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Wednesday, October 05, 2005

Football Finance

By and large I've been impressed by Simon Jordan's columns for the Guardian. His latest though doesn't make much sense. Here are a couple of key quotes

"'fans pay the players' wages', but fans need to know gate receipts don't come anywhere near doing that. This whole debate needs to refocus on one thing: salaries and their effect on club budgets. It's an unsustainable business structure - you wouldn't see it anywhere else - but it's a situation clubs created, and one we have to deal with."

He then gives three main points to explain the position.

1. If you've got a bigger stadium you can charge less. That's why Real Madrid are cheaper than Chelsea (their stadium is twice the size)

2. Football is good value compared to theatre

3. If you buy a season ticket things get cheaper. Those who want to pick their matches should pay for the privilege.

None of these points explain why football clubs need to charge so much, when they could be trying to cut wages. To address the points in the easiest order

2. Football is good value compared to theatre
- but lousy value compared to the Cinema or a Playstation 2. The point is that's not the market they're in. Few people say 'Crickey, £45 to see Chelsea vs West Brom, I think I'll nip down the West End and see what's on at the Old Vic'. A football club's competition is a) football on TV, b) other leagues of football c) rugby, cricket, athletics - and it's lousy value compared to all of them.

3. If you buy a season ticket things get cheaper
I have a certain sympathy for this one, right up to the point where he writes "If Selhurst Park held 80,000 and I knew I was going to fill it every week I could charge £5 for an adult. But it doesn't: we hold 27,000, and it never fills."

Right. So the walk in, casual fan isn't wanted because he wants to pay less than the current price. Never mind that the marginal cost of an extra fan is presumably close to 0 (the amount of cost incurred when attendance rises from 21345 to 21346) and any money earned is additional profit (or lower losses). Easyjet have made clear how easy it is to sell tickets at variable prices. I'm sure football fans would do the same - x on the door, a bit less a few days in advance, a lot less some months in advance and so on.

1. If you've got a bigger stadium you can charge less
Or to put it another way. If you've got a bigger stadium you can afford more in wages, which brings better players which fills the bigger stadium. It's a virtuous circle which starts by 'playing good football and winning games'. If Madrid charged £45 a stadium their attendances would fall. If attendances fall by more than the price increase they lose money and the circle goes into reverse - falling receipts, lower wages, worse players, lower attendances, falling receipts... They don't charge £28 out of the goodness of their own hearts, they charge £28 because after that profit starts to drop.

The point Jordan doesn't want to make is that entire divisions of clubs pushed wages up to ridiculous levels and no-one wants to be the first to cut them. I was impressed that Southampton had massive pay cuts written into their players contracts in the event of relegation. If they manage to come back up they should make sure they use the opportunity to keep the wages lower.

Sunderland hammered their wage bill after their relegation as an alternative to bankruptcy. They're now back in the Premiership with an awful squad and will probably go back down. But if they start spending big money they'll probably be down anyway, and they certainly won't be making a profit. Better a few years of profitable yo-yoing while they wait for reality to catch up with a few more clubs than a season or two of mid-table survival and the arrival of the recievers.

It's no coincidence that 'big clubs' tend to have big stadiums. At clubs like Newcastle or Liverpool it's not true to say that ticket sales don't cover the wages. Wages at these clubs tend to be around 50% of costs while ticket prices are close to 50% of revenues. They're still too high, if I was in Jordan's position I'd be pushing pay for performance, share options and schemes like EVA payments which delay payment for a few years to increase loyalty. It might mean settling for a weaker aquad in the short term, but if the game keeps going the way it is there will be few clubs with strong balance sheets around in 3-5 years (there aren't many now) and a well run profitable business could clean up - at the bank and in the transfer market.

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