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Covid 19- The Crisis deepens

In the previous two articles I have focused upon what I think the likely reverberations of this crisis will be and then had a look at the specific impact upon spending in each case. Today I intend to evaluate in a little more detail what each of the last 2 dips were triggered by, and then analyse some of the emerging trends that we have seen over the last week or so.

As I had mentioned above, the PL has in essence been an enormous growth (bull) market for 30 years. It’s an enormous success story of how marketization, risk, innovative thinking and an acute understanding of how to monetise a hugely popular national game. The two big dents in this upward trajectory came in 2002 and 2008. I don’t want to go into enormous detail about the impact of each (if you want more detail please see the 2nd article in this series) but in short we saw around a 40% reduction in transfer spend which would take 5-7 years to fully recover. The dip in 2002 was deeper while the one in 2008 was more prolonged. Today I want to focus on the factors that led to each of the dips, and make the case that the coming crisis has the potential to encapsulate the worst aspects of both previous crisis.

If we are to start with 2002, this was essentially brought about by a TV network (ITV digital) collapsing and being unable to maintain the spending commitments it had made to clubs in the 2nd tier of English football and below. Given an almost identical business model was employed then as now (spend money you don’t have today, on the basis of a bigger TV deal tomorrow) it left clubs in the Tier 2 (T2) and below horrible exposed. The deal itself was worth just over £100m per season. When it collapsed Sky ended up stepping in and agreed a package worth around £25m per season, so a loss of around £80m per season over the next 2 years was endured by those clubs (though given some of the money was previously paid the likely amount lost was probably lower than this).

The obvious striking points to me in this are initially that footballs reckless practices of spending money on the assumption of sources of incoming always rising seem enormously striking to today, and that the values involved are much smaller than the numbers being spoken about today. We are talking about £80m a season at the upper end lost managing to greatly shrink not just England’s lower tiers but also it’s top division. The Premier Legaue’s (PL) annual contracts are now worth £1.4bn for and around £3bn for domestic rights each year. If an £80million black hole led to an enormous shrinking of spending, what would happen in a situation numbers upwards of 50 times greater are at stake?

A workable model is that around ¼ of the rights are being argued about for this season (the final installment) at about £1 Bn (around 10 times the number in 2002). This works under a best case scenario that we have to right off this season in order to avoid losing next season. If next season is put in jeopardy then it’s very hard to see how football survives. The priority for the PL must surely be to look to minimize the exposure of the £1bn owed and do everything it can to ensure next season goes ahead.

The other point it’s worth mentioning, is that big contracts, in moments of recession or downturn can collapse, or they can be downgraded. I have no idea if current providers will look to do this regarding the rights (though it remains a possibility). However it’s hard not to see clubs sponsors looking at options to downgrade deals (with the legitimate claim that PL clubs have not kept their end of the bargain by playing games in the scheduled period). The more sponsors a club has, again the more exposed they are to this.

So overall the lesson I would take from 2002 is that the PL will do very well do avoid some level of reduction equivalent to 2002 and the likelihood is the level of damage will be more targeted at them and probably greater in financial terms.

The other big dip came in 2008. This was directly following the 2008 financial crash that began to seep into the wide economy. There’s little doubt another recession is coming. Over 20 million job losses have been seen in the US in the last month. To give some context in 2008, across a year the US has job losses of around 2.6 million (which was the highest it had been post the Great Depression era). There is also talk of Quarter 2 GDP being down 35% in the UK. In 2008, the highest drop in a single quarter was 2% and it tended to contract between 1-2% giving a figure over 5 quarters of between 6-7% in the overall contraction figure. While I don’t discount the likelihood of some bounce back from the 2020 figures, the level of severity, speed and scale of the contraction in the world and UK economy is on a different scale to 2008.

I don’t mean to scaremonger on this point, and we move to some degree into speculation after this. The truth is within football, the likely potential severity (and it is at this point potential as no TV has at this point been withheld) and the actual damage we’ve seen to the economy we have clear precedent of what occurs when either of those events happen. We see spending greatly reduce, and the value of players drop accordingly. What we have little model for is what might happen if we lose not tens of millions but hundreds of millions in a tv deal, or how a far more severe contraction in the economy looks like.

There is also a discussion to be had about what happens if you have 2 crisis operating simultaneously. What might the affect have been if you’d have had the 2002 TV collapse operating alongside a 2008 level recession? It may be that a 40% drop in spending is a low water mark and the league will be insulated below much of that. While it is a possibility, it is unlikely the market really dictates a bottom price on that basis. At the other end of projections you get a rout- a collapse where football completely loses control and a level of reduction that makes the above scenario’s look merely like a blip. A situation where all confidence is lost and the game cannot sustain itself. You instinctively feel this should only happen if those in charge do not show the sort of leadership that is required in such a situation.

The middle point, and the one I would be most inclined to go along with would be that the two crisis have an affect, but perhaps not to the true total value (as there is some overlap). If you experience to 40% drops your output stands at around 36% of where it was initially. If actions are taken this could well be a worst case scenario and it could be we avoid hitting the bottom end of this drop. Perhaps we can reduce the impact of the TV deal, and the wider recession to a 30% drop each which would mean a reduction of just over 50% in spending. Again this is not to say any of the numbers above (40% drop, 50% drop or 65% drop) will not pose enormous challenges but in the context where a full scale rout may be on the cards it may be an outcome that the game is allowed to start again on some sort of normal footing.

While the market dictates transfer fees, the big elephant in the room at this point to me is the issue if players wages. It is fairly easy to model what happens with fees, players values just drop, however there is no automatic adjustment to player salaries in quite the same way. I can only say that none of the stakeholders in the game, owners, players or the regulators have emerged with much credit from this episode. However to me, to give football clubs a chance to adjust to a world where revenues will be greatly reduced, a wage reduction of initially 30% would at least provide for some breathing space if it can be allied to a better case scenario of some of the problems mentioned above. The easiest way to have done this would have been a uniform agreement across the game and trying to get this in place as early as possible.

To me having each club, negotiating on an individual basis as being a poor way of trying to get around this. You can’t help but feel the competitive individualism that lies at the heart of modern football may well obfuscate the need for a resolution on the issue. What is to stop a club not reducing wages, and trying to take the best players of other teams if contracts are broken? This sort of narrow thinking may well help them in the short term, but in the long term such an approach will threaten wellbeing of the game. Without strong collective leadership, and clear rules being agreed between all the clubs, the space is open for this and could lead to chaos in a moment where clarity and organization is required.

Within this context I do find it perplexing the Premier League still seems to be intent on looking for a unicorn solution of trying to finish a season by June 30th that is un-finishable (or worse still is exploring options of altering future seasons irrespective of the alarming dangers that exist in extending the financial contagion beyond this season). Not only should resolving the issue of salaries of players be an immediate priority, so to should be trying to negotiate a settlement with the TV companies which is as favourable as possible). Both of these things would be greatly benefited if we had some clarity around what was happening with this season. Uncertainty and confusion rarely allows people to make clear and logical decisions.

The discussion with Matt Hancock and the NHS seems to have further muddied what were already quite choppy waters. Clearly players aren’t comfortable dropping their salaries. With the government coming under scrutiny for it’s policies he ultimately stole a march on the PL in acknowledging that players salaries needed to be put under discussion. What he said made little sense (if you want wealthier members of society to pay more, raise taxes and as a government stop the stigma that is attached to such a demand) but he at least broached an area the PL should have been discussing weeks beforehand. As it happens the players have been quite willing to have made a contribution to the NHS and it seemed to divert talk away from what was required from football itself to ensure it is viable in the new market that is emerging. The point that lowering their pay would affect the NHS has indeed proven wholly counter productive in moving discussions any further forward, and the PL seem to be getting outmanoeuvred by the government above them and the players below.

You can only imagine that asking for a further contribution on wages, will now be much harder than before they had made a commitment on the NHS. The discussion has been allowed to be moved from a financial one (about the security and viability of the game) to a discussion around morality (whether footballers are good people helping wider society). That’s not the terrain the PL should want to engage upon, but in lieu of them getting some semblance of prioritizing the impasse will continue or worse be discussed on a club by club basis. If clubs start to fold though, or go into administration, or have to avoid making payments, it will be every club that suffers as a result.

So as a priority I would look for the discussions on wages. It seems hard for me to see a world where transfers can be done if values are dropping by upwards of 50% but salaries remain in the same ballpark. It may well lead to a further depression of the market and a spiral rather than a reduction in money spent. We will await to see how the crisis develops, and hope that some of the more severe projections don’t play out. However, given the twin crisis football is experiencing concurrently, it is really not time for the complacency and delayed response we are seeing in some quarters.   

  

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