Podolski or Aguero? Hmm….

by Paul

If there’s one thing that I do love, it’s a great football myth. With advent of Twitter, the popularity of fans forums, and journalists with the research skills of someone looking for a pen whilst on the phone, we’ve become lazy. The Press Relations departments in clubs in England have started to become very cute when it comes to shaping the public narrative. They have learnt that if you can shape the narrative, you can essentially do whatever you want and the people will cheer as you do it. The fanatical nature of the average football supporter is not conductive to a reasoned debate about something so emotionally entangled with their psyche. People like to use cliches instead. They’re simple, you can point to media sources who agree and they can’t be argued against in 140 characters.

Usually they are pretty daft things that are hardly worth the energy to argue. Sheikh Mansour has spent £1.1 billion on City. Manchester United would have £500m to spend if it wasn’t for Malcolm Glazer. Liverpool’s price for Andy Carroll is comparative to Sergio Aguero. Everton haven’t spent anything on transfers since Methuselah had spots and danced to crap music. These are all false, that show a misunderstanding either of financial situations within clubs, or are outright falsehoods designed to sensationalise. I mostly try not to get worked up about these as they’re easy enough to disprove. There’s one though that takes a bit of examination and has been repeated like a cult mantra over the last 5 years or so:

Arsenal are doing things the “right way” in football and ensuring the long term stability of their club.

This just isn’t true, and to examine why, we have to look at issues ranging from football economic theory to metrics for success and Arsenal’s own published accounts.

Some Basic Ideals Of The Football Business

Football is a meritocracy; despite the vast wealth spent by clubs in attaining success, the basic premise is that twenty-two players compete over ninety minutes to try and gain points. These points translate into a ranking system known as a league table; the more points that you attain, the higher that you are in that table. Basic stuff, I know. The higher in that table that you are, the more money that you receive in prize money and indirectly in broadcasting revenue.

There are three big earners for football clubs – broadcasting revenue (TV money), commercial revenue (sponsorship deals) and matchday revenue (gate receipts).

What I believe makes the Premier League the superior league system to others, is that we have the most financially fair league in the world in terms of broadcasting revenue. The difference in the income given to the top Premier League club and the bottom Premier League club in a single year by the league was only £20m. Wolves earned £40m from the Premier League whilst Manchester City earned £60m. Of course, this scales across the league and the difference between 4th and 5th is only £3m in this type of revenue.

Clubs then have to compete with each other in terms of commercial revenue and matchday revenue. Commercial revenue is something that we can explore later, but matchday revenue comes from ticket prices and means that clubs invest in their stadiums, and the capitalist ideal takes hold. Clubs will be competing for the business of the fairweather consumer.

This promotes a very competitive league. Of course, somebody has to come and mess up this lovely balance and that somebody, is the revenues from the Champions League. Clubs in the Champions League generally earn an extra £30m a year in revenue and some can earn as much as £60m. This means that the gap between 3rd and 4th has gone from a manageable £3m a year to an insurmountable £33m a year, at least.

Here, we are only considering direct revenue from broadcasting (TV) payments and prize money. There are other factors to consider. Participating within the Champions League brings an extra visibility to the club’s “brand” which increases commercial revenue. The Champions League can be a difference of another £30m a year in sponsorship.

So we see that the Champions League can bring £30m a year instantly and another £30m a year that grows over the longer term through increased commercial revenue. This is important and should be recalled later on.

What Makes A Club Successful?

Quite simply, money makes a club successful. A more accurate way of saying this, is that investment into the squad through transfer fees and wages ensures that the best players play at the club. Better players are statistically more likely to win games than inferior players. This is the exact reason why I don’t play for Real Madrid and Cristiano Ronaldo does, it’s pretty intuitive to most football fans.

In “Why England Lose” (known as “Soccernomics” internationally), Simon Kuper and Professor Stefan Szymanski attempt to marry statistics into the business of football and examine various myths in the game. One of their more important correlations noted, was a direct cause to effect relationship between the spending on player wages and the success of the club. Kuper and Szymanski noted that out of the previous seasons in their long study, those who paid the most wages won the league almost all of the time. They came to the conclusion that transfer spending is not the direct driver of success.

Kuper wrote:

In fact, the amount that almost any club spends on transfer fees bears little relation to where it finishes in the league. We studied the spending of forty English clubs between 1978 and 1997, and found that their outlay on transfers explained only 16 percent of their total variation in league position. By contrast, their spending on salaries explained a massive 92 percent of that variation. In the 1998-2007 period, spending on salaries by clubs in the Premier League and the Championship… still explained 89 percent of the variation in league position. It seems that high wages help a club much more than do spectacular transfers.

Building on from this, in Pay As You Play, authors Graeme Riley, Paul Tomkins and Gary Fulcher examined this one concept in more detail. They determined that Kuper and Szymanski were on the right track but that their ideas on the lack of importance of transfer spending and heavy focus on wages was short sighted. There seems to be a “lag” where transfer spending will not benefit the team’s position for a year or two. Colloquially, football fans call this “gelling time” and it is supported statistically as a real phenomenon.
Riley et al used a more complete definition which they called the Total Team Valuation (or TTV); they do acknowledge the effect that a great manager can have on these statistics or the effect that a bad manager can, but over a long term period, teams with a TTV value over 3.24 (worth £374m) has won the league only once in the post-Abramovich Era, and that was The Invincibles team. You can read their article here for a further analysis of their findings, but the basic idea of those who invest in their squad to a higher amount garner a high league position has been proven historically and statistically.

This Ain’t Just City, It’s A God Damn Arms Race

Chairman and CEOs of Premier League football clubs know the things expressed above. Football revenues increase due to Champions League participation, and investment in the squad is the only way to achieve this over the long term.

It is absolutely possible for a team who does not invest into their squad to achieve finishing in a Champions League spot, it is just not possible for them to stay there over the long term. Every smaller spending club who has broken into the top four has immediately been replaced by the traditional top four the year after. This actually supports the arguments made above; the clubs with the higher TTV (those who have invested in the value of their squad) may have a bad season, or a team with a lower TTV (Newcastle in 2011/12 for example) may have a fantastic season but everybody will always move back to their so called “natural position” over the long term. Statistical outliers are possible in every trend and we are calculating over the long term.

Linking the past seventy billion paragraphs together, we come to a single conclusion:

Investing in a squad is not enough. You must invest at the same rate or better than the people around you.

Let’s think of this as a points system (as an example, don’t send me letters) like this:

1. MCFC – 1000 points
2. MUFC – 990 points
3. AFC – 850 points
4. Spurs – 750 points.

If Spurs buy a player worth 500 points, taking them to 1250 points in total, this surely is a good thing for Spurs and they will move up to the top of the league?

Not necessarily. The football economy is not filled with self contained bubbles, it is interlinked. The reality of football is this:

1. MCFC – 1700 points
2. MUFC – 1500 points
3. AFC – 1300 points
4. Spurs – 1250 points.

So they have closed the gap through investment but not overtaken. Whilst squad investment is great, it is relative to those around you. To improve your squad position in football, outside of a random event where teams have bad seasons or great seasons, you must not only invest in your squad but match and better the investment of clubs around you. Football is a constant arms race.

The Arsenal Myth

This brings me onto the strategy of the Arsenal board since 2004. For many years, representatives of Arsenal have stated that their position is to not get involved in the arms race of football, not to pay high wages or transfer fees and keep it as a profit making entity to ensure their continued financial survival.

My main problem with this, is that it’s nonsense. It is drivel of the highest order repeated over and over in the hope that it will become a fact. Let us look at the gap between Arsenal and the Europa League spots over the past five years:

18 points from 5th.
9 points from 5th.
6 points from 5th.
6 points from 5th.
5 points from 5th.

The gap between them and the chasers has significantly shortened whilst Arsenal have continued their strategy. As we understood earlier, this is because Arsenal’s TTV rating has not grown at the same rate as those around them. This trend can only continue for so long.

Financial stability from a team that earns £30-50m a year from the Champions League does not come from slipping out of the Champions League places. Put simply, Arsenal are not investing in their squad to the same level of the clubs around them and as such are losing their market position as a Champions League club.

Arsenal’s board seem to be making mistake after mistake.

They cite wage bills as an issue whilst having a 57% wages to turnover ratio (which over the previous five years runs at an average of 55%) and was previously 61%.

They cite financial costs of players as a reason that they cannot compete but this is also false. David Silva cost £24m and earns around £150,000 a week. Podolski cost £10m and earns around £110,000 a week. In financial terms Silva cost City £12.6m a year and Podolski costs Arsenal £7.8m a year. They are attempting to say that Arsenal can’t compete because they can’t find an extra £5m a year. They make a net profit of £40m year upon year, have made £341 in the last five years from operating activities with a net spend of £2m on players.

What is the difference between a Podolski and a £30m/200k player?
If Podolski is at £10m + 100k as stated, then his total costs are about £10m a year.
A player signed for £30m and on £200k a week has total costs of £16.4m a year in amortisation and wages presuming a five year contract. We’re talking a £6.4m a year difference between Sergio Aguero and Lukas Podolski that Arsenal, and entity who made £50m profit last year, are arguing is beyond their financial reach.

There is a false argument in place that Arsenal have to acquire their own Sheikh Mansour to be competitive. Hopefully, I’ve shown above that this is false. Arsenal only have to reinvest the same money as their natural competitors of Manchester United and Spurs to keep their TTV ranking amongst the highest four in the league thus ensuring their long term place in the Champions League. They are currently failing to do this.

Not only in terms of squad investment, but also in other indiciators of revenue, Arsenal’ board are consistently failing them. In the previous three years, Spurs have enjoyed a 46% revenue growth, whilst Manchester United have enjoyed a 76% growth. Arsenal’s revenue growth over the same period of time was just 1%. Their matchday revenue has reached a point whereby the price cannot go much higher before supply outstrips demand. , and it has already dropped over the past three years. Their broadcasting revenues have increased, but only because of the total increase in the value of the rights, Arsenal’s share of those rights has gone down. Over the past five years, Arsenal’s share has cost them £6m a year. Or David Silva.

So we come around full circle to what exactly is the Arsenal myth:

Arsenal are doing things the “right way” in football and ensuring the long term stability of their club.

Arsenal are not currently ensuring the long term stability of the club by making a net profit on transfer spend and lowering wages. Arsenal are ensuring the long term financial difficulties of the club by gambling their major revenue source of the Champions League on a statistically unlikely event. Having a net profit on transfer spend is only good if you are increasing the TTV in other methods, or have a high enough TTV to not have to match growth of those around you. Arsenal currently have neither. Their strategy is neither securing revenues for the long term nor sensible.