Global assessment of the business side of football (1)

Saudi Arabia has spent at least $6.3 billion (£4.9 billion) in sports deals since early 2021, more than quadruple the previous money spent over a six-year period, in what detractors have labelled an effort by the Saudi government to distract from its human rights record. Saudi Arabia has deployed billions from its Public Investment Fund (PIF) over the last two-and-a-half years, according to experts’ reports, spending on sports at a scale that has completely transformed the international transfer market for football and changed the professional golf environment. Football clubs in the Saudi league have been on a spending spree to the astonishment of football analysts all over the world. The question is what business sense does it make to spend so much to develop football in a nation not particularly known as a football-loving nation?

About a month ago, Liverpool Football club rejected a $189.6 million offer for Mohammed Salah from Al Ittihad of Saudi Arabia. The club, which is partly owned by the country’s PIF, wanted to buy Salah at the record price. After Liverpool’s 3-0 win over Aston Villa on Sunday, in which Salah scored, Liverpool’s boss Jurgen Klopp said the club would not sell Salah for any price. Saudi professional football is a business to the extent that it involves investment (in players, stadium, customer service, jerseys, advertisement, management etc) and a return (from ticket prices, merchandise, sponsorship and broadcast rights). Professional football officially started in England in 1885 and while technology has changed, the fundamentals of the football business model have not.

Clubs must take risk in investing on ‘buying’ players in the expectation of success in competitions – league and cup – which will in turn attract fans and increase gate-takings. Successful clubs can grow by improving the quality of their squad and by enlarging their stadium. Unsuccessful teams risk financial failure as revenues fail to match promised expenditures. A research carried out in the top two English divisions over a decade to their average wage spending, expressed in proportion to the average wage spending of all clubs, shows that wage spending is highly correlated with league position over time. This accounts for why clubs compete aggressively to hire players. There is now an active transfer market with thousands of transactions a year worldwide (information technology and globalisation have had a huge impact on the football business).

Player characteristics are easily observed before and after they are hired, and so wages can be expected to accurately reflect player’s ‘productivity’ (clubs would not choose to pay more than they could afford, and players would ask for a transfer if paid less than they are worth). And so in football, clubs usually get what they pay for. Not that this relationship is perfect – random factors (miscalculations, amazing grace, misfortune and hasty decisions) make this relationship much less reliable in the short term – players get injured or improve more than expected, and have runs of unexpected bad and good forms respectively. But over time misfortune and amazing grace tend to cancel each other out, and so teams sometimes get what they pay for. There is a market for clubs too. For many reasons, foreign investors do buy clubs outside of their countries of origins, business and second home being major reasons.

Most fans tend to follow a team more based on its success record. In 2003, Jeffrey Borland and Robert MacDonald conducted a survey titled “Demand for Sport” and concluded that teams that are relegated lose large numbers of fans. That is why revenue is so closely related to league position – poor performance on the pitch means fewer tickets sold, less merchandising, less sponsorship and broadcast income. Due to the fact that football business is so competitive – so many teams competing for fans, and with the ever-present threat of relegation, most clubs are only just able to break-even (equal expenditure and income). UK Companies House keeps and provides financial information on English football clubs. Against this background, it is perhaps not surprising that insolvency is a common problem in football management.

Significant underperformance (either in terms of performance based on wages, or of revenues based on performance) is a cogent factor for clubs’ review and some cases for sacking club management and/or coaches. Some players are also discharged to give room for new players. In the last 30 years, there have been at least 70 cases of insolvency involving English clubs in the top four divisions. But this is a pan-European problem. According to the most recent survey of European football club finances by UEFA in 2022, 60 percent of top division clubs in Europe reported an operating loss, 55 percent reported a net loss, 40 percent reported negative net equity and auditors raised ‘going concern’ doubts in 15 percent of cases. This is also not a recent problem: a British government report by Sir Norman Chester in 1968 expressed concern that football clubs might become bankrupt en masse. Government waded in to save imminent unemployment.

In 1983 another report by Chester suggested that without fundamental reforms, English football might collapse. Many people believe that the turning point in English football, following 50 years of post-war decline, came after the Hillsborough disaster and the Taylor Report of 1989, which mandated all-seater stadiums and triggered an investment boom. But, in fact, attendance at English league football started to revive from 1985 onwards. However, despite frequent financial failures, clubs are almost always bailed out by fans and wealthy investors – it is hard to think of one European club of any level that has disappeared in the last 50 years, despite frequent financial crises. Umberto Lago, in “The Financial Crisis in European Football: An Introduction”, published in 2006, suggested that tighter financial regulation to the restructuring of competition, with the aim of easing the financial burden for smaller clubs in particular, must be taken.