Foreign ownerships effects on the English Premier League (Part 3)

This is the 3rd part of the article on the effects of Foreign ownership. If you haven’t read part 1 or part 2 yet than I’d advise you to read it before you jump into the this part. Part 1 can be found here! Part 2 can be found here!

3. Foreign ownerships effects – The pride of a nation

The National team is often the pride of a nation. In times of economic crisis people often look to their nation’s football team as a means to take their mind of the horrid reality of austerity. National games are the only time when fans of fierce rivals can put their rivalry apart and cheer for each others players. For a national team to be successful though, the league needs to supply quality youth that can elevate the national team to new heights. In this part the emphasis will be on the national team and youth and how foreign ownership effects both. It is inevitable to look at the FA’s 25-man squad rule introduced in 2010 and therefore the part on youth will focus on how effective the rule can be.

3.1 Effects on the National team – The loins of the lions

The national team is one of the things foreign ownership affects indirectly. Of course its not the aim of the owners to diminish the talent pool of the national team but it is something that occurs as a consequence. Often people claim that the failure of England to qualify for the Euro 2008 was down to the exuberant transfer made by clubs with foreign owners (Abramovich bought Chelsea in 2003 and Sinawatra bought Machester City in 2007). From the inception of the EPL in the 1992/1993 season until the time of Taylors (2007) study (2006-2007 season) the percentage of English players that start a match have dropped 47 percent. But can this drop be attributed to foreign ownership alone?

Figure taken from Walter et al., 2009

The important thing to note is that in the above graph the flurry of signings by Manchester City from 2008 onwards is not represented therefore it is hard to make a decisive conclusion. Nevertheless from the above graph we can see that since the inception of the EPL in 1992/1993 the percentage of English players in the league has decreased dramatically. In fact, in 1992 there were only 11 foreign players (foreign player here meaning players that are neither British nor Irish) playing in the entire league (Wikipedia, 2012). By 2009 this has changed dramatically: the average foreign player per team was 13 (Williams, 2009). In 1999 Chelsea were the first ever club to have a starting line up which had no British players (Inge et al., 2001) and in 2005 Arsenal was the first ever EPL club to have their team sheet of 16 players be made up of only foreign players (BBC Sport, 2005). Ironically it seems it wasn’t just foreign players who displaced their English counterparts in the EPL but the club owners as well.

According to Taylor (2007) the failure to qualify for Euro 2008 was due to the lack of English footballers in English football. He also argued that foreign ownership just compounds this effect and that it would lead to foreign management methods and increase the amount of foreign players entering the EPL. However, I respectfully disagree with this claim. First of all from the figure above it is evident that foreign players have started displacing English players before “project” type foreign owners were even in the league. Furthermore the Chelsea of 1999 and the Arsenal of 2005 were not in the hands of foreign owners. We should not however dismiss the figure above completely as it points towards a double edged sword when it comes to foreign players and management. In part 2. I have demonstrated how these players, owners, and managers enrich the EPL and make it more marketable. What the above figure shows is that it was the English players who have paid the costs of the financial success of the league. And thus the national team is also victim of this. Dobson et al. (2001) argue that the theories of the economic positives on the EPL of foreign influence outweigh the negative effects on the English national team. Whether or not this is true is politically debatable however it points to something Taylor (2007) implicitly conveyed: the incentives and interests of foreign owners are to enrich the club and the club only. This attitude could potentially hurt the national team, but it should be in the FA’s interest to curb the incentives of these owners in a manner that benefits the English National team.

Even before the FA took direct action by introducing the ’25-player’ rule there was an essence of caution about the number of foreign players in the EPL. In 1999 the department that controls immigration in England, made the rules tougher to slow down the pace of foreign players being introduced in the EPL. It has to be noted that these attempts were not too successful as they could be only applied to non-EU citizens since EU law as outlined by the Maastricht treaty (1991) is about promoting freedom of labour movements and thus a work permit to play football in England is automatically given to all EU footballers. However the intent is clear that it was in response to the concern that English footballers were overlooked by clubs.

In 2010 the FA took direct action against the trend of foreign players displacing English ones by introducing the 25-man rule. The 25 man rule basically states that the 25-man squad of an EPL side must be compromised of, a minimum of eight ‘home grown’ players where a “home grown player is defined as one who, irrespective of his nationality or age, has been registered with any club affiliated to the Football Association or the Welsh Football Association for a period, continuous or not, of 3 entire seasons or 36 months prior to his 21st birthday (or the end of the season during which he turns 21)”  (English Premier League, 2012).

3.2 The 25-man rule and youth development – problem solver or problem creator?

The 25-man rule could be looked at as a way by which the FA wanted to promote investment in youth by the teams. It was an effort made by the FA after England’s failure to qualify for Euro 2008. The reason this article has to look at this rule in detail is to determine whether or not the 25-man rule was able to curb the investments of foreign owned clubs in a manner that they invest in youth development.

The first issue with the 25-man squad rule is the arbitrary number of 25. The reasoning behind this is that with such a limit, as the season progresses and injuries are piled up the managers will have to dip into their academy as they could have an unlimited number of Under-21 names on their team sheet. Thus youth will be used more by the managers. The fault with this reasoning is that it means that the most talented U21s who are 1 or 2 seasons away from being introduced to the team won’t be sent on full season loans if any loans at all as the managers will want to play it safe and keep them at home. However injuries in some areas might not occur and some of these young players will lose a year of footballing experience and might eventually miss out on the first team completely if they don’t get any first team football. Therefore this rule might actually affect the most promising youth in an adverse way instead of benefiting them due to the nature of injuries and suspensions being unpredictable.

The other issue is that the teams with money will have the possibility to go and buy players in the January transfer window: The teams with a lot of liquidity behind them can afford to buy someone in the January transfer window when injuries are piling up. However the team has to make sure they have a free spot on their 25-man squad unless they buy a player who is British. This leads me to my main gripe with the rule: it inflates home-grown players prices. One just needs to look at the recent price tags of the English/British players to see this: Andy Carroll (£35million); Jordan Henderson (£15,8 million); Joe Allen (£ 16,7 million); Stewart Downing (£20 million)

Home grown players are a double edged sword when it comes to promoting the national squad. Players such as Cesc Fábregas and Nicklas Bendtner counted as home grown players despite the fact they are not playing for the England national squad. However their presence in the youth academy definitely had a positive effect on other youth prospects. As one coach from the Premier Academy League put it: “There‟s a transfer, there‟s an obvious transfer, because they [foreign players] will come and people will put them on a pedestal and say that they are technically more gifted . . . but they have to come in and get up to the speed of our game and learn to do everything that they do at our intensity, our tempo. But we have the transfer the other way of their calmness on the ball, the creation of space, that first touch, their decision making . . . it works both ways, and to simplify it, I think it‟s a physicality one way, and a technicality the other way” (Elliot, 2009). This exchange is often termed ‘feet exchange’. Long story short: the presence of foreign youth players in the academy raise the bar for indigenous players as well and thus has an overall positive effect. This doesn’t mean all English players who were training with Spanish young midfielders will come through the system, it merely means that the players who have the right mix of physicality and technicality will rise among the ranks.

What I think the FA was hoping to achieve with increasing the pool of home grown players is naturalisation of top footballers. Naturalisation occurs when a player is eligible to play for a different national team but instead chooses to play for England. This is essentially what happened with Carl Jenkinson. Arsenal bought Jenkinson because they needed a young Right Back who could take over from Bacary Sagna in the long run and not be counted as a foreigner in the 25 man squad. This allowed Jenkinson to raise the eyebrows of Roy Hodgson after some good performances on the pitch and the FA naturalised Jenkinson snatching him from the Finnish FA. (Wilfred Zaha of Crystal Palace was also naturalised) So its a win-win for the club and the FA. The FA gets a new English player and the club gets a free spot on their 25-man squad sheet. Now the problem with this is that the players who are willing to naturalise for England are the ones whose nations football team is even worse. Arteta has been in England and not featured for Spain yet but he has stated he would not want to play for England. What I am trying to convey is that naturalisation has its limits as well.

Ever since the 25-man rule has been in place the academies of the big clubs suddenly began to grow. On the surface this seems like a success of the 25-man rule and to some extent it is the case; however it polarised the league even more. Club managers are not stupid and they soon realised that the best way to fool the current rules is to start signing players when they are 16 years old rather than scout them and then only sign them when they turn 20 if they are good enough. If these players are not good they could be sold anyway. Now this all costs money which means the teams with the most resources will have the largest youth squad. Chelseas youth academy has increased dramatically over the past couple of years (but this did not stop them from investing large amounts of cash into their senior squad). Therefore with the help of the 25-man rule the effects of foreign ownership started to creep into the youth system. Now for the England national team this might be a good thing; however it came at the cost of essentially creating a carbon copy of the EPL at a youth level, where financial background is starting to be an increasingly dominant factor.

So while it would appear that the FA and the English Premier League in general are aware of all these recent impacting factors and both the positive and negative effects that foreign ownership’s are having on the league, the key question at the end of this saga is: What realistically can be done about it and where are these choices inevitably leading us? What future consequences do these outside influences hold for the England national team and the mid-level teams of the Premier league that are the very ‘essence’ of the game? While these questions will be answered in time, for now at least it seems that money really does talk in the football world and sadly a lot of the smaller teams that have made this league so fiercely competitive over the past decade may find the road ahead much tougher to travel without healthy financial backing, while a few less fortunate teams may find themselves fading into obscurity as transfer fees continue to rise and it becomes harder and harder for the average team in England’s famous league to attract quality players.

And we are through! All 3 parts are online for you guys to read. If you missed Part 1 where I looked at the different types of foreign ownerships than click here! If you want to give Part 2 a read again (which focused on transfer prices and wages and how foreign ownership affected it) then click here!

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Sources
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Foreign ownerships effects on the English Premier League (Part 2)

This is the 2nd part of the article on the effects of Foreign ownership. If you haven’t read part 1 yet than I’d advise you to read it before you jump into the this part. Part 1 can be found here!

2. Foreign ownerships effects – The Externalities of Business football

As I have outlined in part 1 foreign ownership is unfair in nature as the fans do not know if the owner will look at the club as a project (which lets face it most fans would love), nor does the owner sign a pledge to act in the best interest of the club. Some owners might just be there to siphon whatever money is left in the club. But these issues only look at the club itself (partial analysis) and don’t mention what effect the actions of sugar daddy’s have on the league and the national team which the owners don’t account for (general analysis). From this point onwards when referring to foreign ownership I mean ”project” type ownership as this has an external effect which is felt the most even if only a small portion of teams are under this type of ownership in the league at hand.

2.1 Effects on the league (economics, marketability, quality) – It’s all about the money, money, money.

Since I finished Part 1 by looking at the different types of ownership and how they look at the league I shall start by looking at how the exuberant attitude of business ownership might have external effects. Please note that this section will look at externalities/external effect, which means that the owners don’t necessarily want these things to occur and might not even account for them. Another thing to note is that these externalities might be positive for the league) and might be negative. Since in part 1 I concluded that “project” ownership is neutral to the financial success of the league the owners won’t mind these externalities occurring and will not do much (if anything) against it. Whether “project”ownership actually takes a neutral stance or not is definitely up for debate but the assumption of neutrality makes the analysis of externalities simpler.

According to Nauright et al. (2010) the EPL is now a highly commercialised league thanks to foreign ownership. And indeed if we just look at televising deals we will see that the televising rights for 2013-2016 cost BSkyB and BT an astounding £3 billion. This figure is huge by itself but if we compare it to the value of the first EPL televising deal (1992-1997) of £191 million it is evident that the EPL has turned into a marketable league. The reason the EPL has rose in marketability is due to the fact that the “foreign players and managers that are involved in the EPL are generally of an extremely high quality” (Del Bosque, 2010). And indeed it is the quality of the players, managers and  ultimately the teams, which make a league attractive but does the league reap the benefits or only the club with the well off owner? The answer is yes.

Length Total Value (£mn) Games covered Per year (£mn) Per game (£mn) Broadcaster
92-97 191 60 38.20 0.64 BSkyB
97-01 670 60 167.50 2.79 BSkyB
01-04 1200 110 400.00 3.64 BSkyB
04-07 1024 138 341.33 2.47 BSkyB
07-10 1706 138 568.67 4.12 BSkyB and Setanta
10-13 1782 138 594.00 4.30 BSkyB and Setanta/ESPN
13-16 3018 154 1006.00 6.53 BSkyB and BT

The smaller teams benefit from the marketability of the league as well but ONLY because the televising rights are negotiated and distributed centrally. “Domestic broadcast revenue is divided on a 50:25:25 basis; 50% is divided equally between the clubs; 25% is awarded on a merit basis determined by a club’s final league position and the final 25% is distributed as a facilities fee for the number of matches shown on television involving the club.” (English Premier League Website). International broadcast revenue is distributed equally among the 20 teams. Therefore this is a huge positive externality for foreign ownership but only due to the fact that televising rights are negotiated and distributed centrally by the EPL.

It can be argued that a league full of well managed teams would have a high marketability as well but it is definitely undisputed that foreign ownership can act as a catalyst to speed up the rate at which this occurs. The value of the broadcasting deals of the EPL have increased exponentially in the past couple of years and this is to a large extent thanks to the presence of 2 “project” owned teams in the league. However I can’t emphasise enough that it is only a positive externality due to the central bargaining process of broadcasting rights. If these rights would be negotiated on a team-by-team basis the benefits of league marketability could only be reaped by the teams with owners willing to invest in the squad.

This commercialisation of the league allowed  foreign owners to focus on a number of different revenue streams which include television rights (apart from the EPL which is negotiated centrally), premium seating options, club branding and other goods and services related (Nauright et al., 2010). The increase in foreign ownership increases the money involved in the league and thus the ability for the league to attract high profile players. This is one of the underlying reasons why the value of broadcasting rights has increased exponentially: the more marketable names are in the league the more value it can fetch in the market. However it is important to note that these marketable players should be dispersed in the league more or less evenly. If the title competition is shared by many teams (top 6 last year) and the season is only decided until very late into the season (last day of the season last year) the more the league can ask for its broadcasting rights.

Another interesting point Nauright et al. (2010) makes is that the increase in foreign ownership is linked to the commodification of the EPL (just to clarify commodification basically means turning something into a ‘commodity’. A Marxian example is commodification of labour in capitalism which means that in order for labour to survive in a capitalist system they have to sell their expertise, essentially commodifying themselves). The intriguing point this implies is that although “project” ownership catalyses the process of commodifying a league (by making it marketable), by doing so it attracts other foreign investors to the league who are not necessarily of the “project” type. Therefore in the EPL Abramovich’s attitude towards Chelsea FC initiated a whole spiral which commodifies the league further. However at this point the commodification of the league is not an externality but an aim for the clubs which ended up with an ownership of the “self-sustaining” type (such as Kroenke of Arsenal FC, Short of Sunderland, Henry of Liverpool). This spiral only occurs in leagues where televising rights (which are affected the most by the commodification of the league) is negotiated and distributed centrally!

Although foreign ownership undoubtedly makes a league more marketable, Nauright et al. (2010) warns us that both players, and the ‘Americanization’ of management/marketing have to be incorporated with moderation into the league otherwise there is a potential that the foreign catalyst displaces the English core.

2.2 Effects on transfer market and wages – Exuberant Inflation

It is important to make a distinction between wages and transfers (eg: one cannot say that Robin Van Persie cost Manchester United £70 million) The reason behind this is because the transfer value can be looked at as an investment where the enterprise acquires an asset. However wages come out on the operating side of the enterprise. Therefore it is vital to keep the two concepts separate from each other. This distinction is more important for regulators (such as FIFA) who want to create financial rules (such as FFP) than it is to the everyday fan but I’d like to ask the reader to keep this in mind when reading through this section.

First let’s look at transfer activity and how foreign ownership has affected it. In order to do this however we have to construct a Price index so we actually know what the real value of the players are. The Bank of England (and every Central Bank of the World) produces Consumer Price Index (hereinafter CPI) which is a comprehensive measure of inflation for consumer goods. However since the football player market is not really a consumer good we cannot rely on CPI data to measure inflation in the transfer market. Fortunately for us Tomkins et al. (2010) already constructed such a figure and termed it the Transfer Price Index (hereinafter TPI). The idea is to take the average transfer values of a base year and see how the average transfer value of players in other seasons compare to this value. The reason we take averages is due to what statisticians call the ‘law of large numbers’ which essentially means that the trends will emerge the more observations we take into account.

If Tomkins et al. (2010) 2011/2012 update is to be believed ever since the creation of the EPL (1192) there has been a rocking 730% inflation on average transfer value. For comparison the Bank of England in the same period recorded a 77,1% inflation in CPI. To put this into perspective: The record signing of £5 million of Chris Sutton to Blackburn in 1994 is today’s average transfer price while the record transfer made by a Premier League side is £50 million submitted by Chelsea FC for Fernando Torres. However it is important to note that TPI doesn’t increase year-on-year which is shown in the figure below.

Image taken from transferpriceindex.com

So some important dates to go with: Roman Abramovich purchased Chelsea FC in June 2003; Sinawatra bought Manchester City in 2007; September 2008 marked the purchase of Manchester City by Sheikh Mansour bin Zayed Al Nahyan; 2010-2011 season is the first season with the 25-an rule in place the EPL. With these in mind when looking at the above figure we can see that it took 2 not just 1 “project” owned firms competing with each other to have an extensive effect on transfer prices. One might argue that this is logical as the two sides will try to outbid each other which leads to a flurry of astounding bids. Of course every club is aware of the soft budget constraint these firms have and will hold off their supply of players until a huge offer is received. This is the rational behaviour of the clubs as they have to balance the books at the end of the day and selling a player for a vast sum can finance their own transfer activities. However other clubs will be aware of the sell and of the approximation of the transfer sum and they in turn will up their asking price for their own players. A perfect example of this chain reaction is the Fernando Torres and Andy Carroll sale. Liverpool sold Torres for an astounding £50 million to Chelsea and then enquired about Andy Carroll. Newcastle were aware of the Torres sale and told Liverpool that they would only part ways with Andy Carroll for a heftier sum. In the end Liverpool bought Carroll for a massive £35 million. Whether the sum paid by both clubs is reasonable is not the point of this piece but it perfectly illustrates the chain reaction which leads to inflationary pressure on the transfer market.

The drop in transfer prices in 2009-2010 can be attributed to the effects of the credit crunch which led to less transfers which were of lower prices as teams became more risk averse. However such a trend was stopped thanks to the FA with the introduction of the 25-man rule in 2010 as a means to save the English national team. This lead to English players ‘turning into gold’ and their prices shooting up on the transfer market. One just needs to look at Liverpool’s squad and the amount spent to assemble it to see the adverse effects of the 25-man rule. In conclusion: it was a mixture of “project” ownership and the FA’s decision that lead to the inflationary pressures prevailing in the EPL right now.

If you are a theorist and would like to explain the TPI fluctuations in terms of a general model then I feel a good starting point would be the shortage phenomena as outlined by Kornai (1992) mixed with the inelastic supply of players. I will not go much into detail about this in this piece as it would be too much of a tangent from the original question: What are the externalities of a “project” type ownership? Having said that if there is a demand for a piece to outline a general model of transfer activity I will write one up. Just leave me a comment if you would like to read about what I think is a good model to explain transfer prices.

Now let us turn to the wage bill of the big six (Arsenal, Liverpool, Manchester United, Manchester City, Tottenham, Chelsea) in the EPL. To some extent wages are more important than transfer prices as Kuper et al. (2012) find that 90% of league position can be explained by the wage bill of a team. Of course this doesn’t mean that the path to glory is to offer your players as much money as you can. Also this 90% correlation between the data doesn’t take into account the incentive schemes put in place via the wage structure of a team. Please note that I will use data up until 2011 because some teams have not yet published their 2012 annual reports at the time of the writing. Also these wage bills represent total wages of a club so they include: first team players’ wages, reserve team players’ wages, coaches wages, board members wages, other staff (medical, scouting, match-day staff) wages, pensions and insurance, and bonuses. Therefore the below figure will have some uncertainty but we are only interested in the general trend which the below figure clearly shows:

Data for Manchester City and Tottenham for the years 2003 and 2004 not available (if anyone knows them please leave it as a comment below and I shall edit the figure)

Tottenham’s admirable performance for the wage bill they have is clearly shown in the figure. They have the lowest wage bill of the big 6 and perform at a level to compete for a Champions League spot. Sure they only made it to the Champions League once but for a wage bill that low compared to other teams that is an achievement worth mentioning. Liverpool’s abysmal wage policy is also apparent in the figure as they have now overtaken Arsenal with their wage bill but have finished several positions below Arsenal. This is surely something Brendan Rodgers will have to address if he is to make it at Liverpool.

From the figure we can see that Chelsea and Manchester City have the highest wage bill which is not much of a surprise if we take into account their soft budget constraints. In fact we can see a sharp increase in Manchester City’s and Chelsea’s wage bill after their sales. The reason behind this is quite intuitive: Both teams wanted to attract big names to the team and since they didn’t have the marketability and tradition of Liverpool and Manchester United they had to lure the player with the help of what they had more of than their competition: money. To lay the blame completely on the teams (“oil money”) and the players (“money grabber”) is not completely justified though as the presence of agents in the modern game definitely play a huge role in the wages the players earn.

The figure above leads to a question which is beyond the scope of this piece but is worth thinking about: Is tradition/football culture a substitute for money in football? Looking at the above figure it can be argued so as it is not unheard of for players to take a wage cut in order to transfer to a team (Arteta to Arsenal) but it is mostly true for players who transfer to a team with a long-standing, proud tradition or to a team with a Champions League spot. Another question that  this raises: Once Chelsea and Manchester City cement their place as a consistent dominant force in Europe will they relax their wage bill? It is hard to tell right now but if they do so it will require massive wage restructuring. Whether they aim to do so remains to be seen-

Now let us look at how the wage bills of these teams affect the overall average annual pay of an EPL football player. The argumentation is the same as it was for transfer prices: Chain reaction. I find myself in a fortunate position (again) as sporting intelligence has published the average footballers wages in England from the 1992-1993 to the 2009-2010 season. We have to keep in mind that the figures are merely guestimates so we can’t take their values quote for quote; however we are only interested in the general trend of wages therefore we need not worry about the exact value of the average annual pay of an EPL footballer in a specific year.

Numbers from sportingintelligence.com

From the figure above the reader can see that although wages increase at a tremendous rate in the EPL, compared to the real sector of the economy, foreign ownership doesn’t seem to have any distinguishable effect on average wages. So then why did wages rise so dramatically? Kuper et al. (2012) argue that the rate at which football wages are rising can be explained by the principal-agent problem (note: agent in this case refers to the players not to the players agents. I’m sorry for the confusion this may cause but this is how it is termed unfortunately). They argue that wages have increased as a way to increase incentives and the reason wages have risen at such a preposterous rate is because the effort of football players is unobservable, therefore to minimize shirking the players are offered massive wages and frequent rises to increase the incentives of work. However I argue that the effort of a football player is anything but unobservable. In fact nowadays football practices can be visited, not just games so incentives to perform should already be in place since monitoring of effort is outsourced to the fans for money. I think the answer behind the massive rise in football players wages lies in the presence of players’ agents, and the ability to soak up an operating loss.

The fact that the EPL has become highly commercialised has already been looked at. This has led to more commercial income for all the teams in the EPL, however players’ agents are also aware of this fact and their aim is to appropriate as much of that extra income for their client as possible (within reasonable means of course). Thus as the teams gain more revenue the more agents will want for their client. The presence of agents therefore acts as an inflationary pressure in the football world and the teams with the biggest revenue streams are expected to have the largest wage bill assuming they have a hard budget constraint. The reason teams with a soft budget constraint won’t fit this trend is because they can successfully soak up an operating loss (in the short run). With these two conditions in mind it is not surprising that the 2 teams with the largest wage bill are teams with soft budget constraint while 3rd place is the most financially successful team in the EPL.

The reason players’ agents can act as a catalyst is asymmetric information. These agents know how many teams are in the race for the player he/she  represents but the teams negotiating do not. This is a reason why free and cheap transfers are attributed with high wages as there is a potential for many teams willing to match the price. This is also the reason behind high profile players sometimes earning ludicrous amounts: Ibrahimovic reportedly earns over £900,000 a week. This wage is rational given the fact Manchester City and Chelsea might have been interested in the services of Zlatan as well something his agent knew for certain while PSG didn’t.

Now there is a problem with this, which the UEFA has realised:  Gianni Infantino, UEFA’s general secretary has said “this [spending spree] may be sustainable for a single club, [but] it may be considered to have a negative impact on the European club football system as a whole. […] The problem is that all clubs try to compete. A few of the biggest can afford it, but the vast majority cannot. They bid for players they cannot afford, then borrow or receive money from their owners, but this is not sustainable, because only a few can win.” What this basically means is that this high inflation in players wages and transfer prices might be sustainable for a very few in the short run but in the long run it may lead to the destruction of several football clubs. Long story short: football is a bubble economy and if it bursts many teams will have to go into voluntary bankruptcy. Teams who have strict financial rules in place won’t really be affected by this; while the teams that are amassing huge debts will be in trouble unless they are able to get rid of their debts.

That’s it for Part 2. Part 1 covered the different types of Foreign ownership. If you missed it click here! Hit the follow button on the right if you don’t want to miss Part 3 which will look at the effects of foreign ownership on youth development and the English national team. The FAs 25-man rule will be looked at as well.

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Sources

Foreign ownerships effects on the English Premier League (Part 1)

What are the effects of foreign ownership on a League? Are they primarily positive or do the negatives outweigh the positives? These are questions one often stumbles upon when discussing football nowadays.  Foreign ownership is not exclusive to football, however, as its roots are in the business world where it happens rather often. It basically means that a local company is being bought by a Foreign Investor. So why is it so different when it comes to football? The answer is: you. The presence of fans who love the club they support can make foreign ownership in football a bit messy. This piece will be a 3 part analysis with part 1 having the aim to explore the the types of foreign ownerships. Part 2 will look at its effects on the financial success of the league and foreign ownerships’ effects on the transfer market prices and wages. Part 3 will look at the National team and the youth and how foreign ownership affects it. It is in part 3 where we will see if the 25-man rule of the FA was the right decision or not.  The English Premier League (hereinafter EPL) will be the focal point simply because that is the league I follow and thus have a deeper understanding of how things work in it (compared to other leagues).

Even the lampposts hate Glazer

To date there are primarily three scenarios that can happen to a club when it is taken over. I will name these three scenarios as “Project“, “Business“, and “Self-sustaining”. The first twp scenarios are exactly the opposite of each other which will have an effect on the way the fans perceive it. Generally speaking “project” type ownerships are more welcome by the fans (of the club that is being taken over) while “business” ownerships will most probably bring grief to the fans. Whether foreign ownership sells the soul of the club remains to be seen (and I will not spend much time on this specific issue myself) but I will state that foreign ownership is unfair by default as the fans do not know if the owner will look at the club as a business opportunity or as a project, not to mention a project ownerships external effect on the league. 

1. Foreign ownership in general – Selling the soul of the club?

First of all we have to note that currently the majority of the 20 clubs in the EPL are under foreign ownership, and that out of the big six (Manchester City, Manchester United, Arsenal FC, Chelsea FC, Tottenham Hotspur, and Liverpool) only Tottenham Hotspur is in British Hands (with Joe Lewis being the majority stockholder owning 85% of spurs). Newcastle United are a team that looks like they can break the top 6 that I have named and they are also a team in British hands.

1.1 Project ownership – Expensive toys for rich (overgrown) kids

By project ownership I mean an owner who looks at his team as a project. In the EPL the first owner to do this successfully was Roman Abramovich whose business attitude towards Chelsea FC, which lead the team to become an EPL force, paved the way for Sheikh Mansour bin Zayed Al Nahyan and Manchester City. The basic idea behind a project ownership is to inject funds into the Football club which will then be used for transfer activities, as illustrated by the table below:

Transfer Market Activity (from Transfer League). Values are nominal and not weighted against inflation

Please note that I only used EPL teams for the representation, and since the EPL was created in 1992 most of the data used in the calculation will be from 1992 onwards. Also note that the table above merely looks at  the dealings of the clubs at hand in the transfer market (in no way are these numbers a representation of the boards dealings) and that I only looked at the clubs within the top 6. There are other clubs that would fit the description of project buyout in the EPL: QPR, Sunderland (prior to Short buyout).

Looking at the table above one might ask if Liverpool FC really does fall under the banner of “project” ownership and it might be argued that to some extent yes it does (especially with last seasons transfer dealings).  But these numbers do not show other revenue streams apart from players being sold and when that is being factored in, Liverpool’s financial activity on the transfer market does not stand out like Manchester City’s and Chelsea’s. In short, John W Henry is a massive improvement over Hicks and Gillet (regarding funds invested in the team), but is far from following the classic “sugar daddy” concept. Instead Fenway Sports Group is aiming at maximising its revenue streams similar to Stan Kroenke of Arsenal FC and and Elis Short of Sunderland.

What is a distinguishing feature of this type of ownership is that the enterprise will have a soft budget constraint. This basically means that the clubs management (this is a wider group than just the club manager) can negotiate with the owners to invest more money into the enterprise’s squad. This is a vital difference as it leads to these clubs having seemingly  limitless demand for players since when they would need to balance the books they simply engage in vertical negotiation with the well off owners to invest more into the club. However by doing so the clubs management loses some control over the club and allows it to be shaped by the owner.

In a “project” ownership the personality of the owner will very much define the managerial aspect of the football club. Ever since Roman Abramovich took over Chelsea, the team has seen 10 different managers at its helm which is roughly 1 manager/season (!!!). This is an alarming figure by itself but factor into the equation the amount of money needed for these manager changes and you get a fortune being paid just for hiring and sacking managers.There is nothing wrong with this but a manager tends to plan for a longer term than 1 season and most of the times the real benefits are only reaped in the 2nd or 3rd season when the manager figured out which tactic is suited for the team and who he should ship in (and out) to make the team better.

If we look at André Villas-Boas record with Chelsea it is not horrible in fact it is better (by a very small margin) than Mancinis record was when he got the Manchester City job (as represented by the table on the left). From the table and the fact that Roberto Di Matteo was just recently sacked after being in charge of Chelsea for a shorter time than Villas-Boas,  it is apparent that Abramovich’s impatience is starting to define Chelsea FC’s decisions. Roman Abramovich wants to produce a team that can consistently win (such as Barcelona FC or Manchester United) but in the process of doing so he is actually taking 2 steps back every time he sacks a manager. If Chelsea do want to be a European force they might have to consider parting ways with Roman Abramovich. The real question is: can they afford to?

Suddenly this doesn’t just seem like a joke

Indeed the first issue that most teams under this type of ownership will experience is that they are essentially locked into a position. Due to the excessive transfer spending (and commercial deals that come from the owners network) these teams generally become indebted to their owner to the extent that they can no longer afford to walk different paths. This dependence is the reason why the personality of the owner will start the define the football club. In fact the more money the owner invests in the club the more it can define what it will look like as the more dependant the club becomes the more superior the owner becomes in any vertical bargaining situation. Of course it is not to say that if the owner leaves the club has to file for bankruptcy but the lavish transfer lifestyle the fans are used to will suddenly come to an end and these teams will have to look to their academy for survival, assuming their academy is good enough to supply the quality needed to stay on top.

Apart from the monetary issues when the enterprise parts way with their ‘sugar daddy’ there is the issue of the managers (Im referring to the boardroom staff here not the manager of the team) having a different set of skills under this type of ownership. Due to the soft budget constraint the teams management will not be as responsive as other teams when the transfer is negotiated. If there seems to be a financial issue the management of these teams usually just go to their owners and engage in vertical bargaining. This does not mean that these  managers are inadequate (vertical bargaining needs skill as well after all) it merely means that the management has a different set of skills. Thus if the owner decides to leave the club it will be a financial and a managerial challenge which is extremely hard to mount.

However the most important question is: Is this type of ownership sustainable? The answer is no. It creates an extreme subordinate-superior position where dependence is what keeps things in place. What if the owner decides to not pay for the team? For a recent example we have to venture into la liga which has recently become another attractive prospect for investors as “there are no more clubs for sale in the Premier League” (Rossell, 2011). There is a high chance that foreign ownership will be popular in this league as it has a financial disparity that stems from televising rights (will talk about this later) which has the potential to “kill Spanish football” to quote the words of Villareal manager Fernando Roig (2011). The team I shall look at is Malága CF which is currently under the hands of Abdullah bin Naser bin Abdullah Al Ahmed Al Thani. In the summer of 2012 Malága CF were struggling financially and didn’t pay their taxes or the player wages for the past weeks. The management of the team engaged in vertical bargaining with the owner to ask the owner to finance things. However things did not work out and the team was forced to liquidise its assets. This meant that Santi Cazorla and José Salamón Rondon left the club on the cheap for the team to be able to continue. Many things can be said about the owner and how he ‘doesn’t understand the ‘sugar daddy’ concept’; however this attitude doesn’t look at the management of the team: Why did they start vertical bargaining rather than sell their less wanted players? When it was obvious the owner won’t pay the team was at a disadvantage when negotiating their players sales. Of course Malága continued on to the Champions League after the sales but the damage dealt to the club puts it at a huge deficit if it wants to be in the Champions League the next season.

1.2 Business ownership – Fans money in businessmen’s  pockets

Ownership of an EPL team (or ex-EPL team) is a very lucrative investment fuelled by huge amounts of income from television deals. The reason behind this is that televising rights are centrally negotiated and distributed to keep financial equality between the teams. Without a doubt teams such as Manchester United and Arsenal FC could negotiate better television deals than the likes of Wigan Athletic or West Ham United. Of course this all sounds fine but Walters et al. (2009) raises a concern that the foreign investors might be solely driven by business and profiteering and not really interested in the success of the team and the league in general. This moral hazard problem is aggravated by the fact that the fans continue to pay their ticket prices which then end up with an owner who has no interest in reinvesting these funds (neither in the squad nor in increasing revenue growth). Very often these type of foreign ownerships are brief (1 or 2 seasons long) and end up with the owners leaving the club with heaps of cash siphoned from the club. This was the case for Portsmouth FC

Fortunately these types of ownerships are not common for teams who already cemented their place in the EPL; however the same could not be said for lower league teams where the respective team is ambitious to break into the EPL. Breaking into the EPL is lucrative as an average EPL club gets 45 million while an average Football League division team gets 1 million (from televising rights). Naturally this invites investors to buy teams which have a high probability of breaking into the EPL and once they make it (if they do) sell the club for a higher value. Some might even argue that this is the reason why newly promoted clubs often get relegated in either their first or second season. Whether this is the case is debatable, however it points to an obvious gulf between the EPL and the lower divisions of England.

Why should we care about this gulf? The reasoning is simple: The larger the gap in financial power between the EPL and the lower divisions the more desperate the management becomes to break into the EPL. This desperation will lead to the active search of people who are willing to invest in the team. The investment required is minimal and the rewards are huge if the team does make it. The worrying part is that the FA does nothing to address this issue and the EPL is only concerned with maximizing the profits for the top division. In fact if a team is relegated from the EPL it is subject to receive funds from the EPL to help it rise back to the top division. As ‘altruistic’ as this might seem it essentially creates a private club of EPL teams that are always financially better off than their lower division counterparts even if their managerial skill is subpar to that of lower division teams. How to tackle this problem is beyond the scope of this piece, but it does present a question to ponder on: Is financial elitism healthy for the league?

1.3 Self-sufficiency – The clubs that desperately want to fit the bill

This is the category that is the exception to the rule (so to speak) and is the broadest in definition. The owners (foreign or not) will want to make the club as self sufficient as possible. One could think of this as the middle ground for foreign ownership. It is not a “business” ownership since the owners do not siphon money out of the club (YES, Kroenke and the board does NOT take money out of Arsenal Holdings plc.). However these owners don’t handle their clubs as a “project” ownership either by throwing money at the squad. Instead these owners aim to maximize revenue streams. According to Dobson et al (2001) these owners of the football club assess the success of the club not solely on trophies but on five factors: profit, security, attendance or revenue, playing success, and health of the league. It is important to note that just like the “project” owners, the “self-sustaining” ownership model also invests/reinvests into the club. However instead of investing completely into the squad, clubs under this model invest in the enterprise itself in an effort to maximise revenue streams.

The degrees to which how much is invested in the squad and how much in the enterprise varies a lot and is often dependant on the saturation of current revenue streams and the potential of revenue growth. Manchester United and Liverpool FC were both capable of increasing their commercial revenues (Liverpool against the odds since they fell out of the Champions League) which allowed both teams to invest in their squad knowing that revenue growth can cover these expenditures. Arsenal FC, however drove its main revenue streams (matchday revenue and property development) close to saturation before attempting to increase commercial revenue via the Asia tour. Now of course Arsenal are tied down in certain deals until 2014 but nothing would’ve stopped the commercial team to attract new secondary sponsors (think about it: Manchester United have 2 different shirt sponsors for their playing kit AND their training kit). Because of this Arsenal are lagging behind in commercial revenue and in order to keep themselves afloat are forced to dip into their squad and sell their assets (More on this here). Of course for Arsenal this is mainly due to the debt they had to incur to construct the Emirates Stadium, a project which left a huge dent on its finances but in the long run, with a strong commercial team, can make the club a European powerhouse as the board envisioned it to be. But for this to become a reality it is imperative for the commercial team of Arsenal FC to ‘up its game’ otherwise the team will start to drift out of the top 4 on the football field as the management will dip in the squad to keep its accounts healthy.

Another point to note is that “self-sustaining” ownerships interest is making the league better as the financial success of the owners are closely related to the financial success of the league (to a large part due to televising rights) as Dobson et al. (2001) rightly point out. In this sense it is closer to “business” ownership since both of these types of ownerships look at the success of the league for potential financial profit. However while  “business” ownership free-rides the success of a league a “self-sustaining” ownership aims to create the success of a league. “Project” ownership takes a neutral standpoint on this matter and one might even argue that it is against the financial success of the league as it decreases financial disparity between teams (increasing competition), and decreases the teams dependency on the owner. However this is debatable and I will stick to “project” ownership being neutral to the success of the league as the team under the owners control has nothing to lose if the league becomes financially successful.

Stay tuned for Part 2 in which the financial success of the EPL is looked at and how foreign ownership affected this. If you are interested in transfer market prices and wages and how  foreign ownership affected it then this is the piece you don’t want to miss out. Part 3 will be published shortly after part 2. Youth development and the national squad will be looked at. If you are interested in how the mixture of the 25-man rule and foreign ownership turned out to be then this is what you’re looking for.

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