When will the football bubble burst?
There have been a lot of economic bubbles, the most famous including at the turn of the century the dotcom bubble which promptly burst, and also the recent housing bubble which burst was a major contributor to the credit crunch. An economic bubble is where a certain market experiences increased sales at prices that are increasingly inflated. Some suggest that there is a current higher education bubble with tuition fees showing a steep increase over the last few years. But surely the most obvious example of a current economic bubble is the Football market.
Football enjoys a worldwide audience with demand for European football (and especially the English Premier league) high in Asia, Africa and South America. The missing continent of America have never been hooked like their counterparts, with some suggesting the lack of adverts mean there isn’t enough money in it for them. This sort of demand has seen incredible amounts of money flood into football, with the combined revenue of clubs in England, Germany, Italy and Spain reaching €6,896 million in 2010. The incredible thing is that it didn’t burst when the world was experiencing a global recession; it has resisted the pulls of the market and is still receiving millions from fans who can ill afford it. Leading the football leagues in revenue is the UK’s Premier league, who acted smartly to share TV rights equally between each team which has seen the league as a whole gain global attention. The same can’t be said in Spain, where teams are allowed to negotiate TV deals themselves and inevitably Real Madrid and Barcelona receive the lion share.
a graph found on http://swissramble.blogspot.com/2011/10/revolution-will-be-televised.html shows how Spanish TV rights are based purely on popularity (Biased towards Real Madrid and Barcelona)
So going back to the definition of an economic bubble, is the football market experiencing inflated values? The answer is emphatically yes, with clubs exchanging millions in deals for players. Three years ago, Cristiano Ronaldo transferred from Manchester United to Real Madrid in an astonishing £80 million deal, somehow valuing him as an employee at that incredible amount. This is clearly an inflated fee and Sir Alex Ferguson even commented on the current market: “In any case, I think the transfer market prices have been terribly inflated over the last year”. But that’s not where the inflation stops, with wages for the top players reaching £250,000 a week, which works out at £13.5 million a year and this is without add-ons like sponsorship and bonuses. Even taking out the top salaries, the average salary for a premier league player is around £30,000 a week, working out at £1.6 million a year, which when you consider a club generally has up to 30 players in a squad that is a enormous wage bill.
So the question remains, when will the bubble burst? Well, that actually doesn’t seem too far off. Taking a look at the premier league, Wolves are the only club to remain debt free, with total debt owed around £2.5 billion. Another damming statistic is that most of the clubs wage bills are higher than 50% of their respective turnover, which isn’t a healthy way to run a business. Returning to revenue, clubs outside the top echelons of the premier league rely heavily on TV deals to supplement their revenue, ranging from 50-80% of revenue. This means clubs revenue could become very volatile if TV deals were to ever drop. This is a big dilemma for clubs that are relegated, as the drop in TV income is huge and parachute payments aimed to help only last a few years.
Showing the reliance on TV income during 2009/2010, again found at http://swissramble.blogspot.co.uk/
There is current evidence that the football market is slowing down, with clubs like Portsmouth and Rangers (of Scotland) entering administration (in the case of Portsmouth for the second time). This shows the danger for clubs of living beyond their means and it remains probable there will be even more casualties. The fear of administration (with cases around Europe) has seemed to have an effect, with Clubs visibly tightening their belt and UEFA (regulators of this market) soon enforcing tight financial restrictions. This can be seen by looking at the amount spent in the last two January Transfer windows in the UK (Usual leaders in spending): In 2011, £225 million was spent, while this year the figure was only £60 million which is a 70% decrease.
So is the football bubble set to burst? It seems like the fear of administration and tighter financial regulation means clubs are tightening their budgets. But we have yet to see a visible decrease in the values of transfer fees or wages from their inflated numbers and until that happens it can’t be decided whether the bubble has burst. But signs are pointing that way and with high amounts of debt and reliance on TV prices, we could see a very messy explosion.