Understandably, a lot of people are starting to think about the transfer window, dream targets and how much they might cost. On our board there has been discussion of Sancho, our rumoured £50m ceiling, how crazily unrealistic this is, etc.
I don't want to get into individual valuations because none of us have info on the mass of variables that would inform this. But I think it is worth discussing the overall impact of the pandemic of football finances, because I suspect our expectations need to be seriously recalibrated.
Many of us knew that the pandemic was coming in January/February but I'm pretty sure most of us didn't really appreciate how dramatically it would impact our daily lives. I think the same is true now in turns of the economic aftermath. We're hearing about the impact, but actually the real effects haven't hit us yet, because most of the economy is still on temporary life support thanks to the furlough scheme, etc. The government is obviously keen to open up the economy, but the bleak reality is that many organisations won't be viable when it does, whether because they have already sustained too much financial damage, or because business will be reduced to unsustainable levels until Covid-19 is eradicated (think about pubs and restaurants that have the same overheads but serve a fraction of full capacity of customers) and limited consumer demand due to sensible caution about the virus, financial hardship, and permanent behavioural change (e.g. I'm thinking I might not bother renewing my gym membership because I've got used to exercising without it and saving a lot of money; also e-commerce was already gradually strangling bricks and mortar retail, and this will accelerate that trend). There's a tsunami coming, and we tend to struggle to appreciate the enormity of these things until they arrive.
Given the implications of the above, football once again doesn't seem that significant. However, I started out with the intention of trying to think about what it means for our clubs and the transfer market. Once again, I'm no expert and privy to no special information, so much of this will be speculative and wrong. But let's look at our revenue streams:
- TV money. I'd guess this is the most secure revenue stream, as it runs until 2022. At that point, it could reduce if TV subscriptions and advertising is down as a result of severe recession.
- Sponsorships. Revenue could reduce as a result of recession - a gradual impact as variety of contracts elapse.
- Season tickets and gate receipts. Likely to be a huge drop in revenue. Even if stadiums can open to fans, it's going to be staggered and with reduced capacity.
All in all, this looks like a significant drop in revenue, but thanks to the diversity of revenue streams, the large chunk of TV revenue and United's global commercial tentacles, we're much less exposed than smaller Premier league clubs, let alone lower league clubs that rely especially on gate receipts.
However, it will be a struggle to reduce costs commensurate with reduced revenues. By far the biggest cost on our balance sheet is salaries. These are contracted so liable to remain as they are until contracts end. (It also heightens the challenge of getting rid of unwanted Chilean players on large salaries.) Let's hypothetically say our revenues drop by 20%. If our costs remain fairly stable, that's a drastic drop in profitability. It's quite possible that the decrease in revenue wipes out all profits and puts us in the red.
In other words, a sustained drop in revenue can result in a much larger reduction (in percentage terms) in spending power.
The same applies to all clubs to some extent. Some may be able to mitigate against it better than others. Perhaps there will be some blanket support mechanisms (e.g. salary reductions across the board). Perhaps clubs will be able to sell access to their 'non-televised' matches (which you'd imagine would disproportionately help our club). I don't see a significant change to our relative financial strength compared to other clubs. But I do think it's likely that the numbers around the sport will be smaller than the ones we've got used to.
As I said, I'm sure some of what I said is wrong and I'm sure there are multiple dimensions to the onrushing economic crisis that I haven't foreseen. I'm interested to read what you all think.
The economic tsunami hasn't even arrived
posted on 2/7/20
comment by Benjamin Kallman (U1734)
posted 17 minutes ago
Do you make Paul Pugba a black pug?
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😂
posted on 2/7/20
Sat Nav, I'm not making any concrete claims. I suppose my basic points would be:
1) The drop in revenue combined with fairly stable costs could see us making a loss in the next year, even without any transfer dealings.
2) Given the overall reduction in revenue throughout the sport, it's likely that the going rate for transfers and in future salary negotiations will drop broadly in line with the reduced amount of money in the game.
3) I'm in no position to quantify any of these things, just to speculate about the overall dynamics of what impacts on the finances and the market, and how that may differ from before. Therefore, I'm not going to say "Sancho is only worth £50m now" or "we can't afford £100m". However, I don't think it's out of the question that the 50m story we read this week is wide off the mark.
4) Since all big clubs are in the same boat I'm sure we'll still see players moving between clubs. (That said, if there is pressure to reduce wage bills, players and agents might consider this is a good time to sit tight on existing contracts.) When players do move, clubs bound by market realities will have to spend their money based on the financial conditions, which will surely have a deflationary effect.
posted on 2/7/20
comment by Red Russian (U4715)
posted 13 minutes ago
Sat Nav, I'm not making any concrete claims. I suppose my basic points would be:
1) The drop in revenue combined with fairly stable costs could see us making a loss in the next year, even without any transfer dealings.
2) Given the overall reduction in revenue throughout the sport, it's likely that the going rate for transfers and in future salary negotiations will drop broadly in line with the reduced amount of money in the game.
3) I'm in no position to quantify any of these things, just to speculate about the overall dynamics of what impacts on the finances and the market, and how that may differ from before. Therefore, I'm not going to say "Sancho is only worth £50m now" or "we can't afford £100m". However, I don't think it's out of the question that the 50m story we read this week is wide off the mark.
4) Since all big clubs are in the same boat I'm sure we'll still see players moving between clubs. (That said, if there is pressure to reduce wage bills, players and agents might consider this is a good time to sit tight on existing contracts.) When players do move, clubs bound by market realities will have to spend their money based on the financial conditions, which will surely have a deflationary effect.
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Gotcha.
It’ll be interesting to see how it pans out. People thought the same with the housing market in 2009 and again after brexit but looking back now, 2009 was the year to buy!
And to stick with the analogy, if you want that house on Kensington Palace Gardens, then you’re going to have to spend big bucks to get it.
I’m sure they will be a slight correction but I wouldn’t be shocked if in 2-3 years we’re back to paying £50m for the likes of Fred (no slight on Fred he’s done ok).
posted on 2/7/20
The economic impact of Brexit is still to be seen. We're out of the EU now but until the end of the year still able to trade as we were as members, due to the transition agreement. Currently it looks as though we're going to crash out without a comprehensive trade deal, and no one credible believes this will have anything other than a significantly negative effect on the economy.
posted on 2/7/20
comment by Red Russian (U4715)
posted 18 minutes ago
The economic impact of Brexit is still to be seen. We're out of the EU now but until the end of the year still able to trade as we were as members, due to the transition agreement. Currently it looks as though we're going to crash out without a comprehensive trade deal, and no one credible believes this will have anything other than a significantly negative effect on the economy.
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I should have been more precise, I meant the negative impact of the result of the referendum.
posted on 2/7/20
No one serious was predicting the referendum result would have a massive economic impact (though it has had some in terms of businesses delaying or redirecting investments in the UK). Certainly any such predictions were speculative and very hard to evidence, because they would have been based on expectations about business confidence before anything substantive had changed.
By contrast, the UK government produced its own impact studied about what different Brexit deal outcomes would do to our economy. These indicated a small negative impact in the case of leaving the EU but remaining in the Single Market like Norway; a significant negative impact if we had a hard Brexit along the lines of May's deal; and a severe impact if we ended up trading on (or close to) WHO terms. Those are this country's best guesses, based on the most complete data, interpreted by the government's impartial expert Civil Servants. May's government was reluctant to share this information, and Johnson's is now in the midst of an unprecedented reform of the Civil Service to enforce leadership of departments by political appointees instead of non-partisan advisors.
posted on 2/7/20
comment by Red Russian (U4715)
posted 3 minutes ago
No one serious was predicting the referendum result would have a massive economic impact (though it has had some in terms of businesses delaying or redirecting investments in the UK). Certainly any such predictions were speculative and very hard to evidence, because they would have been based on expectations about business confidence before anything substantive had changed.
By contrast, the UK government produced its own impact studied about what different Brexit deal outcomes would do to our economy. These indicated a small negative impact in the case of leaving the EU but remaining in the Single Market like Norway; a significant negative impact if we had a hard Brexit along the lines of May's deal; and a severe impact if we ended up trading on (or close to) WHO terms. Those are this country's best guesses, based on the most complete data, interpreted by the government's impartial expert Civil Servants. May's government was reluctant to share this information, and Johnson's is now in the midst of an unprecedented reform of the Civil Service to enforce leadership of departments by political appointees instead of non-partisan advisors.
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Speculation has quite an impact. It came down to the simple argument of ‘well Brexit is going to be an economic nightmare so I’ll pay less for your service or product’
It’s same now with Covid, many people’s purchase trends and trades have significantly changed due to the predicted nightmare that is ahead of us.
My point relates to the position of buyer & seller. If Dortmund are completely crippled financially by August say then they’ll have to sell him, it will then come down to demand and so on.
posted on 2/7/20
We can speculate (and I have done a bit above in reply to 52) about the relative impacts on United and Dortmund. That's obviously one key variable that will affect willingness to sell and buy. But all things being equal, if there's a lot less money coming into the sport, that will impact the price.
Woodward will have much more concrete information about expected changes in the various revenue streams. I have much more confidence in his ability to make these calculations than other aspects of running a football club!
posted on 2/7/20
comment by Red Russian (U4715)
posted 38 minutes ago
We can speculate (and I have done a bit above in reply to 52) about the relative impacts on United and Dortmund. That's obviously one key variable that will affect willingness to sell and buy. But all things being equal, if there's a lot less money coming into the sport, that will impact the price.
Woodward will have much more concrete information about expected changes in the various revenue streams. I have much more confidence in his ability to make these calculations than other aspects of running a football club!
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Very true that last sentence! I think what we’ll see is the more good players and average players and poor players will drop in price. I think the absolute crème de la creme will by and large keep their value due to scarcity, demand and by and large their owners will be reasonably wealthy still.
There are borderline clubs like Aston Villa who if relegated might have to seriosuly rethink the 80m banded around for grealish but Dortmund are valued at what? 800m?
Like you say the chief execs and CFO’s will know best as they have all the information.
What my point on the other thread was simply if we can afford 100m and that is the asking price, then do it. He’s one of the best players in the world in that position which we need to address very badly.
posted on 2/7/20
I think the richest clubs will just to try and ride it until until if either normalises back to something resembling what it was, or not it forces them to really cut costs.
PSG, Chelsea, Barca, Bayern and Juve have already made some pretty big transfers. And it’s not just the transfer fees, by all accounts they’re on pretty massive contracts as well.