When Will The Premier League Bubble Burst?

So England have crashed out of the World Cup, the so-called “golden generation” once again failing to perform on the grand stage. Although England might have found a little form when beating Slovenia, it’s fair to say that the national team has been struggling for almost the entire length of its miserable stay in South Africa with the woeful display against Algeria being one of the worst in living memory and the defeat against Germany the worst-ever at the World Cup.

Never mind, at least English fans can comfort themselves with the thought that they will soon be watching the Premier League again – and that’s the “best league in the world” (copyright Sky Sports’ imbecilic front man Richard Keys). Or is it?

While this is a debate that can never be won on football grounds, it should be rather more straightforward from a financial perspective and, happily for us, the Deloitte Annual Review of Football Finance provides the comparatives. Even though Germany’s Bundesliga is now more profitable than the Premier League with operating profits of €172 million against €93 million, this is partly due to Sterling’s deterioration against the Euro. Moreover, the combined revenue of the clubs in the Premier League of €2,326 million is still miles higher than all other football leagues: Bundesliga €1,575 million, La Liga €1,501 million and Serie A €1,494 million.

"The lion-hearted Premier League"

Despite these apparent riches, there is a growing feeling that the good times in the Premier League are coming to an end. The concern is that football is not immune to market forces, where every boom market is inevitably followed by a bust. However, despite operating in the harshest economic climate, the Premier League bubble defiantly refuses to burst. The reason that football has not been as badly affected as other industries is down to its enduring appeal. 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. Live football continues to attract large audiences on television and this is especially true of Premier League football, whose frenetic style appeals in this media age of low attention span.

The Premier League’s business model is simple, but highly effective. According to their own annual report, they aim to “monetise the global interest in the Premier League and distribute revenue equitably and responsibly”, which essentially means exploiting their broadcasting rights. In order to achieve this aim, the 20 member clubs formed a company called The Football Association Premier League Limited, so when we talk about Premier League financials we have to be careful to distinguish between the clubs’ aggregate revenue (the Deloitte analysis above) and the revenue of the Premier League company, which excludes streams like match day revenue, clubs’ commercial revenue and TV money from the Champions League.

Looking at the accounts of the FA Premier League Limited, there is no sign of the gravy train slowing down. Far from it, as the company’s turnover exceeded £1 billion for the first time in its 17-season history. The 2009 accounts cover the second year of a three-year cycle of broadcasting and other commercial rights and the 6% rise in income is in line with the underlying agreements. Indeed, the turnover has grown by a very impressive 70% in the last four years, which has helped drive the Premier League’s winning cycle: revenue growth, recruitment of the best players (though La Liga might take exception to that), top quality football and further revenue growth.

Of course, one thing, and one thing alone, has driven the Premier League’s success: television - or, more specifically, television money. You might almost say that the Sky’s the limit. Right off the bat, television played a significant role in the Premier League, as money from TV rights was behind its creation in 1992 when the top clubs broke away from the Football League and it continues to be the driving force in its growth (and priorities). Broadcasting revenue is now the biggest element of revenue at Premier League clubs, contributing almost half of their turnover (49%). This is much needed when you consider that match day revenue growth has effectively stalled (up only 2% in 2009), while commercial revenue is also starting to feel the effects of the recession and actually fell 1% last year.

The Premier League’s chief executive, Richard Scudamore, emphasised television’s importance, “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.” There’s that virtuous circle again, even though the figures show that most of that lovely TV money actually goes straight into the players’ bank accounts.

OK, Scudamore might be an arrogant blowhard, but boy does he know how to secure a great TV rights deal. The growth in payments secured for the Premier League TV rights has been nothing short of astonishing from the initial £304 million 5-year deal in 1992 to the £3.6 billion total payments (according to Deloitte) that commence next season. To make that spectacular progress even clearer: on a season basis, the original deal was worth £60 million, while the latest brings in £1.2 billion.

Even when the European Commission tried to loosen Sky’s grip in 2006, the Premier League still managed to secure a 67% increase in the domestic deal to £1.7 billion. And recently, in the midst of the worst recession for decades, the latest deal still produced a 5% increase to £1.8 billion, though this may be due to Sky outbidding Setanta in a desire to put them in their place, ensuring they were only allocated one package, which effectively drove them out of business.

This really is an impressive performance for the Premier League’s wheeler-dealers, but there is a growing awareness that the home market is nearing saturation, hence the mounting focus on overseas rights.

If you think that the increase in the price paid for domestic rights is striking, get a load of the growth in the overseas market. Every time the rights are re-negotiated, the fees more or less double with the latest agreement generating £1.4 billion compared to £625 million in the previous three-year cycle and £325 million the time before that. That deserves some kind of award and Her Majesty duly obliged by giving the Premier League the Queen’s Award for Enterprise.

"Scudamore - I have in my hand a piece of paper"

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. 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.” You can say that again: the Premier League is currently broadcast over 211 territories to more than 500 million homes. As Scudamore says, “Ask people anywhere in the world what they know about Britain and they’ll name the Queen, the BBC and Premier League football.” OK, the Scots and the Welsh might quibble about the reference to Britain, but we get the point.

The overseas rights are marketed to a balanced combination of long-term relationships, such as Fox, ESPN, Canal+ and Sky (in Germany and Italy), and an array of new partners. Revenue increases have been remarkable in the Middle East and Asia, where interest has been bolstered by teams taking part in pre-season tours, including the Premier League Asia Trophy, which has been hosted in Malaysia, Thailand, Hong Kong and China.

However, there are a couple of downsides to this expansion overseas. 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 in the Far East. It doesn’t just hurt the UK market either, as local football in many countries around the world has suffered, due to fans preferring to watch the Premier League on television.

"Richard Keys - the unacceptable face of television"

In addition to the main TV rights, there are other sources of revenue. The BBC pays £172 million for the right to show highlights on that hoary old stalwart, Match of the Day, while Sky and BT pay £84 million for the “near live” rights (matches broadcast in full, but delayed). There is also some diversified revenue from new media, though in truth the surface has barely been scratched with only a few million received for screening highlights online (Yahoo!, previously Virgin Media) and mobile phones (ESPN, previously Sky).

It is easy to understand why television is important to the Premier League, but why is football good business for television? Intuitively we understand that football attracts viewers, but if you look at Sky’s subscriber figures, it becomes very evident why football is central to their 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, bringing in a total of nearly £3 billion a season. 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. The latest Premier League rights cost Sky £541 million a season, but there is clearly still a lot of profit margin there.

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, especially in the core market of males aged 18-34. Dominic Coles, the BBC’s director of sports rights and finance, confirmed its worth, “The Premier League is the world’s most successful domestic tournament and their rights are the most significant sports rights in the UK.”

"Remind me again - who's the sponsor?"

This popularity has also helped the Premier League grow its sponsorship revenue. Barclays recently paid £82 million (up from £66 million) to extend their global title sponsor deal for three years with their president, Bob Diamond, claiming that it “provides a cost effective method to market our organisation.” To nobody’s surprise, Richard Scudamore agreed, “The Premier League must be considered one of sport’s top sponsorship properties. Its great strength is that it is an essentially English competition which has gained a huge international following.”

Partners such as Nike, Budweiser, Lucozade Sport and Wrigleys further highlight the competition’s marketing appeal. Sponsorship has come a long way since the Premier League’s inception. There was no sponsor at all in the first season and Carling paid just £3 million a season for the period 1993-97. This makes perfect commercial sense to any organisation. As experienced football agent Jon Smith explained, “If you are a serious brand player, it’s the only thing on the planet that gives you a quarter of the world’s population every week.”

So the Premier League continues to coin it from selling rights, but it essentially distributes all the money it generates, meaning that it retains no profit. The vast majority of this distribution is given to the Premier League clubs. Half of the money from domestic rights is split equally between the 20 clubs; 25% is paid in facility fees, based on how often a club is shown on TV (with each club guaranteed a minimum of ten appearances, maximum of 24); and 25% is paid in merit payments, determined by the club’s final league position. In addition, each club receives an equal share of overseas rights.

For the last season 2009/10, £905 million of central funds were distributed, including £74 million of parachute payments to those clubs relegated to the Championship. Each club got equal shares of £14.6 million from UK TV income and £10.1 million from overseas TV income. Manchester United ended up receiving more money (£53 million) than the Premier League winners Chelsea (£52.8 million), as they were shown on television more often, so received the highest facility fees (£13.0 million), while Chelsea obviously got the highest merit payment of £16 million, compared to bottom club Portsmouth’s £0.8 million. In fact, each place in the league is worth and additional £800,000, so mid-table teams do have something to play for at the end of the season.

This all means that the top earning club (Manchester United) received £53 million, while the bottom earning club Portsmouth still received a very healthy £31.8 million. The Premier League make great play of the fact that their distribution formula is the most equitable of all Europe’s major football leagues, due to the collective selling of the rights, citing the ratio between bottom and top clubs of just 1:1.67. This is considerably lower than La Liga’s 1:14, as TV rights are sold on an individual basis in Spain.

In particular, the Premier League suggests that equal allocation of the growing overseas rights will make the tournament more competitive. However, others disagree, arguing that this merely begs the question of whether this egalitarian approach should not also apply to the domestic rights. The current UK system is weighted in favour of clubs whose games are broadcast live more often, which naturally means the bigger clubs. This gap is widened further when Champions League television money is taken into consideration, so in 2008/09 Manchester United earned a total of £84.1 million, nearly three times Portsmouth’s money. The financials also explain why clubs don’t really take the FA Cup seriously these days, as the winners only receive a paltry £3.8 million.

On the other hand, clubs with a major global fan base like Manchester United and Liverpool might start agitating for a higher share of the overseas rights, as it is difficult to see how much interest a match between, say, Burnley and Bolton Wanderers would hold in Asia. So far, everyone has followed the party line. As Scudamore said, with more than a hint of complacency, “So long as the overall amount is going up, we don’t get too many complaints.” Not so much the beautiful game as the bountiful game then.

Indeed, the central payments will rise again next year by about a third, as the new TV deals take effect, which means that even the club finishing last will receive an incredible £40 million. No wonder clubs stretch themselves to the financial limit to get into the Premier League, as the size of the prize is so enormous. In fact, the winners of the Championship play-off final should gain at least £95 million, even if they are immediately relegated the following season. First, £40 million for coming last, then £48 million parachute payments spread over four years (£16 million in each of the first two years and £8 million in years three and four) plus at least £7 million additional income from ticket sales, sponsorship deals and other commercial earnings.

"Good times"

To be fair, the Premier League also distributes a fair bit of money down through the football pyramid, including £43 million allocated to grass-roots facilities (Professional Footballer’s Association £17 million, Football Foundation £15 million, Creating Chances programme £8 million, Professional Game Match Officials £2.5 million and League Managers’ Association £0.5 million) and £18 million for developmental support to the Football League, though this only represents 6% of turnover.

In contrast, the Premier League should be praised for their very low administrative expenses, which represent less than 1.5% of turnover, but even here I cannot help noticing that the highest paid director, presumably Scudamore, has not done too badly, receiving over £1.5 million last year, including a £750,000 bonus in respect of broadcasting agreements.

As we have seen, one of the largest “external” payments made by the Premier League is for the parachute payments to those clubs relegated to the Football League, amounting to £74 million. The rationale for these payments is to soften the financial impact of relegation, when the clubs’ television money drastically reduces, on the assumption that the clubs cannot immediately reduce their operating expenses. France’s Ligue 1 is the only other league with such a system and it does seem strange, as it essentially rewards failure and potentially distorts competition in the Championship. If the Premier League is so concerned about the viability of clubs in the lower divisions, why not give the money directly to the Football League instead of the clubs? It smacks a little of “once you’re in our club, we will do everything we can to keep you in (and the others out).”

"Everybody's happy nowadays - not"

However, not everything is rosy in the Premier League’s garden and there are flaws in the business model. Even Deloitte has dared to bite the hand that feeds and pointed out the “imbalance between revenue and costs”. In fact, 14 of the 20 clubs in the Premier League are running at a loss and combined operating profits fell to £79 million last year, the lowest since 2000, mainly due to rampant wage inflation with the crucial wages to turnover increasing to 67% - a record high. Despite the booming television revenue, the combined net debt has also climbed to an unwanted record of £3.3 billion. It’s as if clubs have treated the TV money as some sort of interest-free loan. The other worrying factor is that attendances have fallen two seasons in a row, even though grounds are still more than 90% full.

As a result, there are those who believe that the Premier League should play a stronger role in the sphere of financial sustainability, especially after the high-profile going concern issues at the likes of Portsmouth, Hull City and Liverpool, but Richard Scudamore has distanced himself from these problems (“see no evil, hear no evil”). Actually, when you consider the enormous guaranteed sums, he does have a point, “Given the amount of central income that is generated by the Premier League, it would be down to absolutely rank bad management if a club was actually to go into administration.”

"Happy days"

Nevertheless, the Premier League has not completely stuck its head in the sand and launched a strategic review of its business model back in November 2008, though it will only provide recommendations in December 2010, which may just be “more of the same”. Proposals to date include the infamous 39th game, which would have meant ten additional games played around the world, but this was soon shot down as a blatant money-making attempt, which would have destroyed the competition’s integrity and denied local supporters the possibility of seeing the game live (at least at the stadium).

Next up was the idea of introducing a play-off for England’s fourth Champions League place, featuring the teams finishing in fourth to seventh positions. Although you could argue that this would increase the chances of a team outside the “Sky Four” qualifying for the Champions League, this has again been put on the back-burner, mainly due to the fixture congestion that would arise, but also because it might “damage the product”, the last from David Gold, West Ham’s joint chairman (and full-time rent-a-quote).

Finally, another chairman, Bolton’s Phil Gartside, proposed a two-tier Premier League structure, consisting of 18 clubs in each, in an attempt to protect his club from relegation, sorry, to increase competition, but this has also been parked to one side. In any case, you could argue that the increased parachute payments are effectively creating this format by stealth. Big Phil’s other great idea of inviting Scotland’s Celtic and Rangers to join a reformed Premier League has been flatly rejected.

"Any more bright ideas, Phil?"

Does this flurry of initiatives to increase money mean that there are threats to the Premier League’s dominance? Oh, yes. I can think of at least four:

(a) Customers. TV channels are not immune from the recession and Setanta went bankrupt last year. Although this in itself has 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. 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, last week applied for bankruptcy protection.

(b) Competition. Although the Premier League is the undisputed leader 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, when the “product” would be devalued. There is some evidence that fans in emerging markets attach themselves more to individual players than teams.

(c) Regulatory. Media watchdog Ofcom has already ordered Sky, the Premier League’s main television partner, 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. Although one Premier League insider initially dismissed the ruling, “It’s true that sport has benefited from Sky’s investment, but we are not shy of taking other people’s money either”, this has serious implications for their business model, which is why they have decided to take legal action in order to overturn Ofcom’s decision. Did you get that? The Premier League, not Sky, is launching proceedings – they truly are “partners in crime”. As usual, they dressed this up as a noble gesture, “the consequences for UK sport and UK sports fans are too serious and fundamental for us to ignore”, but their motives are fairly transparent.

"Not even Des could save Setanta"

(d) Technology. Illegal streams of football matches have become very widespread on the internet, so much so that a report compiled for sports rights owners last year concluded that “digital piracy is one of the most important threats today.” However, instead of thinking outside the box (in both senses of the word) and embracing the new technology, the Premier League has responded to this danger in the same way as the music industry – by employing a company to protect their rights online and issuing lawsuits. Broadband is not yet universally available and the quality of the streams is patchy, but younger fans’ viewing habits are definitely changing, so the Premier League should adopt a more progressive attitude to this profound change, instead of throwing all its eggs into television’s basket.

So what would happen if the TV money were to fall? Obviously the funds distributed to Premier League clubs would also be reduced, which would impact all teams, but those at the lower end of the league table would suffer the most, as a far larger proportion of their total revenue is dependent on broadcasting income, e.g. Blackburn Rovers “earn” 70% of their revenue from TV, compared to only 35% at Manchester United.

Deprived of this easy money, clubs would have to cut their coat with the cloth available, i.e. reduce their costs. In practice, this means lowering wages, which seems unthinkable given current behaviour, but could be achieved if all clubs acted collectively (as they do on securing the TV rights). The Bundesliga chief executive, Christian Seifert, has argued, “The Bundesliga pays less then 50% of turnover in players' wages. I'm absolutely sure a league can reduce wages. If all the clubs said: 'OK, we reduce wages by 10%,' maybe you will have some players who would leave for Spain or Italy, but 99% will say: 'OK, still I make a hell of a lot of money’” Indeed, Football League Two has already demonstrated that this is possible in England by implementing a wage cap.

"Sky - even better in 3D"

Unfortunately, the other possibility is that clubs would strive to compensate any TV shortfall by increasing their revenue in other areas, which could mean asking fans to pay higher ticket prices. Alternatively, they could pull their finger out in the commercial area and build their revenues to the same level as their continental counterparts.

The Premier League’s chief executive, Richard Scudamore, remains supremely unbothered, “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 may well be true, but the alarm bells are ringing and, as the song says, there may be trouble ahead.

Money Makes The World Cup Go Round

As the World Cup (excuse me, the 2010 FIFA World Cup) was officially declared open last week amid great colour and emotion, one man in particular beamed with pride. That man was Joseph “Sepp” Blatter, the long-standing President of FIFA, whose bold decision to award the most prestigious competition in world football to South Africa had paid off – in every sense of the term.

While Blatter somewhat unnecessarily reminded us that “the FIFA World Cup is in South Africa,” he could be forgiven for heaving a huge sigh of relief when it started on schedule. It’s not so long ago that experts confidently predicted that FIFA would make a loss on the 2010 World Cup in contrast to the large profits the 2006 tournament generated in Germany. The President had revealed his anxieties earlier this year in yet another of his bizarre outbursts when he accused the “Old World” of “anti-Africa prejudice” in response to the accusation that slow ticket sales were due to security concerns and high travel costs.

Although Blatter spoke movingly in Soccer City of “a dream coming true” and “the spirit of Mandela”, he had revealed his organisation’s priorities a few weeks earlier when he boasted that FIFA’s excellent 2009 financial report justified awarding the World Cup to South Africa as a “good financial and commercial decision.”

You can say that again. FIFA is now projecting record earnings of $2 billion, but this is in stark contrast to the losses that have been incurred by the host country. Financially, it’s a great deal for FIFA, as virtually all of its revenue is contracted in advance via the sale of television and marketing rights, while South Africa has to foot the enormous bill for infrastructure improvements. In fairness, FIFA has made a contribution of around $500 million to the Local Organising Committee and the South Africans retain the net income from ticket sales (the only risky revenue stream), but this is small change compared to the money needed to fund new stadiums, improved transport networks and better security. This financial imbalance has given the expression “a game of two halves” a whole new meaning in Johannesburg.

"You'll never walk alone"

So just how much cash does FIFA expect to pocket? It has budgeted truly impressive revenue of $3.2 billion with event-related costs of $1.2 billion, leading to a “surplus” (please don’t call it a profit) of a cool $2 billion for the 2010 World Cup. Some reports talk of a profit of “only” $1 billion, but that is after allocating half of the gross profit to the budget for development programmes, financial assistance to national associations and other events. In any case, it’s a shedload of money, but it was greeted with unusual understatement by Blatter, who said, “We are comfortable. I wouldn’t say we are rich. A good result has been achieved.” FIFA General Secretary, Jerome Valcke, toed the party line, “Yes, it’s a lot of money, but just to be clear, we are not sitting on profit. All the money is going back to be football.”

While this could be considered a feeble attempt to mask their discomfort at being thought of exploiting South Africa, actually they do have a point. Finance Director, Markus Kattner, said that 95 per cent of FIFA’s total revenue comes from the sale of rights relating to World Cup, leading to a “high exposure” and this was again confirmed by Jerome Valcke, “We are not rich. We are making quite good money thanks to the World Cup, but that’s the only money we have.”

These executives obviously have a vested interest in under-playing their large profits, but the independent analysts Sportcal have supported their views, “FIFA is quick to point out that its profits from the World Cup go towards funding its many other activities over the four-year cycle between World Cups, including less lucrative competitions such as junior and women's World Cups and the quadrennial Confederations Cup between continental national teams champions.”

These tournaments tend to make losses, which are only covered by the profits from FIFA’s premier competition. For example, in 2009 alone, FIFA incurred significant expenses for the Confederations Cup in South Africa ($44 million), the U-17 World Cup in Nigeria ($43 million), the Club World Cup in UAE ($30 million) and the U-20 World Cup in Egypt ($21 million). Not to mention $30 million for women’s competitions the year before.

If we take a look at FIFA’s complete profit and loss account, this is easier to understand. The budget for the four-year cycle leading up to this year has the $3.2 billion revenue from the 2010 World Cup, but the overall profit is only $0.2 billion after deducting costs for all events, football development and operational expenses. Of course, let’s not forget that these are very big numbers, so the profit is still a far from shabby $240 million, which every Premier League club would regard with envy. Having said that, this profit is actually considerably lower than the $0.7 billion recorded in the previous cycle, but then again the 2003-06 financial period was FIFA’s best-ever overall result.

Many of you might be wondering why I am presenting the financials for four years, but this is simply because this is how FIFA views its budget, given the total reliance on the World Cup for its revenue. It works with a four-year financial period, beginning on 1 January of the year following each World Cup. That’s why FIFA’s $2 billion profits from the 2010 World Cup are more than a little misleading, as they have to cover expenses for four years. Alles klar?

Revenue and expenses directly related to the 2010 World Cup are recognised in the income statement using the percentage-of-completion method, so 2009 marked the three-quarter stage in the 2007-10 cycle. Nevertheless, 2009 was notable for being the first time annual revenue reached the threshold of $1 billion, due to increased revenue from the sale of TV and marketing rights, which lead to a profit of $196 million last year.

Analysing the phased analysis above, I wouldn’t mind betting that FIFA’s revenue will be a good $0.5 billion higher than the budgeted $3.2 billion, but this may well be matched by a similar increase in costs, leaving the anticipated profit for 2007-10 unchanged.

Most of FIFA’s revenue is derived from the sale of broadcasting rights and this has increased by nearly 50 per cent for this World Cup to $2 billion, mainly due to improved contracts in the USA with the Walt Disney company (which owns ABC and ESPN) and Univision paying a combined $425 million for exclusive broadcasting rights for 2010 and 2014. The growth also reflects the success of FIFA’s decision to sell TV rights on a country-by-country basis for the largest European markets instead of the previous consolidated deal with the European Broadcasting Union.

These are considerable sums of money, but the television companies do get a lot of bang for their buck. According to FIFA, more than 26 billion viewers watched the 2006 World Cup. As Kevin Alavy of international analysts, Initiative Futures Sport + Entertainment, said, “No other media property delivers the same spikes in audience delivery, day after day, sustained over a month as the World Cup.” If I’ve understood that correctly, that’s a very good thing. The same agency believes that the final on 11 July could be the second-most watched live televised event in history – only behind the Beijing Olympics opening ceremony in 2008.

"Jerome Valcke in good company"

FIFA also earns $1.2 billion from the marketing of the World Cup rights, though there has been no growth since the previous event (unlike TV), as hospitality packages have been affected by the economic downturn and possibly fears of crime. Nevertheless, its new commercial strategy of classifying marketing partners into three categories (FIFA Partner, FIFA World Cup Sponsor and National Supporter) can be considered a success. In fact, some believe that it is likely to produce more money than budgeted with some estimates as high as $1.6 billion.

A Partner enjoys the highest level of association with FIFA, which means they own international rights to a broad range of FIFA activities as well as exclusive marketing assets. The six partners are Adidas (Jabulani!), Coca-Cola, Emirates, Hyundai-Kia, Sony and Visa, paying an annual fee of $24-44 million for the 2007-10 period. The eight Sponsors, including the likes of McDonald’s and Budweiser, pay $10-25 million a year over the same period, but their rights are limited to the World Cup. The lowest tier, National Supporters, pay $4.5-7.5 million a year, but their rights are only available in the host country.

Visa signed a $200 million sponsorship deal in 2006, leading to MasterCard suing FIFA for breaching their agreement, before this was settled out of court. As per usual, Blatter glossed over this minor inconvenience, “We also managed to end the contractual dispute with MasterCard, thus opening the doors to partnership with Visa and completing our pool of partners”, conveniently failing to mention that the settlement cost FIFA more than $90 million.

"Put your hands up for Cape Town"

Similarly, the collapse of FIFA’s former marketing partner ISL (International Sport & Leisure) in 2001, leading to losses of at least $42-46 million, was recently presented by Blatter as beneficial to the organisation, “It was for us, I would say, a very positive moment. We are masters of our own rights and we do not need any agency to work for FIFA. Our partners like the direct contact with us.” Right. You get the impression that he only just stopped himself from saying “masters of the universe” à la Bonfire of the Vanities, but he’s probably right to cut out the middle man, even though the circumstances were not the cleanest.

In fairness, FIFA needs to generate a lot of money to pay for its vast cost growth. Total expenses for the latest four-year cycle are budgeted at $3 billion, which represents a 58 per cent increase over the $1.9 billion in the previous period – more than double the 27 per cent revenue growth.

Almost half of the expenses are event-related at $1.4 billion. In terms of the 2010 World Cup, that includes a budget of $423 million for the Local Organising Committee, though this has been recently increased by $100 million following unforeseen costs on the teams’ training facilities. The other major expense is the prize money of $420 million, which is a 60 per cent increase from 2006’s total of $261 million and is almost three times as much as the $154 million paid in 2002. The winners will pocket a cheque for $30 million with $24 million going to the runners-up. Every team at the World Cup will receive at least $9 million: $1 million as a contribution to preparation costs plus $8 million even if they are eliminated at the group stage.

FIFA is keen to emphasise that the majority of its expenditure is on football, though it would be fairly surprising if it weren’t. In fact, their most recent financial report notes that 73 per cent of FIFA’s overall expenditure in 2009 was invested directly in football – defined as the World Cup, other events and development. This is entirely consistent with FIFA’s stated objective of “organising international competitions as well as constantly improving and promoting football.”

Of course, that’s not enough for President Blatter, who went much further in a recent magazine article, when he pompously wrote, “FIFA is no longer merely an institution that runs our sport. It has now taken on a social, cultural, political and sporting dimension in the struggle to educate children and defeat poverty.” Just in case, his doubters in England were unclear on his motivations, he also put the boot into the greedy Premier League, while extolling FIFA’s noble virtues, “Richard Scudamore is working to make money, while I’m working to have football as a social, cultural event around the world, being a school of life, bringing hope, bringing emotions. That’s the difference.”

So how well has FIFA done in its attempt to emulate Mother Theresa? To be fair, they have dedicated $700 million to the development of football in the latest four-year budget. Indeed, they take great pains to highlight the fact that spending on development programmes in 2007-10 was 50 times greater than the $14 million in 1995-98, while the revenue growth was “only” 12 times greater over the same timescale. Impressive stuff, but I can’t help noting that total expenses have risen by $1.1 billion since the 2003-06 period with only $0.2 billion of this increase attributed to development.

"Golden years"

It’s difficult to know how to react to this. On the one hand, there is no doubt that FIFA has spent a lot on development, but on the other hand, there is a feeling that it could have done a lot more with the funds available. Although there is no shortage of worthy-sounding projects, it does feel a little like this merely camouflages the relatively low investment and certainly not enough to support Blatter’s outlandish claims, “We resolved to instigate a range of projects designed to aid the entire African continent. Football is a force for change. For Africa, for the game, for the world.”

The snappily titled “Win in Africa with Africa” initiative is designed to leave the continent with a proper football legacy, including laying many artificial pitches, and has a hefty $70 million budget, but other projects seem less meaningful. For example, FIFA’s contribution to the Football for Hope centres in 2009 amounted to just $2 million, while the Goal programme, described as the “cornerstone of FIFA’s development work” has completed more than 400 projects in the ten years since its launch, but the expenditure averages out to only $17 million a year.

Blatter has frequently declared that FIFA can make a difference, but I would suggest that it could have an even stronger impact if it cut its own costs. After all, the organisation spends more on operational expenses ($0.8 billion) than football development ($0.7 billion), including $0.3 billion for “governance” (congress, committees and administration). That’s no surprise, if you have seen FIFA’s palatial new offices in Zurich, which cost around $200 million – or more than the $170 million spent on the Goal programme in its ten-year life. Of course, we cannot say whether FIFA’s 360 employees are over-paid, as they do not publish details of their salaries. Three years ago, Blatter confessed that his salary was “$1 million”, which admittedly does not seem that steep for a man in his position, but then again we only have his word for it.

"A load of ..."

FIFA is classified as a non-profit organisation in Switzerland, though, as we have seen, it has a highly commercial outlook, e.g. it has its own official range of FIFA branded merchandise. Its status allows it to enjoy a tax-free lifestyle, though this does oblige it to spend its profits on fulfilling its football objectives. This is probably why they say that the media should not describe the surplus from the World Cup as profit, but as a reserve to insulate the organisation from any unforeseen circumstances that may arise.

Fair enough, but do they have to sit on quite so many reserves? They budgeted an increase in equity to $800 million, but have already reached $1.1 billion. Furthermore, cash balances are an incredible $1.4 billion, up $0.7 billion in just one year. Franco Carraro, chairman of the internal audit committee, defended this amount, “While equity of over a billion dollars seems high, it is necessary as the financial risks exceed it many times over.”

The biggest risk to the financial position would clearly be the cancellation of the World Cup, as almost all contracts with commercial partners are related to this event, so FIFA has an insurance policy in place. However, since 9/11, it has been practically impossible to fully cover the revenue risk, so their $650 million policy now only covers the cost of postponement and/or relocation of the event in the case of natural disasters, war and acts of terrorism. The event’s cancellation is not fully covered by the insurance, so would have to be compensated by FIFA’s own reserves. The caution is therefore understandable, but I still think they could spare another $250 million on developing the game.

"Free Nelson Mandela"

Or they could give the poor host country some more cash. The South Africans do not share in the colossal television or marketing deals - the World Cup’s main money spinners – and their only direct funding comes from the net revenue from ticket sales and a predetermined contribution from FIFA. Although this could amount to $1 billion, it’s a drop in the ocean compared to the cost of hosting the event.

Around three million tickets were made available for the 64 matches of the World Cup and while FIFA’s eternally optimistic general secretary, Jerome Valcke, claimed that the tickets were at least 97 per cent sold out, many empty seats have been clearly visible in the sparkling new stadiums. This has been attributed to poor transport systems, but there is a suspicion that many tickets have been sold to international agencies who have been unable to shift them.

Even Valcke had to admit that FIFA had made mistakes in its ticketing procedures, most notably granting the Match agency the exclusive rights to sell tickets for the 2010 and 2014 tournaments. The high commission charged by Match to travel agents and hotels has been a spectacular failure, which should cause Sepp Blatter some discomfort, as the company is part owned by his nephew, Philippe Blatter.

At least FIFA have stepped in to boost the amount they will pay to the host country from $423 million to $523 million with the additional $100 million funding being used to help improve some of the training facilities, following complaints by some of the participating teams. Interestingly, only $40 million of that had been spent by May, leaving the remainder to be retained by the South African Football Association for the “development of the game”.

"Smile like you mean it"

As a popular supermarket’s advertising would say, every little helps, but the South African government has spent considerably more preparing its country for this footballing extravaganza. They have incurred major costs on building five new stadiums and refurbishing the same number, while every aspect of their transport network has been upgraded, including a new international airport in Durban and a high-speed train link between Johannesburg airport and the city centre. Estimates of the total cost vary, but the BBC calculated $5 billion, while some think it could be as high as $8.6 billion. In any case, it has clearly been one of the most expensive World Cups to stage.

Even though FIFA has thrown a few meaty scraps their way, there is understandable resentment in South Africa that FIFA will make so much money while their own country ends up with a huge debt. Furthermore, local street vendors have not appreciated FIFA’s strong-arm tactics in protecting their precious brand, while the limited availability of tickets for Africans is another source of anger, as the lack of internet access and credit card ownership prevented online purchases.

Stefan Szymanski, an economist who has been advising the South African government, complained, “It’s completely wrong and deeply improper that FIFA is making money out of this”, especially as South Africa has been forced to protect FIFA’s earning from tax. Meanwhile, a Sowetan journalist was even more outraged, “The World Cup is a colonial playground for the rich and for a few wannabes in the South African elite.”

"Two eyes good, four eyes better"

In contrast, former South African president Thabo Mbeki suggested that the 2010 World Cup would be the moment when the African continent “turned the tide on centuries of poverty and conflict.” The current president Jacob Zuma was rather more pragmatic, “we have an opportunity to promote foreign investment, tourism and trade”, as he focused on the boost to South Africa’s image worldwide, which would also be enhanced by the improvements in infrastructure.

In the past, host countries have relied on growth in tourism to help compensate the additional costs. The evidence from previous tournaments is that all the publicity adds at least 10 per cent to the number of tourists over the next 10 years. The accountants Grant Thornton initially estimated 483,000 visitors during the World Cup, but later revised that down to 373,000, largely because of the recession, while South Africa Tourism’s chief executive thought it might be as low as 250,000.

In fact, many now believe that the economic benefits of hosting major sports events are limited. Stefan Szymanski pointed out the opportunity costs to an economy, “The gain in sport is a loss on spending in cinemas.” While criticising FIFA’s excessive expenditure, he asserted, “There’s so much evidence that there’s not even an argument any more – mega events don’t deliver the financial extravaganza that is promised.”

However, FIFA’s gravy train shows no sign of being derailed with their provisional budget for 2011-14 increasing revenue to a staggering $3.8 billion, of which $3.2 billion is already contracted. Just in time for next year’s presidential election, Sepp Blatter promised to double the funding to national associations over the next four years. The healthy finances also allowed him to award each of the six confederations an extra $2.5 million, while every national association will be given a $250,000 bonus. Blatter smilingly explained, “It is a gift, if we can say this.” While others might find different words to describe these payments, Blatter was unperturbed, “The whole family of football is happy.” If you’re in FIFA, there’s absolutely no reason to disagree, though the South Africans might beg to differ.

Will Real Madrid Be Able To Fund Mourinho's Plans?

There are many questions regarding Jose Mourinho’s arrival at Real Madrid, but one thing that is certain is that the “special one” will be demanding funds to fashion the team into his desired formation. According to the Italian press, Mourinho’s acquisition plans will cost around €100 million, as he looks for players with more defensive characteristics. Many names have been bandied about, but the usual suspects are Inter Milan’s Brazilian right-back Maicon, Lazio’s Serbian left-back Aleksandar Kolarov and either Roma’s Daniele De Rossi or Liverpool’s Steven Gerrard to add drive and energy to the midfield.

This expensive shopping list is on top of the money that Real have already shelled out to secure Mourinho’s services. Most of the media suggested that the nerazzurri allowed him to go for €8 million compensation, while Inter’s management has privately briefed that the true cost is €10 million in cash plus a further €6 million to be off-set against future transfers between the clubs. This is in addition to the €5 million pay-off that Real had to give to Mourinho’s predecessor, Manuel Pellegrini.

That’s a lot of money, but it’s still small change compared to last summer’s outlandish spending spree following Florentino Perez’s spectacular return to the President’s seat at Real Madrid. He wasted no time in making his mark, breaking the world transfer record twice in just a few amazing days. First, he bought Kaka from AC Milan for £56 million, only to surpass that sum almost immediately by paying £80 million to Manchester United for Cristiano Ronaldo. In total, Real invested a staggering €250 million in new talent, which also included Xabi Alonso, Karim Benzema and Raul Albiol.

"What does £80m get you these days?"

UEFA’s President, Michel Platini, was quick to condemn “these excessive transfers as representing a serious challenge to the idea of fair play and the concept of financial balance”, though the FIFA president Sepp Blatter insisted that the record deals merely emphasised the healthy state of football (under his presidency), bizarrely likening Ronaldo to a Picasso. Maybe these comments are best ignored, as we know that Blatter is a gigantic hypocrite, who a few years ago vowed to stop “greed ruling the world of football”. As Professor Simon Chadwick from Coventry University said, “Real Madrid are effectively injecting inflation into the transfer market. That’s a serious issue, because it’s something that football cannot afford when many clubs have major financial concerns.”

Perez acknowledged this in an oblique way, “We’re going through a delicate moment with the world financial crisis, but we had to make a big effort for the arrival of new players – which explains the debt.” Ah, yes – the debt. It’s certainly true that the debt “ballooned” (to use Real’s own word) last year to finance the player acquisitions, but it’s by no means the only element of Real’s strategy, which Perez explained thus, “We believe we can improve our accounts by aiming for three goals – increasing ticket sales, increasing bank loans and increasing the club’s economic value.”

"Getting shirty"

Nevertheless, Real were forced to take out €151.5 million of additional bank loans, split evenly between Caja Madrid and Banco Santander, to finance last summer’s signings. Eyebrows were raised at Real’s ability to secure this credit at a time when Spain is in deep recession with unemployment running at around 20%, but the prevailing economic conditions do not appear to apply within the Santiago Bernabeu. Furthermore, the interest rate is relatively low (tied to Euribor) and the collateral used to secure these loans is not specified, though most believe that they are backed by future money from the lucrative television deal. On the other hand, these are short-term loans that have to be repaid in six years, though even here Real have been given some leeway with lower payments in the first three years (€25 million in 2010, €16.665 million in 2011 and 2012), followed by a large payment of €42.170 million in 2013, before settling down to €25 million in the last two years. Given the tightness of available credit, this does seem like a remarkably generous deal.

Hang on a minute, aren’t Real Madrid’s debts the stuff of nightmares? After all, there have been accusations that their debts are around €700 million. Unfortunately for those seeking a conspiracy theory, the truth is much more mundane: it’s simply our old friends in the media playing fast and loose with the definition of debt once again in order to beef up their story. As I have written before, there are many definitions of debt, but the one used by most finance experts has actually been adopted by UEFA in their Financial Fair Play proposal, “Net debt is defined as the borrowings of the club less any cash and cash equivalents. A club’s borrowings will include balances such as bank overdrafts and loans, owner and/or related party loans and finance leases. For the avoidance of doubt, net debt does not include accounts payable relating to player transfers, nor trade and other payables.”

As you will see in the table above, that would mean that Real’s net debt per UEFA is just €38 million, having deducted €112 million of cash from the €150 million bank loans. Interestingly, Real’s own accounts show the progression of net debt and give a figure of €327 million, as they include €219 million owed to other clubs for transfers and €81 million still owed on the investment in the stadium and La Cuidada, the new training complex. In the context of Real’s business, this is probably the fairest figure. Helpfully, Real include a phasing of the outstanding transfer payments, so we can see that they have to find €113 million in 2010 and €63 million in 2011, which will apply a lot of pressure to their cash flow in the next two years. Note that this does not include the fee for Ronaldo, as this was paid in full last summer.

Other commentators have opted to use total liabilities of €683 million for the “debt”, but that includes trade creditors, deferred tax, provisions and accruals. Some of the journalism on this subject has been shockingly ignorant or lazy, such as a BBC report in March, “Sources in Spain disagree on how much Real actually owe. Perez stated at the start of the season that Real were 'only' €327 million in the red, a figure he admitted to when he presented his budget for this season. However, other analysts, who have done a bit of digging through the accounts and talked to banking figures, think the figure may be almost as much as 80 per cent higher. Whatever view you take, these are big, big numbers.” Thanks very much for that incisive “analysis” – worth the licence fee on its own.

Perez told the club’s general assembly that not only would the club be able to “comfortably” confront its obligations in the 2009/10 season, but the net debt would actually be cut by over €100 million to reduce the balance to €210 million (£180 million), mainly thanks to a projected increase in revenue. Anything’s possible, but I’m not sure how likely that is, especially when you consider that the club promised a similar reduction the previous year, only for the net debt to increase by nearly €200 million.

So Real Madrid are well within UEFA’s debt guidelines (net debt should be less than the club’s annual revenue), but how about the break-even rules? In fact, they’re also comfortably in line with those, as the club is actually profitable, reporting €24.9 million (£21.2 million) profit before tax in 2008/09 and making even more money the year before, €51.4 million. Of course, this may change as wages and amortisation increase to reflect the enormous spend on acquiring new players, but, as it stands, Real produce profits.

This is due to their astonishing ability to generate revenue. Real Madrid have topped the Deloittes Money League for five years in a row and this season became the first club to earn revenue of more than €400 million. Over the last ten years, revenue has increased from €118 million to €401 million, representing an average growth rate of 26 per cent. Much of that growth came in the early years, but Real still managed to increase revenues by an impressive 11 per cent last season.

All this despite being relatively unsuccessful on the pitch (by their own exalted standards). Real last won the Champions League in 2002 and have failed to reach the quarter-finals in the last six seasons. They have won La Liga twice in the last four years, but it was their deadly rivals Barcelona that finished victorious in the last two seasons.

"Meet El Presidente"

The other notable aspect to Real’s revenue is how balanced it is between the three revenue streams with about a third being sourced from match day, television and commercial. This diversified structure provides some protection against future fluctuations in income.

Match day revenue is over €100 million, which is pretty good, considering that this came from only 25 competitive home matches (top teams in England often get to 30 matches). To be fair, you would expect healthy revenue when your average attendance is 71,800, one of the highest in Europe. However, worryingly for Real, this represented a 6 per cent decline in the previous season’s attendance of 76,200 and is only 90% of the stadium’s 80,000 capacity. This revenue was also flat compared to the previous season, though it should be recognised that last year’s match day revenue had increased by €19 million, helped by the reconfiguration of some areas of the Bernabeu to increase corporate hospitality areas.

Real Madrid’s broadcasting revenue benefits hugely from the ability of Spanish clubs to sell their TV rights on an individual basis with their Mediapro contract guaranteeing €1.1 billion over the seven seasons up to 2013/14. In fact, Real earn more TV revenue (£137 million) than any other football club. To put that into context, it’s 80 per cent more than Arsenal’s £76 million. This provides both Real Madrid and Barcelona with a significant competitive advantage over clubs from other leagues, but there is obviously pressure from the other Spanish clubs to move towards collective bargaining, as their financial woes gather pace. In fact, Esteve Calzada, CEO of marketing agency Prime Time Sport said, “Real Madrid and Barcelona will try to make sure it doesn’t happen, but it’s inevitable.”

"How much?"

The broadcasting revenue would have been even higher if it wasn’t for a disappointing return from the Champions League, where Real only received €20 million, about half of the €38 million allocated to Manchester United. This is partly due to poor performance, but is also because the TV pool allocation is lower for Spain than England. Interestingly, Real were eliminated by Lyon, despite spending more on transfers last season than all of the teams in the French top division combined. On the other hand, Real earned good broadcasting revenue from friendly matches and the club-owned channel, Real Madrid TV.

However, the engine driving Real’s remarkable revenue growth has been the club’s ability to increase commercial revenue. This now stands at £118.6 million, which is second only to Bayern Munich’s Vorsprung durch Technik. That’s certainly the view of the President, who told the annual general meeting, “We’ll carry on being the leader in sales, because of the value of our brand.” That should not be under-valued with a Harvard University study estimating that 287 million people worldwide follow Real Madrid (even though they can’t fill their stadium every week).

"Hair today, gone tomorrow"

Real benefit from long-term sponsorship agreements with key partners. Their partnership with Adidas commenced in 1998, but that did not stop Perez from negotiating a substantial increase on the existing contract after signing Ronaldo and Kaka, and it is now believed that Adidas pay €40 million a year for the privilege of being associated with the galacticos. Similarly, the club’s shirt sponsor, online betting company Bwin, extended its agreement by three years until 2013 for €20 million a season (a 40 per cent increase). Other high profile partners include Coca Cola, Audi and Spanish beer company Mahou (producers of San Miguel). Given that almost all sponsorship deals include performance-related clauses, the commercial revenue would presumably be even higher if Real were to win the Champions League again.

But does Real’s business model make sense? On the face of it, spending on such a massive scale appears to be financial suicide, but it is actually part of a carefully considered commercial strategy, based on the belief that marketable talent pays for itself in the long run. A club insider explained that “It is better to buy Ronaldo for €92 million than pay €20 million for a player of slightly less calibre and profile.” Perez confirmed this, “What I am sure of is that which seems expensive is the cheapest.”

"I have a cunning plan"

Real firmly believe that they are in the entertainment business, so act like a content provider, similar to a Hollywood movie studio. For Brad Pitt, read Cristiano Ronaldo (albeit with a considerably larger Adam’s Apple). For this strategy to work commercially, it follows that they need the best content, thus they consider the likes of Ronaldo and Kaka to be solid gold investments, which improve their brand identity and can be leveraged into higher sales. Unlike English clubs, Real insist on taking half of a player’s image rights, which can generate considerable money for the club.

This star quality can also help in other areas. As Nigel Currie of Brand Rapport explained, “They are looking to make money from these signings by maximising their future overseas TV rights. The team that has the most marketable players will get the best TV deals.” The presence of star players can also earn a club big money on the pitch, e.g. Real received €15 million for playing two meaningless friendlies in Japan during the David Beckham era, when Real cleverly projected their brand into Asia.

This punt on increasing commercial revenue may sound very optimistic, but Perez would argue that it has worked in the past for Real, pointing to the tripling of revenue during his first presidency between 2000 and 2006. Looked at another way, the University of Catalonia claimed that Real lost €45 million in annual revenue when “golden balls” moved to the US, but it remains to be seen whether Ronaldo can earn it like Beckham.

"Galacticos 1.0"

Or, for that matter, like Zinedine Zidane. Real maintained that they paid for all of the French maestro’s £46 million transfer fee through shirt sales. That claim may be open to question, but it is indubitable that annual merchandising and sponsorship revenues increased by €85 million during the first galacticos period (Figo, Zidane, Brazilian Ronaldo and Beckham). Even in these tough times, the club has sold 1.2 million shirts emblazoned with Ronaldo’s name in Madrid alone, according to the Portuguese sports paper A Bola.

However, many simply do not believe that the numbers add up. Barcelona’s economic director, Xavier Sala i Martin, scoffed, “He says he will recoup (the transfer spend) by selling replica shirts and so he will have to sell 30 million of them. That is impossible.” This may be attributed to envy from the club’s oldest rivals, but even the club’s supplier Adidas admitted that Real Madrid’s shirt sales lag behind Chelsea and Liverpool.

In any case, there is no doubt that Real Madrid has the highest revenue of a football club with £341.9 million, but they also have the highest cost base at £344.5 million, so they make a small loss at the operating level. Their wage bill of £159.4 million is even higher than Chelsea’s payroll, but the wages to turnover ratio is an excellent 46% (exactly the same as Arsenal) and has been on a downward trend for the last few years. Having said that, Real spend big when they feel they need to. They have six players in the list of top 50 footballers’ salaries and a survey by Sporting Intelligence said that Real Madrid is the sports club with the second highest average (first team) salary, only behind baseball’s New York Yankees.

Following last summer’s big money signings, not just in terms of transfer fees, but also salaries, you would expect the wage bill to have significantly increased this year, with Ronaldo on €13 million, Kaka €10 million and Benzema €8.5 million, but Real’s provisional budget hardly rises at all (from €187 million to €190 million), which looks completely unrealistic, even after offloading several players. We shall see.

In contrast, the 2009/10 budget highlights a massive increase in amortisation from €75.9 million to €101.7 million. Assuming that the depreciation on fixed assets is unchanged at €11.5 million, that implies a 40 per cent increase in player amortisation from €64.4 million to €90.2 million. Given the way that accountants write-off the purchase price of a player over the length of the contract, we know that the full cost of a transfer will not be reflected in the profit and loss account immediately, but it will catch up with you sooner or later – and that is what is happening here. Real’s player amortisation at £54.8 million was already higher than any other club, but next year it will be in a league of its own.

Other expenses (including leases, maintenance and professional services) are also very high at €141.5 million, though this was impacted by €45 million of once-off adjustments, including €20 million of asset write-downs and an €11 million reduction in player valuations. However, this was off-set by €37 million of non-recurrent revenue (television €19 million, marketing €18 million), so, everything else being equal, this would mean an €8 million improvement in profit this year. In terms of the UEFA fair play criteria, Real could also boost their profit by €23 million simply by excluding the loss made by their basketball division.

"One that got away"

The small operating loss was more than compensated by the €32m profit on player sales with the notes in the accounts revealing that a further €34 million was made after the books closed, presumably for the Dutch contingent sold in August 2009 (Arjen Robben, Wesley Sneijder and Klaas-Jan Huntelaar). This may seem low in relation to the transfer spend of €250 million, but it is obviously a buyer’s market with other clubs keenly aware that Real want to get off their books players who are no longer wanted. This could be important for Mourinho, as there have been rumours that the club will limit his transfer budget to “only” €50 million, unless he raises more funds by selling players like Rafael van der Vaart, Lassana Diarra and Fernando Gago.

Indeed, Real’s peers have expressed doubts over the Madrid club’s strategy. Barcelona’s economic director harrumphed, “I don’t know where the €300 million that Florentino Perez thinks he has for signings actually comes from”, while David Gill, Manchester United’s chief executive said, “I don’t understand the economics of what Real Madrid are doing. Their turnover is not materially different from ours, so I am not quite sure how they can make the profits to justify their salaries.” Here’s a clue, David: in fact, their turnover is £60 million more than yours – and they’re not paying the banks £70 million a year in interest.

"We'll meet again, don't know where, don't know when"

There’s also no shortage of academics queuing up to put the boot in. Barcelona University’s Jose Maria Gay said, “Real’s most important revenue streams won’t be enough to offset their spending. The costs have soared and they need to increase income by about 20 per cent to balance the accounts. It’s a very risky investment.” Michael Stirling, managing director of Global Sponsors Ltd agreed, “It’s a high-risk strategy. Revenues are not going to come through instantly.” Simon Chadwick was singing from the same song sheet, “Many people would have legitimate concerns that the club will be unable to generate an acceptable return on their player investment strategy. It would seriously undermine Real Madrid’s business model.”

Of course, when the club got into serious financial difficulties in the past, it cleared its €200 million debts by selling the family silver or more accurately the club’s training ground in 2001. Even this was mired in controversy, as the European Commission believed that the price had been inflated by the city authorities reclassifying the area as development land, thus significantly increasing its value before purchasing it – effectively a state subsidy. Jose Maria Gay said that “extraordinary gains are finite”, but in extremis Real could always repeat the trick and sell their mythical Santiago Bernabeu stadium and build a new ground out of town, though this would clearly not be popular with the fans.

"Royal Madrid"

And after all the club does belong to the fans or at least it’s owned by thousands of members who elect the president, so he should take their views into consideration. As a social trust, rather than a PLC, this is a club that does not have to worry about takeovers and does not face the same pressure from creditors. As Gabriele Marcotti put it, “They play by a different set of rules.”

Although the club’s constitution does not allow Florentino Perez to fund the club, his position as one of the wealthiest men in Europe with wide-ranging business interests clearly helps Real’s relationship with banks and sponsors, as he has a huge network of influential friends and contacts, maybe best demonstrated by the fact that a Catalan bank provided the €57 million guarantee that he needed to stand for the presidency.

In many ways, Real Madrid are viewed as the establishment club in Spain with immense cultural and political significance. In other words, they are almost certainly “too big to fail”. The accusation is that they can afford to live in a “Real” world, as opposed to the real world, and can keep on spending, because they know that no bank would ever dare to call in their debts. Stefan Szymanski, co-author of “Soccernomics”, agreed, “Real’s really too big to disappear, whatever debt they incur. No bank would ever be allowed to be the one that sank Real Madrid.”

"Say hello, wave goodbye"

So, the jury’s out on whether Real Madrid’s model works. Despite the huge money splashed out on buying players, the club is profitable, though whether this is simply due to the time lag before this expenditure is fully reflected in the accounts, we shall have to wait and see. When challenged on the financial implications of being knocked-out of the Champions League, Manuel Pellegrini responded, “There is a serious misconception. The project isn’t for a year, far from it.” Obviously for him, it was in fact only for a year, but I take his point: we may not understand whether the numbers add up for a couple of years yet.

All of this leaves us with some conflicting thoughts. While changing managers every season seems like a recipe for disaster, at least this time Real Madrid have gone for a proven winner in Jose Mourinho, which rather begs the question of how much Real would earn if they actually won something?