Thursday, 9 June 2011

The Rules of Football (2)

From CityAM:

ENGLAND’S leading clubs are jeopardising their futures by spending increasingly dangerous sums on player wages, one of the country’s most prominent football finance experts warned last night.

Premier League teams forked out a record 68 per cent of their income on pay packets during the 2009-10 season, according to research published today by Deloitte’s Sports Business Group. The total wage bill of £1.4bn constituted a five per cent rise and wiped out a two per cent improvement in revenues that saw top-flight clubs collectively earn more than £2bn for the first time.

Deloitte’s Dan Jones, who edited the Annual Review of Football Finance, told City A.M. the increase in wages-to-turnover ratio was cause for alarm.

"The thing that concerns us is that we went through about 10 years of the wages-to-turnover ratio in the Premier League being around 60 per cent," said Jones "Then suddenly last year it went up to 67 per cent and this year it’s edged up to 68 per cent. We think that is right at the boundaries of where you want it be. We’ve always talked about 70 per cent as being a warning level. Obviously you have to look at each individual club, but for the Premier League overall to be edging towards that 70 per cent mark is a concern."

Well, duh.

Increases in the profitability of any economic activity* always accrue to the least elastic factor**, using the figures above, turnover went up by £400 million and total wages went up by £700 million, but in the long run, we'd expect the two to go up £ for £.

The reason for this is simple; the costs of actually staging football matches (stadium maintenance, ticketing, security, floodlighting etc) is pretty constant (fixed costs) and can be provided by any one of many competing providers, and the balancing is 'surplus' or 'profits'.

Nearly all this 'surplus' goes on footballers' salaries, because there is a small, limited pool of talent; these teams need to sign up the best two or three hundred players and by definition there are only two or three hundred 'best' players. We know full well that these players would play for a tiny fraction of their current salaries (like up to the 1970s) because it'd still be more than they can earn as a bus driver or gardener or something.

The difference between their actual salaries and what they'd earn elsewhere (as a bus driver etc.) is quite simply monopoly income or 'rent'. So football just follows the usual economic observation that increases in the profitability of the economy just go to 'rents' - which is why the players' share of total income has crept up from 60% to 78% over the last decade. The same rule applies to the economy as a whole - which is why an ever increasing share of GDP goes to 'rents' in the literal sense, i.e. land values.

And the notion that all Premier League clubs as a whole are threatened by these salary increases is a nonsense; if total income were to fall by £100 million, then total salaries would fall by £100 million as well, leaving the clubs no better or worse off.

* To the extent that Premier League football is an economic activity in the normal sense or just vanity spending with no particular profit motive on the part of the owner.

** Paraphrasing Dearieme.


Anonymous said...

And the notion that all Premier League clubs as a whole are threatened by these salary increases is a nonsense; if total income were to fall by £100 million, then total salaries would fall by £100 million as well, leaving the clubs no better or worse off.

Well, eventually they would, but there's plenty of scope for chaos while the players try to hold out. The longer they do, the more damage is done to the clubs.

In the broader economy, you can see the same thing when landlords refuse to drop their rents in a recession. The rents will go down eventually as businesses go under, but the lag makes the recession worse. It's hard to counter that effect, because you'd need to be able to know the correct future rent value in advance.

Mark Wadsworth said...

F, very true, another good parallel.

dearieme said...

What's the average length of an EPL player's contract? Four years, say? Then if on average we are half way through contracts, there's going to be a two year lag.

Mark Wadsworth said...

D, you have thrown down the mathematical gauntlet there.

So average club has total income £100 m and average wage bill £70 million (£2 bn and £1.4 bn divided by 20 clubs).

If income falls by £10 million, then they can cut their wage bill by £10 million by a) not re-signing £17.5 million's worth of players on their old terms and b) adopting new contracts which only pay out £7.5 million a year.

That's an average pay cut for the new contracts/players of about 60%, i.e. from £5 million per player average down to £2 million, still not chicken feed.

Chuckles said...

Just like CEO and top management salaries and bonuses really. Effectiveness and results are about the same too?

Mark Wadsworth said...

Ch, as I've often pointed out, those directors' salaries aren't really salaries at all (and they do not come out of the same pot as ordinary workers' salaries) they are a share of profits after ordinary salaries have been paid (and so they come out of the pot which by rights ought to go to shareholders or be re-invested in the business).

dearieme said...

According to my morning paper, the youngster who's just transferred from Blackburn to ManU turned down a higher paypacket offered by some third club. When he meets his new teammates I'll bet they all mock him. "Get the money, son; an injury could end your career tomorrow" might be the gist of it.

A K Haart said...

Vanity spending? Vanity spending for me is a bottle of wine that isn't on special offer.

Chuckles said...

M, Indeed, I agree completely. Just like Premier League footballers, as I said.

Mark Wadsworth said...

D, for a player it is a trade-off between playing for a top club and then getting known and being able to haggle for a better salary in a couple of years time or being paid more now but languishing in relative obscurity.

AKH, if you have to ask how much something costs then you can't afford it.

Ch, we can draw lots of other interesting parallels. Actually it was Robin Smith who set me off on this train of thought - he reckons that the very highest salaries are in businesses with a large element of monopoly profits, so it's leeches on the back of leeches who earn the most.