Football’s gold rushwill end in tears
Paul Ormerod, author of The Death of Economics, Butterfly Economics and Why Most Things Fail, has described the business model used by most football clubs as “unsustainable” and has warned that more and more clubs face financial ruin.
“The parallels with investment banks are what interested me,” said Ormerod. “They, banks and clubs, both have completely unsustainable business models because any surplus generated just goes to the workers. The investment bankers and Premiership footballers were taking stupendous money out of the game, so all it takes is one little shock for it to become unsustainable. If you have people on ludicrously expensive contracts and your revenue dips a bit, you’re in dire trouble.
“Look at the clubs which drop out of the Premiership and which have subsequently got into serious financial difficulty. Even with those parachute payments they still can’t unwind their commitments fast enough.
“The business model was a recipe for disaster in both cases, banks and football clubs, because it only took a little shock for the whole thing to get into trouble.”
Ormerod drew further parallels between banks and clubs when it came to acquiring talent.
“What’s clear as well is that in banking you poached whole squads of so-called ‘star traders’, in the same way that clubs buy the best players. Now what you can see is that certainly in England the bigger clubs have a much tighter grip on titles than the other clubs, which used not to be the case.
“The business model essentially relied upon – for the top clubs – was someone with a stupendous amount of money being willing to subsidise or buy the clubs, because they just can’t generate revenue themselves on that scale. And those people are just not there any more. Even billionaires have lost a lot of cash.”
Ormerod sees this as the big difference between professional sport now and in the last great economic slump, the Great Depression of seventy years ago.
“The difference between now and the 1930s is that clubs have been relying upon individuals to subsidise them, something which has trickled down from the top three or four.
“A few years ago a friend of mine, a partner in Goldman Sachs, left the firm to set up a hedge fund. I asked him why he didn’t just retire, and he said he wanted to make a billion pounds to buy Southampton – he was a lifelong fan. I felt that was mad, but he said that was the level you needed to make the club a success. He didn’t buy the club, by the way.”
The economist sees a return to the old days of English football, where businessmen invested in their local club.
“In a sense, that’s the model a lot of English clubs are going to have to fall back on. There may be a global brand element for the elite few in the Premiership, that’s different, but as you go down the league, you have too many clubs trying to emulate that billionaire subsidising model on a minor scale. That’s a recipe for failure.”
Asked if Premiership clubs were instances of how not to run businesses, Ormerod agreed.
“That’s fair to say because they’re run on a business model which only works if you have someone behind the scenes with a stupendous amount of money. You can run any business with bottomless pockets, but that day has gone; we can see the problems with the likes of West Ham and Newcastle.”
As a solution, Ormerod points to the strict regulation of rugby league as a possible option: “Premiership clubs are going to have to look at options like the salary cap. There are no guarantees – your income may still fall – but at least you’re approaching something like sustainability.
“The franchise system in Australia means that if a club says ‘we have someone who’ll give us 100 million to expand’, the league exerts much more control and regulation and the club must prove the viability of its plan because the league doesn’t want clubs dropping out.”
