Overspending makes Real Madrid and Manchester United a lot like Wall Street.
Football creates something of a mirror image of Europe and the United States. On the western shores of the Atlantic, the National Football League (NFL) is a tightly-regulated, highly-controlled cooperative entity. Teams are imposed with caps on player salaries, and money from television broadcast rights—contributing the bulk of revenue—is evenly distributed among teams. For what is the de facto national sport of the United States, all of this regulation and income redistribution sounds dreadfully socialist.
Across the pond, European football (soccer) represents the epitome of free-wheeling free market capitalism. Anyone can buy or own a team. Those that perform well qualify for higher or more prestigious leagues and competitions. Players can be bought or sold for however much teams are willing to offer. And there is no equalizing salary cap, which means the richest teams can be shelling out many times more on players than the poorer teams in their league. (“Don’t you think it’s funny,” the World Cup star Wesley Sneijder once teased a fellow Dutch player, “that I make 20 times as much as you?”)
So it’s not surprising that in their bids to outshine their rivals, the richest and most successful clubs, at least those not enjoying the financial backing of a deep-pocketed owner—Real Madrid, Barcelona, Manchester United and Liverpool—have accrued mountains of debt. Real and Barca, the ‘Big Two’ of Spanish football, have debts of over $450 million each. ManU, coming off two decades of unrivaled success on and off the field, has debts amounting to more than $1.1 billion. Not for the first time, serious observers are warning of an industry meltdown (h/t Rajeev Mantri):
“Running as normal companies, the leagues in Spain, England, and Italy would be bankrupt within two years,” [A.T.] Kearney’s Munich-based vice president Juergen Rothenbuecher and colleagues wrote in a report called Football Sustainability Study. Some clubs, even bigger ones, may disappear through bankruptcy in the next few years, the consultants wrote. [Bloomberg]
And yet, success has become dependent on overspending—or is seen to be. Madrid President Florentino Perez has spoken of funding his purchase of superstars Cristiano Ronaldo and Kaka for a combined $200 million through a combination of “increasing ticket sales, increasing bank loans and increasing the club’s economic value.” His inclusion of higher loans suggests that he really has no good ideas as to how to balance the club’s ledgers in the long run.
In one view, Madrid’s purchase of Ronaldo and Kaka makes the club ‘too big to fail’, a brand that can assure its survival even if its debt comes back to haunt it (a fate that may elude Liverpool, for example). Another interpretation is that teams are not really interested in trophies, but that star power (or ‘heritage’) may matter more. In that sense, football may stop becoming a business activity in the classic sense, in that it would no longer be for the financial profit of any individual or group.
None of this sounds very satisfying. What A.T. Kearney and others warn of—a sector-wide collapse—may not come to pass, but specific clubs, even big ones, may fail. Leeds United and Fiorentina experienced dramatic declines brought about by financial weaknesses within the last ten years. At the same time, such inflationary spending has also made it clear that European supremacy in club football is not going to be challenged by leagues in the United States, South America, Asia or elsewhere for some time. With the World Cup now over and a new season about to start, European club football is something that Wall Street—barely out of the Great Recession and struggling with debt problems of its own—should consider watching.