Soccernomics (14 page)

What made these nonsoccer businesses so unstable was, above all, competition. There is such a thing as brand loyalty, but when a better product turns up, most people will switch sooner or later. So normal businesses keep having to innovate or die. They face endless pitfalls: competitors pull ahead, consumers’ tastes change, new technologies make entire industries obsolete, cheap goods arrive from abroad, the government interferes, recessions hit, companies overinvest and go bust or simply get unlucky.

By contrast, soccer clubs are immune from almost all these effects: a club that fails to keep up with the competition might get relegated, but it can always survive at a lower level. Some fans lose interest, but clubs have geographical roots. A bad team might find its catchment area shrinking, but not disappearing completely. The “technology” of soccer can never become obsolete because the technology is the game itself. At worst soccer might become less popular.

Foreign rivals cannot enter the market and supply soccer at a lower price. The rules of soccer protect domestic clubs by forbidding foreign competitors from joining their league. English clubs as a whole could fall behind foreign competitors and lose their best players, but foreign clubs have financial problems and incompetent management of their own.

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The government is not about to nationalize soccer.

Clubs often overinvest, but this almost never destroys the club, only the wealth of the investor. At worst, the club gets relegated.

A club’s income might decline in a recession, but it can always live with a lower income.

In most industries a bad business goes bankrupt, but soccer clubs almost never do. The forty English clubs that entered insolvency proceedings through May 2008 cut deals with their creditors (usually the players and the tax man) and moved on. Yes, Aldershot FC went bankrupt in 1992, but supporters simply started a new club almost identical to the old one. The “new” Aldershot Town AFC has a badge that shows a phoenix rising from the ashes. In Italy Fiorentina went bust in 2002

and got relegated to the Italian fourth division, but within a couple of years it was back at the top, the bankruptcy forgotten. No big soccer club disappears under its debts. If West Ham or (imagine) Liverpool fell into administration, they too would be guaranteed to be reborn under new ownership. No matter how much money clubs waste, someone will always bail them out. This is what is known in finance as

“moral hazard”: when you know you will be saved however much money you lose, you are free to lose money. Soccer clubs are incompetent because they can be. The professional investors who briefly bought club shares in the 1990s got out as soon as they discovered this.

Even the current economic crisis is unlikely to destroy any clubs. A glance at past crises shows how resilient they are. You would have expected the Great Depression to pose something of a threat to English clubs. After all, the Depression bit deepest in the North of England, where most professional clubs were based, and all romantic rhetoric aside, you would have thought that when people cannot afford to buy bread they would stop going to soccer matches.

Crowds in the English Football League did indeed fall 12 percent between 1929 and 1931. However, by 1932 they were growing again, even though the British economy was not. And clubs helped each other through the hard times. When Orient hit trouble in 1931, Arsenal wrote its tiny neighbor a check for £3,450 to tide it over. Clubs know T H E W O R S T B U S I N E S S I N T H E W O R L D 91

they cannot operate without opponents, and so unlike in most businesses, the collapse of a rival is not a cause for celebration.

The Depression culled only a couple of clubs. Merthyr Town, after failing to be reelected to the league in 1930, folded a few years later, the vic-tim of economic hardship in the Welsh valleys (as well as competition from the far more popular rugby union). Wigan Borough went bankrupt a few games into the 1931–1932 season. It left the league, and its remaining fixtures were never played. Aldershot was elected to replace it, and sixty years later, in another recession, it became only the second English club in history to withdraw from the league with fixtures unplayed.

During the “Thatcher recession,” crowds in the English Football League fell by nearly a quarter between 1979–1980 and 1982–1983. Many clubs struggled, and several survived only thanks to a “sub”—financial support—from the players’ union, which didn’t want to see employers go bust. Charlton and Bristol Rovers had to move grounds because they could not pay the rent. However, nobody “did an Accrington Stanley” and resigned from the league.

Most stricken clubs instead “do a Leeds”: cut their wages, get relegated, and compete at a lower level. Imagine if other businesses could do this. Suppose that Ford could sack skilled workers and hire unskilled ones to produce worse cars, or that American Airlines could replace all their pilots with people who weren’t as well qualified to fly planes. Governments would stop it, and in any case, consumers would not put up with terrible products. Soccer clubs, unlike most businesses, survive crises because some of their customers stick with them no matter how lousy the product. Calling this brand loyalty is not quite respectful enough of the sentiment involved. To quote Rogan Taylor, a Liverpool fan and Liverpool University professor: “Soccer is more than just a business. No one has their ashes scattered down the aisle at Tesco.”

NOT BUSINESSES AT ALL

When businesspeople look at soccer, they are often astonished at how unbusinesslike the clubs are. Every now and then one of them takes 92

over a club and promises to run it “like a business.” Alan Sugar, who had made his money in computers, became chairman of Tottenham Hotspur in 1991. His brilliant wheeze was to make Spurs live within its means. Never would he fork out 50 billion lire for a Vieri. After Newcastle bought Alan Shearer for $23 million in 1996, Sugar remarked,

“I’ve slapped myself around the face a couple of times, but I still can’t believe it.”

He more or less kept his word. In the ten years that he ran Spurs, the team lived within its means. But most of the fans hated it. The only thing Spurs won in that decade was a solitary League Cup. It spent most of its time midtable of the Premier League, falling far behind Arsenal. Nor did it even make much money: about $3 million a year in profits in Sugar’s first six years, which was much less than Arsenal and not very good for a company its size. Sugar’s Spurs disappointed both on and off the field, and it also illustrated a paradox: when businesspeople try to run a soccer club as a business, then not only does the soccer suffer, but so does the business.

Other businessmen pursue a different strategy than Sugar’s. They assume that if they can get their clubs to win prizes, profits will inevitably follow. But they too are wrong. Even the best teams seldom generate profits. We plotted the league positions and profits of all the clubs that have played in the Premier League from its inaugural season of 1992–1993 until the 2006–2007 season in figure 4.1.

The figure shows how spectacularly unprofitable the soccer business is. Each point on the chart represents the combination of profit and position for a club in a particular year. One obvious point to note is that most of the dots fall below zero on the profit axis: these clubs were making losses. But the figure also shows that there was barely any connection between finishing high and making money. Although there is some suggestion that a few clubs at the top of the table make more money than other clubs, the chart also shows that other clubs in these positions can make huge losses. Manchester United’s profitabil-ity is clearly the exception. In the thirty years before being taken over by the Glazer family the club generated more than £250 million T H E W O R S T B U S I N E S S I N T H E W O R L D 93

60000

40000

20000

-20000

-40000

-60000

Profits £000

-80000

-100000

-120000

-140000

-160000

3

7

11

13

15

17

19

Position

F I G U R E 4 . 1
Premier League pretax profits and position, 1992–1993 to 2006–2007

($400 million) in pretax profits while also winning eight league titles.

Indeed, other American owners might never have bothered buying into English soccer without United’s example. But no other club could replicate its success.

For most English clubs, our graph shows that there is not even a connection between changing league position and changing profits. In 45 percent of all cases, when a club changed its league position, its profits moved in the opposite direction: higher position, lower profits or lower position, higher profits. Only 55 percent of the time did profits and position move in the same direction. Had there been no correlation at all between winning and making profits, that figure would have been much the same, namely, 50 percent. Clearly, winning games is not the route to making money. As Francisco Pérez Cutiño notes in his MBA thesis, it’s not that winning matches can help a club make profits.

Rather, the effect works the other way around: if a club finds new revenues, that can help it win matches.

It is in fact almost impossible to run a soccer club like a profit-making business. This is because there will always be rival owners—

the Cragnottis, the Abramoviches, or the Gaddhafis who own a 94

chunk of Juventus—who don’t care about profits and will spend whatever it takes in the hope of winning prizes. All other club owners are forced to keep up with them. If one owner won’t pay large transfer fees and salaries, somebody else will, and that somebody else will get the best players and win prizes. The consequence is that the biggest slice of money that soccer makes gets handed over to the best players.

As A. T. Kearney says, you could even argue that soccer clubs are nothing more than vessels for transporting soccer’s income to players.

“The players are completely free to move,” explains Hembert. “They are a key factor in winning, and also in the ego, in pleasing the fans.

And they all have pretty savvy agents who are able to maximize their bargaining power.”

It means that even the cautious Sugar type cannot make decent profits in soccer. In fact, because his team will win fewer matches than its free-spending rivals, some fans will desert him. That will eat further into his profits. From 1991 to 1998 average attendance in the Premier League rose 29 percent, but Tottenham’s crowds fell 5 percent.

Running a soccer club to make money looks like a lost cause. Nor, it might be argued, should anyone attempt it. Most of a club’s customers (its fans) and employees (its players and coaches) and even usually its owners would say that the club exists to play good soccer and win things, not to turn profits. That’s why a report by the British Commission on Industrial Relations in 1974 quoted an anonymous club chairman as saying, “Any club management which allows the club to make a profit is behaving foolishly.” In the not-so-distant past the FA used to forbid club owners to profit from their investment.

Traditionally, soccer clubs have behaved more like charitable trusts than like businesses.

Making profits deprives a club of money that it could spend on the team. One reason Bundesliga clubs rarely do well in the Champions League anymore is precisely that they make profits. In the 2006–2007

season, they spent an average of just 45 percent of their revenues on players’ salaries. That’s not the way to win things, unless you happen to be Olympique Lyon.

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The business of soccer is soccer. Almost all soccer clubs that are not Manchester United should ditch the fantasy of making profits. But that doesn’t mean that they should continue to be badly run. The weight of money that now washes through soccer demands a more businesslike approach to managing cash. Bungs might have been no big deal when transfer fees were measured in the hundred of thousands of dollars but become a problem when they run into the tens of millions.

Soccer clubs need to know what they are. They shouldn’t kid themselves that they are Titanium Metals. Rather, they are like museums: public-spirited organizations that aim to serve the community while remaining reasonably solvent. It sounds like a modest goal, but few of them achieve even that.

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Does English Soccer Discriminate

Against Black People?

In 1991 Ron Noades, chairman of Crystal Palace, popped up on British TV talking about blacks. “The problem with black players,” explained Noades, whose heavily black team had just finished third in the country, “is they’ve great pace, great athletes, love to play with the ball in front of them. . . . When it’s behind them it’s chaos. I don’t think too many of them can read the game. When you’re getting into the mid-winter you need a few of the hard white men to carry the athletic black players through.”

Noades’s interview was one of the last flourishes of unashamed overt racism in British soccer. Through the 1980s racism had been more or less taken for granted in the game. Fans threw bananas at black players.

Pundits like Emlyn Hughes explained the curious absence of black players at Liverpool and Everton by saying, “They haven’t got the bottle.” The writer Dave Hill summed up the stereotypes: “‘No bottle’ is a particular favorite, lack of concentration another. ‘You don’t want too many of them in your defence,’ one backroom bod told me, ‘they cave 97

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in under pressure.’ Then there is the curious conviction that blacks are susceptible to the cold and won’t go out when it rains.”

It’s clear that English soccer in those days was shot through with racism: prejudice based on skin color. But what we want to know is whether that racism translated into discrimination: unfair
treatment
of people. People like Noades may have been prejudiced against black players, but did they make it harder for these players to get jobs in soccer? The ’80s black striker Garth Crooks thought they did: “I always felt I had to be 15 percent better than the white person to get the same chance,” he said. Of course, there was never an explicit color bar in English soccer, but was there and implicit one?