The Financially Unsound and the Red Fury

Just don't let Ramos hold the trophy

There is no doubt which country currently sits on top of the iron throne of soccer. Spain. All foes have fallen at the hands feet of the Spanish national team for the past four years and La Furia Roja go into the summer as favorites to defend their European Championship title of 2008. Those odds are likely to carry over to the their bid to retain the World Cup in 2014. Domestically, La Liga attendance is high with the twin giants Barcelona and Real Madrid locked in a battle for the league title and on course to meet in this year’s Champions League final. The Spanish brand is also the strongest it has ever been with the rivalry of Messi v Ronaldo pulling in eyeballs from all over the globe and Spanish players in high demand across the continent for their technical brilliance.

Unfortunately, the difficult thing about being on top is staying there. Successful national teams need healthy domestic leagues to grow players and internationally competitive clubs to give them exposure to high level soccer (there is a reason Furia Roja draws almost wholly from Spanish clubs; Barcelona and Real Madrid in particular). If Spanish players are pushed abroad due to instability in La Liga the cohesion vital to the tiki-taka style Spain play would be lost.

There are several key trends at work which threaten to undo Spain’s soccer dominance.

The slow (economic) death of the Spanish supporter

Spanish Unemployment Highest in the EU - Feb 2012
Full article/image

Supporters are the life blood of a club, they are the energy which drives the team forward and the spirit that creates the history of franchise. Supporters also provide the core revenue which reinforce clubs in good times and cushion the economic blow of underperformance in difficult times. But as passionate as supporters can be there is a basic rule to keeping the stands full: supporters have to be able to afford to come to the ground. This means that ticket prices cannot be too high and people must have money to spend in the first place.

With one of the highest unemployment rates in the entire European Union, Spain is facing a demographic tidal wave that threatens this very rule. As of February 2012, Spain’s unemployment rate (23.6%) even tops that of Greece (21%).

Even worse, the 18-35 demographic from which soccer draws its most loyal supporters is among the hardest hit. Spain had one of the highest levels of youth unemployment in the Western world, with a third of the unemployed population being below the age of 30 and unemployment rate of 50.5% among the under-25 population.

Under25 Unemployment 1999-2011 - Cross Country

For comparison look at historical annual unemployment rates for the under-25 population across Germany, Spain, the UK, and Greece. With Spain running at approximately double its historical average of youth unemployment background conditions for sustained attendance numbers or ticket prices have to be considered difficult. This bulge of unemployed youth represents a lost generation of supporters and the trend does not look like improving anytime soon as Spain’s economy continues to flail within the eurozone.

Bursting the broadcast bubble

Revenue Breakdown of Top 10 Euro Clubs. Full image

Broadcast revenues are what have propelled soccer spending, particularly at Europe clubs, to stratospheric heights. The rapid growth in revenues from tv rights sales has allowed clubs to grow at a much faster rate than their supporter base. Costs have grown proportionally as fast such that TV money is no longer a bonus but essential to club (and league) finances. If we look at Deloitte’s most recent Money League breakdown we can see at a glance that broadcast money is the biggest revenue contributor in the majority of Top 10 clubs.

Such concentration is not a problem as long as broadcasters are content to pay ever increasing prices in bidding wars for the rights. Unfortnately, softness is starting to appear in the market as Spanish broadcasters are starting to realize that the price of rights are uneconomical. Recently, Spanish TV channels have floated talk that they will withold bids in an effort to reduce prices for the rights. Antena 3 de Television SA and Mediaset Espana Comunicacion SA are targeting a drop of at least 50% from the previous year.

Imagine what would happen if the ‘broadcast’ portion of Barcelona and Real Madrid’s revenues charts were cut in half. In reality the global appeal of Barcelona and Real Madrid as well as their ability to individually negotiate rights sales make it unlikely that they will absorb the full price of cut in demand, it is the rest of La Liga (and the Segunda Division) which would take the full force of the hit. Use of the word ‘obliteration’ would not be hyperbolic in describing the likely effect on Spanish clubs.

Fiscal mismanagement on the club level

Debt to Revenue Ratio in the 2009-10 Season

Spanish clubs are currently experiencing the initial effects of financial mismanagement as uncontrolled growth in wages and other costs outstripped any revenue gain the clubs had experienced with half of the clubs in the Primera and Segunda divisions entering bankruptcy in the past year. Debt levels like those seen at the end of the 2009-10 season are clearly out of line with all other top flight leagues.

This triggered a strike by the Spanish Professional Footballers’ Union which delayed the start of the 2011-12 La Liga season until $72m in back wages and player freedom in the case of default were guaranteed.

Despite the wakeup call, wage growth continues to be out of line with economic reality and threatens to swallow any benefits gained through the bankruptcy process.Out of control costs also have the potential to exacerbate the revenue situation by violating UEFA’s Financial Fair Play Regulations (FFPR) which are coming into play in the 2012-13 season. Being barred from the lucrative European competitions would be just one more slap in the face of already struggling Spanish clubs.

And so it goes…

Each of these reasons separately is painful for club soccer, taken together they translate into a migraine of perfect-storm-like proportions for the national team.

While the downturns in the Spanish and broader European economies have played their part in the weakening of Spanish soccer the FA, the leagues, and the clubs are wholly undeserving of any kind of ‘Get Out of Jail Free’ card. Irresponsible management and lax regulation are at the core of Spain’s problems (as in most leagues) and will be the chief cause for any decline. That is not to say that decline is imminent or inevitable, just that conditions are favorable. If the groups involved can collectively face reality and work to reverse the trends La Furia Roja could just as easily rule for a generation. As always, the challenge is getting everyone to look further than next season’s title.

The Financially Unsound and the Red Fury

3 thoughts on “The Financially Unsound and the Red Fury

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s