The Financially Unsound and the Red Fury

Just don't let Ramos hold the trophy

There is no doubt which country currently sits on top of the iron throne of soccer. Spain. All foes have fallen at the hands feet of the Spanish national team for the past four years and La Furia Roja go into the summer as favorites to defend their European Championship title of 2008. Those odds are likely to carry over to the their bid to retain the World Cup in 2014. Domestically, La Liga attendance is high with the twin giants Barcelona and Real Madrid locked in a battle for the league title and on course to meet in this year’s Champions League final. The Spanish brand is also the strongest it has ever been with the rivalry of Messi v Ronaldo pulling in eyeballs from all over the globe and Spanish players in high demand across the continent for their technical brilliance.

Unfortunately, the difficult thing about being on top is staying there.

Moneyball Does Not Work In Soccer

When Michael Lewis’ Moneyball: The Art of Winning an Unfair Game hit shelves in 2003 booksellers could be forgiven for believing that a story about sports management and statistics might not exactly light up the mass-market audience.  Even though it was about America’s national sport it was about the Oakland Atheltics, not the Yankees.  Moneyball of course went on to be a national bestseller as Lewis’s tale of the underdog A’s and Billy Beane managed to capture the attention of baseball fans, academics and corporate executives alike.

Moneyball is about the success of a perpetually underfunded baseball franchise in the face of the financial might of historically larger baseball clubs.  Lewis’ explanation for Oakland’s success is two-fold: a rigorous application of statiscal sobriety to player selection and business acumen in player trading.  Billy Beane used these tools to outperform competitors year after year while also paying out a much smaller wage budget; it is a familiar American narrative that plays especially well in the recent times of extreme financial disparity.  But Lewis’ most important theme is emphasizing the rewards of innovation in an industry which had grown complacent and wasteful.

An environment in which major financial decisions, like player trading and wages, are divorced from reality is easily recognizable for soccer supporters because an equally ridiculous climate exists in the world of soccer.  Elite clubs owned by billionaires are able to splash mountains of cash on outsize transfer and wage budgets while the minnows who must operate within the considerations of balance sheets and income statements are resigned to the fate as perpetual middlers or relegation fodder.  The rise of Manchester City is only the most recent example of a club whose financial presence places one more brick in the wall between the tiers of clubs.  Moneyball has a following among soccer supporters because it gives hope that money is not the sole determinant of a club’s success and that disciplined management and scientific innovation can build an underdog into a giant.  It worked in baseball, can it work in soccer?  Is it possible to buy low, sell high and still win things in soccer?

The Premier League Arms Race

Philip Cornwall has written a piece in this week’s Football365 Opinion about the increased spending taking place in this year’s January transfer window.   Spending levels are roughly double of last January’s, a trend which he attributes to the perennial waves of hope and fear running through the Premier League, the former a result of being within reach of a lucrative Champions League spot, and the latter from being too close for comfort to the deadly bottom three berths.  But the point spread between clubs is tighter than in previous years which has intensified the fight for places, and in the case of the bottom clubs the fight away from certain places.

The most important point, which in my opinion Cornwall under-emphasizes, is that despite the increased spending on incoming players, it is an absolute certainty that three clubs will go down to the Championship next year.  No matter how much the average playing skill level of clubs goes up, three will lose. 

Forbes and Football Club Valuations

Forbes recently published its list of the Top 20 Football Clubs by valuation. Topping the list were familiar names Bayern Munich, Barcelona, Arsenal, Real Madrid, and Manchester United.  The ranking paints a rosy picture of the soccer world with at least 9 clubs commanding valuations of more than $500m and 15 out of the 20 clubs having positive income numbers.  The world of football is not in such dire straits after all, look at all the money!

Not so fast…why don’t we take a closer look at some things.

1. Current Value (est. by Forbes) – as noted in the footer, “value of team based on past transactions and current stadium deals”.  Which means that the last price the club was bought at is the baseline, plus however much the stadium and land cost.

As we have seen owners buying football clubs for ridiculous valuations, it would seem equally ridiculous to base a current valuation off of that previous instance of temporary insanity.  And stadium values?  I suspect that there is not really an efficient market for football stadia as it would be hard to imagine Bayern Munich moving to Old Trafford should the need for a better stadium deal arise.

2. Debt / Value – What happens when you divide by an inflated value?  Everything looks better and its time to buy more C.Ronaldos!

3. Operating Income – again as noted in the footer, “Earnings before interest, taxes, depreciation and amortization, player trading and disposal of player registrations.”

Let’s read that again with the useless bits removed.  “Earnings before interest, *, * and *, player trading and disposal of player registrations.”  So this list evaluates the economic health of clubs before you take into account the three largest, most important categories of financial activities they engage in. Seems to be some important omissions there Forbes.

Forbes in general seems to love playing fast and loose with the numbers in their list featurettes (ex. the Forbes rich list, almost all people’s net worths are estimated or contributed *COUGH* DONALD TRUMP by the person in question).  And understandably so, the lists are huge readership drivers, it is almost inevitable that just having a populated list by print deadline is favored over accuracy.  Not that they aren’t entertaining…let’s just not take them for indicating anything realistic about the state of the economic football world.