Tag Archives: Market

Dec 10 2012

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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