Wednesday, December 7, 2011

Money's Too Tight To Mention At Inter

It’s fair to say that Inter have had better starts to the season. Although they qualified from the Champions League group stage with a game to spare, they currently languish in 16th place in Serie A. Admittedly they have a game in hand, but they are still a colossal 14 points behind league leaders Juventus with a third of the season gone.

The triumphant 2009/10 season when the nerazzurri became the first Italian team to win the treble of the scudetto, the Coppa Italia and the Champions League in a single year under the guidance of José Mourinho seems a distant memory. Inter fans have become accustomed to success, as that triumph meant that their team had won five league titles in a row (including the one awarded to them for 2005/06 by the courts after the calciopoli scandal).

There are many reasons behind this decline, not least an aging squad, but most of the problems are off the pitch. The board’s lack of a long-term strategy is evidenced by the rapid turnover in coaches since the “special one” moved to Real Madrid in the summer of 2010. Rafael Benitez’s miserable six-month reign did not reach Christmas, while past Brazilian international Leonardo lasted little longer, as he joined Paris Saint-Germain in June 2011.

His replacement, the former Genoa boss Gian Piero Gasperini, fared no better, as he was unceremoniously sacked after four defeats in five games, notable only for a plethora of formations that confused his own team rather more than the opposition. The current incumbent, Claudio Ranieri, brings vast experience to the role, but he is Inter’s fifth manager in less than two years.

"Should I stay or should I go?"

The club’s confusion is further highlighted by the names of the other managers that they approached for the position, including the likes of Fabio Capello, Guus Hiddink, André Villas-Boas and Marcelo Bielsa. If you can discern any similarities in their tactical approaches, then you’re a better man than me. Unsurprisingly, they all rejected the poisoned chalice.

The other explanation for Inter’s woes is financial, namely that the club no longer splashes out the vast sums on recruiting players that it has done in the past. Their modus operandi under long-serving president Massimo Moratti has been to run the business at a huge loss ever year, which has only been made possible by the owner covering the deficit with continual capital injections.

In fact, in the 16 years since Moratti took over, the club has accumulated losses of around €1.3 billion with the president personally putting in over €750 million. Moratti has been criticised by many Inter fans, but he can hardly be accused of not putting his money where his mouth is. Even if his decisions have not always been the best, the reality is that the president’s financial support has been an absolutely essential part of the club’s success.

However, this approach will not work in the future, as Inter are faced with the new challenge of UEFA’s Financial Fair Play (FFP) Regulations, which will ultimately exclude from European competitions those clubs that fail to live within their means, i.e. make a profit.

The first season that UEFA will start monitoring clubs’ financials is 2013/14, but this will take into account losses made in the two preceding years, namely 2011/12 and 2012/13, so Inter’s accounts need to rapidly improve.

However, they don’t need to be absolutely perfect, as wealthy owners will be allowed to absorb aggregate losses (“acceptable deviations”) of €45 million, initially over two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions. The maximum permitted loss then falls to €30 million from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount).

This effectively means that Inter need to slash their spending, especially transfer fees and wages. Although the new rules have destroyed Inter’s traditional business model, they were initially welcomed by Moratti, ”Some thought that FFP was against owners like me, but I say that at last it means that I can stop putting money into football every day. Inter are so expensive that I wouldn’t recommend it to anyone. I hope that FFP allows us to experience football in a different way.”

The impact on Inter’s activity in the transfer market has been dramatic. In the 12 years up to the end of the 2009 season, their net spend was €473 million (with staggering gross spend of €831 million), while the last three seasons has seen net sales of €24 million. Even when Mourinho spent big on the likes of Samuel Eto’o, Diego Milito and Wesley Sneijder, this was more than covered by the amazing fee received from Barcelona for Zlatan Ibrahimovic.

The new regime was explained this summer by chief executive officer Ernesto Paolillo, “We have to sell, then after we have sold we will see what Inter will buy. Absolutely, we are thinking of FFP.” His views were echoed by sporting director Marco Branca, when explaining that the club could no longer afford the fees commanded for top talent like Alexis Sanchez, “We have to organise our finances for the financial fair play rules in the next two years. We are looking for younger players now with great talent, who we can develop.”

That policy has meant the arrival of youngsters like Ricardo Alvarez, Yuto Nagatomo and Philippe Coutinho, but the reluctance to spend also contributed to the departure of Rafael Benitez, who had issued the club with a “back me or sack me” threat.

This belt tightening is clearly evident when looking at the net spend in Serie A over the last three seasons with Inter’s net sales of €24 million only exceeded by Udinese, a famous selling club. Although it is true that most clubs have reduced their transfer expenditure, it is noticeable that in the same period two of Inter’s main rivals, Juventus and Napoli, lead the way with over €100 million apiece. Juventus currently lead the league, while Napoli are going great guns in the Champions League…

Of course, that is the downside of turning the taps off, as there is a good chance that the team will become less competitive, at least in the short-term. There has clearly been a diminution in Inter’s offensive capacity with Ibra and Eto’o (21 goals in Serie A last season) being followed by Mauro Zarate and Diego Forlan, especially as the Uruguayan is ineligible for the Champions League group stages.

The fundamental reason that the club needs to address its finances is, of course, its massive losses. Over the last five years, these have amounted to a shocking €665 million. Eat your heart out, Manchester City. A couple of years ago, Moratti attempted to explain this, “The considerable loss is justified to keep our team at the top level worldwide.” In other words, it’s the price of success.

There are a couple of ways of looking at the trend. On the one hand, the losses have been largely reducing since the €207 million reported in 2007, but on the other hand there was certainly plenty of room for improvement. The best result in recent years was the €69 million loss in 2010, though that was heavily influenced by the Champions League success and the sale of Ibrahimovic.

What is quite worrying is the deterioration last season to an €87 million loss, especially as the word on the street was that the deficit would be “only” €60 million, thus raising grave concerns that the plan to be in line with FFP was already in tatters.

Of course, Inter are by no means alone among Italian teams in making losses. If we look at a schedule of the profit and loss accounts of Serie A teams over the last two (fully reported) seasons, it’s a sea of red ink with only six clubs profitable over that period. However, it’s the magnitude of Inter’s losses that is striking with the club recording the largest losses in each of those seasons. Their cumulative loss of €223 million was far higher than the next worst club, Milan with €77 million.

The other negative point to note is Inter’s high reliance on player sales. In fact, if we exclude profit from this activity plus the largely positive impact of exceptional items, then the situation becomes even more stark, as the underlying loss has averaged around €150 million over the last four years.

Profit on player sales was worth an impressive €72 million in 2010 (largely Ibrahimovic €54 million, Biabiany to Parma €5 million and Maxwell to Barcelona €4 million) and a net €31 million in 2011 (mainly Balotelli to Manchester City €22 million, Burdisso to Roma €8 million and Destro to Genoa €5 million). The latter sum would have been even higher if Inter had not had to write-off an incredible €21 million on some player sales, notably Quaresma to Besiktas (€13 million) and Mancini to Atletico Mineiro (€5 million).

Both 2006 and 2007 were adversely impacted by a change in the accounting treatment for the amortisation of transfer fees, while 2006 was boosted by the sale of Inter’s brand to a subsidiary. In the last couple of years, profits have been enhanced by €16 million compensation paid by Real Madrid to secure Mourinho’s services and a €13 million payment by RAI for the right to use the image library.

It’s not as if Inter’s revenue is too shabby. In fact, for 2009/10 (the last season when all Italian clubs have published their accounts), their revenue of €225 million was the largest in Serie A with only Milan and Juventus anywhere near them. Roma were the only other club with revenue above €100 million, while the others were miles behind the nerazzurri.

Inter’s revenue also places them 9th in Deloitte’s European Money League, which on the face of it is pretty good, though problems begin to emerge when we take a closer look, as they are a long way short of their peers abroad. Real Madrid and Barcelona, generate around €400 million, which is around twice as much as Inter. As well as benefiting from substantial individual TV deals, the Spanish giants are also allowed to count membership fees as income (instead of capital increases).

Both Manchester United and Bayer Munich earn around €100 million more, the English taking advantage of significantly higher match day revenue, while the Germans’ commercial expertise puts Inter to shame. This vast revenue discrepancy makes it difficult to compete, especially when that shortfall in turnover occurs every year.

Those of you who take a keen interest in football finances may be wondering why the revenue figures used in the Money League are lower than those reported in Italy. The reason for the difference is that Italian accounts report gross revenue, while Deloitte uses net income, as this is consistent with the approach used in other countries. Therefore, for 2009/10 this excludes the following: (a) gate receipts given to visiting clubs €3 million; (b) TV income given to visiting clubs €18.4 million; (c) revenue from player loans €1.1 million; (d) change in asset values €3.4 million. Adding the €25.8 million adjustments to the €224.8 million in my analysis gives the €250.6 million reported in Italy.

Inter’s challenge is made all the more difficult by the underlying problems in Italian football. This year a report form the Italian Football Federation (FIGC) concluded, “The current business model is difficult to sustain and not very competitive.” Its president, Giancarlo Abate, noted that in particular match day income, sponsorships and merchandising were in need of urgent attention to reduce the reliance on TV money.

Ten years ago the total revenue of clubs in Serie A of €0.9 billion was only just behind the Premier League’s €1.1 billion and practically double the other major leagues (Bundesliga, La Liga and Ligue 1), who all earned around €0.5 billion. Last year, the picture looked very different with the Premier League’s revenue surging to €2.4 billion, while the Bundesliga and La Liga had both caught up with Serie A at €1.5 billion with Ligue 1 trailing at €1.2 billion.

This is reflected in the revenue growth of leading European clubs. Although Inter’s growth looks pretty good against other Italian teams, it pales into insignificance compared to top teams in Spain, England and Germany. Two examples will illustrate that: first, Arsenal’s revenue in 2005 was €28 million less than Inter’s, but is now €48 million more; second, Barcelona’s revenue was only €47 million higher six years ago, so just about within striking distance, but is now far over the horizon at €234 million higher. As Milan’s CEO, Adriano Galliani said, “Twenty years ago Milan invoiced more than Real Madrid, today only half. That’s the real problem.”

Overall, Inter’s revenue has only grown by 13% in the last five years from €188 million to €213 million. Like all the big Italian clubs, the majority of Inter’s revenue (59%) comes from television with €124 million. According to the FIGC report, Serie A has the highest dependency on TV income of any of the leading five leagues at 65%, compared to France 60%, England 50%, Spain 38% and Germany 32%.

The flaws in Inter’s business model are clear with only 25% generated by commercial operations (€54 million) and 15% from match day (€33 million). In the last two years, these last two revenue streams have barely increased at all and only television has contributed any meaningful growth, largely due to a more lucrative Champions League contract.

In 2009/10, Inter earned an impressive €138 million from television, which was the highest in Italy, thanks to a combination of an attractive domestic individual deal and those Champions League millions. Only Juventus and Milan were in the same ballpark (for identical reasons), while all other Italian clubs received considerably less money, e.g. Napoli, Lazio and Fiorentina got less than half those sums at around €40 million.

Years of protest at this lack of a level playing field finally led to a new collective agreement being implemented at the beginning of last season. There is a complicated distribution formula, which still favours the bigger clubs, though the result is a small reduction at the top end. Under the new regulations, 40% will be divided equally among the Serie A clubs; 30% is based on past results (5% last season, 15% last 5 years, 10% from 1946 to the sixth season before last); and 30% is based on the population of the club’s city (5%) and the number of fans (25%).

So, the larger clubs will lose out from the new arrangement, but mid-tier clubs should benefit. There has been much discussion over how the number of fans (worth 25% of the deal) will be calculated, leading to a major dispute between the larger clubs and the smaller clubs, but this now looks to have been resolved.

An article in La Repubblica suggested that Inter would lose €8 million, but the reduction reported in the accounts is far smaller with the domestic TV money falling just €3 million from €89 million to €86 million, though it is not clear whether this is a final figure or just an estimate while negotiations continued.

One reason that the decrease might be lower than anticipated is that the total money guaranteed in the new collective deal by media rights partner Infront Sports is approximately 20% higher than before at around €1 billion a year, which cements Italy’s position as the second highest TV rights deal in Europe, only behind the Premier League, but significantly ahead of Ligue 1 and La Liga. In fact, Italy’s deal is worth twice as much as the Bundesliga.

That’s particularly impressive, given how little is received for foreign rights, though there is some optimism that this will increase in the next round of contract negotiations. On the other hand, it is not completely clear what will happen with the 2013-15 deal for domestic rights. Although €2.5 billion has been secured from Sky/RTI for 12 of the 20 Serie A clubs, the league is still to determine how to handle rights for the eight clubs not included.

Somewhat puzzlingly, I can find no trace in Inter’s accounts of prize money for the UEFA Super Cup (runners-up €1.2 million) and the FIFA Club World Cup (winners $5 million) that were both disputed in 2010, so it might be the case that this money will only be booked in the 2011/12 accounts.

The Champions League has been kind to Inter financially with over €115 million received in the last three years in participation and prize money alone, though Europe’s flagship competition can be something of a double-edged sword, as their revenue declined by €11 million in 2011 from €49 million to €38 million, due to Inter only reaching the quarter-finals compared to winning the trophy the previous season. Those are just the television distributions, but there are also be additional gate receipts and bonus clauses in various sponsorship deals.

The Europa League's TV distribution is very low in comparison, so last season the four Italian representatives only earned around €2 million each. Although none of them progressed further than the last 32, the highest pay-out was still only €9 million. However, at least this tournament still delivers additional gate receipts.

One glaring weakness for Inter is match day revenue, which is very low at €33 million, down from €39 million the previous year, largely due to a reduction in Champions League gate receipts from €17 million to €7 million.

Although this is the highest in Italy, it is tiny compared to leading clubs abroad. This is perhaps best illustrated by a comparison with Manchester United and Arsenal, who earn €126 million and €108 million respectively. This works out to around €4 million revenue a match, which is over three times as much as Inter (€1.3 million), even though their stadiums are smaller.

Inter’s average attendance of 58,000 in 2010/11 is impressive (again the highest in Italy) and was actually the eighth best in Europe, but San Siro suffers from having hardly any premium seats or corporate boxes, which are the money spinners elsewhere.

This is why Inter have been exploring opportunities for moving to a new stadium that could maximise their revenue earning potential, including naming rights, as explained by Paolillo, “In Europe the stadium makes money seven days out of seven.” Not only that, but Inter have to pay €4.3 million rent a year to the local council, who own the stadium.

Unfortunately for Italian clubs, Italy failed in their bids to host either the 2012 or 2016 Euros, which would have been a catalyst to upgrade. Juventus are the only top club that owns its own stadium, which they hope will double their match day income. Even that project was beset with bureaucratic delays, which is why Paolillo hopes that new laws will be introduced to facilitate the construction of new stadiums. Patience will still be required, as Moratti recently explained that it would not be possible to move “in the short-term”.

Even after a €6 million rise in commercial revenue in 2011 from €48 million to €54 million, this is still fairly low for a club of Inter’s history. Perhaps understandably it’s less than Milan and Juventus, but it’s only just higher than Roma and Napoli. More pertinently, it’s significantly lower than Bayern Munich, who earn an astonishing €173 million.

Inter have enjoyed very long-term relationships with commercial partners, but this may have prevented them from taking up more lucrative opportunities elsewhere. Pirelli have been Inter’s shirt sponsor since 1995, but only pay €12 million a year. Similarly, kit supplier Nike have been partners since 1998, also paying €12 million a year.

To be fair, this compares favourably with deals at other Italian clubs: (a) shirt sponsors: Milan – Emirates €12 million, Juventus – BetClic €8 million, Napoli – Lete €5.5 million and Roma – Wind €5 million; (b) kit suppliers: Milan – Adidas €13 million, Juventus – Nike €12 million, Roma – Kappa €5 million and Napoli – Macron €4.7 million.

The issue is that these deals are much lower than leading clubs abroad. For example, the following clubs all have shirt sponsorships worth more than €20 million a season: Barcelona, Bayern Munich, Manchester United, Liverpool, Manchester City and Real Madrid.

Belatedly, they are looking to make more from global opportunities, hence playing the Italian Super Cup match against Milan in the Bird’s Nest stadium in Beijing, but they have a lot of ground to make up.

The other factor damaging Inter is one facing all Italian clubs, namely a problem with fake merchandising. They can seemingly do little to prevent this, but have asked the state to tackle the issue. That’s a generic issue, but one specific to Inter is the annual €16 million payment for use of the brand after the earlier operation to sell this to one of its subsidiaries.

However, the most important challenge for Inter is their wage bill. The good news is that they managed to cut this by €44 million in 2011 from a frightening €234 million to €190 million, thus reducing the important wages to turnover ratio from 104% to 89%, so it now comprises player salaries €149 million, coaching staff €16 million, bonus payments €13 million, other staff €6 million and social security €6 million.

On the face of it, this is a notable achievement, but it masks some worrying factors. The main reasons for the decrease were a €38 million cut in bonuses, due to the Champions League payments the prior year, and a €9 million reduction in coaching salaries, following the departure of Mourinho. The player salaries actually rose by €3 million, which was not in the plans, probably due to the number of “senior citizens” still on the books.

In addition, this is still a very high wage bill by anybody’s standards. As a comparison, it’s only €10 million below big-spending Manchester City’s €200 million (the highest wage bill ever reported by an English club). It’s also more than a third higher than the €142 million paid by Inter as recently as 2006.

Furthermore, it remains one of the largest wage bills in Italy, e.g. in 2009/10 Inter’s wages were about the same as Juventus and Roma combined. An analysis by La Gazzetta dello Sport this summer suggested that Milan had overtaken Inter in the wages stakes (at least for the first team squad) with €160 million compared to €145 million, but it’s far from certain that their figures are accurate. In any case, a wage to turnover ratio of just under 90% is nothing to write home about and is much worse than UEFA’s recommended maximum limit of 70%.

The other element of player costs, namely amortisation has also been reduced in 2011 from €61 million to €53 million, though it is still two thirds higher than it was in 2008, and is higher than other leading Italian clubs with Milan, Juventus and Napoli the closest at around €40 million.

For non-accountants, amortisation is the annual cost of writing-down a player’s purchase price, e.g. Gianpaolo Pazzini was signed for €19 million on a 4½ year contract, but his transfer is only reflected in the profit and loss account via amortisation, which is booked evenly over the life of his contract, i.e. €4.2 million a year (€19 million divided by 4.5 years).

"Old man river keeps rolling along"

Despite Inter’s history of large losses, they have publicly welcomed FFP. Paolillo said that the initiative was the right one for the football industry in order to avoid the collapse of clubs, likening the state of the sport’s finances to the sub-prime banking crisis. More specifically, he added that Inter was up for the fight, “We will be ready to meet all the standards set by UEFA and we are working on various fronts. That means cutting costs and increasing revenues.”

All of the losses made to date are not considered for FFP, as the first accounts to be included in the calculation are those for 2011/12. Inter seem quite optimistic about their ability to meet the targets with talk of reducing the loss to €30 million this season and reaching break-even in two years, which would be within UEFA’s acceptable deviation of €45 million for the first two years.

However, that is by no means a done deal, especially as Inter’s track record for financial planning is not the best, as seen by last year’s figures where the loss widened to €87 million, much worse than the forecast improvement to €60 million.

"Me and Julio down by the school yard"

So let’s try to project Inter’s loss for 2011/12, based on the information we already have. This is accompanied by a health warning that this type of analysis will never be 100% accurate, as some of the reported figures are not certain, e.g. transfer fees, wages and contract extensions. Nevertheless this exercise should give us a strong indication of whether Inter are at all close to achieving their objectives.

1. Exceptional Items

By definition, the 2010/11 once-off €13 million payment for use of the image archive should not be repeated every year, so this should be excluded.

2. Financial Fair Play Adjustments

It is not generally appreciated that UEFA’s break-even calculation is not the same as a club’s statutory accounts, as it excludes certain expenses that are considered to represent positive investment, such as expenditure on youth development (€10 million) and community (€2 million) plus depreciation on tangible fixed assets (€4 million), which gives a total of €16 million to be deducted.

Youth development and community investment are not separately disclosed in the accounts, so these values are estimates based on similar reviews of other clubs.

"Two Diegos for the price of one"

3. Revenue

Even though there is much potential for growing revenue in the long-term, Inter have limited scope for increases next year. Nothing will happen on the stadium front, the TV deal is unchanged and the club is locked in to its main sponsorship agreements. The only wild card is how far Inter progress in the Champions League – though there is also the issue of what happened to the €5 million revenue from the UEFA Super Cup and the FIFA Club World Cup.

All in all, I have assumed that revenue remains flat.

4. Profit on Player Sales

The post-balance sheet events section in Inter’s accounts inform us that they have already made €25 million profit on player sales, largely due to Eto’o going to Anzi Makhachkala and Davide Santon to Newcastle United. Unless further sales are made in the January transfer window, this means a €6 million reduction year-on-year, as 2010/11 included €31 million profit here.

The problem for Inter is that they would need to maintain this level of player sales each year (unless they can compensate for €25 million elsewhere), so their fans can expect at least one star, such as Sneijder, Maicon or Julio Cesar, to be sold next summer. Indeed, Sneijder has already admitted, “Inter need money and I’m for sale if the right offer comes in.”

Of course, a strategy of “selling the family silver” is finite (and potentially counter-productive), unless Inter acquire an ability to develop players for sale, maybe through their academy. What’s for sure is that Inter will never repeat the mega profits made from the Ibrahimovic coup.

5. Wages

Inter are attacking their wage bill on a number of fronts: (a) a “salary cap” of €3 million for a first team player, unless he is a superstar; (b) the future remuneration package will have a lower basic salary with a higher bonus element geared to success; (c) contracts for older players will extended at a lower salary; (d) expensive, fringe players will be offloaded when possible, e.g. Sulley Muntari; (e) high earners like Eto’o, Mancini and Suazo will be allowed to leave; (f) and replaced with younger, cheaper players.

This all sounds very logical, though some strange decisions have still been taken, such as the recent contract extension for Lucio, who has been a great player, but whose best days are clearly behind him.

Using the salaries published in La Gazzetta, the impact of new signings in 2011 is estimated to increase the wage bill by €22 million. Note that Pazzini, Ranocchia and Nagatomo were all recruited in January 2011, so the cost impact for 2011/12 is only six months.

"Ricky, don't lose that number"

For the departures, I have taken the net salaries from La Gazzetta and uplifted them by 50% to calculate the gross cost with the exception of Eto’o whose cost has been widely reported as €20 million. That produces savings of €39 million in 2011/12.

Similarly, the net impact of loan deals (Zarate and Poli in, Pandev and Mariga out) is a €1 million saving.

In total, the wage bill should come down by €18 million – though there will obviously also be the impact of Primavera moves, any new contracts and bonus payments.

There is talk of slashing the wage bill to around €120 million, but that is a long way off.

6. Player Amortisation

Although the 2011 signings have relatively low salaries, they also increase the costs via the amortisation of their transfer fees, which I have estimated as €18 million per annum, though the impact in 2011/12 will be only €14 million, due to some costs being booked last year for players purchased in January.

The €12 million forecast reduction in amortisation should be fairly accurate, as these figures are taken directly from Inter’s accounts. There is no improvement shown for some departures, as the players were either home-grown (so no amortisation) or have been fully amortised in the accounts, e.g. Marco Materazzi.

The net impact is a small increase of €2 million, though I would expect Inter’s frugal policy in the transfer market to eventually bear fruit, leading to a sizeable reduction in a few years.

Adding up all of the factors above (1 to 6) would produce a 2011/12 loss of €88 million for Inter, though this falls to €72 million once the FFP adjustments are excluded. Little wonder that Moratti warned, “We are not yet able to balance the books. I don’t know how Italian clubs will play in the Champions League in future, if UEFA’s fair play is confirmed.”

Looking at the projected figures, his recent pessimism is perfectly understandable, but there is a clause in the small print of the FFP regulations (Annex XI) that states that clubs will not be sanctioned in the first two monitoring periods, so long as: (a) the club is reporting a positive trend in the annual break-even results; and (b) the aggregate break-even deficit is only due to the 2011/12 deficit, which in turn is due to player contracts undertaken prior to 1 June 2010.

In other words, Inter would be allowed to exceed the “acceptable deviation” of €45 million by the costs of pre-June 2010 signings, so long as the 2011/12 deficit was only due to this factor.

Assuming that this clause refers purely to wages (and does not include player amortisation), I have calculated this exclusion for “big name” players to be €66 million. Note that players whose contracts have been extended since 1 June 2010 are not counted (as explicitly noted in the regulations), so I have not included Milito, Zanetti, Sneijder and Lucio.

This would reduce the FFP result for the break-even calculation to just €6 million, which I am sure UEFA would look on favourably.

So it seems that Inter’s old boys might have saved them once again. Although this is a temporary factor, it does at least buy Inter more time to get their house in order, though, as we have seen, that effectively means more work (a lot more work) on the wage bill.

Of course, the greatest threat to Inter’s bottom line next year is if they fail to qualify for the Champions League (for the first time in 10 years). Given their awful start, that is no longer a formality, especially as Italy now only has three places following the loss of one to Germany this season, though it should be remembered that their form in the second half of last season was superlative and they should be helped by the return of some of their stars from injury.

"King Money"

Some have suggested that UEFA would never apply the ultimate sanction of throwing a leading club out of their competitions, but Moratti is not so sure, “I do believe they will go ahead with it, so you can’t pretend it’s not happening.” His view are supported by UEFA’s General Secretary, Gianni Infantino, “We will apply these rules strictly in order to safeguard the future of our game.”

In the meantime, Inter are pushing ahead with their plans, including a focus on youth, not just in terms of buying less experienced players, but also their own academy. Even if their youngsters do not progress to the first team, they can be sold profitably or used as makeweights in deals, as Biabiany was when buying Pazzini from Sampdoria.

From the perspective of FFP, it would make little sense for Moratti to step aside, as benefactors are no longer allowed to support losses by putting in money. That said, it is possible that a Sheikh or Russian billionaire might be better placed to secure “friendly” sponsorship deals, as Manchester City have done with Etihad.

For the time being, it looks like Inter will have to continue on their path of austerity, echoing the philosophy of the new Italian government. In truth, they are caught between a rock and a hard place, as they need to rapidly cut costs, but at the same time their squad is in urgent need of rejuvenation. It’s a tricky problem, but they somehow need to resolve it if they wish to once again compete at the highest levels.


  1. I'm happy to see and hear that clubs are taking FFP seriously, an American, a level playing field means if you get your one big signing wrong, in this case Forlan, then you are really hosed for a season.

    I also agree with you that "friendly" sponsorships are going to be the end around - CEOs of large MNCs with hundreds of shell companies will easily be able to cut some deals.

  2. Brilliant post!!!!
    Keep them rolling!!!
    Can we have one on Liverpool??? :)

  3. Just to correct: inter won 5 championships in a row INCLUDING the 2005/2006 awarded after calciopoli. The 2004/2005 scudetto was not awarded to anybody since the championship was deemed completely off-tracked by calciopoli facts.

  4. @_nero,

    Of course, you're quite right. Thanks for that - now edited and corrected.

  5. Another thing to bear in mind for Inter from now on is that, starting this year 2011/12, the number of Italian clubs allowed to compete in the Champions League has been reduced from four to three.

    The Bundesliga gets its participation increased from three to four, reflecting the greater comparative success of German clubs than Italian clubs in recent years, notwithstanding Inter's victory under Mourinho.

    So, the question for Inter this year is will they manage to clamber up the table to at least third place this season.

    I wouldn't bet on it.

  6. @Frank,

    Absolutely right. I meant to mention that point, which I've included in other blogs about Italian clubs, but for some reason omitted it. I've taken the liberty of amending that paragraph. Thanks.

  7. What happens to the club which comes third in the Italian League from this season on? Do they have to play a pre-qualifying opponent or two, as Arsenal had to do this season, or do they go straight into the Champions League group stage?

  8. @Frank,

    3rd place goes into Champions League play-off round.

  9. Thank you for the amazing post. As an Interista this is very worrying, just an unbelievable mess in losses these years. Italy is in a really tough spot.

  10. Hi SR,
    Great article, two quick questions if you don't mind.

    Firstly, what would happen if Moratti were to leave unexpectantly by choice or otherwise?

    Would the club be able to continue as a going concern? Their revenue has potential to grow for the reasons you mentioned, it almost makes the balance sheet the important factor in whether the club has capability to the bring itself to a more sustainable level.

    Secondly, and out of professional interest, could you please explain how the revenue is gross again?


  11. Fantastic article, as always. Congratulations

  12. Excellent article. This just confirms what we Inter fans feared - that we will be selling 1 or 2 of our stars next summer as well. Inter will need 3-4 years at the very least to build the next championship winning squad and start a new era.

  13. The biggest problems are the old players draining the wage bill and the inadequate stadium situation. Both could be solved if the could would want to, however I dont really think that Moratti is in it anymore.

  14. Hi,
    Thanks for the excellent contribution to the discussion.

  15. I've been curious about this for a while - when you mention player transfer fees being amortized to Profit and Loss account, is it also that the transfer fees shown as an asset in the balance sheet is reduced by the amount amortized, much like depreciation on immovable assets?

    Great work btw, I've been following your excellent site for a while now. Never fails to live up to the thoroughness I've come to expect from it.

  16. @Anyonymous (1.58),

    Yes, that's right. The value of the asset in the balance sheet is reduced by the amortisation charge.

  17. amazing stuff as always, I've been waiting for someone to have a proper look at inter.

    I would take one slight exception with what you were saying above about inter being a selling club because they generate profits from the sale of players, because that kind of gives a kind of misleading impression.

    As a crude illustration, Say Inter sold Zlatan for €70 million and booked the profit at the start of the 2009-10 season. They also got his €10 M salary off the books. But they then went out and spent every single penny on players over the age of 26, like eto'o, sneijder, milito, motta, lucio, pandev, and quite a few miscellaneous other young players who have vanished without trace.

    Because of the amortization process, lets say that those players were signed on four year deals, the process looks like €72 million in, only €18 million out in increase amortization payments, but every year for the next four years, and then you get on to the six enormous wage packages that you've added.

    Because they went straight back out and spent all of the money, on a load of experienced, but expensive players, they got a great short-term shot in the arm, and with some good organization, and a good slice of luck, it paid off immediately with a european cup win.

    But beyond the first season, it has made the clubs problem of Too many old players, on insanely high salaries worse, and that is killing them on the field, and damaging their ability to rebuild the squad.

    So the effect of selling zlatan was a short term cash windfall, that was turned into a huge rise in the annual cost of supporting the squad. In the accounts you can see that over two years the wage bill jumped by €50 million (I know that a good chunk was bonuses) in the two years under mourinho, and amortization jumped €30 million, that's €80 million a year extra that the club need to earn to break even.

    It's an old trick that some football managers use. I like to call it the Harry-Rio gambit in honour of what harry did when he sold rio ferdinand to leeds. They booked a huge profit on selling him, and then harry went out and spent every single penny on the fees of 6 or 7 largely useless players, and their 6-7 wage packets nearly bankrupted the club. So the sale of rio ferdinand went from being A great financial windfall, to nearly destroying the club.

    But then again jose only did what was asked of him, which was to win the european cup, and he wanted to restore his somewhat tarnished reputation, before getting the hell out of there. What did jose care about what would happen 2 years after he left, when inter would be fielding an insanely expensive team, with an average age of 31, with all of the slowing down, and increased succeptability to injury that that entails.

  18. Hopper, great post and nice different view :)

  19. Peter250, I may have misunderstood you when you said the following:

    …eg. Player X is valued at £30m. I'm moneybags albion and I offer you £1m up front for player X (5 year contract). After his first game, I will pay you an additional £20m, after his first goal £10m. First international cap £1m. If we win the league £2m.

    ...Bought a player for a total potential expense of £34m, but the impact on amortisation (and thus relevant expense for FFP) if as above is only £200k per year.

    Seems open to abuse for me....

    Yes, the amortisation would be only £200k for each of the five years of the contract. However, assuming the player plays just one game and also scores one goal, the selling club receive a further £30m as part of the performance-related terms of the contract.

    In that case, either this £30m would be charged in full as an expense for the first year of the contract or, more likely, would also be spread over the length of the contract.

    In the first case, the buying club would have a huge expense to add to the wages of a £30m player and in the second case would have a normal level of amortisation spread over five years, exactly as happens normally at present.

  20. Thanks for the great article as usual. But I'm wondering why you didn't refer to the recent Gazzetta salaries report. Also, I've heard that Inter had 5 new sponsorhip deals which are long contracts. The club's recent strategy to bring in young players shows their efforts to tighten their belts, however, this article painted somewhat too bleak prospect.:-(

  21. @Anonymous (5:30),

    Actually I did refer to the recent Gazzetta salaries report here: "An analysis by La Gazzetta dello Sport this summer suggested that Milan had overtaken Inter in the wages stakes (at least for the first team squad) with €160 million compared to €145 million".

  22. Really great blog! Very insightful. Where do you get the information on Italian clubs' finances, may I ask?

  23. there are errors:

    Pazzini 12M + biabiany
    Alvarez 5,5M + bonus
    Nagatomo 7M
    Castaignos 3M
    Benedetti 4M?? Ridicoulous

    1. @Anonymous (8:27),

      What I like more than anything is when I spend days researching an article and then some joker comes along and blandly states that there are errors without providing a shred of evidence to back up his (or her) figures.

      Wherever possible I have taken the transfer fees from Inter's own published accounts. For example, the fees for Pazzini, Nagatomo and Benedetti are from page 24 of the accounts for FC Internazionale Milano SpA. The exact figures are as follows:

      Pazzini €19,000,000
      Nagatono €10,950,00
      Beneditti €4,112,000

      I would accept that the fees for Castaignos and Alavarez have been reported at different values in different publications, but Alavarez is often shown as €5.5 million plus €4 million bonus, which is why I opted for €9.5 million.

  24. hi there.. a very great article..
    but i'm wondering how you get the financial report of FC Internazionale SpA? is it public available? i'm searching through the web and not found it yet.. as an interista and an accounting student, this report will be very interesting for me..
    sorry for bad english..

  25. Suming down... No Calciopoli => No internazionale...

  26. Thank you for explaining the situation. An update after this horrible 2012-2013 season with INTER ending 9th would be very much appreciated.

    Best regards from Arad, Romania ^^


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