The Economics of Football
by George Hatjoullis
The Economics of Football (soccer for my North American readers) is not complicated. Nor is it true that football is not profitable. The profits may not take taxable form but football is profitable. The huge revenue now generated by football accrues to many stakeholders (but not, it seems, to HMRC). The correct economic model for football is thus revenue maximization rather than profit maximization. Once this is understood the many peculiar aspects of this game become more obvious.
The customer consists of football Supporters and football Fans. The Supporter spends money directly with the club in the form of tickets, membership fees and official merchandise. The Fan spends money on football via media and unofficial merchandise, such as sports channels and gambling. The two overlap but they do constitute separate revenue streams and it is worth keeping them conceptually separate. Fans may never attend a live match. The revenue accruing to football comes from diverse sources including sponsorship and advertising. Hence the Fan that buys a certain razor blade because it is used by a recognisable footballer is contributing to football revenue. Football is about branding.
There are two classes of Supporter/Fan. The first is lifelong. The club is part of the Supporter/Fan’s social identity. There is a real sense in which the club is felt to ‘belong’ to this class of Supporter/Fan. The support is unwavering and the expenditure consistent. The second class is fickle. These are the glory seekers that want to associate with success. They will most likely be only Fans and follow the most successful teams. They constitute a large source of revenue for football, either directly or indirectly. However, their expenditure is less consistent. It needs success. Over time Fans do accrue into Supporters.
The distribution of revenue into the football game is somewhat opaque. All we that we know is that HMRC does not get much. The various governing bodies have an interest in maximizing revenue as do the clubs, managers, players, physios, grounds staff etc. The bigger the cake the larger the crumbs. It raises the question of whether football is managed as an objective, competitive sport or revenue maximizing form of entertainment. The two are not necessarily mutually consistent. If a club that is not so well supported wins the ‘title’ the revenue accruing to football may not be as great as if a well supported club wins. The fickle fans may not spend so much and ‘neutrals’ may take less interest. There is thus always a commercial interest, for the football business as a whole, in a ‘big club’ winning the ‘title’. Two ‘big’ clubs in a final will generate more interest, and hence more revenue, than two ‘small’ clubs. If you speak with any random fans the question of ‘big club bias’ always comes up. No one, to my knowledge, has produced any scientific evidence to confirm or refute this popular view, but the view is widespread. It is also consistent with a revenue maximizing model for football.
At the club level the same revenue maximizing considerations apply. It makes sense to spend obscene amounts of money on a high-profile and talented player, both in transfer fees and wages, because the revenue from shirt sales, sponsorship, new fickle Fans etc may well repay dividends on the investment. Ultimately, an aspiration to success is vital to revenue. It is this aspiration that makes a club ‘big’. It is revenue that makes a club ‘big’, and aspiration is vital to revenue. Not every club can win in every year. An aspiration to success requires having won a significant ‘title’ in recent memory and presented a consistent and serious challenge in the intervening years. In order to move into ‘big’ club status one has to win a ‘title’ and pose a consistent challenge. This creates certain barriers to entry for the ‘smaller’ clubs. They do not have the necessary revenue to attract talent or any ‘big club bias’ that may be available. It is a chicken and egg problem because without the talent and/or the ‘big club bias’ how do they move to aspiring to success?
Transitions to aspiring to success require investment. The rise of Chelsea and Manchester City in the English Premier League has taken substantial investment. The failure of Arsenal to sustain appropriate investment levels has diminished its aspiring to success status, though it still just retains this status. Teams such as Everton and Tottenham Hotspur (Spurs) remain just shy of ‘big club’ status. Investment is a necessary condition for acquiring aspirational success. It is not sufficient. In all business ventures skilled management is a necessary adjunct to appropriate investment, otherwise the investment will fail. In football there are two tiers of management to consider. First, there is the corporate management that should handle all financial and commercial aspects of the club. Then there is the management of what happens on the pitch. In a well-managed club the two are likely to be separate. The corporate management needs to appoint a coaching team with a well-defined set of objectives and a budget, and let them get on with it. The skill in corporate football management is in finding and appointing the appropriate coaching team to match the investment. Failure of the football team is ultimately down to corporate management. It may be failure or it may be strategy; it depends upon the objective.
For many clubs heavy investment is not deemed desirable by the corporate management. They therefore quite logically appoint a coaching team that will maximise on pitch success subject to the limited investment. The coaching team may be very successful in this objective even though actual results may be disappointing to Supporters. A club aspiring to play consistently in the Champions League needs a substantial investment and a proven coaching team. It needs a coaching team led by someone who can command the respect of players, motivate them as well as understand the tactical needs of the game of football at any level. New head coaches invariably inherit a squad which they must motivate and organise whilst reshaping to suit their own particular tactical approach. It takes time. It is a sign of poor corporate management if there are frequent changes in head coach. Whatever the strategy, frequent changes in head coach is always a sign of poor corporate management.
In any business, the board or senior management will appoint specialists in fields in which they have little or no personal competence. The skill is in identifying people, who can fulfil the corporate mission, to head up the specialist divisions. The choice of staff and organisation of these divisions is then left to the appointed managers. They are given a time horizon and performance markers along the way. Clearly drastic action may be needed if they fall short of the markers. It is a failure of those appointing if such action is required. It happens but it does not happen often in successful corporations. Indeed if it happens too often the senior management may itself be replaced. In football, drastic action is the norm and senior corporate management is almost never replaced. This reflects the ownership structure of football clubs. Nevertheless, many owner-managed clubs are poorly managed and one sure sign is the frequent change of head coach. It may be ‘their’ club but they do not do themselves any favours by poorly managing the club. They de-motivate the Fans and reduce the accrual of new Supporters. They damage their own revenue base. This is also likely to damage their standing in the wider football village which is solely dedicated to revenue maximization. It is a bad strategy.