrys of this world. Football clubs need to carry squads of 30 or so players, and youth academies, and scouting and support infrastructures, and operations, and a stadium. The idea that they can just pay players upwards of £5m a year each is a fantasy that is thankfully finally being acknowledged.

Harry Redknapp managed to hoodwink Gaydamak at Portsmouth into spending a fortune on players and paying them obscene amounts of money to fend off other clubs. Pompey get 20,000 on a good day. Do the maths.

This is the biggest issue in football. Well done, David, for bringing it into debate here.
Paddy Francis
8   Posted 27/01/2010 at 16:42

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Sorry Alan, but you’re views are a bit odd.

My uncle runs a corner shop nice and tidely and does ok for himself. But that doesnt mean that if ASDA and Tesco’s get a bit too aggressive and over invest in new stores, my uncle will be in a position to take over the groceries market.

We’re a very small fish. Our corporate strategy has been non existent (even getting our own club store in the City Centre was trumpeted as if it was the invention of shirt sponsorship). It most certainly is not our "secret weapon"!
Nick Entwistle
9   Posted 27/01/2010 at 18:05

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If the money became a leveller, wouldn’t the top clubs try to bring in individual contracts for broadcast rights?

As for Real Madrid, they advance themselves through the construction laws in Spain which give an opportunity to... sweeten deals, in pursuit of more money... and plenty of shirt sales!
Gavin Ramejkis
10   Posted 27/01/2010 at 18:25

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Paddy, sorry but the limited company and dividends idea/good old days were destroyed years ago by the government’s ongoing 'tax you till you bleed then tax you some more', with IR35 regulations, even the avoidance schemes such as umbrella companies are now being targeted, another one-eyed Jock prick Gordon Brown special as Chancellor of the Exchequer.

If you don’t want to pay UK tax and don’t want to do jail time, the only way to do so is move to another country or become a non-UK resident. The money these guys earn would easily allow them to setup a nice home in the Channel Islands; Jersey, Guernsey, etc and fly to training and games and retain their tax status, the flight from Jersey to Liverpool or Manchester takes about an hour or so on a commercial flight, less on a private jet.

James Crolla
11   Posted 27/01/2010 at 20:53

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If this is true and top players will move abroad for more wages then the inevitable consequence will be teams tracking young talent on lower wages.

Fellaini and Rodwell would become major targets........

Always look at the negatives sorry.
Derek Thomas
12   Posted 27/01/2010 at 22:46

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Interesting point, Gavin... maybe we should have built Finch Farm on the IoM.

Hypothetically, I’m sure someone will know, is it possible to BUY the IoM, how much would it cost.

It’s a very nice place if you like that sort of thing and I’ve had many a nice stay there, especially in the days before we had all day opening on the Mainland, but with the best will in the world there is only fields there.

Kippers, the Manx cat, and the birch... oh and maybe the BeeGees and thats it. Shouldn’t cost too much.

Reminds me of an interesting short story title..... ’How much for just the Planet?’
Dennis Stevens
13   Posted 27/01/2010 at 22:55

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Derek’s point about the IOM reminds me of the tax "exiles" of the 70’s & how they could only spend so many days a year in the UK - would that still apply? If so the scenario Gavin describes wouldn’t quite work out.
Gavin Ramejkis
14   Posted 28/01/2010 at 00:27

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Derek and Dennis, I’ve lived and worked in the Isle of Man twice and Jersey once too, I wouldn’t recommend the Isle of Man to live as in Winter it’s a cold, soaking wet shithole and has very high male suicide rates for a good reason, people visit it in the summer when it’s mobbed for the TT and Manx rally. Unless you have a criminal record you can just move over and buy property and move there, the IoM Government is very open about people moving in. Unless you have EPL wages and a big bank account forget moving into Jersey as a resident unless the States of Jersey (their little government) rate you as an essential worker you wont get housing qualifications and can only rent.

Out of the two I’d recommend Jersey as a much nicer place and only an hour by fast ferry to St Malo and thus into Europe.

Dennis the laws relating to residency are for overnight stays, if you come over to play matches and train and fly home then it doesn’t count, I was a Jersey resident for two years and two months and saw all seasons and enjoyed that life far more than the Isle of Man.

I stand to be corrected but I wouldn’t be surprised if Matt le Tissier only played for Southampton so he could get back home to Guernsey.
David Ellis
15   Posted 28/01/2010 at 02:08

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Thank you David for bringing up this topic.

The Premier League business model only works when revenue keeps increasing. Each club uses whatever revenues it has to obtain the best players it can in order to finish high up the league. They fund this by ever rising TV revenues. But they never make any profit as all the extra revenue goes straight to the players (and their agents). Only the richest club (only one) can afford to make a profit — because it can match the spending of others, win things and still have money left over. Traditionally this was Man Utd.

Eventually revenue will stop rising. That time appears to have come. The upward bidding of salaries will have to stop. Worse as long term contracts have been agreed with players the higher cost base is locked in. If revenues fall the clubs start bleeding money. Even worser if they have borrowed against future revenue and interest rates rise or the future revenue is insufficient to repay the debt.

There are a few complexities to add to this picture
(a) sugar daddies like at Chelsea, Portsmouth and Man City can allow a club to spend way beyond its revenue. This is OK until they ask for the money back — see Portsmouth, or unexpectedly stop giving the cash — see West Ham
(b) gambling on Champions League revenue which fails to materialise — Leeds (and to some extent Newcastle)
(c) new owner loads acquisition debt into the club — Liverpool and Man utd
(d) cost of borrowing goes up or sources of borrowing disappear — everyone

We are less affected than others by this retrenchment. But we will still be affected.
Mark Reid
16   Posted 29/01/2010 at 17:04:23

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One of the best posts (and well debated) on ToffeeWeb I’ve seen.

In response to Derek’s point about the IoM:
Purchase of the United States Virgin Islands, 1917

Formal transfer of the islands occurred on March 31, 1917, along with a US payment to Denmark of $25,000,000 in gold coin. (US$396,825,396.83 in 2009 money). Bear in mind that was an undeveloped island, IoM GDP is £2.1billion. So if you wanted to buy it you’d have to multiply that figure by several hundreds......

Anyway back to Everton.

I was having a read of this little beauty yesterday, after ToffeeWeb’s little reorganisation.
http://www.toffeeweb.com/season/09-10/comment/fan/article.asp?submissionID=13125
It makes you wonder about the “glass half empty” views people have re: Everton.
Read PETER LEE and PAUL LEYLAND’s contributions on there. It strikes me of the big efforts being made to keep the books balanced for years at Everton. Something the rest of the Premier League are now having to get to grips with – even paying back their debts (heaven forbid!).

There has been over the past 3 months a cataclysmic shift in the land that is the Premier League. For Everton the way the club operates I agree we will be less affected as we are used to trying to live within our means.

Should be very interesting seeing how our rivals cope with the new environment. My personal view is that the club shouldn’t acquire more debt on players. But debt in relation to the stadium issue would be more appropriate as its lower risk and expands our revenue potential.

A bad tackle or poor attitude could lead us to lose tens of millions of pounds. Players are risker.

Thats my view. But it’s heartening to see others recognise that the Premier League land is returning to something that could work in our favour - other clubs returning to some sort of sanity.

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