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There is no doubt Covid-19 has left deep scars on the balance sheets of European football clubs precipitating a fundamental re-evaluation of the commercial models of the major leagues. The four main revenue streams of media rights, sponsorship/commercial, matchday and player trading have all been affected to varying degrees leading to an average 20% reduction in revenues of the major clubs in the 19/20 published accounts. Worse is still to come once the full effects of a Covid affected season are realised in the 20/21 accounts. So is this a temporary blip or a permanent realignment?
Media Rights
Media rights have been the oxygen fanning the revenue flames of the top leagues for the last 20-30 years, achieving over €8.8bn in combined revenues across the 5 leagues last season. However, even before the pandemic began there were signs that the tide was changing when the English Premier League (EPL) reported an 8% reduction in the value of their domestic media rights for the 19/20 cycle. In June 2020 the Bundesliga (DFL) reported a 5% drop (albeit after an 85% increase in the previous cycle). October 2020 ushered in the fiasco surrounding French football (LFP) who just a year earlier triumphantly announced a new four year deal with Mediapro (60% increase) that would spark the renaissance of French football. That contract was cancelled after only four months resulting in a short term agreement for this season 8% lower than the previous deal. Serie A are currently evaluating two offers from Sky & DAZN for their domestic rights starting in 21/22 and are now looking at a 5% to 10% reduction rather than an anticipated 18% increase.
So what about the biggest two leagues in revenue terms? Both the EPL’s and La Liga’s domestic rights negotiations for the 22/23 cycle were due to start in Q1 this year. However both are delayed in the expectation that the world will be returning to some form of ‘new’ normality later in the year where the negotiation environment may be more positive. La Liga’s last cycle was a 23% uplift and demand for the product driven by technological innovation and high production values remains strong.
International appeal
The EPL and La Liga are arguably less exposed to any potential reduction in the value of their domestic rights as the global desirability of their product remains high, resulting in the international and domestic rights fees being much more evenly distributed. 55% of the EPL’s and 56% of La Liga’s total revenues comes from domestic rights fees compared to Ligue Un (95%), Serie A (72%) and DFL (80%).
Giving further credence to this view, the 2019 Rethink TV forecast report said ”Amongst the world’s most lucrative sports, the price of soccer rights is expected to swell from US$12.8 billion to US$31.9 billion ( in the period to 2025), primarily due to greater viewership of Europe’s top leagues in Asia and North America.”
The EPL have already sold the Scandinavian rights to NENT network for €2.3bn in a 6 year deal from 2022 to 2028 (a 30% uplift from the previous deal). This deal alone – €383M per annum is more than the annual international sales of Serie A, Bundesliga and Ligue Un. La Liga will be able to follow suit from 22/23 as it will be able to sell longer term rights both domestically and across Europe (having previously been restricted to a 3 year cycle) so we expect an uplift in the value of these rights in the long term.
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Matchday
Matchday income has been the most severely affected by Covid-19 with the majority of clubs likely to be reporting no more than 5% of their 18/19 (pre Covid) revenue. Clubs with bigger stadia and matchday facilities are being more adversely affected. The repercussions of this dramatic fall in revenue are likely to be felt for at least another season (21/22) as it is unlikely that clubs will be allowed full stadia for the entirety of the 21/22 season and many clubs who have not already refunded season ticket holders will face no revenue from that source next season. Don’t expect matchday revenue to fully bounce back until at least the 22/23 season.
Sponsorship/Commercial
Sponsorship has been the least affected (10-15% reduction) with many clubs showing admirable ingenuity in creating additional value for their sponsors, particularly around creating additional advertising assets (both physical and virtual) and driving digital engagement . Many partners have also shown real loyalty and understanding with some sponsors showing great ingenuity in their activations such as Cadburys “Donate your words” campaign with Manchester United. Covid19 has without doubt accelerated the penetration of digital engagement and is an area with enormous potential for growth. Clubs who are able to provide the right tools to effectively grow, understand and engage with all of their fans (not just those attending games) will be the most successful in creating long term growth. Generating compelling content is a central pillar of this strategy with player generated content at the forefront . A 2020 La Liga social media survey reported that La Liga’s players had double the size of the followers of the clubs (1.3bn to 560M) but strikingly, the engagement rates of player content were 20 times higher than club owned content, highlighting that when players share content, fans actively engage and consume it. Clubs need to ensure effective communication and clear alignment between the players and the commercial team to ensure player buy-in that ensures content is genuine and impactful. Although elements of this could become contractual the power and authenticity is exponentially higher when both player and club see mutual benefit.
E-commerce at many clubs has been a low priority. With no matchday fans, club merchandise sales have dropped markedly with those clubs who have developed significant e-commerce capabilities less affected. The pandemic needs to accelerate change in e-commerce as clubs look to target all of their fans, not just those entering club stores on matchdays.
Player Trading
Unsurprisingly, both the volume and revenue from player sales have dropped markedly since the pandemic began last March. Although Premier League clubs spent close to £1bn in the summer window, it was notable that spend in other top leagues was significantly down with most clubs choosing to protect balance sheets. In January, this trend has continued with the EPL spending 70% less than last year, mediated not just by Covid-19, but by the new rules resulting from Brexit taking effect. This situation needs careful observation as it develops in tandem with changes to broadcast rights valuations. EPL has long been the buyer of choice for European clubs developing talent and whilst those clubs are likely to benefit financially in the medium term from keeping their best under-18 talent for longer, the spectre of a more systemic fall in mid-tier transfer valuations will reduce a key income stream for many clubs. Whilst there would still appear to be a place for the €100m price tag in the case of a Mbappe or Kane, these deals are also facing greater considerations around true ROI. Meanwhile in the relatively normal atmosphere below this level, it’s not hard to see a fairly significant price drop coming, driven by reduced budgets and the subsequent oversupply of players caused by many clubs reducing their squad sizes to reduce costs. Within this financial squeeze is the opportunity for true value to emerge for those clubs with sophisticated enough approaches. Rather than acting like the lottery winner, mesmerised by the opportunities of exotic overseas shopping trips, more clubs may take more notice of what they already have “at home” or what they can develop. Smart clubs have always known this of course. Smarter clubs still see the folly of a recruitment operation dictated by the whim of of the current head coach and so expect to see many more examples of a leader paid to coach the team not recruit its constituents, and much less tolerance for the £100k a week player the current incumbent “doesn’t fancy”. More broadly, clubs previously reliant on player trading for profitability will need to show greater bravery and creativity in their approach to diversifying revenues and reducing costs, most notably player salaries.
Balance of power
Will we see a more fundamental power shift from agents and players to clubs? FIFA are certainly trying to affect the former and the economics and breadth of available talent are likely to impact the latter. Whilst the rarest talent will be least affected, we shouldn’t generalise the market from the perspective of the few. Harsh economic realities cast shadows longer than the current period and the majority of owners and executives will remember this for much longer than the players will. With a fresh look at the volume of available talent, the opportunity to invest in more advanced systems and processes to create greater certainty of hire and the opportunity for a reset which the current market provides, who would bet against an emergence of more performance related pay for all players? Could we even foresee a move toward true alignment to overall commercial success, perhaps even in equity based participation in longer term value as we have seen in financial services? It is also now time to insert a force majeure clause in player contracts that ensures player salaries reflect the commercial realities caused by a global health crisis which will mitigate downside risk protecting the club’s very survival should history repeat itself.
Why invest now?
The current Covid-19 environment has highlighted some of the outdated practices in European football and how clubs have been reliant on the previously ever-rising tide of media rights and transfer values to drive revenue. We have seen how Covid-19 has accelerated the speed of vaccine research, the widespread adoption of video communications and caused many of us to re-examine what is important to us. Though the short term pain of transition is unquestionable, we have also seen the benefits a crisis can create. For those club owners who want to do things differently, the pandemic provides the ideal environment to acquire a club at a significant discount to pre-Covid levels and instigate change and disruption to drive long term value for all stakeholders. It is imperative that clubs focus on the revenue streams they can control to drive revenue growth and treat any rise in the value of media rights in the future as a bonus rather than a necessity.