and welcome to the Double Piff, the world's most agreeable soccer analytics podcast. I am Michael Kalie, we are back, the closing of the transfer window is in the rear view mirror, we are looking back at a window from our car, I don't know. Anyway, we are now in position to talk about the article that we wrote. Remember that?
Yeah, we wrote an article for Bloomberg. It came out, uh, kind of pay wall because Bloomberg makes money, but we wrote an article that we were pitched on sort of talk about some fun stuff happening in soccer with Chelsea and Barcelona, and the article is about that. But it ended up developing into kind of a larger thesis on what we think about the business of football. I think really hello and welcome to Double Piff, you know, blah, blah, blah.
Introduction, yes, coming out in the Discord, music, you heard as wellers. Let's talk about what we wrote. It was basically, it ended up being the double pivot thesis on what's going on with the business of soccer, which like, we wrote it for the odd loss of this, more or less what they wanted, I think. And part of part of the business of writing things for publications is, uh, figuring out what it is that they want, where they pitch you a vague idea.
Uh, and then you pitch them back what it is that they're actually asking for. And then there's, I think what happened in this process. One kind of fun part of this process was that we just had to go back and get the timeline right on everything that happened with Barcelona, which kind of drives home. Just how it's saying it all was, is, uh, is was this, I don't know.
It's sort of a while ago. Yes. And so I want to talk a little bit about Barcelona. We don't need to get into all of the details.
You can all link to our podcast with John Cindreo and our podcast about the Daniel, almost situation, which is still ongoing, always fun. But the key to understanding it for our larger thesis is that there were two related parts of the Barcelona story with that there was both, there was the Polongas, which is the ways that they pulled revenue forward from, from the future and made it into present revenue in order to make their books look a little better in order to get themselves capitalized in the present. And there was a, a loan that they got secured through Goldman Sachs, which enabled them to actually stabilize themselves as a business. So coming out of coming into the pandemic, Barcelona were being run very, very poorly, wage bill, absolutely exploding revenues, not keeping pace, you know, wages to revenue in the 75% range at time, unsustainable stuff.
And then their revenues get blown up by COVID and they're in an actual financial crisis. And they're in actual financial crisis at the same time as they are in a La Liga regulation financial crisis. This is what leads to them having to let Leo Messi go because they literally are not allowed to pay his salary because they don't have money. And they don't have money in a way that could have been an existential crisis for Barcelona Football Club.
Bringing in some money through the Palancas, getting a little bit of present revenue, allowed them to get a loan backed by Goldman Sachs and thus allowed them to continue functioning as a football club. But it's still left them with large losses. The loan doesn't count for La Liga FFP and they had to continue doing Palancas. I think importantly the pull out of this is like one, the Palancas as part of how these teams are financializing their business and two, there were real money, real like day-to-day business.
Can you run your business problems at Barcelona despite them being one of the biggest and best revenue-generating football clubs on the planet? Yeah, that's all correct. But what it highlights and I think what we spend a lot of time writing about is that on the business side of football, there is this divide, right? There's this divide between do you not have money and thus you need to do things to get money to continue to exist, right?
Like, have you spent beyond your means to such a degree that you have no money to spend or and or do you just want to spend more? And do you need to do financial engineering to allow you to spend more because there are rules that prevent you from spending more? Spending more than you make just divides very neatly into two separate categories. They're spending more than you make but you haven't and they're spending more than you make but you don't have to and those are two separate things.
Right. And the financial regulation that's been put in place from La Liga's FFP, UEFA's FFP, the Premier League Profits and Sustainability Rules, they make no distinction between A and B. Correct. What they will say is that this is all about protecting clubs from owners who want to spend money that they don't have.
That is what they will say. It has the byproduct of making sure that owners don't spend too much money on players, period, which has other effects. I mean, I think that there's a very reasonable case that sports teams are just highly unusual businesses. It's, you know, if a if a startup goes under or even like a company that's been around for a little while making.
Yes. Yeah. I don't know. It was bad.
People were for Kodak but it didn't have it like our society, our economy manages those sorts of things. There is as long as growth continues as long as demand, whatever, blah, blah, blah, blah. That's okay because there was not a large local community that was deeply invested in the in Kodak despite having no real economic connection to Kodak. Right.
Sports are really weird. Sports are weird. I mean, that's just the closest thing is probably universities, but those are also sports. Right.
They're fully explored as part of it, which is that because of the emotional ties, it's really, really reasonable to want to make sure that as the league as the overarching entity in which these clubs are organized, you have mechanisms that prevent them, that that protect them from their own owners and it's totally seems reasonable to me and regulation is hard doing play. And that's something that I really want to drive home as part of this good, good regulating is hard to do. That does not mean you should do it, but it does mean that as you are regulating, you need to be very alive to whether or not you are regulating well and strive to do regulations well that accomplish the things you want them to accomplish. And if that's not happening, the answer is to do better regulations.
It suggests, and there's lots of circumstantial evidence to support this, that a big part of the point of these regulations is to constrain owners who do have enough money to spend beyond their means to spend beyond the club's means because the owner is happy to dump the money in. That there is the clubs, the leagues generally don't want a whole league of Roman Abramovich and United Arab Emirates owned clubs spending more and more and more and more money because there's lots of owners, eventually I think it all get bought out, are there that many, but most owners don't want to be competing against someone who is playing a different economic game than them. And I don't think that's like unreasonable, but that's not what they're saying the rules are for. Right.
Look, we see this in America's works right now in baseball, in particular, where there are like owners that would rather have profits than have to spend that money on players in order to compete. What strict financial regulations on these owners do is make it so that they don't have to choose, right? Because if nobody could spend a ton of money, well, then you just have to do not spend a ton of, everybody's not spending that much and you get the profits and to compete. It's not a choice anymore.
And what is really, really interesting in this sort of dynamic is that the groups that own soccer teams in particular, this is not a dynamic that exists in America's works really. Soccer teams for soft power purposes, maybe for money laundering purposes for whatever other than making money or like losing money on a toy. I mean, that's, that exists everywhere. They don't want to be constrained.
They want to lose money. Like, they're happy losing money to pay more for players, like for them, there is no labor power struggle part of this equation, right? Like, there is no, we don't want to pay our employees more so we can have more profits. It doesn't matter to them.
And it is a very different dynamic and really interesting counterbalance that happens in professional sports in Europe. One thing that I think we argued in the article and as you start talking this through, I'm coming up with like different structures of argument. I think this is like implicit in the argument is that it is not the existence of nation state oligarch money laundering ownership, which has caused labor costs to become unstuck. Labor costs in football are unstuck.
And the best hypothesis for this, I mean, I'd love to see someone write like a real economics paper or something. But the best hypothesis for this is it's about competition, is that there is not one top league, there are many top leagues. And so one top league can always get stronger, one club in one league can always get stronger by player from other team. And there is competition with the lower divisions where if you lose, you end up losing much more money.
And so it is reasonable. And this is the, you know, the Sunderland vortex we talked about a lot, it becomes reasonable to spend more money in order to avoid, even though that's going to cause larger losses. Those losses that you were taking on are still smaller than the losses you would take if you got relegated. And both of these conspire to drive the percentage of revenues that are paid to wages up far, far higher in European sports than in American sports.
Most American leagues, you know, the NFL, the NHL, the NBA have a, basically have a salary floor. The structure of it is always a little bit funky and the way the percentages work is all funky, but they more or less set it up that 50% of revenue will go to wages. Major league baseball is structured a little bit differently. The owners have very successfully maneuvered within their system, such that the percentage of money going to salary in baseball, which just be like above 50%, not crazy, but like well of it is that a little under 50%.
So the owners like winning a labor battle in baseball. In European soccer, it's in the 60s, sometimes in the 70s. And it's just like, never it sits because of, and like that is just structural to the game as far as I can do, structural to the way it's set up, and it's a humongous drag on the ability of soccer teams to be successful as businesses in the way the North American sports teams are. There's a real question here, right, of do you want regulations to make, to have the end of point goal of making sports teams be financially sustainable entities?
Or as I think say, United Arab Emirates might say, it's none of your goddamn business how I run the club that I own. If I don't want it to be a financial stable entity without me plowing outside money into it, that's my business. And I think that that's a reasonable argument as far as it goes. The problem is, right, that you, what we started the conversation talking about, which is like, you really shouldn't be letting owners bankrupt these teams because of the community ties and stuff.
And by the way, I don't think that's limited to like European soccer, like American sports are also like, you know, sometimes people get caught up in my club for a franchise or whatever. There are deep emotional ties in American sports for fans and their teams as well. Like this is just how sports works. Talk about the world.
What's about being done to the Oakland A's? What's being done to the Oakland A's? It's horrible. And it's great that in European sports, there's a lot of structures that prevent that.
Right. You know, the original Cleveland Browns, Cleveland in the middle of the night, the Dodgers of the Giants, leaving New York to go to West Oakland. American sports is littered with these things and these things are bad and they're popularly considered bad. We're not like, oh, this is a double pivot like the crazy, liberal left soccer podcast making these arguments that don't fly with middle America.
No one ever fucking hates that shit. Right. Yeah. Exactly.
And so like, having those rules is good. It is also like, I think totally legit to be like, screw you, I bought this club, let me spend money on it. No, I don't think we're gonna like, I don't think we're gonna like sit here and on this podcast propose alternative rules for how European soccer should be run right now. But I think that what I would say is, I think it's the totally legitimate point to make, to say, hey, look, yes, rules, regulations are good.
These rules and regulations are doing something that is not misaligned with their stated goals. So either change your stated goals or change your regulations. It's important to note here that the rules that have been set up, the various profit and sustainability financial fair play rules don't really serve as the kind of wage cap that exists in American sports. They might put a small amount of downward pressure on wages, but it's not that much like this is a really far cry from what I think the European Super League was intended to accomplish.
The European Super League wasn't was structures a closed system and within a closed system, you can start collectively bargaining down wages as a percentage of revenue. And that is a far more powerful situation for ownership to be in than you can't take more than 120 million pounds in losses over three years. If you get 120 million pounds in losses over three years, you can bring your club in a pretty big deficit, paying pretty high wages. And I don't think that there was a, these rules are, and so these rules are, while they are in some way intended to maintain soccer clubs, sustainability, while they are in some ways, I think intended to prevent oligarchic nation state ownership from out competing ownership that is not backed by that much money.
They are also not that effective at solving the fundamental underlying problem European soccer, which is that they pay too much for labor, you know, to be regularly profitable. I mean, I don't know that that's a problem, it is, it is a problem for the owners who are the people putting these rules in place. Yes. It's a problem for some of these ones.
So, wait, for example, that's a yes, it is a problem for Chelsea is not a problem for Barcelona. Barcelona chair. And Chelsea, don't we think Chelsea does, but this is another, this is like the other part of what we wrote about here, which is like Chelsea are really, really, really aggressively doing financial engineering to like, exploit every loophole they can find at PSR to spend more. Arguably, Chelsea are supposed to be aiming at profitability based on their ownership.
And it is not immediately clear to either of us how to square that part of the circle. Chelsea are a great way in here because Chelsea are in theory, a club that should be aiming at at least like breaking either or not losing that much money. And this is the other part of our article, which is, why does anyone buy soccer teams? Like, we've just described a situation where everyone's losing money or like, on net everyone's losing money.
There's a very small percentage of teams that are making money, they do exist, it can be done, but it is in no way the norm. And it's even more not the norm if you extend below like the top 12 in the Premier League. It's in no way the norm in most leagues now in on the continent. And so why would anyone be buying it?
And certainly people would buy in because they think it's fun to lose money, which is effectively the way Barcelona is run. It's a shareholder democracy and the various people who own Barcelona are flying at Barcelona losing money because they love Barcelona. And that's fine. And then you've got, you've got oligarchs, you've got nation states, but most of the people that own soccer clubs, most of the consortiums that own soccer clubs are in some way business operations, and they keep losing money year over year.
So why do they buy in? And there actually has been a reason for that, which is that soccer clubs have appreciated in value at rates of like 10% a year when you look at sales that have happened since like people who bought in the early 2000s and selling in the last five, 10 years have made anti-spectacular year over year gains and asset appreciation. And so there has actually been a weird kind of business case for buying and selling teams, even though they lose so much money. I mean, this then gets into a question of, well, if they always lose money and if they are structurally set up to lose money, why do they appreciate it?
And I think there's a number of answers to that. I mean, in some ways, right, they aren't just allowed to be good. They are a fun toy for rich people to have. And what you are in effect doing is paying an entrance fee into a club that you now get to belong to.
And as that club becomes more prominent, the fee to get in goes up. And you can like, catch in your ticket to somebody else. And fair enough, and then that becomes a profitable enterprise so that people who want to make money trade in access to the club, in effect, right, that's just sort of how like, you know, how luxury the panel works. There are also like real financial ancillary benefits oftentimes to owning a club.
One of the reasons that when during the great financial crisis that this hit sports really, really hard was that what had become a popular thing to do was to buy a sports team and its stadium and or arena and the land and stuff around it in order to develop an area and have control over rents in an area that is now increasing in demand because it is near your stadium arena. Yeah. And this was like, like, and this is what honestly led a lot of Americans into European sports ownership, right? They looked at these stadiums that could be either completely rebuilt or refurbished or upgraded in all of these ways that would give you access to revenue streams that would be profitable on top of owning the club.
And this is sometimes correct. It's very case-by-case basis, but it was a lot improved over the decade of the 2020s to be a lot harder to do than American investors thought it would be. But I think that's still around a lot what's going on in Italy right now with Americans buying into these clubs. Roma is in the process of getting a new stadium built, the two Milan clubs are in the process of getting a new stadium built, all of them are owned by Americans.
You know, it's just what, you know, that's one of the visions, right? You have them. It's what time I'm doing, right? You build a modern stadium that modern stadium makes you money in a lot of ways other than the soccer club, you host concerts, you host NFL games, you do all of this stuff.
And that money that you make from that more than offsets the losses you get running the club. That's the thesis. And then the other part of it is that I think a number of owners have said this more or less explicitly is that this could become insanely profitable if you could control labor costs. Yes.
And revenues have been going up spectacularly. That's the 90s. People in the affluent world have just started spending way more money on sports than they used to, more than other goods. People just like sports more.
I don't know. People have figured, or maybe another way of putting this is that the people who are selling sports in some way, whether it's tickets, whether it's TV packages, whatever, have determined that the demand for sports was actually much higher than people thought. That everyone's always loved sports and it's just being monetized more effectively now. And so like TV deals have been going up and up and up.
We talk to the authors of the club, Joshua Robinson and Jonathan Clegg, about the formation of the Premier League. And a core part of this story correctly is how much money Murdoch Sky paid for those TV rights and what they paid is like nothing, like orders of magnitude, two orders of magnitude more or less, less than TV rights costs now, maybe someone less than that. But still, regardless of how you look at it, the amount of money that people have are spending on these TV actors talk about a ton. And so there was a case for a while, still exists to some degree, that these revenues are exploding, you buy into something that is growing and you figure out the costs down the line.
And the revenues seem to be stabilizing, maybe we got some international rights are still going up with a domestic, appears cap to raise Roberts and wrote a great piece on this. And ticket prices are not, prices are not accelerating as much as they used to either. And so if we're in a place where revenues are not at least accelerating as much and no one's done anything about the labor costs, that case starts to look a lot more dubious. And then I would add two more factors here.
One is that revenues slowed down at exactly the same time that inflation accelerated, which impacts costs. And so what you have is not only did the growth slow down, nominally, but in real terms it slowed down even more than that and probably backslip a bunch. And then secondarily it became harder to buy a sports team, it became harder to get the money together to buy a sports team both because they became much more expensive and because money became way less free. The era of sports team valuations rising and the ever increasing cost of access to the club was an era when very rich people could borrow money basically for free.
And the fact that your sports team was losing the amount of money every year, but you could sell it for more than you bought it, as long as the costs of borrowing were cheap, the sports teams losses would pay for themselves. And it is no longer the case that that is true whatsoever. And what you saw is in reaction to this, a lot of the people that bought into clubs looked to get out or at least to defer some of the costs, right? This is wife and my sports group sold a chunk.
This is why we have some time like in running Manchester United now, right? Like a lot of owners were like, we're gonna sell, oh well I guess we can't really sell because nobody's gonna buy it for how much we would be willing to sell it for. So we'll just sell small parts to like take out cost for ourselves. And you know, like money ain't free anymore.
Yeah, it's an interesting question, a side question of whether these teams have gotten so valuable that it's become just harder to sell them as luxury goods. This is the, that is also by the way not confined to soccer. One of the things, the New York Knicks are not terrible, they're decent again, but when they were really, really bad, everybody wanted to go on. One of the problems was there were the billion dollars and you couldn't really find somebody to come and buy it.
And what often sort of happens in like circumstances like this, and you see this in soccer all the is that like some famous people put up a chunk, but there's a relatively small percentage of the overall money, which is supplied by like pretty anonymous rich guys and bankers. But when you get up towards a billion dollars, if you're like a rich celebrity, you like chunk two million into the pot to buy this club, what a game, like it gets you like, nothing it gets you like, you know, 10 million is 1% here, like. And building like an actual billion in financing is not trivial for consortiums of rich guys and banks. And wait, let's sit up.
So like, yeah, I mean, I do think that that's like a major issue. Once you're that level, it's like, well, we got to figure out a way that this doesn't lose this money all the time, or we have to sell it for less money. And then the valuations are going down, which then again, makes it less desirable for somebody else to come buy it. The labor cost thing to me is like the core of this story.
Yes. That it's just the case that players in soccer have so much more of the money that is made on soccer. And there are costs for the players here too, like they don't have collectively bargained rights. They are the system is not there's no protections for players.
They just get more wages. And those wages, by the way, are like way more widely dispersed than American sports. So it is not like a top heavy market. The big, big place that people make way more money as athletes in Europe than they make in America is not the content.
It's a championship. Exactly. It's the championship. It's the lower end of the Bundesliga.
Guys who simply would not be professional at this quality of player would probably like own a local dealership in their, right, they were a college football star who then went and, you know, opened a local card dealership or like, man, opened a local card dealership, got a cushy gig from the booster who owned the card dealership after their time in college. Yeah. Of course, that's a good story. Some people have much tougher lives.
Yes. Absolutely. And though they simply, they're simply are not jobs for them to play professional sports or the jobs that exist for the paper and professional sports pay way, way, way less. But the like a backup central defender on Iron Truck front first makes a solid, you know, upper middle class salary.
So all that money goes to players. And that's the system. But the fact of the system is a really big problem for ownership. And they have been unable to drive costs out of this goes to the point that Mike was making much earlier on.
And this I talked about in my piece that if you want to drive labor costs down as a owner of capital, you cannot be out competed by somebody else who will not drive labor costs down. It requires solidarity. And you know, in major league baseball, I followed this like George Steinbrenner, the owner of the Yankees, terrible person, but a terrible person who had no interest in working in solidarity with the other owners. And it took decades for the other owners to beat him down.
They had to kick him out of the game for a while. To be clear, his kicking is going to kick down the game is extremely well deserved. Yes. But like other people did bad things too.
It didn't kick down the game. A hundred percent correct. You have a level of B made to be bad. If you are in solidarity with the other owners, instead of if you were out spending the other owners.
Yeah. And they built that solidarity. They drove labor costs down. I'm not saying there's a happy story, but this is the story that owners want.
And a big, one of the reasons the Super League failed is that PSG had no interest in being part of it. And once it looked like it was going to fail, Manchester City had no interest in being a part of it. And without solidarity among ownership, I don't know how they start to drive these costs down. And they have invited in people because they wanted to get that bag.
They wanted to make tons of money selling their club that owners approved these because they were thinking, hey, if we say that the piff of Saudi Arabia is a fit and proper owner, then maybe I'm the one who's going to get the money for it. But what they did is they invited in people who are not interested in ownership solidarity. So having talked through all this, I'm now going to hit you with the conclusion that I wish we put a blueprint, which is that a big part of what's going on here is that the financial landscape of the world changed such that ownership's exit strategy for those who are interested in making money was no longer, I will sell this for more than I bought it for and has become, how do I make this profit? And I think what we've, that is why you go from, we will accept any old fucker with a lot of money to on a team to, we have strict rules about how much you can spend.
And because of the ways in which the world has changed, the end of zerp, the COVID blowing holes in everybody's budgets, everybody kind of looked around and said, we can't just lose money in perpetuity because we'll make more when we sell because what if we don't? And so now you have to scramble to figure out how do we make this profit. And right now I think that ownership and leagues are really betwixt in between those things. Yeah, there's a mix.
And part of the reason this makes this because in the before times, they did let in Carter anyway, and, and, and Saudi Arabia, and Roman is gone now, but Roman Abramovich and the guy who definitely doesn't smuggle heroin on his boat, like, then Al Sirusvav, who definitely did not ever do, right? Exactly. And I think that there is a bit of like, you know, closing the barn door with the houses of horses. Anyway, some of the bar, and I don't see any strategy here from ownership that looks like it could work.
On the other hand, maybe like a luxury good thing still plays for a while. I mean, I think there's like a battle smits, right? Like, I think somewhat restrictive rules do slow, you know, they seem to be self slowing transfer spending more than salary wage spending, which is a distributional effect and not necessarily a good one for world soccer. Like, you know, that was a big, anyway, that's a big way that money would flow from Richard Chief's support teams.
We spend a lot on transfers. If you're no longer doing that, and you're just sort of like telling the agents to have their guys not resigned with the poor clubs so that they could sign with the rich clubs, like, the big loser in that is not the rich teams, it's not the players. It's the teams that are now having much more trouble selling their players to say. How do you feel about that?
That is an interesting question. Who's going to be on the purview of this study? But I think that you were right that there have been fixed in between a little bit, but I think that they're sort of like rounding the edges of all of it, right? So the luxury good sort of still persists to a certain degree.
They are becoming more cost conscious. And I think there will be a direction formed. It's just kind of a question of what breaks first and how. Like, I don't think that, you know, World's like international soccer, European soccer is a bubble that is about to pop.
No, I don't either. But at the same time, if for some reason someone came to me as a financial analyst and asked if they should buy a European soccer team, I mean, obviously, like, each situation is different. But like, at the top end, like, no, I mean, I, that's what the rule did set, right? Why would you be buying the rule?
Like, why did you spend that much money on Chelsea? I have no idea. I think the Italian clubs, so Roma and the Milan clubs. I see the argument a little bit more.
I think maybe the next thing you'll maybe see is Spanish clubs. Like, those are still like, those are ones where you can sort of talk yourselves into like revenue opportunities and stuff. If you have, if you have an industry where on net tons and tons of money is lost. That doesn't mean that every single operation is losing money.
Right. You can absolutely come in and be the really smart ones who identify the place to go and spend, who identify the ways to build new revenue streams, identify, you know, who run the soccer team well so that your costs are relatively low compared to the quality that you're getting and all of those things are done. And it can be done. Teams do do it.
Ownership coming in on average, they all think they're going to do it and only some of them do it. There's all, there remains a case for it, but you have to believe in yourself and how good your business plan is to a much higher degree than is necessary to buy into an industry that doesn't have the problems of European soccer. Hang on that note. We can talk a little bit more about it.
And we'll be back later this week with more buckets. Thanks for listening. And I'm going to put a whole bunch of links in the show notes because we referenced a lot of stuff because this is sort of like, I don't know, our pieces of things. Yes.
This is, this is, this is so that very operating top. Cheers. Cheers.