Friday, 3 June 2016

Football Clubs: Get Them While They're Cheap

Swansea City this week became the thirteenth Premier League club to be bought by foreign owners, as ownership passed to another American consortium.

Received wisdom says that you don’t make money from football clubs, so why do it?

Clubs are bought for many reasons – sovereign wealth funds use them as a vehicle to help diversify their economies through tourism; ownership of a club might bring global respect or credibility; some local-boys-done-good like to put something back into their community; others see ownership of a football club as the ultimate vanity project.

Very few owners talk publicly of their ability to make money from their supposed investments. Yes, there is television money pouring into English football like never before but I think that’s a simplistic and short-term way to look at it.

My view is that most clubs are actually undervalued.

Take away the television money that forms the mainstay of PL clubs’ income and you’re not left with a great deal. Yes, some of the big clubs have massive shirt deals and ancillary income from slicing their sponsorship inventory into minute segments but ultimately whichever way you look at it, under the current model, all that’s being sold is inventory, limited by naturally low ceilings: sponsorship (assets, categories), tickets & hospitality (stadium capacity), merchandise (stock availability, distribution). Ultimately, all most clubs are doing is trying to eke out a small percentage increase on last year’s figures.

The other issue with selling inventory is that it tends to be a low margin game: there are sizeable costs to be taken out of the revenues earned (which we never talk about) and as a consequence, those huge income numbers are not matched by equally impressive profits. That’s before we even take out player wages and transfer fees, which Deloitte this week estimated alone accounted for 67% of the money earned in 2014/15.

In its current guise, the traditional sports club model is rigid, linear and inelastic. Subtracting TV money (which cannot be guaranteed long-term), YOY revenues leave a lot of room for improvement and in compound terms are pretty flat. When TV money accounts for 70-80% of a club’s income (soon to be 90%+ for some under the new TV deal) something has to be done. Clubs need to take greater control over the asset they should control: their customers.

I was introduced recently to a brilliant book: Exponential Organisations and amongst many gems was this chart, which demonstrates neatly the time it has taken various businesses to achieve a $1bn market capitalisation. The obvious take out is that many of the businesses set up for the digital age – exponential organisations – have torn up the rule book as to how quickly that magical number can be achieved. These are all businesses which have harnessed technology, data, analytics and mobile to build businesses that are agile, fast-growing and unencumbered by traditional rules. As very few of them actually produce anything physical, they are high-revenue, high-margin businesses. Costs of sale can be similarly discounted. These are 24/7 businesses and most have developed aspirational brand positions.

We see multiple valuations of sporting organisations based on brand value (ultimately the ability to commercialise a brand), which are always fun to read but are not based on anything especially substantial.

Where clubs miss a huge trick is in not realising that they all sit on a huge untapped goldmine: data. Football fan loyalty is taken for granted: they never change their allegiance, they will buy anything with the club logo on etc. but the truth is that ain’t so. One PL club with whom I am familiar in its last full year (taking out TV money) accrued an incremental 63p on average from its total database. That’s the equivalent of buying 3 extra lives on Candy Crush. To put this into context, some supermarkets – operating in a hugely disloyal, hugely competitive, price and offer driven market – are disappointed not to make £200 extra from their customers.

Speaking of supermarkets, it was also pointed out to me last week that the stadium shop of one major PL club based in a big city turned over less than two-thirds of the average Tesco Metro.

The problem is that as an industry we are thinking like the “Typical Fortune 500 Company” shown above, when we need to be thinking more like Facebook, Uber and Google. The focus on selling out matchday, shifting product stock and filling sponsorship categories is a modern day equivalent of Sissyphus and his rock: every Monday, we’re all doing exactly what we did last Monday.

Building a business fit for the digital age: informed by data, harnessing smart technology and creating digital products and services is the way not only to a higher revenue business but also to higher profits.

Yes, clubs are undervalued and that possibly also includes from TV money. It’s unlikely that minimum guarantees will continue forever – whether in the form of the current TV deal, sponsorship fees or merchandising royalty thresholds – but that should mean the ability to build more dynamic, elastic, profitable exponential businesses. It won’t fall into our lap, there is much work to be done but we need to stop thinking like football clubs and start thinking like media businesses.


Well Said will shortly be publishing a white paper expanding on these ideas and outlining the key areas sports organisations need consider to undergo genuine digital business transformation and build a more exciting, dynamic commercial model. Watch this page or email if you would like to receive a copy.