Notes from Underground

The world is now going into a deep and sharp recession. With each week that passes increasing indicators are available to strengthen this conclusion. In America we have unemployment figures akin to the Great Depression, accept what took 4 years in America to arrive at took little over 4 weeks in 2020. In the UK the news on the levels unemployment came as a surprise. It rose to over 2 million and its highest level since the mid 90’s, overtaking the 2008 crash in a single month. Unlike the US the UK currently has a job retention scheme in place protecting millions more jobs at a cost roughly equivalent to what is spent on the NHS. How and when this scheme is wound up, without costing millions more jobs is becoming an increasingly difficult dilemma for a Conservative government at one level famed for championing the values of the market but at the same time acutely aware the market is going to wreak havoc on society of left unfettered. In terms of spending, the last month the US announced spending was down 16% and in a single month (around 25% greater than the 12% estimated figure) and retail spending was down 80%.

Those in the lever of power, who had hoped for a very quick bounce recovery are now downgrading predictions, moving from a “V” shaped recovery to hoping to get a “U” shaped recovery, with a longer period of stabilisation at the bottom before recover can come.

For football- though an industry that holds enormous importance to its followers- remains relatively small fry in this recession. Virgin Airways who could well dissolve through this crisis, turns over more than every professional club in the UK combined over a 2 year period. It is a small industry whose belief that it will remain immune from the pressures that will come is a damaging myth that ought to be getting tackled from those at the very top of football, who at present resemble Nero fiddling around the edges as Rome burns.

To some degree there are structural, or meso reasons for the inertia and arrogance experienced within football. Certainly in England-barring a couple of examples (which have been analysed here ) in 2002 and 2008 the league itself is an enormous success story. Over 25 years of continuous growth (on average around 17% year annual inflation). In terms of TV, sponsorship, viewers, fans, investors the Premier League has shown unique enterprise and ability to buck wider trends and grow its brands-in a period where growth rates in the wider economy, and to a degree across sport have slowed. My own perception, if that those within football (be they loyal fans or employees within the game) are not needlessly pig headed in their belief football will just keep going, but it’s more a reflection of the structural and cultural realities they have known for the majority of their lifetime. There is a belief that football, and often the top football clubs are simply untouchable.

When you have situations where institutions feel untouchable and that they cannot fail, recklessness tends to set in. The obvious comparison would be with the financial services sector before the 2008, where a common outlook was developed that they had resolved the inherent flaws of capitalism and found an equilibrium that could not go bust and only boom. The inevitable decline was heightened by the recklessly that flowed from the flawed conclusion- where a culture of short termism and greed led to an imposition of toxic debt within the system that spread to the wider economy. That toxic cocktail of unfettered masculinity, greed, short termism and arrogance are all apparent within football too.

The truth is, we now have window dressing to try and maintain that very system from those at the top of the game. They want a return to business as normal, and in spite of still routinely having several hundred people dying every day a decision to continue to push forward for what is a dangerous return has taken precedence over fundamental discussions of how we can re-shape what the national game looks like to safeguard its long term future. Holland, France and Belgium have all cancelled their leagues on safety advice grounds, and all have substantially lower numbers than the UK in terms of deaths. It’s hard to avoid the conclusion that at present, any attempt to try and re-think what football might mean (wage controls, more risk management of money’s spent to long term investments etc.) is currently sidelined to just keep the wheel the turning. As above, we fiddle while Rome burns.

Football will be impacted by the coming crisis. Primarily because the decline is just too sharp for it not to be but also because it is now impacting aspects of the wider economy that play a vital part of the football infrastructure. Unemployment, lower wages, companies’ profits being hit all feed into the eco structure of the game. In a crude sense, fans who lose their jobs will have to give up Season Tickets. Fans who have to take wage reductions will have to reduce the games they attend, reduce the spend on club merchandise or even expensive tv subscription packages (which fuel the game). Businesses whose profits (and revenues) are squeezed will have less to invest in lucrative sponsorships or buying up premium seating and boxes at grounds. This process is already occurring. Manchester United today announced £28m in losses for the 3 week period in March where football wasn’t being played, how do they look when we have 3 months of not playing by June? How do they cope with potentially 12 months of playing behind closed doors and not accessing the hefty gate receipts?

Much of the commonality of the discussion around how the particular infrastructure of the Premier League will adapt seems to rest on the idea that there will be an even contraction, with all clubs losing money evenly. The other somewhat bizarre idea I’ve seen posited is that we can judge how teams will recover by their performance before the recession hit. Neither of these approaches hold any weight. Recessions are inherently uneven and represent a fundamentally different epoch than what went before. What may have been a strength 2 months ago is now potentially a big weakness (and the reverse).

The truth is that Premier League clubs have different profiles. In essence there are 2 groups namely the top 6 and the bottom 14. Within those groupings you can also probably stratify along the basis of those clubs who have an owner who is willing to continue to put money in, even when it’s not logical to do so for short term profits, though for simplicity we will stick with the concept of two groups. The top 6 generally have higher wages, better wage to turnover ratios and much higher turnover. The increase in turnover can essentially be put down to commercial revenues (including sponsorships), match day income and finally monies generated from European participation. While they earn more money from domestic TV rights, because of the more egalitarian nature of TV payments, the differential is much closer. In essence the top 6 are more reliant on commercial and match day revenues, whereas the bottom 14 rely upon TV rights payments being made.

While it is difficult to predict exactly where football is heading in specificity there is at least some consensus on the broad direction of travel. It looks as if football will return at some point this summer, it will be televised but is likely to be undertaken in empty stadiums until at least the early part of 2021. Even if fans are allowed back, there are questions as to what sort of capacities will be available. While there will be some hit on TV payments this will be much smaller than both Match day loss of income and commercial loss of income.

While the match day loss of revenue is fairly self-explanatory the commercial loss is very unlikely to return to pre-Covid 19 levels for some time. In a world where retail is down 80% in America I would suggest a 50% reduction in all commercial activities would not be an unreasonable assumption to make for Premier League clubs. In truth, if sponsors start reneging on deals it may go as high as 75% (depending on how long it takes to get a vaccine). If we work from the assumption though, that we get around ½ of next season played in stadiums will full earning potential, given we’ve lost ¼ this year we would be looking at a reduction in match day income of 75% and commercial revenues of upwards of 50%.

I did some quick modelling on these numbers (alongside an implied loss of TV revenue of 10-15%) and one consequence of these changes is the league becomes more egalitarian. Where the turnover gap from 1st to 20th is over 5 times currently, this would drop to around 3 times. The pain would not be spread evenly amongst all clubs, and on the face of it will hit the top teams disproportionately harder and begin to make the league more egalitarian (which in the medium term may strengthen the product, if you take the view the competitive nature of the Premier League is its key USP over other competitions).

The 2nd assumption, that pits the idea that those clubs who are successful now will automatically benefit from the post Covid political economy of football seem to fly in the face of economic orthodoxy. It’s widely accepted that different businesses thrive under different economic conditions. To use a football analogy, a player who may be necessary in a midfield position when chasing a game from behind is probably different to one you would want when defending a lead. One player may be superior but different skills are required in different circumstances.

Many of the top clubs have become increasingly adept at working the FFP system to justify the high wage and transfer spends they have. In the boom times, buying aggressively numerous young players, on long contracts with not insubstantial wages-knowing their value grows as they reach maturity was a sound financial policy (and in essence what every club is trying to do). The issue with such an approach now is that with potentially collapsing prices and wages what were once growing assets can now potentially become unmovable anchors who will not now pay the dividends you felt they might when you invested the higher wages at the front end. If you consider a club like Chelsea, who may regularly have 30+ young players out on loan with the medium term intention to sell at a profit that the prices they wanted to achieve to justify the strategy may have gone. The reality is also that cash strapped football league clubs may no longer be able to afford the wages the players were on so you lose money twice in terms having to maintain their wages. Footballers who you felt were at a point of maturity to be sold may still only be loanable assets.

I do sense in general the market for players who hold no value continues to decline. Whereas once it was players who were 30+ who couldn’t command fees, which has been creeping down to players below 30, and there are some assumptions that players aged 27 now won’t be able to command many fees. Structured deals involving long loan spells (upwards of 2 years) have become more common before the crisis and will likely escalate after this crisis as cash becomes tighter. Ultimately, if a club can loan a proven PL player for little or no transfer fee, why would they pay to loan a young player from a top PL club? The changing nature of the transfer market will have ramifications all the way down.

This is just one small example of a business in Chelsea who were separately shrewdly prior to the recession will now find it has a potentially bloated squad with players it can’t move on. Its strength may become it’s weakness. The process feels inherently unfair (hence why people struggle to countenance) but recessions are rarely fair or logical in any real sense of the word.

The Premier League and UEFA need far more fundamental discussions to be taking place if they want to survive this crisis. The FFP regulations were barely fit for purpose the boom times (and actually achieved the exact opposite of what was promised of fairer competitions and clubs who are more stable). If I were being kind it is essentially just inflation busting legislation, which you could argue was necessary following the bubble that emerged after the 2008 decline. The issue you have, is inflation busting laws, in a period of sharp deflation and recession are precisely the opposite of what is required (and bear more than a passing resemblance to the Fed’s response to the 29 crisis in America where they refused to print money such was the fear of inflation). The response of the fed led to what was a sharp recession and helped developed a multi-year depression. The concern from the outside would be that the intransigence of football to see the new reality emerging could well repeat these mistakes nearly a century on in football.

What is now required within football is a move away from the short-termism, greed and inequality that pervades much of football. A recognition that the value set of the top teams far from building football actually sucks money, integrity and sustainability out of the game. We need legislature that is explicit in its approach to try and combat their corrosive influence as well as the culture that has followed on from that. Sustainability and equality need to be on the agenda. As a spectacle football benefits from a fair competition. A simple, worthwhile and logical wage cap needs to replace the bureaucratic complex system we have seen with FFP. Limit clubs to whatever the medium spend is in any, given league + 10% and strive to see monies that go into the game to not disappear on contracts that provide 4-5 years of value before disappearing. In the end, it is only when we start to approach these tough questions will we begin to ensure the independence and viability of our national game for generations to come.