The Premier League TV Deal - Master And Servant

Premier League chief executive Richard Scudamore is a man accustomed to dealing with large numbers, but even he struggled to believe just how much his negotiating team had secured in the latest auction for the rights to broadcast his “product” in the UK. The amount was an astonishing £5.136 billion for the three-year cycle starting in the 2016/17 season, which represented a 70% increase on the current £3 billion deal.

This was a lot more than most analysts had expected, especially given that the current domestic TV deal had itself increased by 70% compared to the previous agreement. The magnitude of the increase was a testament to Scudamore’s ability to generate vast sums of money for the 20 Premier League clubs, but we could have done without his false modesty: “Am I surprised? Of course, the little old Premier League, doing quite well here.”

It should be emphasised that this deal is only for the UK live rights. We need to add the highlights package for which the BBC has paid £204 million (up from the previous £180 million) to give total UK TV rights of £5.340 billion, which represents a 67% increase.

In addition, the overseas rights for the 2016-19 cycle will only be sold towards the end of the year. These are currently worth around £2.2 billion with most observers reckoning that there will be another healthy increase. I’ve gone with a reasonably conservative 30%, which is in line with the estimate from well-known media analyst Claire Enders. This would take the overseas rights deal up to £2.9 billion, which would mean a 52% increase in the total rights from £5.4 billion to £8.2 billion.

Others have assumed a higher increase in the overseas rights, which would give a potential total of £8.5 billion (or even as much as £9 billion), but Ed Woodward, Manchester United’s executive vice-chairman, cautioned that the overseas rights were unlikely to increase at the same rate as the UK rights, which benefited from some specific reasons: “A record number of companies requested tender documents and serious interest emerged from several companies.”

The potential new entrants included Eurosport, backed by new parent company Discovery, and the Qatari broadcaster BeIn Sports, but the UK rights were once again shared between Sky, who paid £4.176 billion (up a noteworthy 83% from £2.3 billion) and BT, who paid £960 million (up a more modest 30% from £738 million).

The nature of the bidding process, namely a blind auction, clearly helped drive the increase, resulting in (likely) total annual revenue of around £2.7 billion, nearly a billion higher than the current £1.8 billion. That would be split between: the guaranteed domestic £1.780 billion (up from £1.066 billion) and the assumed overseas £968 million (up from £744 million). To place this into context, the initial Premier League TV contract back in 1992 was worth the princely sum of £51 million a season.

The new UK deal has increased the cost per game by 56% from £6.5 million to £10.2 million – or an amazing £113,000 a minute. The percentage growth is a bit lower than the absolute cost, as this deal includes more games per season (up from 154 to 168). Sky in particular have had to shell out a lot more for their share of the rights with their cost per game rising 69% from £6.6 million to £11.0 million (for 126 games). In contrast, BT’s cost per game has only increased by 18% from £6.5 million to £7.6 million (for 42 games).

All this lovely TV money has significantly improved the revenue of the Premier League clubs. In the 2013/14 season, which was the first of the current three-year deal, Liverpool received the most (£98 million), while bottom placed Cardiff still pocketed a cool £62 million. Half of the UK deal is shared equally among the 20 Premier League clubs, while 25% is linked to where a club finishes in the league and the remaining 25% is based on the number of times the club is televised live. The overseas TV deal and central commercial revenue is distributed equally.

That’s none too shabby, but the projected figures for the new deal (from the 2016/17 season) are even more impressive. Based on the 67% growth in the UK rights and the assumed 30% growth in the overseas rights, the top club would receive £152 million (up £54 million), while the 20th placed club would get £92 million (up £30 million). The size of the Premier League TV deal also explains why some clubs appear not to take the FA Cup that seriously, as the winners only receive around £3.5 million (in total).

The Premier League has one of the fairest distribution models in Europe, but it is worth noting that the gap between top and bottom would increase from £36 million in 2013/14 to £60 million in 2016/17.

This all assumes that the redistribution methodology remains the same, which Scudamore would not guarantee, though he was “absolutely confident that the clubs will do the right and proportionate thing.” He’s almost certainly right – so long as the right thing involves allocating the lion’s share of the money to themselves.

The much larger TV money enjoyed by Premier League clubs compared to the majority of their European peers, allied with the relative equality of its distribution, is evidenced by the Deloitte Money League. Not only did the number of Premier League clubs in the top 20 increase from six to eight in the 2013/14 edition, but even more strikingly, the number of Premier League clubs in the top 30 compared with last year has risen from eight to 14 and all 20 Premier League clubs are now within the top 40 globally.

In this way, Aston Villa earn more revenue than Roma, while Southampton generate more than Benfica, which might seem crazy to traditionalists, but is the logical result of the massive influx of TV money into the English Premier League. The absolute giants, like Real Madrid, Barcelona and Bayern Munich, are likely to remain at the top of the financial pyramid, but the rest of the Money League will come to be dominated by English clubs.

Although TV deals in the other major European leagues have also been on the rise, their growth rate has been nothing like as fast as the Premier League. The projected deal for 2016/17 of £2.7 billion a season is almost as much as the combined revenue from the deals for Serie A, the Bundesliga, Ligue 1 and La Liga, which is worth around £2.9 billion. In fact, if we were to use the current Euro exchange rate of 1.35, then it would actually be higher.

The next highest TV deal is Serie A, which will be around £1 billion in 2017/18 (€1.2 billion), while the Bundesliga and Ligue 1 are both around £0.7 billion. Even though the Bundesliga will have doubled its TV rights in the 10 years since 2001, it is still only projecting €835 million for 2016/17 (including a forecast of €162 million for international rights). The latest Ligue 1 deal also shows a healthy increase: 20% in the domestic deal (from 2016/17) and 150% in the international deal (from 2018/19), but again is way behind the Premier League. The Spanish league is estimating €800 million, which equates to around £0.6 billion.

The rise in TV money should therefore increase the competitiveness of Premier League clubs relative to their foreign competitors, but Scudamore was also at pains to note that it would also raise competitiveness within the league itself, thanks in part to the most equitable distribution of TV revenue among the top five European leagues.

The ratio of revenue from first to last in the Premier League is 1.6, which is indeed lower than the other leagues. Only the Bundesliga comes close at 2.0 (Bayern Munich £30 million, Eintracht Braunschweig £15 million) with La Liga at the opposite end of the spectrum at 7.8 (Real Madrid and Barcelona £112 million, Almeria £14 million). The distribution is also much wider than the Premier League’s in Italy, which has a 5.3 ratio (Juventus £75 million, Sassuolo £14 million), and France 3.4 (Paris Saint-Germain £36 million, Ajaccio £10 million).

Another way of looking at this is that all Premier League clubs already receive more money from their domestic league TV deal than all but 5 other European Clubs: Real Madrid, Barcelona, Juventus, Inter and Milan. When the new Premier League deals starts in 2016/17, this list will reduce to just Real Madrid and Barcelona – and even that is in doubt following La Liga’s decision to move to collective bargaining, where the top club will only be allowed to receive 4 times more than the lowest club.

Some of the comparatives are really striking, e.g. Bayern Munich (£30 million), Atletico Madrid (£34 million) and Paris Saint-Germain (£36 million) all received a lot less for winning their respective leagues than Cardiff (£62 million) did for being relegated from the Premier League. As Scudamore put it, somewhat jarringly, but completely accurately, “Burnley are now, economically, bigger than Ajax.”

Given the equitable distribution of the Premier League TV money, the importance of qualifying for the Champions League is underlined. In the 2013/14 season this was worth an average of £32 million to the English clubs, but the size of the prize will significantly increase from the 2015/16 season with the new deal. UEFA advised the European Club Association that clubs could expect a 30% increase in revenue, but the uplift should be even higher for English clubs, as BT’s exclusive acquisition of UK rights is double the current arrangement with Sky.

Financially there is already a large gap between the Premier League and the Championship, where clubs currently receive around £4 million a season, comprising £1.9 million central distribution from the Football League deal plus a £2.3 million solidarity payment from the Premier League. Those clubs relegated from the Premier League receive a parachute payment, which was £24 million for year 1 in the 2013/14 season, in place of the solidarity payment.

This means that the majority of clubs in the Championship last season received a hefty £58 million less than the club that finished bottom in the Premier League. Those clubs receiving parachute payments had £22 million more than a “normal” Championship club, but still £36 million less than the lowest Premier League club.

From 2016/17 that gap is likely to become an abyss, despite the Football League announcing last week what they described as “a significant financial boost on two fronts” with an extension to the current broadcasting agreement with Sky Sports and a new (higher) mechanism being put in place for the solidarity agreement.

No financial details were divulged for the Football League TV deal. It was portrayed as “the most lucrative in The Football League’s history”, but it is only a one-year extension covering the 2018/19 season (with the League also having an option to further extend the arrangement into 2019/20). Given the deal before the current one was worth £2.5 million a season (i.e. higher than he current £1.9 million), let’s assume that the extension might be worth around £3 million.

The new approach to the solidarity payment is more interesting, as this has now effectively been formally linked to the size of the Premier League TV deal, being equivalent to 30% of a third-year parachute payment. Note: League 1 and League 2 clubs will respectively receive 4.5% and 3% of a third-year payment. Based on my assumptions, that would increase the annual solidarity payment to £6.5 million from the current £2.3 million.

That would imply that TV money for a Championship club would rise to £8-9 million, while a club with a year 1 parachute payment would receive a mighty £38 million. However, here’s the thing: the gap to the bottom Premier League club would still increase from £58 million to £84 million. Mind the gap, indeed.

Note that the 2016/17 parachute payment to relegated Premier League clubs of £36 million is an estimate, based on the current approach, whereby the amount distributed as parachute payments is linked to the size of the TV deal, specifically to the equal shares received by Premier League clubs for both the domestic and overseas deals: 55% in year 1, 45% in year 2 and 25% in each of years 3 and 4 (adding up to a total of 150%).

Last week’s Football League announcement noted that from 2016/17 parachute payments will be reduced from the current four seasons to three seasons. I have assumed that the total paid out will be the same in percentage terms (i.e. 150%) and I have also maintained the methodology that has higher payments in the early years. There is obviously a number of assumptions here, but the central point about the gap to the Premier League increasing is likely to remain valid.

It does feel like the Football League has to be grateful for any crumbs that they might be given from the top table. Granted, this is still a lot of money, but everything is relative. The risk is that clubs will continue to extend themselves either in pursuit of promotion to the Premier League or to stay in the top tier.

Indeed, most of the additional money from previous TV deal increases has simply been spent on higher player wages, transfer fees and agents (Alan Sugar’s famous “prune juice” effect). To illustrate that point, since 2007 the wages to turnover ratio in the Premier League has deteriorated from 63% to 71% as wages have grown at an even faster rate than revenue.

However, that may well not be the case this time round, as clubs now have to operate within Financial Fair Play (FFP) regulations. Most pertinently, the Premier League’s rules have specific clauses relating to TV money, so clubs whose player wage bill is more than £52 million will only be allowed to increase their wages by £4 million per season for the next three years. It should be noted that this restriction only applies to TV money, so any additional income from higher gate receipts, new sponsorship deals or profits from player sales can still be spent on wages, but TV is clearly the most important revenue stream for most Premier League clubs.

Interestingly, the current regulations run to the end of the 2016 season, so it is more than likely that the thresholds will be revised upwards in line with the new TV deal, though the principle of not “wasting” all of the increase on player wages will almost certainly still be followed.

"Perfect Blue"

There is still likely to be an inflationary impact on transfer fees, as even mid-tier Premier League clubs will be in a position to outbid most leading European clubs, especially as they will be effectively restrained by UEFA’s FFP rules. This effect will be exacerbated by the strengthening of Sterling against the Euro, which will also boost the purchasing power of English clubs. That said, they will be forced to pay a premium compared to continental clubs, as sellers will be acutely aware of their higher bank balances.

Scudamore noted that the additional money would help clubs attract the best available talent to the Premier League, “People want to see the top stars here”, but he slightly weakened his argument when he added, “Look at the excitement of transfer deadline day”, which could surely only be enjoyed by anyone with a somewhat bizarre appreciation of yellow clothing.

The hope is that clubs will use some of the TV windfall to reduce ticket prices, especially as the vast majority of Premier League clubs’ revenue now comes from TV. Even in 2012/13, which was before the 2013/14 increase in TV money, let alone the new 2016/17 deal, half of the clubs sourced more than 65% of their revenue from television – and it’s only getting more important.

If we take Stoke City as an illustration, 70% of their 2012/13 revenue came from television, rising to 77% in 2013/14 and an estimated 84% in 2016/17. Just let that statistic sink in for a moment: when the new TV deal starts, less than one-fifth of Stoke’s revenue will come from gate receipts and commercial income.

So what? Well, at the risk of sounding like John Lennon (“you can say I’m a dreamer”), as gate receipts become less important as a revenue stream, that might just increase the chance of lower ticket prices. As an example, the Football Supporters’ Federation calculated that just 3% of the increase from the latest deal would pay for their “Twenty’s Plenty” campaign, which is an attempt to cap away ticket prices at £20. At the very least, clubs should freeze the current price levels.

Regardless of the moral imperative, there are sound commercial reasons why lowering ticket prices might be good for business. It would make football more affordable for youngsters (or a future generation of customers) and it would protect the brand by not only filling stadiums, but also improving the atmosphere with less of the “prawn sandwich” brigade. This was acknowledged by Scudamore: “Clubs understand that the number one strategic priority is to keep the stadiums full. They also need to understand that young fans must be encouraged to attend games. The clubs will do the right thing.”

Let’s hope so, but I’ll not hold my breath. Immediately after the deal, we were treated to the standard, mealy-mouthed response from a football club executive, this time Manchester United’s Ed Woodward, “Our prices are fairly priced compared to the market.” From a supply and demand perspective, he’s obviously right, given that last season saw record average attendances of 36,696 and stadium occupancy of 95.9% in the Premier League, but this stance excludes great swathes of society that simply cannot afford to go to a match these days.

"Richard Scudamore - shake your money maker"

One risk is that all this additional wealth will simply provide a return on the investment made by owners, especially as so many of the clubs have been bought by overseas investors. For some, it is clearly a vanity project rather than a commercial enterprise, but others have arrived with a hard-headed business strategy.

Scudamore admitted that “reducing losses and making clubs more sustainable…. does make clubs more attractive to investors”, though he cautioned that “it’s a pretty risky investment unless you are purchasing a club that can pretty much guarantee its Premier League status.” What might be better for investors on a risk-reward basis is to acquire a Championship club for a relatively small investment, then push for promotion to the Premier League and its associated riches.

There will also inevitably be an impact on the prices paid by subscribers to Sky Sports and BT Sports, though it is unlikely to reflect the entire increase. As Scudamore said, “If you look at what happened last time, we delivered a 70% increase and in no way has that been passed along in anything like the direct proportions to the consumer.” Indeed, Sky promised that “the majority of the funding would come through substantial additional savings to be delivered by efficiency plans.”

This raises the question of why Sky paid so much for these rights. Even though the old saying would have it that “he who pays the piper calls the tune” (certainly accurate when it comes to the scheduling of many matches), it is equally true that Sky’s business model is very dependent on Premier League football, which has been the driver for their revenue growth. This is especially the case now that Sky have lost the Champions League rights to BT from the 2015/16 season, which incidentally also increased their war chest available for the Premier League rights.

"In the City"

They literally could not afford to also lose the Premier League rights, so put in blockbuster bids to ensure that this nightmare scenario did not happen, also winning the most popular packages in the process (Super Sunday, Monday Night Football, Saturday lunchtime and the new Friday Night “Lights”).

The need for high-quality content is imperative for their so-called “quad play”, i.e. TV, broadband, mobile and phone customers. As MLS commissioner, Don Garber, explained, “Content is king and sports content is the king of kings.”

What is surely undeniable is that more of the Premier League TV money should benefit the grassroots. As Clive Efford, the shadow sports minister, put it: “These are incredible sums of money and it would be nothing short of criminal if none of this extra money goes to expand participation at the grassroots of football.”

Scudamore has defended the Premier League against the accusation that they should do more: “We have a very good track record of investing some of this money in the wider interests in football and the community. Overall we give away on an annual basis about £270 million. It will be £800 million over the course of this deal.”

However, these figures have to be reviewed very closely. In previous years, the Premier League have made great play of the fact that they distribute 15% of their revenue externally, but the reality is that this includes parachute payments to the relegated clubs, which is hardly what most people mean by “grassroots”.

According to the Premier League’s Season Review for 2013/14, the external payments amounted to £285 million, split between £169 million parachute payments and £116 million external distributions, i.e. just 6% of revenue. Unfortunately, the season review no longer fully details the external payments, but the previous years highlight the minimal growth in most areas, e.g. the money given to the Football Foundation actually fell.

Since 2010 the Premier League’s revenue has grown by £878 million from £1.037 billion to £1.915 billion. The vast majority of this growth £732 million has gone to Premier League clubs with a further £106 million boosting parachute payments, leaving just £41 million for additional external payments.

Put another way, just 5% of the Premier League's revenue growth  has gone to external distributions. There should surely be a moral responsibility to give the grassroots a larger slice of the cake. Yes, the Premier League might pay out substantial sums in absolute terms (and more than other leagues), but it could and should do more, e.g. it could link all external payments to the size of the TV deal in the same way they have just done with solidarity payments.

"Thank you for sending me an Angel"

If the clubs do not agree on such action themselves (and it has to be said that their altruistic record to date is not overly encouraging, e.g. not even paying a living wage to all their employees), then it might be down to the government to get more involved and legislate a broader distribution of the money to benefit grassroots football, especially as the sheer size of the new deal will mean that the Premier League’s actions will be under more scrutiny than ever.

In fact, the Premier League’s domestic TV deal is the second largest in world sports with the £1.8 billion only bettered by the NFL (American Football) whose deal until 2022 is worth an annual £3.2 billion. However, the Premier League’s new deal has overtaken the NBA (basketball), whose nine-year deal from 2016/17 is worth £1.7 billion, and is nearly twice as much as the £1.0 billion earned by the MLB (baseball). That said, even Scudamore admitted that “it might be a very, very long time” before the Premier League surpasses the NFL.

All of this assumes that the Ofcom investigation into the Premier League’s collective selling of TV rights concludes that that it is not anti-competitive. This review follows a complaint by Virgin Media that the Premier League makes a lower proportion of live matches available to be broadcast in the UK than other rival European leagues. Theoretically, if Ofcom rule in favour of Virgin Media, then the TV rights auction may have to be re-run under different rules.

There is no doubt that this is a spectacular TV deal, which will provide immense benefit to the 20 Premier League clubs. However, it is difficult to fully accept Scudamore’s overly simplistic view of his organisation: “Things like the Premier League, the BBC and the Queen are things that people feel are good about the UK. Ultimately, we’re a success story.”

To a large extent, yes, but the overwhelming feeling is that the TV money largely allows the Premier League to lord it over everybody else, so that they can indulge in their own version of Depeche Mode’s “Master and Servant”, both in terms of overseas leagues and all other parts of domestic football – from the Championship down to the grassroots. Simply put, the colossal amount of money now pouring into England’s top flight from the TV companies should be more fairly distributed. Then, all football fans could be genuinely proud of the Premier League.

Chelsea - Hey Hey, My My (Into The Black)

By the standards of most clubs, Chelsea’s 2013/14 season was pretty good, as they finished 3rd place in the Premier League and were semi-finalists in the Champions League, but it must have felt a little disappointing after capturing silverware in each of the previous two seasons: the Europa League in 2012/13 and, most memorably, the Champions League and FA Cup in 2011/12.

However, this did not stop their progress off the pitch, as they reported record revenue of £320 million, up 25% on the prior year, and profit of £19 million (before tax), compared to a loss of £51 million in 2012/13. Equally importantly, given Chelsea’s history of being bankrolled by their owner Roman Abramovich, these results ensured that “UEFA’s break-even criteria under the Financial Fair Play (FFP) regulations continue to be satisfied.”

Chairman Bruce Buck was keen to note that the club’s new focus on its finances had not dramatically impacted their performance on the pitch, “while improving our financial figures, we remained competitive in football’s toughest competitions.”

In 2013/14 Chelsea improved their bottom line by £70 million, as they managed to convert a £51 million loss before tax to a £19 million profit. After tax, the figures improved from a £49 million loss to an £18 million profit.

The £70 million profit improvement was mainly driven by significantly higher profit on player sales (Luiz, Mata and De Bruyne), which increased by £51 million to £65 million, and revenue growth, including £39 million from the new Premier League TV deal and £29 million from sponsorship and merchandising income. This was partially offset by higher player costs with the wage bill up £20 million, amortisation (cost of expensing transfer fees) up £14 million and impairment (writing down player values) of £19 million.

This is the second profit Chelsea have made in three years and the largest since Abramovich became owner of the club in 2003. When they were making large losses, the club famously predicted that they would break-even one day and this has now become a reality, albeit a few seasons after they hoped to achieve this milestone. It should be noted that the £1.4 million profit registered in 2011/12 was largely due to £18.4 million profit on the cancellation of preference shares previously owned by BSkyB.

Of course, Chelsea have been making substantial losses in the Abramovich era, amounting to £631 million in the eight years up to 2011, including a hefty £140 million loss in 2005, as the owner poured money into the club to build a competitive squad.

Part of this is due to so-called exceptional items, which have increased costs by £121 million in the last decade, due to compensation paid to dismissed managers £61 million, impairment of player registrations £28 million, the early termination of a former shirt sponsor £26 million and tax on image rights £6 million.

However, it is profit from player sales that is having an increasing influence on Chelsea’s figures. In the seven years between 2005 and 2011, Chelsea made £73 million from this activity, but have made £108 million in just three years since then, most notably £65 million last season (up from £14 million), largely due to the sales of David Luiz to Paris Saint-Germain, Juan Mata to Manchester United and Kevin De Bruyne to Wolfsburg. In particular, Chelsea would have made a loss of £46 million instead of a £19 million profit without these sales.

Chairman Bruce Buck played this down, “we financed player purchases from sales”, but there’s a lot more to it than that. The strategy is to acquire young talent and develop it in a cost-effective way, making extensive use of the loan system, notably at Dutch club Vitesse Arnhem, which appears to be an unofficial feeder club for Chelsea.

On a few occasions, a player will succeed in establishing himself in Chelsea’s first team, one example being goalkeeper Thibaut Courtois, but most players are effectively being developed for future (profitable) sales, while being placed in the shop window at the same time. Not every player will bring in big money, of course, but the strategy only needs a couple of lucrative sales to be successful. Although it will be far from easy to sustain these profits, we already know that next season’s accounts will also be boosted by the £28 million sale of Romelu Lukaku to Everton.

This approach has been questioned by some commentators, especially as an incredible 30 players have left Chelsea on loan this season, but the Blues are by no means the first club to adopt such a “buy low, sell high” strategy with Udinese having done similar for many years. Complaints would include treating players like stocks and shares, not to mention ensuring other clubs cannot buy this promising talent, but there are no rules against it – yet.

It is undoubtedly a smart strategy in the FFP era, as the club had to wean itself off its reliance on its Russian owner to cover its operating losses. Basically, any investment in a youth academy can be excluded from the FFP break-even calculation, while profits made from player sales are included in the analysis. Furthermore, if the players are loaned, then most of the wages are covered by the loanee clubs.

It remains to be seen whether more academy players make it at Chelsea, though there are high hopes for Ruben Loftus-Cheek, Lewis Baker and Izzy Brown in particular, but either way Chelsea’s new trading strategy has helped drive the improvement in their financials.

For this purpose, it is important to note how clubs account for player trading. When a club buys a player, it does not show the full transfer fee in the accounts in that year, but writes-down the cost (evenly) over the length of the player’s contract. So, if Chelsea splash £32 million on a new player with a 4-year contract, the annual expense is only £8 million (£32 million divided by 4 years) in player amortisation (on top of wages).

However, when that player is sold, the club reports the profit on player sales, which is essentially sales proceeds less any remaining value in the accounts. In our example, if the player were to be sold 3 years later for £35 million, the cash profit would be £3 million (£35 million less £32 million), but the accounting profit would be £27 million, as the club would have already booked £24 million of amortisation (3 years at £8 million).

Up to now, this has surely only interested accountants, but it’s become very relevant for FFP. Furthermore, any players developed through a club’s academy have zero value in the accounts, so in these cases any sales proceeds represent pure profit. Chelsea are clearly highly aware of this accounting treatment. In fact, their annual report notes that the club has valued its playing staff at £353 million, while the accounts value is only £226 million.

Even Jose Mourinho has commented on Chelsea’s revised strategy: “We are making money to be able to spend money. In every transfer window Chelsea is losing players, is selling players. In the winter one we sold Mata; in the summer one we sold David Luiz and Lukaku. So Chelsea in this moment is not a spender – Chelsea in this moment is making more money in transfers than the money we spend.”

As well as player trading, Chelsea have significantly increased their ongoing revenue, which was up £64 million (25%) from £256 million to £320 million, driving through the £300 million threshold for the first time. Both broadcasting and commercial grew substantially, broadcasting up £35 million (33%) from £105 million to £140 million and commercial up £29 million (37%) from £80 million to £109 million, while match day was flat at £71 million.

In fact, since 2009 match day revenue has fallen 5% from £75 million to £71 million, while commercial more than doubled from £53 million to £109 million and broadcasting grew 77% from £79 million to £140 million.

Chelsea’s revenue of £320 million remains the 3rd highest in England, only behind Manchester United £433 million and Manchester City £347 million, though still ahead of Arsenal £299 million (in 4th place, natch).

All clubs in the Premier League have grown their revenue in the 2013/14 season, as they all benefit from the new TV deal, but the two Manchester clubs have increased their revenue by more than the others: City are £76 million up, United £70 million up, while Chelsea grew by “only” £60 million. In this way, the gap is getting bigger.

Chelsea had the 7th highest revenue in the world in 2012/13 with £260 million, according to the Deloitte Money League, which is obviously far from shabby, but was still a long way below the Spanish giants, Real Madrid £445 million and Barcelona £414 million, and Bayern Munich £370 million.

We will not know whether Chelsea’s position will change in the 2013/14 version until PSG publish their accounts, but the gap will close, partly due to Chelsea growing at a faster rate (23%) than Madrid (6%), Barca (0%) and Bayern (13%). This trend is exacerbated by the strengthening of Sterling with the exchange rate against the Euro improving from 1.1668 to 1.25.

As match day revenue barely changed in 2013/14, while both broadcasting and commercial grew significantly, its share of Chelsea’s revenue has dropped from 28% to 22%. Broadcasting is up from 41% to 44%, while commercial is up from 31% to 34%.

After finishing 3rd in the Premier League, Chelsea’s share of the new Premier League deal was £94 million, up £39 million (71%) from £55 million. All PL clubs get an equal share of half of the domestic deal and all of the overseas deals. The remaining 50% of the domestic deal is allocated based on a merit payment for finishing position and a facility payment based on number of games shown live.

Chelsea also received €43 million for reaching the semi-final of the Champions League, which was slightly higher (at least in Euro terms) than the €42 million they received from Europe the previous season: €31 million from the Champions League, despite elimination at the group stage, and €11 million for winning the Europa League, when they overcame Benfica in the final. Of course, it is not as high as the €60 million earned in 2011/12 when Chelsea beat Bayern Munich in a dramatic final to win the Champions League.

The new Champions League deal from the 2015/16 season will further increase the prize money with UEFA recently advising the European Club Association that clubs could expect a 30% increase in revenue. The uplift may be even higher for English clubs, as BT’s exclusive acquisition of UK rights is double the current arrangement.

It’s worth exploring how the TV (market) pool is allocated. Chelsea’s share of the UK market pool is dependent on both how far they progress (compared to other English clubs) and their finishing place in the previous season’s Premier League. In this way, Chelsea (€18.5 million) earned less than Manchester United (€23.8 million), even though they progressed one stage further (semi-final compared to United’s quarter-final), as they only finished 3rd in the previous season’s Premier League, while United finished 1st.

Commercial revenue rose £29 million (37%) from £80 million to £109 million, partly due to increases in the Samsung shirt sponsorship from £13.8 million to £18 million and an extension in the Adidas kit supplier deal until 2023, which increased the annual payment from £20 million to £30 million. In addition, the club signed new partnerships with Rotary, Hackett, Coral, William Lawson’s, Indosat and Guangzhou R&F Football Club.

However, Chelsea are unlikely to improve on their 9th place in the Money League, as every other leading club is also focused on growing this revenue stream. In particular, Bayern Munich have managed to increase commercial income from £203 million to £233 million, more than double Chelsea. PSG’s numbers are inflated by their €200 million deal with the Qatar Tourist Authority.

To reinforce this point, in England Manchester United have increased commercial income by 171% (£119 million) to £189 million, which is better than Chelsea’s 106% (£51 million) over the same period – and that’s before United receive the full benefit of their massive new Chevrolet and Adidas deals. Similarly, Manchester City is now up to £166 million, driven by their Etihad sponsorship. Chelsea are still way above Arsenal, though the Gunners’ PUMA deal only starts from the 2014/15 season.

Time will tell whether former Liverpool managing director Christian Purslow, who has been recruited as head of commercial activities, will manage to bring in new sponsorship deals, though he certainly talks a good match (as seen in countless TV and radio appearances).

There have been numerous reports of Chelsea switching shirt sponsors from Samsung to Turkish Airlines next season, which would increase the value from £18 million to £25 million. This would be more in line with the £25-30 million deals that most other elite clubs have (Arsenal – Emirates, Real Madrid – Emirates, Barcelona – Qatar Airways, Bayern Munich – Deutsche Telekom), though still a long way short of Manchester United’s Chevrolet deal of £47 million (depending on US$ exchange rate).

Match day income rose slightly by £0.3 million (0.5%) from £70.7 million to £71.0 million. This was no surprise, as the club explained, “with Stamford Bridge filled to capacity year after year there was no scope for significant financial growth in this area. General admission ticket prices remain frozen at 2011/12 levels.” This revenue stream peaked at £77.7 million, thanks to the success in the Champions League and the FA Cup.

Chelsea’s match day revenue is around £30 million lower than Manchester United, Arsenal, Madrid and Barca, as they have much bigger stadiums. This explains why the club has spent so much time searching nearby locations for a new stadium, but they were outbid for the Battersea Power Station and have ruled out moves to sites in Earls Court and Old Oak Common. The club now appears to be focusing on expanding Stamford Bridge’s capacity form 42,000 to 55,000, though this would be a tricky, lengthy exercise, so revenue is unlikely to meaningfully increase here for many years.

Wages increased by £20 million (12%) from £173 million to £193 million, though the wages to turnover ratio lowered from 67% to 60% following the 25% revenue growth. This ratio has improved every year from the recent 82% peak in 2010. Note that these wage figures have been adjusted for exceptional items, e.g. in 2013/14 the reported staff costs of £190.6 million have been adjusted for a £2.1 million credit for the release of a provision for compensation for first team management changes.

Chelsea therefore still have the third highest wage bill in England of £193 million, behind Manchester United £215 million and Manchester City £205 million, but ahead of Arsenal £166 million.

In Euro terms, Chelsea’s €241 million is just behind Real Madrid €250 million and Barcelona €248 million, but ahead of Bayern Munich’s €215 million – though this depends on the exchange rate used (1.25 here, as this is likely to be the 2013/14 Deloitte Money League rate).

Although Chelsea are still spending big in the transfer market, e.g. this summer saw the arrival of £32 million Diego Costa from Atletico Madrid and £30 million Cesc Fabregas from Barcelona, net spend is declining, thanks to equally big money sales, such as David Luiz £40 million and Romelu Lukaku £28 million (and, by the way, major kudos to whoever secured so much money for those sales).

That said, if we look at the last three seasons, only Manchester United have outspent Chelsea: £231 million against £137 million. Both Chelsea and Manchester City £128 million have clearly been impacted by the advent of FFP, so much so that Arsenal and Liverpool are now spending at similar levels.

Even though Chelsea still report substantial operating losses in the P&L, the operating cash flow has been positive for the last two seasons after adjusting for non-cash flow items, such as player amortisation and depreciation, and working capital movements. Nevertheless, Chelsea still require funding from the owner to cover player purchases and other investments, resulting in £51 million net financing in 2013/14.

However there is no debt in the football club, as this has all been converted into equity by issuing new shares. That said, the club’s holding company, Fordstam Limited, does have around £1 billion of debt (£984 million as of June 2013) in the form of an interest-free loan from the owner, theoretically repayable on 18 months notice.

Given Chelsea’s several years of heavy financial losses, many observers had believed that they would fall foul of FFP, but that has not been the case, as confirmed by the club: “The latest financial results combined with those from the previous two years mean that for the second monitoring period for FFP we will fall comfortably within the limits set by UEFA, who measure expenditure against the income from football-related activities. Chelsea also complied with FFP criteria over the first monitoring period.”

The club has taken advantage of some of the allowable exclusions for UEFA’s break-even analysis, namely youth development, infrastructure and (for the initial monitoring periods) the wages for players signed before June 2010. As we have seen, FFP is now being addressed by the new player trading model, but it is clear that this legislation has been at the forefront of Chelsea’s thinking.

Even the self-proclaimed “Special One” has got involved, though not without a degree of irony: “Chelsea is working in relation to Financial Fair Play, but I think it is a contradiction, because it was to put teams in equal conditions to compete and what happened really with the Financial Fair Play is a big protection to the historical, old, big clubs, which have a financial structure, a commercial structure, everything in place based on historical success for years and years and years.”

Hence, Chelsea’s new focus on living within its means. That will mean using a combination of profits from player development (and sales) and further increases in commercial income. As Bruce Buck put it, “Going forward, we have ambitious plans to build a pioneering global commercial programme, partnering with innovative and market-leading organisations from around the world. In the era of FFP, we must progress commercially to continue the circle of success to invest in the team and get results.”

In the meantime, Chelsea’s 2013/14 results are maybe best summarised by the wonderful Neil Young, “out of the blue and into the black”, as they have demonstrated that it is possible for them to remain successful while also balancing the books.

UEFA Prize Money - Rhapsody In Blue

The Europa League has long been regarded by leading clubs as a poor relation to the far more lucrative Champions League, but Chelsea’s prodigious efforts after parachuting in to the junior competition might just give pause for thought, as they will end up earning more from Europe this season than any other English club.

Although they earned €5 million less than Manchester United from the Champions League after exiting at the group stage, they will receive at least €6.5 million from the Europa League, even if they lose the final. If they repeat last season’s victory in the Champions League, the sum earned will rise to around €9 million.

This means that Chelsea will receive at least €40.9 million (Champions League €34.4 million + Europa League €6.5 million), rising to as much as €43.4 million if they win the Europa League. Of course, the bad news is that this will still be significantly less than last season’s €59.9 million for the Champions League triumph - though the blow will be somewhat softened by money from the UEFA Super Cup (€2.2 million) and the FIFA Club World Cup ($4 million).

The other three English Champions League qualifiers should still be smiling though, as they have all actually earned more money this season, thanks to a substantial increase in the available prize money (around 22%).

Manchester United’s income rose €4.1 million to €39.3 million, though the difference falls to €2.9 million once the €1.2 million they received from dropping down to the Europa League in 2011/12 is taken into consideration. Similarly, Manchester City’s income increased by €5.8 million to €32.4 million, reducing to €4.6 million after deducting last season’s €1.2 million from the Europa League. Finally, Arsenal will receive €34.5 million, which is €6.2 million higher than the previous season.

As an aide-mémoire, the money for UEFA’s two tournament is divided into two parts: (a) prize money based on participation and results; (b) TV (market) pool.

Prize Money – Champions League

Each of the 32 teams that qualify for the Champions League group stages is guaranteed a participation base fee of €8.6 million even if it loses every single game. There is also a performance bonus of €1 million for each victory in the group stage plus €500,000 for a draw. So if a team manages to win all six of its group matches, it will get €6 million on top of the base fee.

If a team qualifies for the first knock-out round (the last 16), it is awarded a further €3.5 million, while there are additional performance prizes for each further stage reached: quarter-final €3.9 million, semi-final €4.9 million, final €6.5 million and winners €10.5 million. So if you go all the way and win the trophy, you would earn a total of €37.4 million (not counting the TV pool share), which is up from €31.5 million in 2011/12.

Prize Money – Europe League

The principle is the same in the Europa League, though the sums involved are much smaller. Each of the 48 clubs involved in the group stages receives a participation base fee of €1.3 million. In addition, there is €200,000 for each win and €100,000 for each draw in the group stage. A new addition this season, presumably to encourage clubs to give their all, is qualification bonuses for teams that progress to the round of 32: group winners earn €400,000 and runners-up €200,000.

Turning to the knock-out stages, clubs competing in the round of 32 will receive €200,000 each, clubs in the last 16 €350,000, the quarter-finalists €450,000 and the semi-finalists €1 million. The Europa League winners will collect €5 million and the runners-up €2.5 million.

That’s now a pretty good incentive, compared to the €3 million paid to Atlético Madrid, the 2011/12 winners. In fact, the winning club could now receive a maximum of €9.9 million, 54% up from last season’s €6.4 million.

Although the Europa League’s 2012/13 prize money is higher as a proportion of the Champions League (26% v 20%), the gap between the two is actually growing (€27.5 million v €25.1 million).

Nevertheless, it can still be a very useful boost to clubs like Chelsea that drop down from the Champions League, especially if they reach the final, which is worth either €6.5 million or €9 million (assuming €2 million for the Europea League TV pool, based on previous years). It does require Stakhanovite efforts on behalf of the playing squad, which may jeopardise their chances in their domestic league, but, as the figures above indicate, it can make a big difference.

TV Pool

In addition to these fixed sums, the clubs receive a share of the television money from the TV (market) pool, which is allocated according to a number of variables. First, the total amount available in the pool depends on the size/value of a country’s TV market, so the amount allocated to teams in England is more than that given to, say, Spain, as English television generates more revenue. Clubs can also potentially do better if fewer representatives from their country reach the group stage, as the available money is divided between fewer clubs.

In the case of the English clubs in the Champions League, the allocation works as follows:

(a) Half depends on the position that the club finished in the previous season’s Premier League with the team finishing first receiving 40%, the team finishing second 30%, third 20% and fourth 10%.

(b) Half depends on the progress in the current season’s Champions League, which is based on the number of games played, starting from the group stages.

However, the 2012/13 allocation for the element based on the previous season’s Premier League finish was changed following Chelsea’s Champions League win as follows: Manchester City (1st) 30%, Manchester United (2nd) 25%, Arsenal (3rd) 15%, Chelsea (5th) 30%. So, the first three clubs lost a portion of their TV pool following Chelsea’s remarkable success.

TV Pool – Allocation

The TV pool allocation methodology can produce some results which seem strange at first glance, e.g. Manchester United and Arsenal were both eliminated at the last 16 stage, but United received €4.3 million more than Arsenal (€23.2 million v €18.9 million). 

This is entirely due to United finishing one place ahead of Arsenal in the 2011/12 Premier League, so receiving 25% of that half of the TV pool (€10.8 million), compared to Arsenal’s 15% (€6.5 million). Of course, both clubs received exactly the same (€12.4 million) for this season’s Champions League progress, which incidentally was more than the €9.3 million for Chelsea and Manchester City, who both went out at the group stage.

Thus, from a purely financial perspective, it is important not just to qualify for the Champions League, but also to qualify in as high a position as possible. Fourth place may be considered a trophy these days, but second or third place are worth even more to the bank balance.

A club’s finances are also boosted if the club finishing fourth fails to win the qualifier for the group stage, as this would mean that the TV pool would then be split between only three teams instead of four. In the same way, it is better financially if the other English clubs do not progress as far as your team.

Note that these calculations assume that the total English TV pool is the same as last season, based on the Sky/ITV deal being more or less the same size, though there are some indications that it might be slightly lower.

However the money is split, there is no doubt that all the English clubs playing in the Champions League have a considerable monetary advantage over the rest of the Premier League, as can be seen by the above analysis of Media revenue from last season – and that was before the 2012/13 increases. As The Clash once sang, it is indeed a “Safe European Home”, at least for a privileged few.