Yves here. Satyajit Das discusses the economics of investing in sports, using football, or to avoid confusion with American football, soccer, as an case study. It is instructive to observe that a big cause of the poor economics is the competition for “talent” as in top players. At least the money is going to what fans most value.
By Satyajit Das, a former banker and author of numerous works on derivatives and several general titles: Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006 and 2010), Extreme Money: The Masters of the Universe and the Cult of Risk (2011), A Banquet of Consequences RELOADED (2021) and Fortune’s Fool: Australia’s Choices (2022)
Football (or soccer, as it is sometimes known, distinguishing it from other pursuits involving humans in colourful tight shorts and shirts chasing, kicking and throwing variously shaped balls) is probably the planet’s most popular sport. Globally, around 300 million including over 100,000 professional players play while over 5 billion fans follow the game. Over 1.5 billion viewers watched The 2022 Men’s World Cup final.
The game’s broad appeal is linked to its simplicity. In Latin America, Africa and Asia, it is common to watch people, varied in ages, playing in any open space, with a ball or even a bundle of rags. Another attraction is that it does not require specific size, muscularity or stature to excel unlike some other sports.
Football has additional dimensions. Affiliation with a particular team defines status, place and tribal linkages. In poorer countries, especially in Asia and Africa, the sport is a complex consumer product laden with standing, lifestyle and a vision of first-world life. For many poor children, it embodies dreams of emulating their heroes to achieve sporting and financial success.
The game evokes great passion. In The Soccer War, Ryszard Kapuściński recorded how a dispute over football escalated into the 1969 football war between El Salvador and Honduras.
In the last two decades, football has become something else – a financial asset attracting massive sports investment.
Historically, football clubs were private concerns reliant on funding from members, ticket sales, match day revenues and limited sponsorship. As the game professionalised, the costs – player salaries, support staff, and infrastructure (stadiums, training facilities etc.) – increased exceeding income sources.
Football clubs became increasingly dependent on benefactors – wealthy individuals or, in many cases especially in Latin America, governments – for whom the money spent was more about politics, community, love of the club or game than return on investment. While these groups still play a role, it is generally in poorer countries or smaller clubs because of the scale of the financial needs of major first-world leagues.
Today, much of the funding takes the form of investment by ultra-rich individuals and sovereign wealth or state funds. Initially, it was mainly American established sports franchise owners (such as the Glazers) and Russian and Chinese oligarchs. Increasingly, it is Middle-East Petrostates, such as Qatar, United Arab Emirates and most recently Saudi Arabia, either by the ruling families, entities acting on their behalf or state or sovereign wealth funds.
Saudi Arabia has been particularly prominent. They bought the English Premier League club Newcastle United and injected large sums to improve its performance. In the last year, the Saudis have spent at least €891 ($944) millionon players, including aging stars such as Portugal’s Cristiano Ronaldo, France’s Karim Benzema and Senegal’s Sadio Mané, to strengthen their hitherto unremarkable domestic league. It is part of a broad plan to invest as much as $20 billion in the sport.
On the back of this interest, institutional investors are increasingly seeking exposure to these types of assets.Private equity and hedge funds, such as Clearlake Capital, Silver Lake and CVC, are prominent.
Football, club franchises, teams and players are now at the core of complex commercial and political exchanges.
Expected financial returns are an obvious motivation.
The case for football investment is couched in terms of capital gains from rising franchise values and participation in a rapidly expanding sector. American investors, traditionally leaders in sports investing, see limited growth prospects in their established North American holdings (National Football League, National Basketball Association, Major League Baseball). Football in Europe or elsewhere is seen as more attractive with greater upside due to its international span and less well exploited markets.
The financial case has a number of weaknesses.
Appreciation in prices paid for clubs is linked to increasing broadcasting revenues, which have sky-rocketed, especially for globally popular competitions like the English Premier League and the Champions League. According to one study, income for the leagues of England, Spain, Germany, Italy and France increased to a record €17.2 ($18.2) billion in the 2021-22 season, compared to €9.3 ($9.9) billion a decade earlier.
Cable TV and streaming services have been willing to pay ever escalating amounts for exclusive rights to show sports events to secure subscribers. Football provides cost-effective content. It compares favourably to the costs of a modest sitcom and provides relatively secure success amongst fickle audiences.
But it is difficult to see the amounts paid for broadcasting rights continuing to increase. Traditional and Cable TV operations as well as streaming services are increasingly financially constrained. This reflects revenue concerns, falling advertising income and subscriber numbers, as well as rising costs, including for content. Fragmented coverage requiring multiple subscriptions and rising access cost, especially amidst a cost of living crisis and falling real incomes, are likely to increase pressures on broadcasters. A likely industry consolidation may reduce competition for rights.
The position is complicated by the varied structure of sports. The US has closed and centrally controlled leagues where the governing body controls the number of franchises, approves investors and generally runs the sport with a mind on investor returns. There is no system of promotion or relegation with the same clubs competing year after year. Highly regulated transfer and draft systems from feeder leagues or colleges is used to make each year a fairer and closer contest between teams.
In contrast, most non-US leagues are run with varying degrees of professionalism with irreconcilable factional disputes common. Most club football globally entails performance based promotion or relegation which has a significant effect on revenues and value. Poor performance can lead to an English club finding itself excluded from lucrative European competitions or demoted to lower divisions reducing revenue potential. On-field results determine financial outcomes – everyone likes a winner!.
Very few football concerns make money. Revenues (broadcast receipts, ticket sales, match day earnings, merchandise, sponsorship) rarely cover expenses, dominated by player salaries and transfer fees payable to other clubs for talent. European football clubs lost more than €10 ($10.6) billion between 2020 and 2022. While the losses were exacerbated by the pandemic, most clubs and leagues have not been consistently profitable over the last decade.
Like investment banking, the best players have appropriated a large portion of revenues. This leads to a vicious cycle. To ensure on-field success, clubs pay large sums for star players who may or may not live up to their billing. Other clubs then bid higher amounts for players to remain competitive creating a wage and transfer fee spiral, expertly orchestrated by player agents.
In the most recent round of transfers, clubs spent a record $7.36 billion on purchasing players. An additional $697 million was spent on fees to agents. Player salaries have also risen due to bidding from some well-funded clubs and leagues. Ronaldo is being paid a reputed $200 million per year. In comparison, Benzema was a positive bargain at €100 ($106) million annually. The higher salaries percolate through the game as clubs accede to player demands to keep their stars to stay competitive.
The result is costs exceed revenues with on-field success going to clubs with deep-pocketed investors willing to take often large losses. This is the laxative or ‘prune juice’ effect, a term coined in 2015 by former Tottenham Hotspur owner and businessman Lord Alan Sugar – higher broadcasting revenues simply go in one end and out the other.
Some larger clubs, such as Spanish club Barcelona, have used their income to create academies, where children as young as 8 or 9 years old are identified and developed with the hope that they become stars, avoiding the need to buy players. Lionel Messi is a product of Barcelona’s development program having joined the club when 13 years old. Clubs make money from trading players or developing talent for sale to better resourced franchises. Consistent with the adage that you need money to make money, smaller clubs do not have these options.
The investment risks are high. There is perennial exposure to player injury and availability. Many purchased stars fail to perform as expected in their new surroundings or prove incompatible damaging team harmony. Other risks include disruption from interruptions (Covid-19) and trade restrictions (sanctions and work permits such as those that emerged post Brexit), especially important in football given its international nature. Performance, sometimes affected by luck, weather of referee decisions, is linked to revenues. There is conflict with fans, as the Glazers have found with Manchester United, who resent the intrusion with what into what they see as ‘their club’.
Some investors, primarily the ultra-rich and private equity, have used significant amounts of borrowings to finance purchases and ongoing cash flow shortfalls. Financial risk combined with the high underlying operating risk adds to the problems.
Investments are often justified by spurious resort to diversification benefits. There is simply not a sufficiently large sample over the requisite time horizon to assess whether investing in a football team enhances your portfolio risk-return trade off on the Markowitz efficient frontier.
In reality, investment success relies on spending more than others. If the other has ample resources and a disregard of financial returns, then it is difficult to make money from football. It does not help that normally intelligent and disciplined businessmen become emotional when they run sports businesses resulting in poor decisions.
Recent experience suggests that football investments, especially outside North America’s closed Major League Soccer system, have relied on the ‘greater fool’ theory of investment. You assume that irrespective of the price paid someone else down the track will pay more to take the asset off your hands. This works as long as new investors are able to be seduced to participate. As required investment amounts have risen, the dwindling number of deep-pocketed, interested individuals, family offices and state funds with the necessary funds means that the game of ‘pass-the-parcel’ becomes untenable.
Football investments require a different frame of reference.
Interest from Russian and Chinese oligarchs may have been motivated by opportunities to transfer funds abroad. In a similar vein, state and sovereign funds may be driven by a strategic shift away from traditional low yielding reserve assets of US dollar, yen or Euro denominated government bonds.
The threat of de-dollarization and confiscation of reserves, especially after Western actions against Russian assets, may be a factor. But direct investment in a US, UK or European sport team entails direct dollar exposure and risks confiscation or being caught up in trade restrictions. In the aftermath of the Ukraine war, Russian Roman Abramovich was forced to divest his interests in Chelsea football club. Perhaps to reduce this risk, Saudi Arabia are investing in players and developing their domestic league to control this risk. Saudi sports investment also highlights other possible objectives – building businesses and revenues for a post-oil economy.
Investment in football is frequently criticised by politicians and human rights groups as ‘sports washing’ or soft power projection. Saudi Arabia has allegedly spent at least $6.3 billion in sports deals alone since early 2021 in what critics have labelled an effort to distract from its human rights record, including the murder of journalist Jamal Khashoggi.
There is nothing new in the practice. Governments, both democratic and authoritarian regimes, have used sports or entertainment to showcase and promote their countries’ economic and cultural assets externally. The criticism frequently reeks of complacent moral superiority and hypocrisy. No one objects to US investments despite Abu Ghraib, questionable geo-political interventions or its treatment of domestic minority groups.
Fans appear indifferent. Chelsea’s former owner Roman Abramovich is highly regarded by the supporters who were grateful for the Russian’s willingness to fund the club’s recent on-field successes and better facilities over 19 years. In fact, it is doubtful, given Saudi Arabia wealth and importance in the energy market, they need to engage in sports washing or are particularly concerned about any condemnation.
Football investments are sometimes passion projects of wealthy hobbyists without economic logic. This is the ‘Victor Kiam syndrome’ – the man who liked Remington razors so much that he bought the company and coincidentally the New England Patriots professional football team.
For the immensely wealthy, the amounts required are modest. For Abramovich who at one point was worth around $50 billion, the money spent on Chelsea constituted little more than pocket money. For the Russian whose business career was circumscribed heavily by the state, it may have been the challenge of restoring the football club’s fortune. The motivations of Abu Dhabi’s Sheik Mansour, whose family controls 10 percent of the world’s oil reserves, the motivations may be similar.
The extensive wealth and lack of concern for returns complicates matters for investors seeking traditional financial returns.
The change in football club ownership affects the game and its followers in many ways. Fans complain about high ticket prices. They must subscribe to cable or streaming services to follow teams as free-to-air broadcasters now have limited coverage of games.
Financial owners are focused on altering the organisation of football to ensure profitability by controlling costs and re-building balance sheets. Key steps include creating permanent leagues featuring better known clubs and regulation of salaries and transfer fees. The impetus for change comes from US investors who want to ensure a sustainable and profitable model for their investments by creating a controlling cartel.
The failed attempt to create an European Super League, made up of a few elite teams, was financially driven. The aim was to reduce less-viewed games featuring minor teams and eliminate the risk of relegation or not qualifying for lucrative competitions.
Cost controls and salary caps are common in US sports, such as American football and basketball, where hard spending limits help financial owners by underpinning profitability and valuations. Europe’s football’s governing body –UEFA– is seeking to limit the amount clubs competing in its competitions can spend on its playing squad to 90 percent of its revenue which will progressively reduce to 70 percent. Unlike previous proposals, non-compliance would attract sanctions, such as transfer bans or limits on squad size.
The ultimate objective of the regulations is to reduce player salaries. There is a case for reducing the unimaginable salaries of some super-stars. However, most journeyman players, on whom the reduction may well fall disproportionately because of the desire to retain the services of scarce outstanding talent, do not earn stratospheric amounts. Given the low chance of reaching the game’s highest levels, a lifetime of training, the risk of injury, a relative short playing career and uncertain post-sport prospects, it is unclear whether the remuneration is disproportionate.
The changes, tantamount to price fixing by the clubs, may be difficult to implement and contrary to competition laws. An earlier attempt to enforce spending limits by a two-year ban from the Champions League for Manchester City — was overturned in the Court of Arbitration for Sport.
There are other problems. The steps designed to improve profitability may also solidify the position of current dominant clubs. Given the vast difference in financial resources, weaker clubs may be perhaps frozen out. The sport risks becoming concentrated amongst a handful of global brands excluding smaller local clubs and their local supporters.
The changes may destroy the unpredictability and ambition that fuels interest in football. Glorious stories of unlikely success, such as humble Leicester City’s totally unpredicted success in the 2015-16 English Premier League, are what drives the sport.
Financial viability may be good for owners but would it be good for the sport and its fans?
The rise of football investing raises subtler questions; what is football for? what wealthy owners mean for the sport itself?
Football, like many sporting or cultural activities, is less a business than a community or public service. It provides meaning for and creates bonds between people, both physically and digitally, through shared experience. Fans care deeply about the game and their club, even when they may not be winning. Scottish friends still talk about the time that the national side scored their first goal against Brazil in a World Cup in 1982; for the record they lost 4-1 and have never beaten the Latin Americans.
The attachment is inexplicable. As Nick Hornby wrote in Fever Pitch: “I fell in love with football as I was later to fall in love with women: suddenly, inexplicably, uncritically, giving no thought to the pain or disruption it would bring with it.” Hornby confessed that the tyrannical control of football over his life and those of people around him as his club Arsenal’s fixture list determined everything -christenings, weddings or any gatherings. In Brilliant Orange, author David Winner wryly documents the place of football, especially the national team’s often brilliant but always idiosyncratic performances, within the Dutch psyche.
The ultra-rich, whether individuals or states, can spend and lose their money how they like. As the old saying goes – to be a millionaire you simply need to start with a billion dollars. The concern is that purchase of the clubs and game by the rich and powerful may be taking away leisure and pleasures of football for many.
Seemingly not content with merely owning the world and running everything, narcissistic ‘rich-‘ and ‘tech-bros’ now increasingly meddle in politics, public policy and international relations despite a lack of requisite domain knowledge. Not content with mere wealth frequently owed to sheer dumb luck, they want to control how we think but our little pleasures.
There are alternatives. The German Bundesliga is amongst the most profitable of European football leagues and games attract large attendance. Clubs cannot be owned by a single owner and the controlling share must be held by supporters. German football is treated as a social good and emphasises affordable supporter access. While German clubs cannot always compete with the richer privately-owned clubs elsewhere in the world, there is something to be said for the model.
Football like the world revolves around avarice – clubs, players, managers and agents are all greedy. Supporters hunger for on-pitch success and trophies. Investors in feeding the insatiable desire of these groups have introduced their own voracious demand into the mix.
A version of this piece was published in the New Indian Express.