Tag Archives: Football Club Revenue

Sunk Costs, Market Structure and Football Clubs

Over the holidays I read Stefan Szymanski’s book “Money and Football – A Soccernomics Guide”. Szymanski also co-authored “Soccernomics” with Simon Kuper. There were various references to economic theory through the book which I will refer to on this blog.

Market Dominance

Dominance in a market is often associated with the lack of competition whether it be due to monopoly power, predatory pricing, the scale of investment etc. However this is not the case when it comes to football. Szymanski mentions the fact that there are 27 professional teams withn a 50 mile radius of Manchester Utd. If fans don’t like United, there are plenty of alternatives as there are in Madrid which has 5 professional clubs. In some countries football rivals play in the same stadium:

  • In Germany: Bayern Munich and TSV 1860 Munich,
  • In Italy: Inter Milan and AC Milan,
  • In Switzerland: FC Zurich and FC Grasshopper
  • In Brazil: Botafogo, Flamengo and Fluminense

Football Clubs.jpgDominance in markets usually occurs because of the initial investment required to compete in the first place – set-up costs. If you look at the railway industry (which could be said to be a natural monopoly) the cost of putting down new train tracks by the existing ones or a new line would be excessive and the ability to cover these costs would very difficult. Any benefit that may arise from competition would be diminished by the cost of duplication.

Dominance is easy to explain if there are very large set-up costs, which, once spent, cannot be recovered other than by operating in the industry. Economist refers to these costs as Sunk Costs.

Dominance in a market can also occur in markets where there are less sunk costs. Take for instance the soft drinks industry as an example. It remains relatively inexpensive to set-up a production plant to bottle soft drinks but Coca-Cola dominates the world market with 42% market share, followed by Pepsi with 28%. Their dominance is through advertising which makes up the majority of the sunk costs. Advertising is an example of ‘endogenous’ sunk costs which are determined by the firm as opposed to ‘exogenous’ sunk costs which are determined by technological requirements.
Premier League Players.jpgIn professional football the focus is on player investment rather than advertising, where the big clubs are those that spend heavily on players and win league championships. Teams that win are more likely to attract a larger fan base and greater revenue. Szymanski states that the big difference between football and soft drinks is that the pattern of dominance looks the same in small markets. For instance clubs in the English Division 2 (Division 4 in the old days) still stay in existence mainly because they operate in a different market than the Premiership teams. Of the 88 clubs in the English Football League in 1923, 85 still exist, and most of them still play in the 4 English Divisions. Also those clubs in the lower Division do benefit from intense local loyalty especially through tough times with performance. When clubs get relegated to the Championship from the Premier League, although they lose revenue from TV rights their fan base remains fairly constant. However a lot of these clubs will find it hard breaking into the dominant group – Manchester City, Manchester Utd, Liverpool, Arsenal, Chelsea, Spurs – unless they receive significant funding from an investor who doesn’t expect to see a financial return or have an exceptional season without high profile players like Leicester City who won the Premiership in 2015/16.

Unlike most business in which loss-making firms shut down or merge into other businesses, football clubs almost always survive. This does not prevent dominance, but unlike most industries, it does mean that the pattern of dominance tends to look the same everywhere. Source: Szymanski

Football Revenues 2016 – EPL teams dominate.

Football Rev - 2015Real Madrid topped Deloitte’s money league for the 11th successive year with $577m.  The combined revenue of the top 20 teams rose by 8% – $7.16bn – from 2013/4 season.

“There are a number of metrics, both financial and non-financial, that can be used to compare clubs including attendance, worldwide fan base, broadcast audience and on-pitch success. In the money league we focus on clubs’ ability to generate revenue from matchday (including ticket and corporate hospitality sales), broadcast rights (including distributions from participation in domestic leagues, cups and European club competitions) and commercial sources (including sponsorship, merchandising, stadium tours and other commercial operations), and rank them on that basis.” Deloitte Football Money League 2016

Barcelona’s achievements in the 2014-15 season have translated to financial success. The European champions have jumped ahead of Manchester Utd, with revenue of $560.8 as compared to $519.5.

However Deloittee predict that Manchester Utd will be making a big push for the top spot next year for the following reasons:

  • £75m kit deal with Adidas
  • £47 million-per-year shirt sponsorship deal with Chevrolet
  • £5.1bn television deal starting in 2016-17 season

The wealth of the English Premier League, mainly due to TV rights, means that 17 of the wealthiest 30 clubs are from the EPL. West Ham Utd sneak in at 20th place but Deloitte noted the success of English clubs was due to two reasons:

  • the relative equality of distribution rights in the English Premier League
  • the performance of the pound against the euro.

Paris St Germain and Bayern Munich who dominate their domestic tournaments are 4th and 5th respectively but to find an Italian club you have to go down to 10th place with Juventus the Serie A winners last season. AC Milan a regular in the top 10 have now dropped down to 14th place.

Football Money League – 2013-14

A report out by Deloitte’s identifies Real Madrid as the world’s highest-earning football club for each of the last 10 years with revenue of €549.5m ($745m) in the 2013-14 season. The world’s top 20 clubs earned over €6.2 billion with broadcasting rights and commercial sponsorship becoming the biggest earners. With lucrative television deals in the English Premier League 20 of the top 40 clubs are from this competition. Ticket sales now have the lowest share of the main revenue streams. See table below from Deloitte’s.

Football Revenue 2013-14

Real Madrid – first again in the revenue league

This time of year sees the publication of the Deloitte Football Money League which is renowned as the most contemporary and reliable analysis of the clubs’ relative financial performance. Real Madrid retain the top spot for a ninth consecutive year with a revenue of €518.9m. Following their success in domestic and European competitions, Bayern Munich leapfrog Manchester United to secure third place. Paris Saint-Germain up to fifth place with revenue of almost €400m. Interesting to note that Manchester Utd have the highest revenue from matchday and a lot more than there cross town rivals Manchester City. Also the increase in Arsenal’s matchday revenue is indicative of their new ground (Emirates Stadium)- see graph below:

Top revenue earning clubs