The World's Most Recession-Proof Sport

Published>Thu, Apr 29 10 01:48 AM

Parmy Olson, Forbes.com

In the stands of Old Trafford die-hard fans of heavily indebted Manchester United are holding up signs scrawled with messages to the team's American billionaire owners: "Glazers Out!" Just down the M62 motorway in Liverpool fans of that fitfully performing team want its pair of U.S. sports moguls, Thomas Hicks and George Gillett, Jr., out, too. They might get their wish. Liverpool was recently put up for sale after even Goldman Sachs couldn't see how to make a going business out of the club without building its much-delayed new stadium. Farther south Birmingham City's owner, Hong Kong businessman Carson Yeung, is at risk of losing his club for want of settling his bills with his advisors. And on the southern coast Portsmouth suffered the ignominy of being the first English Premier League club to be put into bankruptcy administration after running through four owners in barely a year.

When these debacles make the headlines it is easy to understand why many soccer faithful believe their sport is in trouble. But it's not. Sponsorships and broadcast rights money have continued to roll in for Europe's top 20 soccer clubs. Their combined revenues grew by 26 million euros ($36 million) to 3.9 billion euros ($5.5 billion) for the 2008--09 season, while their value rose from 439 million euros to an average of 451 million euros (to $632 million from $691 million). And there is more to come yet, they believe, from the burgeoning soccer-mad markets across Asia, Africa and Latin America.

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Broadcast rights account for 42% of the revenue of Europe's top 20 clubs (sponsorship, merchandising and ticket sales provide the bulk of the rest). Broadcast and sponsorship revenues for the UEFA Champions League, the Continent's elite club tournament, rose by a third to 1.1 billion euros ($1.5 billion) for the 2009--10 season. Those get divvied up among the top clubs on a performance formula. But it is the multiyear TV rights for their domestic leagues that have let them ride out the downturn and will fatten their coffers in the next few years. The EPL's domestic broadcast rights for 2010--13 sold for 1.8 billion pounds ($3 billion), a 4% rise from the previous three-season cycle. Its international rights went for 1.4 billion pounds ($2.3 billion), a 70% jump from the last round.

Soccer differs from American sports in the way it distributes its TV money. U.S. leagues like the NBA and NFL tend to sell rights centrally and then distribute the revenue equally. Most European soccer leagues share revenues based on performance. The EPL distributes half the money equally among its 20 clubs, with the other 50% based on number of TV appearances and league position. France opts for a 75%-25% split. Performance-related sharing of broadcast rights makes leagues more competitive, according to Stefan Kesenne in the International Journal of Sport Finance.

In Spain La Liga's two biggest clubs, Barcelona and Real Madrid, sell their broadcast rights individually, while the rest of the clubs negotiate collectively. This arrangement leaves Barca and Real pocketing half the money from broadcast rights to La Liga games. Little surprise they tend to dominate the league year in, year out. Barcelona has become so wealthy this way it eschews a shirt sponsor. Its players' jerseys sport the logo of Unicef, the UN children's charity the club supports.

So important is TV money to the EPL and its clubs that its chief executive, Richard Scudamore, spends three-fifths of his time planning, negotiating and selling broadcasting deals or protecting the league's intellectual property rights. He has headed the EPL for the last 11 years and fiercely upholds its free-market characteristics: no salary caps (in contrast to the NFL and NBA), no limits on owner equity (German clubs have to be 51% German-owned while many French and Spanish clubs are mutual societies owned by fans) and freedom to borrow as much as is needed to buy one of its clubs.

As a result half the EPL clubs are foreign-owned and collectively make the league the most indebted in Europe, carrying 56% of all the debt of the region's top leagues combined, or about $5.2 billion, according to statisticians at UEFA, European football's governing body. This number only fuels the xenophobic reaction to debt-loading seen at Manchester United, Liverpool and elsewhere, but Scudamore can't see what all the fuss is about. "Quite a lot of the borrowing across the Premier League has been used to buy clubs. That has caused some angst. But that doesn't make it any less manageable," he says. "Our most indebted clubs are the ones with the biggest revenues."

Yet EPL clubs' hefty borrowing to buy clubs, pick up new players and pay them fat salaries has not gone down any better among soccer's top administrators than foreign ownership has gone down among English fans. In early April Sepp Blatter, president of the game's governing body, FIFA, criticized clubs like Manchester United and Liverpool for piling up too much debt from paying their players too handsomely. Michel Platini, the former Juventus and France star who now heads UEFA, is another who believes that English clubs are buying their way to success. He is pushing to level the financial playing field through new rules for participating in UEFA tournaments.

Critics may despair at English soccer's financial high-rolling, yet the fact that investors are willing to get themselves into debt to invest in EPL clubs at all says something about the sport's growth prospects, especially abroad. Says Robert Tillis, managing partner of Inner Circle Sports, an investment bank that specializes in sports, media and entertainment: "If you look at the number of fans that you have for Manchester United and Liverpool in Asia, it dwarfs all four of the U.S. [pro sports] leagues combined." For more on the business of soccer, please visit www.forbes.com/soccer. Special Offer: Free Trial Issue of Forbes

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