Super clubs don’t understand football

I.

Success ≠ expertise

You can win the lottery without understanding how the lottery works.

You can inherit a famous painting without understanding anything about art.

You can buy a house whose value is increasing without understanding the property market.

Sure, your success might be even greater if you understand the lottery, art or property.

But the link is not necessary. Luck, inheritance and circumstance can favour you independent of expertise.

Deducing a reverse causal link is equally wrong.

The possession of a famous painting or a valuable house does not make you an expert in these things.

‘I possess, therefore I know’ does not hold.

Sounds obvious, and yet, the ‘success equals expertise’ delusion remains popular.

We assume that billionaires must know what they are doing in business because they got rich.

Well, no.

It could be expertise. Or it could be luck, inheritance, and circumstance. We do not know until we look closer.

The same applies to football.

Just because you own a big club does not mean that you know what you are doing.

Maybe you inherited an already big club. Or your club got bigger by luck. Or the tide was rising in general.

Seeing how certain clubs operate, it is surprising that football survives the incompetence of its executives.

Speaking of incompetence brings us to the Super League.

The Super League

On 20 April 2021, 12 clubs proposed a super league (SL).

• England’s richest six: Man Utd, City, Liverpool, Chelsea, Arsenal, Tottenham;

• plus the richest in Spain: Real, Barça, Atlético;

• and Italy: Juve, Inter, Milan.

Another three (PSG, Bayern, Dortmund) were earmarked as founders but declined to launch.

Two points proved controversial.

First, the 12 clubs tried to break Uefa’s monopoly to organise club competitions in Europe.

The 12 hoped that their SL would:

• either replace the Champions League (CL);

• or rival it, with both running in parallel;

• or sit on top of it, relegating the CL to second class.

The 12 did not disclose their preference, presumably waiting for a negotiated settlement with Uefa.

However, they had underestimated Uefa’s resolve to defend its monopoly.

Few fans endorse Uefa. Yet in this moment of crisis, the devil you know became the lesser evil.

Second, in a shock move, the 12 sought to kill the football pyramid.

When the Premier League broke away in 1992, the PL kept promotion and relegation with the rest of the Football League.

The SL desired a closed competition instead. No relegation for the 15 founders. Only vague talk about promoting another 5 teams.

Promotion and relegation are key to the European idea of sport.

In theory, every team has the chance to rise to the top or fall to the bottom.

Economic reality undermines that ideal theory. But it remains a possibility.

Incompetence + incomprehension

The launch of the SL on 20 April 2021 looked unprepared.

Briefed journalists leaked the story during the day. Later, the 12 clubs released short statements. A minimalist website offered trite marketing slogans.

Details about the new competition were vague. No executive spoke to the public. Only after midnight, Real president Florentino Pérez gave a car crash interview on a Spanish talk show.

The SL proposal caught fans by surprise; as well as coaches, players, agents, sponsors, and politicians.

Public outrage was prompt and strong.

After immense pressure, a day later, one club after another withdrew. Only Real, Barça, Juve stayed defiant.

The failed launch showed incompetence.

And it showed something else: incomprehension.

The 12 did not expect such a reaction. Not from fans, and surely not from players, politicians and even sponsors.

(In England, Boris Johnson might have backstabbed English club executives, indicating approval and then changing his mind.)

The 12 did not understand their own clubs and their own industry.

This is a good occasion to widen the perspective. How does the football business work, and what did the owners not get?

II.

How the football business works

Traditional business aims for profit.

To turn a profit you need a unique product which you can sell at a margin.

Unique means something buyers want and ideally few others can offer.

Your uniqueness can be based on facts, which makes selling easier.

Or it can be make-believe, then your marketing needs to work hard.

Think of Apple, who combine unique products and strong marketing for fat profits.

Football is a product that fans are crazy to buy.

But many offer it! For historical reasons, a huge number of clubs compete in the same market.

With competition high and the market fragmented, clubs/companies struggle to reach high enough margins.

When competition is high and margins are low, the remaining option is to reduce costs and increase size.

Think of Walmart: huge sales of low-cost items for size and keeping operating costs down (cheap land outside cities, minimum wages).

In football, costs are about 80–90% player-related (wages and transfer fees).

Players hold the power, for two reasons.

First: Talent is scarce, especially at the top.

Club demand for talent is greater than the supply of top footballers.

In supplier markets, prices rise.

Other industries can replace expensive labour costs with technology. But footballers cannot be replaced by robots (yet).

Second: Fans/consumers have an insatiable appetite for talent, whatever the cost.

Fans root for the best players and thus, as an unintended consequence, push up labour costs.

Fan desire for top talent creates the supply shortage that drives up wages, which fans then bemoan.

This circle feels ironic and irrational. But football and fandom are irrational.

Football’s inner logic leaves little room for cost reduction.

In short, this is why profit is rare in soccer.

Competition is too high, costs are too high, plus high risk and uncertainty as clubs cannot plan sure success on the pitch.

The Super League was a logical reaction, to an extent: get rid of competition.

Instead of many clubs competing across Europe, let’s reduce the field to 12 or 15 super clubs.

The SL wanted a new top tier. Like professional clubs had done with amateur teams in the 19th century.

Small problem, though…

This is not what fans/consumers want.

Because it is not sport.

If you cannot lose or be relegated, and others cannot win or be promoted, it is not a sport.

A closed competition is mere show business.

Like the Harlem Globetrotters: entertaining, but lacking the thrill of true consequences.

Ian Wright put it perfectly: Arsenal fans want to play Barcelona regularly. But they want to earn that right!

The football business is a paradox.

The nature of competitive sport makes for unique entertainment, which can be monetised, but cannot be made profitable.

The 12 owners/executives did not grasp what their fans/consumers want.

They did not understand the nature of sport and the base of their business.

And so they made a terrible miscalculation.

How football owners get rich

Owners of football clubs can get rich, however.

Not because they make a profit, but due to rising asset prices.

Think of the property business.

Profit margins from housing rents are low; at least in well-regulated markets with high investment and maintenance costs.

Investors do not buy property primarily for the profit from rents.

They buy because property prices have been rising and rising for a long time.

Excessive price bubbles burst, like in 2008, yet many recover.

(In West European countries the reason is a lack of new houses built, due to bad politics and difficult geography.)

Kroenke at Arsenal

Kroenke is a good example. He treats Arsenal like a property investment and behaves like an absentee landlord.

It’s a business he knows. Kroenke began as a property developer, building malls for Walmart, when the shopping mall industry was booming in the 1970s and 80s. It helped that he married a Walmart heiress.

Part because he was interested in sport, and part because sport shares characteristics with the property market, he began to invest in US sports. Day to day running he left to executives.

Such a hands-off approach is easier in the US. The closed system in America, with a few clubs and good control over players, makes it more predictable and generates at least small profits.

Besides small profits, the main attraction is that sport has been a growing business field and asset prices have been rising fast.

Kroenke came to Arsenal not fully grasping how the European market differs. His initial buy-in was cheap, however eventually the total takeover cost was high at 1 billion.

But Arsenal own excellent stadium property and, thanks to Wenger, were more efficient than other clubs: Arsenal got more sporting success for its money than others. Plus usually a small profit at the end of the year.

Wenger was ideal for the Kroenkes: Wenger’s stability and over-performance allowed the construction of the Emirates, the key asset value of Arsenal.

Wenger’s consistency, qualifying for the CL for 20 years, was unusual in that it reduced risk, and he was efficient: you could give him a budget for 5th and he would finish top 4.

Of course, fans want more than efficiency. They want glory.

Maybe luck deserted Arsenal at one or two key junctures (CL 2006, title races 2008, 2016). But then again Arsenal benefited from luck with the Invincibles, a unique achievement that is hard to replicate in a competitive league.

But the focus on minimum spending to get the job done was not enough for the big trophies, just the small ones. So fans got restless.

After 20 years, Wenger’s annual miracle work didn’t work anymore. Arsenal lost efficiency in the final Wenger season and even more since then.

Wenger was coach and sport director. Arsenal have not found anyone to fill these two shoes and it’s difficult to find one, let alone two such exceptional persons.

Kroenke’s calculation: European football is fast-growing, even more dynamic than US sports. It’s the only truly world sport. Clear trend towards asset growth.

He was hoping, like other US owners at Liverpool and Utd, and execs at Real and Juve, that eventually football would transform into US model of a closed league with just a few clubs: and so make higher profits possible.

Beyond profits

Profits will not arrive, however, because of the paradox mentioned earlier.

Assets might continue to grow, subject to two question marks.

The first worry is the corona crisis, a considerable dent in the growth curve.

While today many watch on screens, the core event is still a packed crowd in a stadium.

In a pandemic age of social distancing that poses a challenge.

Good news: vaccines are working. But the race between vaccines and new variants is ongoing.

Until the whole world is vaccinated a risk will always remain, even for the vaccinated in the rich world.

The second question is football’s long-term trajectory.

European football is like the old American Wild West, attracting fraudsters and cowboys who thrive under the weak enforcement of the law.

Football also attracts dubious political interests.

Sports-washing has a long tradition. Henry Norris (1865–1934) used both Fulham and Arsenal to wash his not always clean reputation as a property developer and politician.

In recent years, laundry levels have reached new heights.

Via football, shady oligarchs and oil states seek favourable public opinion and influence among Western governments.

In the worst examples, owners use clubs for money laundering.

Rules are weak in football, and weakly enforced.

Unequal economic chances have created an enormous gap within and between leagues.

Both issues, bad governance and economic inequality, undermine the greatest asset of any sport: an open and fair competition.

The 12 super executives made a fatal logical error:

They see that the landscape is becoming less competitive and less appealing.

But their conclusion, to focus even more on a tiny elite, threatens to make matters worse.

Football has many self-made problems. Governance is the key aspect.

Football can keep growing if it stays competitive on a wide basis.

At this point, it appears that football cannot reform itself. It needs outside help.

A pan-European political intervention is unlikely, however. The EU has shown no appetite to intervene. Brexit has added another hurdle.

Eventually, it comes down to a philosophical question. How far can growth go? Nothing can grow forever.

In the 1980s, clubs/companies were small business in the definition of economic textbooks. Today, they are medium-sized.

Compare Bayern, one of the largest and well-run clubs, with their sponsors like Adidas and Volkswagen.

The gap is still huge. Plenty of room for growth, if managed well.

But there are limits to growth. We live in a finite world. Eventually, football will become a mature, saturated market.

Silicon Football

Football should compare notes with the tech world.

Silicon Valley is an asset rather than profit world.

Few internet companies make a profit, let alone a substantial.

The Silicon Dream is a rising stock price.

Finding the ideal time to cash in on your Yahoo or MySpace stocks before the companies or their markets become mature. As they are not profitable, once their asset growth has halted, they fade away.

Elon Musk is a good example. He became a billionaire without running companies that turn a significant profit.

He is a hands-on asset manager. He finds growing fields and makes a fortune from rising asset prices.

Sometimes he jumps on a genuine trend, like electric cars.

Sometimes he is just a good salesman, forever selling the future, no matter how unnecessary. (See the Mars adventure; Hollywood calls it a MacGuffin.)

He excels at extracting public money. Good PR work convinced politicians in California and Norway to pay high subsidies for his cars. Las Vegas pays crazy money for a car tunnel. Space adventures burn a lot of his assets, but equally a lot of American taxpayer money.

Musk is too success-orientated to invest in football, which offers too little reward for too much trouble. (And he does not need sports-washing yet.)

But his hands-on asset manager style, his ability to sell needless but catchy projects, his talent to extract public money, is something football owners might want to emulate. (Although fans might not enjoy it as much.)

Change is in the air

Football is not a good shape right now.

Doomsayers in the past got it wrong. The last major crisis, in the 1980s, when the game went backwards for a while, was overcome.

But just because doomsayers were wrong in the past does not mean that they will be wrong forever.

Interesting times are coming to football.

¶

This piece is part of my essay collection “Rethinking Football” which I am publishing as an e-book in progress on the Leanpub platform.