Author: Laura Dewis

PY Gerbeau on the business of football

Updated Thursday, 13th October 2016
The business of football discussed by PY Gerbeau, from the BBC/Open University's Rules of the Game.

This page was published over 5 years ago. Please be aware that due to the passage of time, the information provided on this page may be out of date or otherwise inaccurate, and any views or opinions expressed may no longer be relevant. Some technical elements such as audio-visual and interactive media may no longer work. For more detail, see our Archive and Deletion Policy.

  • This article is adapted from The Rules Of The Game, a BBC/Open University co-production from 2002. As such, some topical references might have dated. We're leaving the article here for historical context. See our latest content about football

PY with a football A football team is not like other businesses – it can never be in a position to eliminate all competitors and become a monopoly supplier. If it did, then there would be no-one left for the team to play! It's a cross between business and warfare.

Stefan Szymanski, from Imperial College Management School: "Football lies somewhere between economics and warfare. In warfare, there can only be one winner. My success necessarily means your failure – and that's true of winning the football league. But there's also a business dimension to football – for the league to be successful, all of the teams have to be commercially viable. A successful industry is one in which all the firms can thrive and all the firms can make profits coexisting with one another. The problem in football has been reaching those agreements which might enable the teams to co-exist commercially as well as competing effectively on the pitch."

And there is a link between spending and success, according to Szymanski: "There are really three relationships. One is the relationship between success on the pitch and wage expenditure. Teams that spend more achieve higher league positions. The second relationship goes from success to revenues. Teams that are successful in the league generate considerably higher incomes than the less successful teams. The third relationship that you also might expect to find is the relationship between success on the pitch and profitability. But in fact it isn't there."

But if every team spends more, there are still bound to be winners and losers – both on the pitch and in the profit and loss accounts: "There is a fundamental problem in a sports league, which is if everybody wants to be the winner and only one team can be, there's a danger that everyone overspends in the hope of being that one successful team. That means that everyone might end up losing money, and that seems to be the situation that we find ourselves in at the moment. And lower division teams are trying to become Premier Division teams by spending everything they earn, and more, on the players. That is not a sustainable business model. What would make a viable business model would be for these teams to limit their ambitions and accept minor team status, and simply become breeding grounds for the new talent for the Premier League. Whether the fans and the owners will be satisfied with this is quite another question, but the truth is, in economic terms, that's the business model that will work."

Find out more about the business of football with this free OpenLearn course.

Individual football clubs have to survive in a competitive market – competition for players, competition for TV income, competition against other leisure activities. Promotion to the Premier league is the biggest incentive of all: this can boost club income by up to £10m a year. Relegation to the First Division means an instant loss in revenue of £6m – £7m a year from TV income alone!

"Pay TV has fundamentally transformed the economics of football clubs. Before SKY in the mid-1980's the value of the television contract for football was around £10m. The last SKY contract was signed for £1.1bn, a hundred-fold increase in a period of 15 years. What that's caused is not just a huge increase in income, the ability to spend more money on players and also to fund stadium development and the like. It's also caused a huge growth in inequality, because most of that money has gone towards the top teams in the premier League. They now generate 50% or more of their income through television contracts, and perhaps only a quarter from supporters attending the games. Teams in the lower divisions are really like the old-fashioned football clubs, and still generate most of their income from the turnstiles, from people attending the match." (Szymanski)

Club owners rely a lot on the brand loyalty of the fans. "A significant proportion of those that are interested commit themselves perpetually to a single team. That's what's really important – the interest comes through following your team through thick and thin. In economic jargon, you'd say that the demand for this product is totally inelastic – people will pay whatever it costs and will continue to support their team through thick and thin. The problem with that, for the football fan, is that the owners of teams can exploit that willingness to support the team and the fans end up being taken advantage of, maybe through higher ticket prices, maybe through not spending all of the money on the team. In other markets fans can make their dissatisfaction known through what economists call 'exits'. They can go and look at an alternative product and buy that, and that threat keeps the owners of the brand committed to serving the customer. The problem in soccer is that exit is not really a credible strategy, in that once you are committed to a team it is very hard to change your mind about that." (Szymanskii)

But the money a club takes at the turnstiles just isn't enough to keep even the smallest club afloat. Sponsorships, replica kit, TV rights, events catering, on-site leisure facilities – income from much more than gate receipts is needed for individual clubs to survive. According to Firoz Kassam, Chairman of Oxford United Football Club:

"A football club in any division could not survive on its own on gate receipts, on sponsorship. It has to have other businesses around it. But you need good balance, you can’t do without the supporters and without them the game won’t exist so you need them. You need business people and you need money, a man with money to throw money into it. And a balance of those three can make a successful team. Today I'm pleased to say we are probably the only club which has got absolutely no debt whatsoever and a beautiful, brand-new stadium. That's a big achievement in three years, but if I don't get success on the pitch then these seats will be empty and I can't afford that. Being financially healthy doesn't do anything for the supporters, they need good results on the pitch, and that will come. If you look at it strictly as a business, that will not go down very well with the supporters. They don't want to know how much money you are putting in, all they want is three points on the day."

footballs

Buying a football club is a risky business. Club owners have to balance profit and security, revenue and success. For most clubs profits are down, and according to Firoz Kassam, 80% of league clubs are currently in financial difficulties.

"If anybody wants to go into the football business thinking it's a business then that is the first big mistake, and I would say don't do it. Football is a hobby, it's not about making money . So unless there are ways of turning that round, my advice to other businessmen is don't get involved. I took over a club that was eighteen million pounds in debt – it was madness. AND THAT IS AN HONEST ANSWER! It had no proper home or ground to play in, players weren’t being paid, staff weren’t being paid, when I first got involved. So it was in a very serious financial difficulty. But I could see longer term that there was potential. I've committed myself so deep that there's no turning back. I mean, to build this facility has cost me £15m pounds. Most of my own cash. Now I can't see me getting that back in a long while, but as long as I turn it into some sort of a business which will give me a return on my money then I'm happy." (Kassam)

Recent figures showed Premier League profits down by a quarter, and between them the other league clubs were spending a third more than they were earning, mainly on players' wages. Szymanski, on the subject of players' salaries, notes: "The players have a monopoly over the talent that they are selling to the clubs, and they sell that monopoly talent in a market place. Therefore the wages must reflect exactly what they're worth, as long as there's competition. And what we see is escalating salaries as a result of escalating club income, so that the players end up earning most of the money that comes in. And if we see club incomes increasing through TV rights, we can expect player salaries to go up even further. Effectively, all of the money that goes into the sport ends up in the pockets of those that provide the entertainment, and those are essentially the players."

Kassam adds: "Salaries for a second or third division player earning a hundred and fifty, two hundred thousand pounds a year, that's madness – you don't even get that in the banking world, you're working in the City and you don't get that sort of money. That is absolute madness. The only answer I can think of is salary caps, that would go a long way towards helping the clubs."

Players' wages account for about 80% of top clubs' turnover, and can be more than 100% of turnover for smaller clubs. Businesses outside football would be considered in trouble if their wage bill rose to more than 65-70% of turnover. High wages are the root of what we might call the club-owners' dilemma:

"One way to think about the way football clubs interact is that there is a dimension of competition between them but also there's a dimension of co-operation. For a league to work properly, the teams must co-operate with each other, and the more co-operative they are the more successful they can be. One way they can be more successful financially is by spending less. If everyone agreed to reduce their wage expenditure by say 10%, then player salaries would go down by 10%, profitability would go up by 10% and all of the club owners would be better off. The branch of economic theory that explains why this does not happen is called 'game theory'. While it might be advantageous for each club to cut wages to pursue success, it's collectively a disaster. The problem is that nobody will stick to the agreement to cut wages – each owner wants everybody else to cut expenditure but wants to maintain it himself. So in practice, the outcome of the 'game' is that everyone increases their expenditure, nobody reduces, and the owners of the clubs get to the worst possible outcome rather than the best. In game theory it's known as the Prisoner's Dilemma." (Szymanski)

But football is not going to go bust! As long as there is economic growth, demand for football will continue to grow. Szymanski comments: "It's important to remember what drives the value of sports rights, including football, is increasing demand from consumers for leisure activities, and leisure activities grow as incomes grow. As long as we expect that there will be economic growth so there will be increasing demand for football and so the value of the football rights will increase. Football is on the crest of a wave. It is actually doing very well, and likely to continue to do well into the future."

 

Become an OU student

Author

Author

Ratings & Comments

Share this free course

Copyright information

For further information, take a look at our frequently asked questions which may give you the support you need.

Have a question?