The Revolution Will Be Televised

The last few days have provided a great deal of ammunition for those lamenting the state of football, specifically the seemingly inevitable march towards a game completely dominated by financial matters. The charge was led by Liverpool’s managing director, Ian Ayre, who suggested that the leading clubs should receive a larger slice of the money from overseas TV rights, as the average fan in Kuala Lumpur “isn’t subscribing… to watch Bolton.”

Ayre adopted the language so beloved by marketing men the world over by adding, “Personally I think the game-changer is going out and recognising our brand globally.” Although this statement would score highly in a game of corporate buzzword bingo, it provoked a scathing response from the football community, which roundly condemned the apparent avarice behind these cringe inducing words.

If his intentions weren’t clear enough, Ayre whistled a version of the Pet Shop Boys’ “Opportunities (Let’s Make Lots of Money)”, while he explained his grand plan, “Maybe the path will be individual TV rights like they do in Spain.” The only problem was that the other football clubs did not seem to match his enthusiasm to rip up the status quo (at least publicly), so Ayre rapidly back-tracked via a clarification that this initiative wasn’t in fact “about Liverpool trying to breakaway and sell their own rights.” Oh no, it was purely about the way that the Premier League distributed its international rights.

Clearly, any idea that apparently involves applying the opposite approach to Robin Hood, namely to take from the poor to give to the rich, is likely to attract a huge degree of opprobrium, but before Ayre is completely dismissed out of hand, it is surely worth asking the simple question: does he actually have a point? In addition, we should try to understand the factors driving a (presumably) rational man to stick his head above the parapet in such a masochistic manner.

Looking at the distribution of the Premier League television money in 2010/11, we can see that Liverpool received £55.2 million, which incidentally was £12.3 million more than Bolton’s £42.9 million. A great deal of the money is shared equally: 50% of the domestic rights, which is worth £13.8 million to each club, and 100% of the overseas rights, worth £17.9 million to each club. However, 50% of the domestic rights is allocated in a way that does favour the leading clubs.

For these funds, 25% is for merit payments, determined by the club’s final league position, and 25% is paid in facility fees, based on how often a club is shown live on television. Each place in the league is worth an additional £757,000, which can make quite a difference, so Liverpool’s sixth place delivered £11.4 million last year, while Bolton only received £5.3 million for fourteenth place. Similarly, it’s no surprise to see that the top clubs feature much more often on television than those lower down the league, so Liverpool’s 23 appearances produced a £12.1 million facility fee, compared to Bolton’s £5.8 million, which was a result of the guaranteed minimum 10 appearances.

Nevertheless, although this algorithm does benefit the leading clubs, it is not a gigantic benefit. Ayre’s issue is with the overseas rights, which are distributed entirely in equal shares, as opposed to the domestic rights, which to a degree reflect performance and popularity.

In the past, this would not have been a concern, but the point is that this is now serious money. First of all, the growth in payments secured for TV rights has been nothing short of astonishing, from the initial £253 million five-year deal in 1992 to the £3.4 billion payment three-year deal that commenced last season. To make that spectacular progress even clearer: the original deal was worth just £50 million a season, while the latest brings in more than £1.1 billion a year.

That’s obviously fabulous news for football clubs, but closer examination of the new rights deals reveals an interesting (and potentially worrying) trend. Revenue for the sale of domestic TV rights (live matches and highlights) hardly grew at all in the new contract, implying that the home market may have reached saturation point. Instead, it is overseas fans that have been behind the explosive growth with the revenue more or less doubling each time that the rights are re-negotiated: 2001-04 £178 million, 2004-07 £325 million, 2007-10 £625 million and 2010-13 £1.4 billion.

To place that into context, in 2001-04, the overseas rights accounted for only 11% of the total deal, while they are now worth 42% with many analysts predicting that they could be higher than domestic rights after the next deal is signed. Therefore, what was previously the icing on the cake is now a very substantial slice, so it was really only a matter of time before the top clubs pointed out the anomaly between the different allocation methods used for domestic and overseas rights.

"Bolton - not popular in Kuala Lumpur apparently"

Some of the money paid to secure overseas rights seem barely credible: the Abu Dhabi Sports Channel paid over £200 million for the Middle East and North Africa (almost three times the £80 million paid by previous incumbent Showtime Arabia); in Singapore, an island with a population of less than 5 million people, SingTel paid £200 million to secure the rights from its rival StarHub; similarly, in Hong Kong i-Cable paid nearly £150 million, much more than the £115 million Now TV paid last time around.

There’s no doubt that the Premier League is one of England’s most successful exports, being shown in 212 countries around the world. Recent research from leading sports business consultancy Sport + Markt suggested that 70% of global football fans watch “the best league in the world” (© Richard Keys).

Given these amazing statistics, Manchester United manager Sir Alex Ferguson has suggested that broadcasters should pay even more for the rights to live football, “When you think of that, I don’t think we get enough money”, though he appeared more concerned about television’s impact on his team’s fixture list.

That said, the Premier League’s TV rights deal is the envy of other leagues. At £1.1 billion a year, it is well ahead of the rest with only Serie A (£0.9 billion) coming close. Incredibly, the deal is twice as much as La Liga (£0.5 billion) and three times as much as the Bundesliga (£0.4 billion). The principal reason for the disparity is the overseas rights, which are worth nearly £0.5 billion in England, but are negligible everywhere else. This helps explain why English clubs are increasingly focused on this element of the deal.

This argument is further supported by looking at how other major leagues distribute their TV income. In England the current deal works out at 67% of the revenue being allocated by means of an equal share with 17% based on on-pitch performance and the same amount on popularity, defined as the facility fee for number of times a club is broadcast live. No other league distributes as anywhere near as much via an equal share.

The closest is France, where the equal share comprises 50%, while the remainder is distributed based on league performance 30% (25% for the current season and 5% for the last five seasons) and the number of times a team is broadcast 20% (over the last five seasons).

Italy returned to collective bargaining this season with 40% 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 number of fans (25%) and the population of the club’s city (5%).

TV revenue in the Bundesliga is divided among clubs via a points system based on their league position over the past four years. Performance is weighted in favour of the more recent years, so last season a factor of 4 was applied to 2010/11, 3 to 2009/10, 2 to 2008/09 and 1 to 2007/08. However, a form of equality is then applied, as the club with most points only receives twice as much money as the club that has the lowest number of points.

La Liga allows each club to arrange its own individual deal, which is largely attributable to popularity, though you could argue that some of this is derived from past performance. No matter, it is clear that none of the money is allocated via an equal share.

In summary, with the exception of La Liga, every major league distributes a good proportion of the TV funds equally, either explicitly or via the weighting of the allocation. However, the Premier League distributes more money this way than any other league, mainly due to the surge in overseas rights.

The result is that the ratio from top to bottom earning clubs in terms of TV payments is much smaller in the Premier League at 1.5, especially compared to La Liga where it is 12.5. So, last season Manchester United received £60 million, while Blackpool got £39 million. In contrast, Barcelona and Real Madrid received around £123 million, while Malaga had to make do with £10 million.

That’s bad enough, but the real issue in Spain is that the drop starts immediately with third placed Valencia only receiving £37 million, so the big two earn at least three times as much TV money as their closest challengers. Every other league is more equitable with the top team earning between 1.1 and 1.2 times as much as the third highest earner.

"Pictures on my wall"

It is however true that the Premier League still has the smallest ratio between top and bottom clubs with 1.5 against 2.0 in Germany, 3.5 in France and 10.0 in Italy (the gap in Serie A will reduce after the introduction of collective bargaining). This is largely due to the impact of the rise in the value of the overseas TV deal, as this ratio was almost three to one in the early days of the Premier League.

In other words, the TV deals at Barcelona and Real Madrid are very much the exception to the rule, so Ayre’s “unfair” comparison only really works for these two behemoths and not for the hundreds of other clubs in Europe. In fact, Liverpool’s TV deal compares favourably to everyone else, especially now that Italy’s clubs have switched from individual arrangements to collective bargaining.

The winds of change have even hit Spain with a proposal to reduce Barcelona and Real Madrid’s share of the combined TV revenue from 45% to 34%, though they seem to be blowing rather slowly, as this would still provide them with a massive competitive advantage and any move towards revenue sharing is unlikely to be implemented before 2015/16.

From the perspective of the lesser lights in England, TV money is critically important to their prospects. In 2009/10 television accounted for a staggering 70% or more of revenue at clubs like Wigan Athletic, Blackburn Rovers and, yes, Bolton Wanderers. Without this money, these clubs simply wouldn’t be able to compete and might even struggle to survive. According to Wigan chairman Dave Whelan, “We will finish up like the Spanish league with just two teams in it, no competition, no anything, no heart and soul.”

Some might argue that no more than six clubs could realistically mount a title challenge in any case, but “on any given Sunday” (or Saturday) any team in the Premier League is capable of winning against “the big boys”, as Sam Allardyce used to describe them.

However, TV money is also of great importance to the top clubs, as evidenced by the most recent Deloitte Money League that shows that television is the largest revenue stream for 16 of the top 20 clubs. The only exceptions are three German clubs that place more emphasis on commercial operations and Arsenal, thanks to the money-spinning Emirates stadium.

In England, TV rights have driven the virtuous circle often referenced by Premier League chief executive Richard Scudamore, “The continued investment in playing talent and facilities made by the clubs is largely down to the revenue generated through the sale of our broadcast rights.” Put another way, English clubs need strong revenues to compete with their European rivals when trying to attract world-class players, both in terms of transfer fees and wages, which is surely one of the main reasons behind Ayre’s intemperate outburst.

He will have recognised that Liverpool have been growing their revenue much more slowly than their peers. In 2005, Liverpool’s revenue of £122 million was £44 million lower than Manchester United and £120 million behind Real Madrid. In 2011, the gaps have widened to £144 million and £234 million respectively. That means that Real Madrid, Barcelona and Manchester United earn around twice as much as Liverpool, which is an enormous shortfall every season.

The inequality is growing all the time, as Liverpool’s revenue has essentially been flat for the last three years. In 2011, the improvement in commercial income thanks to the new Standard Chartered shirt sponsorship has been offset by the failure to qualify for the Champions League. It’s a similar story of lack of growth at Arsenal, though their revenue did overtake Liverpool after the move to a new stadium.

The harsh reality in football is that money does tend to buy success, so Liverpool have to explore every possible avenue of generating additional revenue and their options are limited. In particular, they are hamstrung by Anfield. Although this is a wonderfully atmospheric old ground, redolent with history, it lags behind the others in terms of money-earning potential.

Its capacity is only 45,400, which is much less than Old Trafford (76,000) and The Emirates (60,400). As Ayre said, “We are 30,000 seats behind our biggest competitor and that’s worth a lot of money.” In fact, Liverpool’s match day revenue of £43 million is less than half of Manchester United (£108 million) and Arsenal (£93 million), while even Chelsea, whose Stamford Bridge ground is even smaller (41,800), generate more than them (£67 million). Liverpool only earn around £1.6 million from each home match, which is significantly less than United (£3.7 million) and Arsenal (£3.3 million).

This structural weakness has been exacerbated by Liverpool’s failure to qualify for the Champions League. In 2010/11 Liverpool battled their way through to the last 16 of the Europa League and received €6 million (£5.4 million) for their efforts. In contrast, the four English clubs in the Champions League enjoyed an average of £35 million, excluding gate receipts and bonus payments from sponsors. After reaching the final, Manchester United collected a hefty £47 million.

Of course, this does rather suggest that one old-fashioned way for Liverpool to grow their revenue would be to do the business on the pitch, which would not only boost their coffers with higher performance payments, but would make them more attractive to prospective sponsors. This is a winning combination that has propelled Manchester United’s commercial income above £100 million, assisted by the significant global TV exposure.

The impact can be clearly seen by looking at the composition of English clubs’ TV revenue. The payments from the Premier League are much of a muchness, but the real “game-changer” (to use Ayre’s own word) is the Champions League. Yes, qualification for the Europa League helps, but the money is only around 20% of that earned by clubs in Europe’s flagship tournament.

Interestingly, English clubs receive a higher proportion of the TV (market) pool in the Champions League, due to England’s television deal being bigger, which produced the bizarre result of losing finalists Manchester United actually receiving more money than the winners Barcelona.

Currency movements have also helped English clubs, as Champions League money is distributed in Euros, which, despite recent travails, has strengthened against Sterling in the last few years. Although this is a moving target, it is a factor that should be considered when making comparisons with clubs from the continent, as this has contributed to the relative improvement by the likes of Barcelona and Real Madrid against English clubs.

Now that we have established some of the reasons why Ayre might seek to increase his club’s share of television revenue, we should explore whether such a move would actually increase revenue.

"Our house, in the middle of our street"

The Premier League believes that its international appeal is largely down to a model that delivers competitive matches, which is in stark contrast to the procession offered by La Liga, where the third-placed team has finished 21 and 25 points behind second place in the last two seasons. Indeed, Sevilla’s president Jose Mari del Nido described the Spanish league as “a load of rubbish”, because only two teams could conceivably win the title.

While there is a lot of truth to this argument, it is not necessarily the full story, as it’s not as if the upper echelons of the Premier League have been anything but a closed shop since its formation. The traditional “Sky Four” (Manchester United, Arsenal, Chelsea and Liverpool) have rarely been threatened, though Manchester City have now become a highly credible challenger, thanks to the injection of oil millions.

Furthermore, if a competitive league were the only reason for success in overseas sales, then surely the Bundesliga would be the viewers’ preferred choice, but, as we saw earlier, the Germans’ overseas rights of around £40 million are less than 10% of the money received by the Premier League.

"Global A Go-Go"

That said, although it is far from certain that reducing the Premier League’s competitive nature would reduce revenue, intuitively we can probably conclude that this would weaken the bargaining position of its marketing men, who, in fairness, have done a superb job to date.

Looked at from another perspective, we do have tangible evidence from Italy that moving from individual rights to a collective system increases revenue, as broadcasters pay a premium for having the whole product rather than the rights to individual clubs. In fact, the new Serie A deal is on course to meet its target of €1 billion, which represents a considerable improvement on the aggregate of the previous individual deals. Spanish football expert, Professor Jose Maria Gay de Liébena from the University of Barcelona, believes that introducing collective bargaining would boost total TV revenue for La Liga from €600 million to €900 million.

Therefore, Ayre’s fondness for individual rights might not produce the gains he envisages, as it is entirely possible that Liverpool would merely receive a larger slice of a smaller cake.

Of course, after Ayre’s “clarification”, we now know that his proposal was restricted to international rights. If that is indeed the case, then it is difficult to see why he would risk so much contempt for so little reward. Assuming that he wanted to allocate these rights in the same manner as domestic rights (50% equal share, 25% merit payment, 25% facility fees), then that would have produced an increment for Liverpool of only £4.3 million in 2010/11 (and incidentally a reduction for Bolton of just £2.7 million).

Of course, the potential future increase in overseas rights may make such an amendment more valuable, while Ayre may have been thinking of another distribution methodology that was more favourable to his team, e.g. 50% for Liverpool and 50% for Manchester United. Only kidding.

In fairness to Liverpool, if they wish to remain competitive in a world where they once reigned supreme, they need to address the financial imbalances caused by the money pumped into the game by Roman Abramovich at Chelsea and Sheikh Mansour at Manchester City, which has inflated transfer fees and wages for every other club. Despite the advent of UEFA’s Financial Fair Play regulations, other clubs have also been boosted by wealthy benefactors, such as Paris Saint-Germain, Malaga and Anzhi Makhachkala.

"John W Henry - This is the modern world"

Liverpool’s owners are cut from a different cloth. Although John W Henry’s Fenway Sports Group (FSG) is a clear improvement on the reviled duo of Tom Hicks and George Gillett, they are far from following the classic sugar daddy model. Instead, this is a group of savvy businessmen who will seek to manage the club well, aiming to maximise revenue and ideally get a return on their investment. This is no different from other American owners like the Glazers at Manchester United, Stan Kroenke at Arsenal, Randy Lerner at Aston Villa and Ellis Short at Sunderland.

While in many ways their ownership will benefit their clubs, it would be naïve in the extreme not to appreciate that they have been attracted by the financial possibilities offered by the Premier League. In contrast to sports franchises in the US, where they have to share all revenue received, including TV money, gate receipts and merchandising, in the Premier League they keep the vast majority of revenue earned.

This was confirmed by Liverpool chairman Tom Werner, “That is the difference with the EPL. If we can generate interest in Liverpool here and around the world, we will benefit from that.” That comment also touches on the other attractive aspect of the Premier League for American investors, namely its global appeal, which again is not something enjoyed by sports like baseball, basketball and American football.

"I am the son and Ayre of nothing in particular"

So that’s the plan, but Ayre raised another point that gave pause for thought, which was that the Premier League bubble might “burst, because we are sticking to this equal-sharing model”. He was specifically referring to La Liga’s ability to attract the top players from the Premier League, which seems like a blatant attempt at scaremongering, given that there’s no shortage of imports from Spain, such as Juan Mata and David Silva, while Cesc Fabregas’ return to Barcelona was a special case. In any case, there are other equally important factors at play here, such as currency and tax rates.

However, there are a few threats that might endanger owners’ strategy of coining it from television, which are primarily due to: (a) economic pressures on the Premier League’s customers, i.e. the TV channels; and (b) regulatory decisions.

TV channels are not immune from the recession, as we saw when ITV Digital and Setanta went bankrupt. Although the latter’s collapse did not in itself prove problematic, as ESPN snapped up the TV rights relinquished by Setanta, if Sky were to hit financial difficulties this would be extremely serious for the Premier League and by extension the clubs. This may not seem likely, but it is not beyond the realms of possibility. For example, Mediapro, the company that owns the TV rights in Spain for La Liga, applied for bankruptcy protection last year.

"And it's... LIVE!"

On the other hand, it is clear that the Premier League is central to Sky’s business model. Of the satellite company’s nine million customers, around five million of them pay for the sports package, earning Sky some £2.5 billion a year. On top of that, pubs pay Sky huge sums for licences to show matches. Admittedly, the sports package contains more than just football, but the Premier League is the jewel in the crown, so must be responsible for most of that business.

In these days of multimedia with countless entertainment possibilities, television viewing figures are declining across the board, but average audiences for live football matches have remained consistent. This is particularly important for companies struggling to push their brand through traditional advertising.

Perhaps a more plausible possibility is that broadcasting companies would seek to end the cycle of ever increasing payments for TV rights, as happened recently with the new Ligue 1 deal in France.

The courts of law might also pose a threat to the television money enjoyed by Premier League clubs. A recent ruling by the European Court of Justice in a case brought by a Portsmouth pub landlady stated that broadcasters cannot prevent customers from using cheaper foreign satellite television services to watch Premier League football. As Sky /ESPN will no longer have exclusivity in the UK market and are likely to be under-cut by foreign broadcasters, the theory goes that they would have to lower prices to compete and so pay less for the TV rights.

"Richard Scudamore - One way or another"

However, to date the Premier League has proved very adroit at finding creative solutions to such challenges, so it would not be a great surprise if it found a way to maintain (or even grow) its revenue. The likeliest outcome is that they would market one pan-European rights package, though other options are also possible, such as launching their own TV channel, as the Dutch Eredivisie has done, but this would be a pain and more complicated than working with professional broadcasters.

Another possibility might be to sacrifice the continental European revenue, which represents around 16% of all European rights (£390 million), in order to protect the significant £2 billion of UK revenue by stopping sales elsewhere in Europe.

Finally, this might just be a storm in a teacup, as in practice very few subscribers would switch to a foreign language service. Although many of Sky’s commentators and pundits are not that popular, they’re surely easier on the English ear than their Greek or Polish equivalents.

However, English clubs could face a sizeable reduction in their Champions League revenue as a result of the ECJ ruling. William Gaillard, adviser to UEFA president Michel Platini, warned, “This may force us to sell the rights on a Europe-wide basis, which would prevent us from identifying individual national TV pools. That will be bad news for clubs in big TV markets such as England.” This is a genuine threat, as the current £400 million deal with Sky and ITV is the biggest in Europe.

"Boy with a problem"

Another regulatory factor arises from UEFA’s Financial Fair Play regulations, which force clubs to break-even if they want to compete in European tournaments. This means that most clubs will either have to cut costs (effectively wages) or increase revenue from football operations, which again helps explain why Liverpool have dared to question the distribution of the TV money. Indeed, when John W Henry bought the club, he said, “With the FFP rules, it is really going to be revenue that drives how good your club can be in the future.”

Of course, the introduction of FFP does in itself raise questions about the inherent unfairness of clubs like Barcelona and Real Madrid being able to sell their TV rights individually, as this clearly provides them with a monetary advantage over clubs in other leagues.

Looking further ahead, advances in technology could provide a threat to revenue (via illegal internet streaming) or a major opportunity to make even more money. There is little doubt that overseas investors see huge potential in football clubs’ TV rights. As John W Henry said, “American owners understand media and the long-term global implications. They're going to want to reach their fans in the new media landscape. The Premier League was created in response to changing media. Audiences will drive leagues rather than the other way round.”

"Werner - Ground control to Major Tom"

This is particularly relevant to Liverpool, as FSG have substantial expertise in this sphere, owning 80% of New England Sports Network, a regional cable television network, while chairman Tom Werner is an experienced television producer. To give an idea of the size of the prize, the value of the New York Yankees’ official cable network is three times as high as the club itself.

It is equally clear that foreign owners see great promise in online delivery, hence Stan Kroenke’s purchase of a 50% share in Arsenal Broadband long before he launched his takeover bid for the whole club. Indeed, the emergence of fast broadband networks might be the catalyst for clubs to launch their own channels to interact directly with their fans.

That’s all future music, but in the here and now what are the chances of Ayre’s TV rights initiative succeeding?

In practical terms, such a change would require a two-thirds majority at the annual shareholders meeting, so 14 of the 20 Premier League clubs would have to approve the plan. However, not one club has come forward to provide support, leaving Ayre to change his song of choice to The Beautiful South’s “I’ll Sail this Ship Alone”. Given that turkeys are unlikely to vote for Christmas, it is no surprise that smaller clubs are not in favour, but all of the leading clubs have also praised the concept of collective selling.

"Glazers - What do I get?"

Even Manchester United, who would benefit most from such a move, said via their chief executive, David Gill, that “the collective selling of the television rights has clearly been a success.” There is still a suspicion that some clubs may be considering the idea privately, e.g. there are rumours that John W Henry has discussed the plan with the Glazers, but for the moment the idea appears to be dead in the water.

Nevertheless, it is obvious that football clubs are now prepared to think out of the box in order to grow their revenue. It does not take a particularly large leap of imagination to see that this idea is part of a grander strategy to form a European Super League, as hinted at by Ayre’s decision to compare Liverpool to Barcelona and Real Madrid while attempting to justify the change.

Wigan chairman Dave Whelan thundered, “They want to take all the money for themselves, but they know the top six cannot play each other every week, so they will eventually look to Europe and the creation of a European league.” He found a surprising bedfellow in Real Madrid’s former General Manager, Jorge Valdano, who said that the overwhelming domination of the big two in Spain would inevitably lead them to abandon Spain for a European league.

"Slave to the rhythm"

Whatever Ian Ayre’s intentions were in raising this subject, there is a sense that this is only the beginning in terms of clubs exploring new revenue opportunities. Most fans would understandably be against his views, but as he said, “It’s a real debate that has to happen”, and it’s not going to go away that’s for sure.

In any case, it’s hardly a bolt from the blue that a club from a league formed with money as its primary focus should look for ways to earn even more, especially as football has become big business in recent years. Whether it be the inflationary impact of mega-rich benefactors or the desire of owners to make a return on their investment, money has become the name of the game.

Much of that is down to the huge amounts of cash provided by television, which on the plus side has helped to fund investment in new stadiums and to attract top players to England, but has also driven some questionable priorities. As Sir Alex Ferguson said recently while commenting on the increasing influence of television, “When you shake hands with the devil, you have to pay the price.” That may be a touch over-dramatic, but there are undoubtedly some uncomfortable issues around football’s cosy relationship with the television. Following his elevation to pariah status, Ian Ayre for one would surely now agree that the sun does not always shine on TV.

Is Football's Gravy Train Slowing Down?

Last month Deloitte published the latest edition of the Football Money League, their annual ranking of European clubs by revenue. Once again, the Premier League featured prominently with seven English clubs listed in the top 20, though the two highest earning clubs were still the Spanish giants, Real Madrid and Barcelona. On the face of it, this was yet another demonstration of the Premier League’s ability to generate revenue, while defying the effects of the economic recession.

Once again, Manchester United were the highest ranked English club in third position, while Arsenal, Chelsea and Liverpool all retained their positions in the top ten, though Manchester City were the biggest movers, rising nine places to 11th, one position better than Tottenham. Aston Villa were a new entry to the Money League in 20th position.

Moreover, the combined revenue of the clubs in the Premier League of around £2 billion is still miles higher than all other football leagues (Bundesliga £1.4 billion, La Liga and Serie A both £1.3 billion), though it should be pointed out that the German league is actually more profitable. On top of that, Deloitte forecast that revenue for the 2010/11 season will rise once again to £2.2 billion, thanks to the new television contract and some higher sponsorship deals.

In short, everything would appear to be rosy in the Premier League’s garden, at least from a revenue perspective. However, there have been a few indications recently that all might not be well with the Premier League’s business model with revenue growth slowing down at most clubs. Even Arsenal, who have been portrayed by UEFA as a shining example of a well-run football club, reported a 3% decline in their revenue for the first six months of 2010/11.

The signs were already there in the cycle of 2009/10 results. Revenue was flat at clubs like Everton and Sunderland, while the leading clubs have by and large also been suffering. In fact, we can reasonably take the financials of what can now be referred to as the “Sky Six” (Manchester United, Arsenal, Chelsea, Liverpool, Manchester City and Tottenham) as a decent proxy for the Premier League, as they account for almost 60% of the league’s total revenue.

In 2009/10, the revenue for these six clubs grew by 5%, which looks fairly impressive, but there are a few aspects that should be stressed. First, more than two-thirds of the £56 million increase came from just one club, Manchester City, who were boosted by a series of “friendly” commercial deals from the Middle East, while there was virtually no growth from the traditional “Big Four” clubs. Second, although revenue has risen by 77% (about £500 million) since 2004, very little of that growth has come in the last three years. This highlights the importance of the three-year TV deal with Sky, which once again climbed in 2008. Since that date, the annual percentage increase in revenue has fallen away from around 20% to 5%.

For the Premier League, there’s no doubt that television has been the gift that keeps on giving, significantly boosting all clubs’ revenue since the self-proclaimed best league in the world first held hands with Rupert Murdoch’s minions. This has almost certainly given most clubs an inflated sense of their commercial acumen, as they have conveniently forgotten the old economics proverb about a rising tide lifting all boats. Looking at how the revenue of the top six clubs has changed over the past few years, it is striking how similar their growth has been since 2004 with only a couple of exceptional events, like Arsenal moving to the Emirates Stadium or Manchester City’s new-found ability to secure marketing deals, altering the landscape.

In fact, television is now the biggest element of revenue at Premier League clubs, contributing almost half of their turnover, though the proportion is a bit lower for the top six clubs at 40%. This is much needed when you consider that match day revenue growth has effectively come to a standstill, in fact decreasing 5% in 2009/10, while commercial income barely grew at all (3%), if you exclude Manchester City. There are legitimate question marks over whether the Premier League’s growth engine will continue to motor ahead or whether it has stalled.

In order to understand what is going on, we need to explore each of the three main revenue streams at football clubs in detail: (1) Match day revenue - largely derived from gate receipts (including season tickets and memberships); (2) Broadcast revenue – largely from the Premier League and Champions League, but also including Cup competitions; (3) Commercial revenue – mainly sponsorships and merchandising.

1. Match day

Match day revenue is traditionally the most important source of revenue for football clubs, and that remains the case for our six clubs, even though it has been surpassed by broadcasting revenue. In fact, relatively high ticket prices, allied with a lot of corporate hospitality, mean that five of the top nine places in the Money League for match day revenue belong to English clubs with both Manchester United and Arsenal generating around £100 million a season.

That said, match day revenue actually declined at four of our six clubs last year (10% at Chelsea, 8% at Manchester United, 7% at Tottenham and 6% at Arsenal), while it was flat at Liverpool. This is nothing new under the sun with match day revenue hardly growing at all since 2007.

There are really only five ways to grow match day revenue: (a) raise ticket prices; (b) stage more matches; (c) increase the number of fans; (d) have a better mix of spectators (in terms of revenue generation, if not passion); (e) build a new, larger stadium. Let’s take a look at each of these factors in turn.

(a) Ticket prices. It’s difficult to see how English clubs can greatly increase ticket prices, as they are already among the highest in Europe. Even Manchester United announced a freeze in their season ticket prices this year, after the Glazers had increased prices by an average of 10% a season since their unwelcome arrival. Chelsea did raised their ticket prices at the beginning of this season, but this followed four consecutive seasons of freezing prices and was the first increase since July 2005.

"If you build it, they will come"

In a blaze of publicity, the rise in VAT also lead to the first £100 “ordinary” ticket in English football at Arsenal, and though cheaper options are available, prices are considerably higher here than, say, the £10 a head paid by most Borussia Dortmund fans.

The conclusion has to be that there is some scope for raising ticket prices, but not much. As former culture secretary Andy Burnham said, “We have seen fans priced out of going to football”, and resistance is growing towards higher prices. Last week, the Arsenal Supporters Trust warned the club that it should not attempt to cover the cost of wage increases via season ticket price increases.

(b) Number of matches. Match day revenue obviously depends on the number of games played at home, so extended runs in the cup competitions can provide a significant boost to revenue, even if the TV and prize money is inconsequential. The other side of the coin is that fewer home games can lead to a reduction in revenue, which is exactly what happened to four of our clubs. Manchester United, Arsenal and Tottenham all played fewer home ties in the domestic cups, while Chelsea were hurt by an earlier Champions League exit. Arsenal were particularly impacted as they had an incredible five fewer home matches in 2009/10 (27 compared to 32 the previous season).

(c) Number of spectators. The other aspect of volume in the economists’ price-volume equation is the number of bums on seats (“no standing, please”). Average attendances fell slightly at five of our six clubs last season, the one exception being Manchester City, whose crowds rose by over 6%. In fact, crowd levels have been remarkably resilient in this difficult recessionary climate with all of our clubs filling at least 95% of their stadium capacity. That’s a notable demonstration of support, underlined by the fact that average crowds so far in the 2010/11 season have actually marginally increased at five clubs with only Liverpool falling (the Hodgson factor?). The average attendance at Manchester United has held up, even though season ticket renewals fell 5%. Of course, the corollary of this positive news is that there is hardly any room for growth.

(d) Spectator mix. Although the “prawn sandwich brigade” is roundly derided by the majority of fans, there’s little doubt that they allow football clubs to get more bang for their buck. Perhaps the best example here is Arsenal, whose move to the Emirates brought them far more premium priced seats and notably expanded corporate hospitality facilities. In fact, Arsenal make 35% of their match day revenue from just 9,000 premium seats at the Emirates. Clearly, you don’t want too many bankers and other corporate types killing the atmosphere at the ground, but an effective balance can be struck.

(e) New stadium. Arsenal’s move to the Emirates more than doubled their match day revenue in 2006/07 from £44 million to £91 million, moving them four places up the main Money League from ninth to fifth. Sometimes, it is possible to expand the capacity of the current stadium, as Manchester United did in 2006/07, when they completed the upper quadrants at Old Trafford. However, the big money growth, especially for those clubs with smaller grounds, comes with a move to a larger, more modern stadium, which is why so many have been looking at such a possibility. However, as we have seen, there are many hurdles to overcome before successfully completing such a project.

Tottenham’s hopes of moving to the Olympic Stadium appear to have been thwarted, while Hicks and Gillett’s famous spade never quite reached the ground at Stanley Park in Liverpool. Similarly, Chelsea have struggled to find a suitable location in West London, though the Earls Court Exhibition Centre may once again be on the agenda. Manchester City’s match day income has been restricted by the deal they signed with the local council, though a new agreement means that they would get more benefit if they were to expand the capacity at the City of Manchester Stadium.

All of these factors produce vastly different match day revenues per match with Manchester United and Arsenal really coining it at around £3.5 million, while Tottenham and Manchester City earn considerably less at £1.5 million and £1 million respectively. Interestingly, Chelsea generate far more revenue (£2.4 million) than Liverpool (£1.6 million), even though their ground capacity is nearly 4,000 lower. If you ever wanted to understand why clubs are exploring other options, there’s the reason right there.

2. Television

However, in the modern world, it’s television that drives revenue growth. Its impact can be clearly seen by looking at the 45% uplift in 2008, which coincided with the introduction of the new three-year TV deal. Last season, it was the same old story with broadcasting income rising an average of just under 10% at our six clubs, increasing its share of total revenue to 40%. In fact, it’s even more important lower down the Premier League, where TV can account for a staggering 70% or more of revenue at clubs like Blackburn, Bolton and Wigan.

The Premier League can be criticised for many things, but their ability to market the “product” is beyond censure. The growth in payments secured for the TV rights has been nothing short of astonishing from the initial £253 million 5-year deal in 1992 to the £3.4 billion payment that commenced this season. To make that spectacular progress even clearer: the original deal was worth £50 million a season, while the latest brings in more than £1.1 billion.

This makes sense if you consider that audiences for live football have continued to hold up, while viewing figures have declined across the remainder of the schedule. This is premium content for pay-TV stations, whose business model relies on selling lots of subscriptions to sports channels.

Great news for football clubs, but closer examination of the new rights deals reveals an interesting (and potentially worrying) trend. Revenue for the sale of domestic TV rights (live matches and highlights) hardly grew at all in the new contract, implying that the home market may have reached saturation point. Instead, it is overseas fans that have been behind the explosive growth with the revenue doubling each time the rights are re-negotiated: 2001-04 £178 million, 2004-07 £325 million, 2007-10 £625 million and 2010-13 £1.4 billion.

Some of the increases seem barely credible: the Abu Dhabi Sports Channel paid over £200 million for the Middle East and North Africa (almost three times the £80 million paid by previous incumbent Showtime Arabia); in Singapore, an island with a population of less than 5 million people, SingTel paid £200 million to secure the rights from its rival StarHub; similarly, in Hong Kong i-Cable paid nearly £150 million, much more than the £115 million Now TV paid last time around.

As Steve McMahon, the former Liverpool player turned executive at the Singapore-based Profitable Group, said, “It is a global game. The television figures when Liverpool or Manchester United play are 600 or 700 million.” To support his assertion, the Premier League is now beamed into 575 million homes in more than 200 countries around the world.

"The future? No, very much the past"

In fact, the extraordinary globalisation of the Premier League could make English football the first world sport to earn more money from supporters abroad than at home. Foreign rights already account for 44% of the total and it would be no surprise if they overtook domestic rights in the future. Chief executive Richard Scudamore boasted, “By focusing on the quality of the game, their players and their grounds, the clubs have produced a competition that people want to watch – both at matches and at home.”

However, he who pays the piper calls the tune and there are a couple of downsides to this overseas expansion. First, it makes it more likely that kick-off times will be changed to suit fans abroad, so we can expect more lunchtime matches that can be screened during the evening peak viewing time in Asia. Second, it becomes imperative to continually promote the Premier League brand abroad, hence the unpopular proposal to play a 39th game abroad (in the same way that the NFL and NBA have marketed their product by staging matches in London) on top of the customary exhausting pre-season tours.

The other concern has to be that in the same way that revenue from the sale of domestic rights appears to have reached a plateau, this might now also be the case for foreign rights. Certainly, it would be surprising if the next deal were to double in value once again.

"Coming on tour near you soon"

Having said that, it should be acknowledged that the Premier League TV deal is still the best around, compared to other European leagues. At £1.1 billion a season, it is higher than Serie A £760 million, Ligue Un £560 million, La Liga £500 million and the Bundesliga £340 million. The difference is largely due to those foreign rights, e.g. the Premier League earns £480 million a season, while La Liga only receives £130 million and the Bundesliga a paltry £35 million.

This does not necessarily provide such a big competitive advantage to the leading English clubs, as the distribution is more equitable in the Premier League, meaning that the major Spanish and Italian clubs earned more broadcasting revenue last year. From this season, this may well change in Italy, as they have now moved to a collective agreement, leaving Spain as the only important European league where rights are sold on an individual basis.

The Premier League make great play of the fact that their distribution formula is the most equitable of all Europe’s major football leagues, citing the ratio between bottom and top clubs of just 1 to 1.7, which is considerably lower than La Liga’s 1 to 12. In 2009/10, Manchester United received the most money from the Premier League with £53 million, while bottom club Portsmouth received a very respectable £32 million. However, in La Liga, both Barcelona and Real Madrid received £117 million, while the bottom club only got £10 million. Actually, in Spain the drop starts almost immediately with third placed Valencia only receiving £35 million.

That said, there are ways in which the Premier League distribution model does favour the leading clubs. It’s true that half of the domestic money and all of the overseas rights are split evenly among the 20 clubs, but 50% of the domestic rights is not. For these funds, 25% is for merit payments, determined by the club’s final league position, and 25% is paid in facility fees, based on how often a club is shown live on television.

Each place in the league is worth an additional £800,000, which can make quite a difference, so Chelsea took the maximum £16 million last year, while Portsmouth only received £800,000. Similarly, each club is guaranteed a minimum of ten TV appearances with a maximum of 24. It’s no surprise to see that the leading clubs feature much more often than those lower down the league, so Manchester United’s £13 million facility fee was more than twice that of Hull City (£6.3 million).

Fair enough, you might think, given that more people are likely to tune in to, say, Arsenal against Spurs than Birmingham City against Blackburn Rovers. However, that does rather beg the question of whether clubs with a global fan base like Manchester United and Liverpool might start agitating for a higher share of the growing overseas rights on the same principle.

There’s certainly little difference between the leading clubs in terms of Premier League distributions at the moment with the range between first and fifth place being only £3 million (£53 million to £50 million). This only emphasises the importance of reaching the Champions League to these clubs with the four qualifiers last season benefiting by an average of £29 million each, excluding gate receipts and additional payments from sponsors.

The distributions are a mixture of participation fees (€7.1 million) and performance bonuses (in the group stage, €800,000 for each victory plus €400,000 for each draw). There are additional payments made to teams that progress further in the competition with €3 million the reward for advancing to the round of 16, €3.3 million for reaching the quarter-finals and €4.2 million for a semi-final place. The winners of the final collect a further €9 million, with €5.6 million going to the runners-up. Distributions are based in Euros, so the weakening of Sterling over the last few years has further increased the value to English clubs.

In addition, clubs receive a share of the television money from the so-called market pool. This is a variable amount, which is allocated depending on a number of factors: (a) 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; (b) the number of representatives from a country, so an English team (with four representatives) might receive less than a German team (with only three representatives); (c) the position of a club in its domestic championship in the previous season, so if two teams from England both reach the quarter-final, the one that finished ahead of the other in the Premier League would get more money; (d) the number of matches played in the current season’s Champions League.

The size of the Champions League revenue pool has been steadily increasing, but once again the growth rate has been slowing down. Nevertheless, there is still an enormous difference between the Champions League and Europa League in terms of payments. Last season, Fulham’s valiant run to the final of the Europa League only earned them £8 million, which is £16 million lower than the smallest payment received by an English representative in the Champions League. Therefore, Liverpool’s failure to qualify for Europe’s premier competition will have a big negative impact on their finances, while Tottenham’s will receive a hefty shot in the arm.

As with any other business, however, there are threats to the Premier League’s dominance of the football television market, starting with the courts of law.

A recent non-binding opinion from an advocate at the European Court of Justice in a case brought by a Portsmouth pub landlady stated that broadcasters cannot prevent customers using cheaper foreign satellite television services to watch Premier League football. This brings into question the current model whereby the Premier League licenses its content on a country-by-country basis, which has allowed the league to fully maximise the value of its rights.

If this opinion is confirmed by a court ruling, the implication is that in the future the Premier League would have to sell the rights in one bundle to the European Union, theoretically reducing the revenue received, at least according to Omar Sheikh of Credit Suisse, “Ultimately the value of the rights will probably go down, because there are only two likely bidders on a pan-European basis.” On the other hand, a relatively low proportion of overseas income currently comes from Europe and the Premier League has to date proved very adroit at finding ways to get the most out of its TV rights.

There are other regulatory challenges to the current model. Media watchdog Ofcom has already ordered Sky to give rival broadcasters cheaper access to its exclusive rights, maybe by up to a third, which may in turn lead to Sky paying lower prices for those rights, though the Premier League (apparently linked by an umbilical cord to Sky) has decided to take legal action in an attempt to overturn the decision, as “the consequences for UK sport and UK sports fans are too serious and fundamental for us to ignore.” Yeah, right. Pull the other one, it’s got bells on.

The reality is that TV channels are not immune from the recession, as we saw when ITV Digital and Setanta went bankrupt. Although the latter’s collapse has in itself not proved problematic, as ESPN snapped up the TV rights relinquished by Setanta, if Sky were to hit financial difficulties this would be extremely serious for the Premier League and by extension the clubs. This may not seem likely, but it is not out of the realms of possibility. For example, Mediapro, the company that owns the TV rights in Spain for La Liga, applied for bankruptcy protection last year.

Although the Premier League is the current undisputed “heavyweight champion of the world” in terms of global popularity, that could change if more of football’s top stars decide to move to another league like La Liga, e.g. Cristiano Ronaldo to Real Madrid, as the “product” would then be devalued. It’s also true that to a certain extent the Premier League have had it easy so far selling its content overseas and it’s only a matter of time before the other leagues pull their fingers out and provide some meaningful competition.

"Goodbye Premier League, hello La Liga"

Perhaps the most intriguing question is how the Premier League reacts to new technology, which could be both an opportunity and a threat for the leading clubs. To date, it has responded in the traditional old economy manner by employing a company to protect its rights online and issuing lawsuits against those that provide illegal streams on the internet.

However, the emergence of fast, broadband networks might just be the catalyst for clubs to interact directly with fans. Although ventures like MUTV and Arsenal TV Online have hardly set the world alight, it is clear that foreign owners can see huge potential in online services, hence Stan Kroenke’s purchase of a 50% share in Arsenal Broadband (more than his 29.9% stake in the club). To give an idea of the size of the prize, the value of the New York Yankees’ official cable network is three times as high as the club itself.

Just because television is the medium of choice now does not mean that this will always be the case (“Video killed the radio star”) and there may well be a paradigm shift in the future in how fans watch football and how clubs generate broadcasting revenue. In the long-term, you can envisage a scenario where clubs heavily discount tickets to encourage fans to attend, as they provide much of the atmosphere and excitement that makes the Premier League such an appealing spectacle. One day they might even “invert the pyramid” and pay fans to attend…

3. Commercial

Back in today’s hard-hearted world, commercial revenue had been declining in the Premier League, but it rose an impressive 13% for our six clubs last season, though the performance was very much a mixed bag. Most of the growth came from Manchester City, whose commercial income grew a staggering 159% from £18 million to £47 million, thanks to a raft of amicable agreements with companies based in the Middle East. Manchester United have also been no slouches in the commercial arena, as their new territory specific approach delivered many new secondary partners like Turkish Airlines, Betfair, DHL, Thomas Cook, Singha and Epson. On the other hand, commercial revenue fell at both Arsenal and Liverpool.

Even with these improvements, there is still a lot of scope for growth if you compare how much revenue German clubs generate. Although this is facilitated by advertisers loving the German combination of high crowds and easily accessible televised games, it still seems strange that Schalke 04 can earn more commercial revenue (£66 million) than all but one English club. Even the £81 million generated by a fabulous franchise like Manchester United pales into insignificance relative to the £144 million produced by Bayern Munich.

That said, the leading English clubs have all managed to increase their shirt sponsorship in 2010/11, some of them significantly: Liverpool’s deal with Standard Chartered is £12.5m more than the £7.5m paid by Carlsberg; Manchester United’s deal with Aon is £6m better than the £14m from AIG; Chelsea have negotiated a £4 million increase in their Samsung deal to £14 million; while Tottenham have adopted an innovative arrangement of different shirt sponsors for league (Autonomy) and cup competitions (Investec), worth a combined £12.5 million compared to the previous £8.5 million with Mansion. In fact, the total shirt sponsorship revenue in the Premier League has now overtaken the Bundesliga.

In the same way, clubs are still managing to increase revenue from their deals with kit suppliers. There was another contractual step-up in Manchester United’s amazing Nike deal to £25 million, while Chelsea signed an eight-year extension of their deal with Adidas, which greatly increased the annual payment by £8 million from £12 million to £20 million.

Although “the boom in European football merchandising is ongoing”, according to Dr. Peter Rohlmann of PR Marketing, only two Premier League clubs make the list of top ten clubs in terms of revenue with Liverpool third and Manchester United sixth in a report compiled by Sport + Markt. However, their figures have been questioned by United, who claim that the analysis is based only on sales made at the stadium. Such figures are always debatable, as they are not always prepared on a comparable basis, e.g. if retail operations are outsourced, a club will only include a royalty payment in revenue. Nevertheless, what can be said with some confidence is that it is only really the less established leagues that can look forward to significant growth here.

The holy grail for commercial revenue seems to be selling stadium naming rights, but this has proved easier said than done for most clubs. While Chelsea have often spoken about hoping to secure £10 million per annum, the only team in our six clubs that has actually sealed a deal is Arsenal – and they needed to move to a new stadium to achieve this.

Furthermore, in order to gain funding for the stadium construction, the deal with Emirates is not particularly good (£90 million for 15 years up to 2020/21, including the shirt sponsorship until 2013/14), which has held back the club’s commercial income. Arsenal have invested in an expensive new commercial team, so we shall see whether they can deliver any growth in the short-term. As chief commercial officer Tom Fox said, “Ultimately a club is worth what it monetizes.”

That said, commercial revenue is impacted by a number of external factors: the economic climate, number of home games (merchandising and catering) and progress in cup competitions, due to performance-related clauses in sponsorship agreements.

Nevertheless, the flood of new foreign owners in the Premier League clearly believes that there is gold in them there hills. As an example, John W. Henry, whose New England Sports Ventures bought Liverpool a few months ago, spoke of the club’s global revenue potential, when outlining his team’s plans to transform the Reds’ finances, as he did with the Boston Red Sox. NESV clearly hope to use their baseball experience to generate more commercial revenue from global sources.

One other “revenue” stream for football clubs is the profit made on player sales, which you might think would be negligible for the leading clubs, but has brought in a lot of cash for Manchester United and Arsenal, who averaged £39 million and £29 million respectively over the last three years. Indeed, the main reason for the drop in Arsenal’s interim profits was the lack of player sales. Some top clubs on the continents actively use player sales as part of their business model, two obvious examples being Lyon and Porto.

"My profit on sale was how much?"

So why is revenue growth important? We can look at that from two very different perspectives.

First, English clubs need strong revenues to compete with their European rivals when trying to attract world-class players, both in terms of transfer fees and wages. This is the virtuous circle often referenced by Richard Scudamore, “The continued investment in playing talent and facilities made by the clubs is largely down to the revenue generated through the sale of our broadcast rights.” OK, he’s talking specifically about television revenue here, but the general point remains valid.

Whether this is desirable is another question, as the wages to turnover ratio is nearing a critical 70% in the Premier League. Each time that the clubs’ revenue substantially increases, usually through a more lucrative broadcasting deal, the clubs simply pass the additional funds straight into the players’ bank accounts. According to a report recently published by UEFA, although top-flight clubs across 53 countries increased their revenue by 4.8% to €11.7 billion, costs rose by nearly twice that at 9.3%, resulting in total losses of €1.2bn – more than twice the previous record.

The advent of UEFA’s Financial Fair Play regulations, which will force clubs to balance their books without relying on a benefactor’s generosity, mean that the ability of clubs to generate more revenue from football operations will become critically important. As John Henry said on his arrival at Liverpool, “With the financial fair play rules, it is really going to be revenue that drives how good you club can be in the future.”

"Richard Scudamore - nothing wrong with the Premier League"

Given their stellar showing in the Deloitte Money League, this would appear to place England’s leading clubs at a considerable advantage. Certainly, the Premier League’s “see no evil, hear no evil” chief executive, Richard Scudamore, remains confident, “People said we were a bubble going to burst. They said it eight years ago, six years ago, four years ago. From all the indicators we've got, we don't think interest is lessening.”

That is clearly the case right now, though as an industry football is very fortunate that it has such loyal “customers”. The reality is that people love football and will spend considerable sums to follow their team, be that through attending matches, watching them on television or buying the club’s merchandise – even when they disapprove of the club’s owners, as we have seen at Manchester United.

However, a few signs are emerging that the clubs will have to work harder to earn their revenue growth, become more commercial, if you will, rather than simply rely on the three-year cycle of television rights delivering ever-increasing sums of money. The time is fast approaching when they will need to seek alternatives. At that point, we shall see whether football clubs do indeed have the skills to pay the bills.