Member Article

Financial prudence and regulation in the football business

No-one would disagree there is something awry about the business of football. Here’s a global industry in rude health which is generating more and more revenue each year, and yet it’s most successful firms make huge losses and the majority simply struggle. Karl-Heinze Rummenigge, former German striker and acting chairman of the European Club Association, has put it like this: “If we carried on in the way we are, with several clubs in Europe losing more than 100 million euros each year, then it is only a question of time before we have a big, big problem. This is a good moment to bring the game back to a more ‘rational’ way.”

The need for financial prudence and sanity has led to UEFA’s Financial Fair Play initiative. A condition of being allowed to play in future UEFA Champions’ League and Europa League competitions will be to ensure finances are in good order. This, for example, means no negative equity, and revenues cannot be less than defined costs, with clubs’ financial statements assessed on averages of audited data supplied for the previous three seasons. Given that last year’s Champions League delivered £595 million for the clubs involved, the threat is a significant one for clubs as businesses, and will be enforced from the 2013/14 season, meaning action needs to happen now.

Manchester City and Chelsea stand out as the kind of cases that UEFA wants to eradicate. Manchester City’s deficit for 2010/11 was the largest ever recorded for an English football club and the club wage bill exceeded turnover (the team finished third in the Premier League that year and were knocked out of the Europa League relatively early). Chelsea also reported high deficit and debt levels. Both clubs are owned by wealthy backers so the 2012 Community Shield game between the two was termed the ‘Oil Firm Derby’.

So what are the prospects for creating a new spirit of fiscal sanity from the Financial Fair Play initiative? There are several problems with UEFA’s principles. UEFA’s definition of deficit relates to ‘football relevant’ income streams and that would appear to exclude sale of naming rights as practised by Arsenal, Bayern Munich and Manchester City, particularly in City’s case as the sale of rights is to Etihad Airlines, arguably a related partner to the club owners. Restrictions on player budgets will translate into reduced potential to hire star players. This has two implications - it becomes harder for new teams to challenge established clubs in the Champions’ League. Restrictions on player budgets could well imply reduced quality of League competition - and reduced values of broadcast rights sales. UEFA needs successful and glamorous players and teams in order to promote its Champions’ League brand. In the end, a threat by UEFA to exclude Barcelona from the Champions’ League cannot be credible. The bigger clubs could join with others to threaten formation of a rival league similar in format to the Champions’ League. Broadcasters, sponsors and fans would surely prefer a competition with deficit-ridden Barcelona and Manchester City to a competition without these big spending teams but with a group of financially disciplined yet mediocre second-string teams from around Europe.

Football is a business like no other. It may well be that a financially ‘sensible’ game will either be a sign of - or a trigger for - its decline.

This was posted in Bdaily's Members' News section by Professor Robert Simmons .