So Much for Using the EPL as a Model

[CraigSca]

Portsmouth just 'tip' of football financial folly

By Paul Armstrong and Gary Morley, CNN
February 10, 2010 8:45 a.m. EST


Portsmouth's battle for survival in the Premier League has switched from the pitch to the courtroom.

STORY HIGHLIGHTS

• Portsmouth has estimated debts of $94 million and four different owners over past season
• West Ham's new co-owner said buying the club made "no commercial sense"
• European ruling body UEFA plans to bring in new rules governing debt and ownership
• From 2012 all European clubs will not be permitted to spend more than they earn

London, England (CNN) -- A leading English football club plying its trade in the world's richest league has moved a step closer to financial ruin, in a case which highlights the dire economic climate the "beautiful game" finds itself in.
Portsmouth, currently languishing at the bottom of the Premier League, faces an even greater battle off the pitch as it attempts to block a move by British tax authorities to have it placed in administration due to unpaid taxes.
Having failed to reach a settlement with Her Majesty's Revenue and Customs (HMRC) over an outstanding bill of £7.5 million ($11.76 million), the club was forced to go to court Wednesday to seek an adjournment of a hearing on a winding up petition presented by the HMRC.
With estimated debts of £60 million ($94 million) and four different owners over the past season, Portsmouth's precarious situation lends credence to recent comments made by another Premier League club chairman that investing in football makes "no commercial sense."
After taking control of West Ham in January, new owners David Gold and David Sullivan revealed that the club had debts of more than $160 million. They said the London club's problems stemmed from the ill-fated takeover in late 2006 by an Icelandic group, whose main backers were hit hard by their country's economic meltdown in 2008.
"We would not buy this club at all if this wasn't West Ham. It makes no commercial sense for anyone to buy this club, and it's amazing that two other people wanted to buy it," Sullivan said.
"We bought this as supporters, not from a business point of view. We will raise more money and, with other people, will dig the club out of the mess it is in."
"Football is too heavily dependent on the well-being of a small number of highly-paid individuals.
--Alan Sugar



However, the level of debt prompted Gold to this week to declare that the club's entire playing staff would have to take a pay cut in the summer.
Despite the millions pouring into the Premier League from broadcasting and commercial deals, co-owner David Sullivan pointed to a culture of irresponsible spending sparked by wealthier clubs such as Manchester City and Chelsea.
"They're bad for football. Maybe the ultimate solution is a wage cap," Sullivan told journalists. In the NFL, the salary cap is calculated by looking at the overall earnings of the league and then dividing that number between the individual teams to determine what they can spend that season.
Former Tottenham chairman Alan Sugar also criticized the "irresponsible manner" in which he thinks most football clubs' finances are run.
In an interview with BBC Radio, he said the game's business model was "flawed and vulnerable" and too heavily dependent on the well-being of a small number of highly-paid individuals.
"Cristiano Ronaldo was sold (for $125 million by Manchester United to Real Madrid). God forbid he got run over by the number 36 bus in Madrid -- he'd be worth nothing," he added. "That's how vulnerable football is."
United, regularly near the top of a wealth list compiled by accounting firm Deloitte, recently announced plans to raise $813 million through a bond issue to help refinance crippling debts accrued from the 2005 takeover of the club by the Glazer family.
A year ago, football's finances seemed to be healthier than ever, bucking the trend of global economic hardship.
The total value of the European transfer market had ballooned to a staggering $20.76 billion by the end of the 2007-8 season, and clubs -- especially in England -- splashed out big in the January 2009 transfer market, with the Premier League responsible for a record-breaking $252 million in player purchases.
"The economy of football is not an exception to the rule of economics.
--Jose Maria Gay de Liebena



RELATED TOPICS

• Business
• European Football
• Real Madrid CF
• FC Bayern
• Manchester United FC

Even given those rosy-looking figures of 2007-08, the most recent available, Europe's top clubs then still owed more than $6 billion according to a study by football finance expert Jose Maria Gay de Liébena, an accounting professor at the University of Barcelona.
"Clubs are getting deeper and deeper into the mire of enormous debt, and along with overvalued assets and costs that far outstrip income levels, this is the biggest of football's ills," Gay de Liébena said in his report.
With European ruling body UEFA planning to bring in new rules governing debt and ownership from 2012 which mean clubs cannot spend more than they earn, the pressure is on to find a safe financial footing.
Chelsea's billionaire owner Roman Abramovich responded by converting the $540 million he has given the English club in interest-free loans into equity.
Even Manchester City, owned by Abu Dhabi oil billionaire Sheikh Mansour bin Zayed Al Nahyan, have to keep an eye on their bottom line after figures released by the club revealed losses of almost $150 million. Sheikh Mansour has invested a staggering $630 million since buying the heavily indebted club in August 2008, the figures revealed.
And it's not just in England where clubs, also including the American-owned Liverpool, are battling to stay afloat in a sea of debt -- said to be around $4.3 billion for the whole of the Premier League, according to the Wall Street Journal.
German giants Bayern Munich plan big wage cuts, according to Britain's Guardian newspaper, and may be forced to sell star asset Franck Ribery, long a target of Real, United and Chelsea.
"We are going to try to reduce the wages," the Bundesliga club's director of sport Christian Nerlinger said. "The wages have gone through the roof and, therefore, we have got to get our message through to the players that a new contract does not necessarily mean a pay rise."
Scottish clubs were last year forced to accept a far less lucrative replacement deal from Sky and ESPN following the collapse of Irish broadcaster Setanta, highlighting how precarious the existence of some leagues is.
"The economy of football is not an exception to the rule of economics," Gay de Liébena said. "If one major sponsorship or television deal collapses, the clubs will sink."

[DaddyTorgo]

heh


"Cristiano Ronaldo was sold (for $125 million by Manchester United to Real Madrid). God forbid he got run over by the number 36 bus in Madrid -- he'd be worth nothing," he added. "That's how vulnerable football is."

[DaddyTorgo]

jeezus!

Even Manchester City, owned by Abu Dhabi oil billionaire Sheikh Mansour bin Zayed Al Nahyan, have to keep an eye on their bottom line after figures released by the club revealed losses of almost $150 million. Sheikh Mansour has invested a staggering $630 million since buying the heavily indebted club in August 2008, the figures revealed.

[sterlingice]

Originally Posted by DaddyTorgo

heh


"Cristiano Ronaldo was sold (for $125 million by Manchester United to Real Madrid). God forbid he got run over by the number 36 bus in Madrid -- he'd be worth nothing," he added. "That's how vulnerable football is."

I like that it's not just any bus but "the number 36 bus"

SI

[mrsimperless]

Originally Posted by DaddyTorgo

jeezus!

Even Manchester City, owned by Abu Dhabi oil billionaire Sheikh Mansour bin Zayed Al Nahyan, have to keep an eye on their bottom line after figures released by the club revealed losses of almost $150 million. Sheikh Mansour has invested a staggering $630 million since buying the heavily indebted club in August 2008, the figures revealed.

and it was worth every penny... lolz

[claphamsa]

this is moronic.... it will only make the rich richer....

[GrantDawg]

Originally Posted by claphamsa

this is moronic.... it will only make the rich richer....

What is moronic is that it takes a rule or law to keep teams from being idiotic. How many teams in the EPL have borrowed themselves into oblivion? The EPL set-up is always going to favour the rich teams, and having rival teams borrow themselves into receivership is not a way to bring parity.

[sovereignstar]

Sheikh Mansour has spent a lot of money on infrastructure, not just transfers. Funny that the media loves to keep pointing out how much money they've spent the last year and a half considering they now have little to no debt.

[sovereignstar]

Originally Posted by mrsimperless

and it was worth every penny... lolz

Come again? No serious football fan expected them to end up Top 4 this season, but there is still a good chance of that happening. Like I mentioned in my post above, they've spent lots of money off the pitch. Infrastructure, marketing, etc. Wouldn't expect anyone that says "lolz" to acknowledge that though.

[DeToxRox]

Isn't soccer supposed to be the prototype for which all other sports should follow?

Doesn't seem like it's any better if the "best" league has this many issues. Hell, seems worse.

[BYU 14]

Never thought I would see anybody make Steinbrenner look frugal.

[Marc Vaughan]

There have always been teams who gambled on things coming up black and found the ball sitting in white, the last 'big' side to do this was Leeds United, they got to be a decent team and decided to gamble on being able to achieve Champions League football consistently .... didn't and its taken them years to start to recover (which they are now).

I expect Portsmouth to end up in a similar state, but time will tell - if they do actually 'go down' then it'd be a huge shock to the league over here and maybe just maybe might encourage a few of the mid-sized clubs to see sense in their spending, but then again .... probably not

[Marc Vaughan]

Originally Posted by DeToxRox

Isn't soccer supposed to be the prototype for which all other sports should follow?
Doesn't seem like it's any better if the "best" league has this many issues. Hell, seems worse.

Soccer runs a 'capitalist' economy unlike the socialist economies that American sports ironically contain (weird but largely true if you think about it ).

As such teams speculate on their futures and semi-regularly teams 'implode', normally its the smaller ones who run out of options - but as I posted above now and again a big team does find itself in trouble, its natural for it to occur* ..... in most cases the club in question manages to restructure itself over time and drift down the leagues as they find their financial feet again - during the history of the English leagues only a handful of clubs have ever gone bust totally - the most famous of which 'Accrington Stanley' was reformed and is now in League Two.

Details of the various clubs who've dropped out of the professional pyramid over the years can be found here:

http://en.wikipedia.org/wiki/List_of...l_League_clubs
(re-election was an old system where by the bottom professional club was voted on by the other clubs in that division as to whether they should be retained in the league or the top club from the next lower league (the 'Conference') take their place if I remember right)

*but even as a Brighton fan (we're natural Portsmouth rivals) I hope they survive, it'd be sad to see them go.

[Apathetic Lurker]

Originally Posted by Marc Vaughan

Soccer runs a 'capitalist' economy unlike the socialist economies that American sports ironically contain (weird but largely true if you think about it ).

As such teams speculate on their futures and semi-regularly teams 'implode', normally its the smaller ones who run out of options - but as I posted above now and again a big team does find itself in trouble, its natural for it to occur* ..... in most cases the club in question manages to restructure itself over time and drift down the leagues as they find their financial feet again - during the history of the English leagues only a handful of clubs have ever gone bust totally - the most famous of which 'Accrington Stanley' was reformed and is now in League Two.

Details of the various clubs who've dropped out of the professional pyramid over the years can be found here:

List of former Football League clubs - Wikipedia, the free encyclopedia
(re-election was an old system where by the bottom professional club was voted on by the other clubs in that division as to whether they should be retained in the league or the top club from the next lower league (the 'Conference') take their place if I remember right)

*but even as a Brighton fan (we're natural Portsmouth rivals) I hope they survive, it'd be sad to see them go.

You just want them to survive for the derby's, dontcha? And the hooligan stuff

[Marc Vaughan]

Originally Posted by Apathetic Lurker

You just want them to survive for the derby's, dontcha? And the hooligan stuff

I love derby matches there's nothing quite like them for atmosphere imho.

I vividly remember a Brighton vs Portsmouth cup match from about 15 years back where for some ludicrous reason a group of portsmouth fans were let into the West stand at the Goldstone ground with us Brighton fans.

We were a team on the decline and they were in ascendancy - but on the day it was a close match and I seem to recall we ended up edging them out 1-0 or something similar, great match and improved vastly by the close proximity of Portsmouth fans to wind up

PS - This was back in the day when the grounds were mainly standing room and I still remember being tightly packed in and literally being 'swept' along with the crowd as they moved forward when there was a scoring opportunity ... fantastic stuff

[Mac Howard]

The article has it arse-about-face. In the above cases it's not the football club that is getting the businessman into trouble but the businessman that's getting the club into trouble. In each of the cases above the clubs have been bought by businessmen who couldn't really afford the money they paid or intended to invest in the club.

Man Utd are making enormous profits as a club. But the Glazers bought the club with borrowed money and dumped the debt onto the club. Utd's profits are disappearing in paying off the Glazers' debts. West Ham are in trouble because the owner went bust. Chelsea and Man City will get into trouble if the owners bail out.

There's no question that running a football club has considerable risks in a setup that has promotion and relegation. But that's always been the case and traditionally clubs have been owned by men who have done so for the kudos not the profit. The risks have simply got bigger as the gap between the Premiership and Championship has increased. It's not changed qualitively but quantitvely. Unfortunately, recently we've had a clutch of businessment who think they can profit from a club. Alan Sugar - the one whinging above - was the first businessman to do that.

And it is these businessmen who get other clubs into trouble through their affect on transfer fees and wages.

A salary cap is unlikely to work unless you an create a world-wide system. That's very doubtful You can do it in the NFL because there's nowhere for a player to go if he doesn't like the deal he's offered. That's not the case in soccer. We have a salary cap here in the Australian A-League and it's directly responsible for every player who shows any ability at all leaving the league for Europe or Asia.

I also would think that Real Madrid might have insured themselves against the possibility that Ronaldo takes on a No 36 bus.

[Marc Vaughan]

recently we've had a clutch of businessment who think they can profit from a club. Alan Sugar - the one whinging above - was the first businessman to do that.

It'd be intruiging to know how Sugar actually got on with that - I believe he bought his share in Spurs initially for £20m and sold up for £47m*, but I don't know what other income and/or costs were incurred by him if any (and so can't judge whether he truly made a profit or not).

*£22m in 2001 and the final shares for £25m in 2007.

[Ajaxab]

Originally Posted by Mac Howard

There's no question that running a football club has considerable risks in a setup that has promotion and relegation. But that's always been the case and traditionally clubs have been owned by men who have done so for the kudos not the profit.

Interesting point. It reflects what Simon Kuper and Stefan Szymanski argue in one of their chapters in 'Soccernomics.' They argue that it owning a football club is an inherently bad business decision.

To speak to MV's point, they actually talk about how Alan Sugar ran Spurs within his means and how unpopular he was as a result. Unfortunately, that meant the club wasn't very successful and could only finish mid-table for many years. Sugar made $3 million per year in the first six years, but that was a lot less than Arsenal and apparently pretty poor for a company the size of Tottenham. The authors make the case that Sugar's Spurs "illustrated a paradox: when business people try to run a soccer club as a business, then not only does the soccer suffer, but so does the business" (p.92).

The moral of their story is that if one is going to buy a football club, it should be for love of the game and love of the team, not for profit. To take a profit from the club is to take away some of its potential success.

[I. J. Reilly]

Is this only an issue in England? I thought I read somewhere that there were some really shady things going on with Real Madrid’s finances.

[Marc Vaughan]

To speak to MV's point, they actually talk about how Alan Sugar ran Spurs within his means and how unpopular he was as a result. Unfortunately, that meant the club wasn't very successful and could only finish mid-table for many years. Sugar made $3 million per year in the first six years, but that was a lot less than Arsenal and apparently pretty poor for a company the size of Tottenham. The authors make the case that Sugar's Spurs "illustrated a paradox: when business people try to run a soccer club as a business, then not only does the soccer suffer, but so does the business" (p.92).

But if you think about it from Sugars perspective - he bought the club for 20m and flipped it 10 years later for over double that, while from a pure profitability perspective it wasn't a great success if you view it as a 'stock' then it didn't perform particularly badly (and was also good press for Sugar as his public profile was hugely raised by his involvement in the club - in fact it could be argued that his later TV success with the 'Apprentice' was partially based on the hard headed persona he displayed publicly while owning Spurs).

I'd also argue that while its 'claimed' Spurs soccer suffered under Sugar, if you actually look at their table positions between when Sugar owned them and today there is extremely little difference (under Sugar their 'mid-table' positions included several 7th and 8th positions since then they've only bettered that twice (ending up 5th both times)) ... however they have spent MUCH MUCH more.

What was plain under Sugar was that success was what mattered and the manner in which it was achieved didn't - something which Spurs fans have traditionally cared about, most spurs fans want nice football first and foremost rather than just grinding out points.

PS - I'd also argue that Arsenal is ran as a business far more than most clubs, yet it continues to remain a competitive club because of the clever management of Mr. Wenger.

[PilotMan]

Originally Posted by sterlingice

I like that it's not just any bus but "the number 36 bus"

SI

[DaddyTorgo]

Originally Posted by PilotMan

well played sir!

[Ajaxab]

Originally Posted by Marc Vaughan

But if you think about it from Sugars perspective - he bought the club for 20m and flipped it 10 years later for over double that, while from a pure profitability perspective it wasn't a great success if you view it as a 'stock' then it didn't perform particularly badly (and was also good press for Sugar as his public profile was hugely raised by his involvement in the club - in fact it could be argued that his later TV success with the 'Apprentice' was partially based on the hard headed persona he displayed publicly while owning Spurs).

I would agree with you there. The Soccernomics guys don't seem to be accounting for that which can't be immediately measured monetarily. I would suspect that they would say that if Sugar wanted Spurs to be better than they were that he needed to spend that 20m on the club and not take it as profit a decade later. But his business interests prevented him from doing so. Kuper and Szymanski would also likely say that doubling one's investment in 10 years is a poor return compared to other areas of the economy in which that money could be invested. So it seems they're trying to think about the question at the broadest economic level.

Originally Posted by Marc Vaughan

I'd also argue that while its 'claimed' Spurs soccer suffered under Sugar, if you actually look at their table positions between when Sugar owned them and today there is extremely little difference (under Sugar their 'mid-table' positions included several 7th and 8th positions since then they've only bettered that twice (ending up 5th both times)) ... however they have spent MUCH MUCH more.

I honestly don't know the answer to this question, but was Tottenham spending much, more in an absolute sense or in a relative sense? Were they spending much, much more than they had previously? Or were they also spending much more than Man Utd, Arsenal, Chelsea, etc.? If their increased spending was being matched by these other clubs then it would make sense that their table position would be similar to what it is today.

Originally Posted by Marc Vaughan

PS - I'd also argue that Arsenal is ran as a business far more than most clubs, yet it continues to remain a competitive club because of the clever management of Mr. Wenger.

+1 But that massive debt makes me reluctant to take on the job in FM.

[Mac Howard]

A correction to my post above after lying in bed this morning and thinking about what was said in greater depth. I think now that relegation is not the cause of risk it's the (market) solution to it.

By the time you're relegated you've already failed. Portsmouth's problem is not that it's been relegated it's because it hasn't. It still has the running costs of a Premiership side without the income needed. Once it's relegated its running costs will be significantly reduced and, aided by the "parachute payments", it will have a chance to recover even if, like Leeds, it has to drop one more league before it does.

Relegation is a risk-averse mechanism that moves a club into a lower operating cost environment that gives the club the chance to recover.

If you think about it the football league clubs in England have performed extremely well not just through this recession - which hit Britain even harder than the US - but through the dozen or so recessions since the football league was formed. They even survived the Great Depression - indeed some would argue that many individuals survived that depression (psychologically) because of football. Football clubs were never more popular than in the depression.

Despite repeated recessions in the 20th century only one club has gone bust since the FA's inception as far as I'm aware. That is remarkable. No other commercial operation can come close.

It comes about, of course, because clubs are not just commercial operations but communities. They serve fans not customers and many fans retain their loyalty regardless of success or failure. It is these fans that pull the club around when they drop a league or two by staying loyal and that is what allows clubs to recover. Income is reduced but not as much as operating costs thanks to these fans.

Leeds is not an example of a failing club, it's an example of the resilience of the club system and the capacity for recovery the system has. Bad commercial decisions were made but the system has pulled the club around and its now rising from its temporary ashes. Many other clubs have done the same in past seasons.

Platini/UEFA's problem with the EPL is not its failings but its success that has come at the cost to other European clubs. If he's worried about failing clubs he needs to look to Italy not England where the danger of closure is far greater partially because the Italian fans are far more more fickle than the UK's and Serie A fans refuse to be Serie B/C fans (or even remain Serie A fans when their clubs begin to fail)..

[MIJB#19]

Originally Posted by DeToxRox

Isn't soccer supposed to be the prototype for which all other sports should follow?

Doesn't seem like it's any better if the "best" league has this many issues. Hell, seems worse.

From what I learnt over the past decade and a half, in soccer there are no good examples on how to run a business at all. It's far from a well hidden fact that most of the clubs in the big leagues are actually stuck in huge debt. For example, AC Milan and ManUtd sold Kaka and Cristiano Ronaldo to get some relief, while at the same time Real Madrid got in even more dept by their absurd purchases.

With those actions, they pull the rest of their respective leagues into dept with them. The only way to remain competitive and try to avoid relegation is spending more money. And at the same time the big clubs in other leagues, and consequently the weaker clubs in the other leagues.

But apparently Fiorentina and Leeds United (to name a few went-bankrupt-clubs) haven't been clear enough cases for what's going on.

[Big Fo]

MLS certainly isn't using the EPL or La Liga as a model. They do talk with the folks who run the Bundesliga, which is more regulated financially to try and prevent teams from overspending and going into debt and has a more even distribution of TV money. In Spain for instance, each club negotiates their own TV deal and the money that Real Madrid and Barcelona bring in combined is a similar amount as the other 18 clubs combined.

[sterlingice]

Originally Posted by DaddyTorgo

well played sir!

+1

SI

[Senator]

Hastings United will never move up, but by God, they will stay in the black.

[Abe Sargent]

Originally Posted by Mac Howard

A correction to my post above after lying in bed this morning and thinking about what was said in greater depth. I think now that relegation is not the cause of risk it's the (market) solution to it.

By the time you're relegated you've already failed. Portsmouth's problem is not that it's been relegated it's because it hasn't. It still has the running costs of a Premiership side without the income needed. Once it's relegated its running costs will be significantly reduced and, aided by the "parachute payments", it will have a chance to recover even if, like Leeds, it has to drop one more league before it does.

Relegation is a risk-averse mechanism that moves a club into a lower operating cost environment that gives the club the chance to recover.

If you think about it the football league clubs in England have performed extremely well not just through this recession - which hit Britain even harder than the US - but through the dozen or so recessions since the football league was formed. They even survived the Great Depression - indeed some would argue that many individuals survived that depression (psychologically) because of football. Football clubs were never more popular than in the depression.

Despite repeated recessions in the 20th century only one club has gone bust since the FA's inception as far as I'm aware. That is remarkable. No other commercial operation can come close.

It comes about, of course, because clubs are not just commercial operations but communities. They serve fans not customers and many fans retain their loyalty regardless of success or failure. It is these fans that pull the club around when they drop a league or two by staying loyal and that is what allows clubs to recover. Income is reduced but not as much as operating costs thanks to these fans.

Leeds is not an example of a failing club, it's an example of the resilience of the club system and the capacity for recovery the system has. Bad commercial decisions were made but the system has pulled the club around and its now rising from its temporary ashes. Many other clubs have done the same in past seasons.

Platini/UEFA's problem with the EPL is not its failings but its success that has come at the cost to other European clubs. If he's worried about failing clubs he needs to look to Italy not England where the danger of closure is far greater partially because the Italian fans are far more more fickle than the UK's and Serie A fans refuse to be Serie B/C fans (or even remain Serie A fans when their clubs begin to fail)..

Nicely written

[Mac Howard]

From this morning's Guardian newspaper:

Portsmouth could be handed a lifeline in their struggle to avoid sinking into oblivion after it emerged that the Premier League was considering bringing forward the £11m parachute payment the club would earn if relegated at the end of this season.

Richard Scudamore, chief executive of the Premier League, was said by the Daily Mail last night to be canvassing the other 19 top-flight clubs to see whether they would be willing to endorse the plan, which would keep the south coast club afloat and enable it to fulfil its fixtures

Portsmouth could well go under because they can't yet take advantage of the recovery mechanism of relegation that I described above because they could go under before the end of the season. Fortunately Scudamore seems to have understood that and suggests bringing forward one aspect of that process to save the club..

Pompey fans are some of the most dedicated fans in the UK and for their sake I hope the FA see the light and the move succeeds.