Football's going bust, not coming home

One thing we are very good at is spotting when an industry is in trouble, and right now football, especially English football is going bust right before our very eyes. Almost without any attention from the mainstream media.

On the face of it, English football looks in good shape, high wages, expensive stadiums, full stadiums and hundreds of millions watching around the globe. This doesn’t appear to be an industry in crisis, but when people start to look at the numbers they will see that football is indeed within the last 3-4 years of being solvent.

So what’s the problem?

This time it isn’t just case of profit and loss. Even if football returns to a gross profit (which it won’t), it is now still too late. Revenues falling due to illegal streaming v higher player wages equal a bad future, but it is worse than that, much worse.

Much like the subprime collapse of 2007-08, football clubs have debt leveraged against assets that are now falsely priced. When the price of those assets drops, football clubs become insolvent very quickly. In this case, those assets are football players. The bubble is about to burst.

To explain it simply and for example, say clubs can borrow £40m to pay for a player that is worth £50m. This is because the lenders assume that if the club gets into trouble they can sell that asset for at least £40m and get their cash back.

A issue is that when the money stops pouring into football, transfer prices will fall and those assets won’t be worth anything like the money that was borrowed to pay for them. This causes lenders to stop lending money to clubs and prices drop even further.

Why would money stop pouring into football?

Forget “why would it?” the amount of cash entering football is already on the decline. The evidence for this is the last auction for domestic rights to show the Premier League. Bids were so low that one of the 6 packages didn’t even sell. The reason for this is down to a mixture of the growing number of streaming sites and the ever increasing cost of watching football legally. Simply put, people can now watch football for free across the net.

The evidence that this is happening can be seen in this year’s transfer market. Compared to previous years, the amount of buying is at a fraction of years gone by.

Drop in viewing figures

It’s clear that people are choosing in ever increasing numbers to watch football for free. This is, of course, a problem for the Premier League and its clubs. The worrying part is there is not a single thing that they can do about it and the problem for them is getting worse.

In a way, it is almost a mathematical certainty now that football will go bust. A small number of viewers stop paying because they can get it free, this means that to cover the costs or the rights they have already bought, the broadcasters need to charge more to those that stay. This force’s more to leave and the cycle continues until the broadcasters admit they have lost and that nobody will pay for price rises.
Can broadcasters can pay less for the rights!

Well, they already are and the next time they bid they will reduce them even further. At the end of the day, clubs are not going to be getting the sort of cash that they are used to. We estimate that their TV rights income could drop to as little as 25% of what they are currently receiving.

Now if football clubs don’t realise this or acknowledge it, then they are in deep trouble. But again, when you look at the signs you will notice that clubs are acknowledging it. There has been very little big money moves this transfer window. Only Liverpool and Man City have gone out and spent big money.

In a way, it is very much like the SubPrime mortgage crisis where nobody on the inside wanted to blow the whistle because they knew they’d be left holding all these worthless assets (players) and would be no longer able to sell them on.

Over the coming years, clubs will be desperate to offload players from high salaries but with nowhere to see them too, they will have to offload them for free at the end of their contracts. The problem is that on every football clubs balance sheet is a current value for that player. What we are saying is these values are now false under this scenario. Which makes less solvent than currently, they appear to be. It will also make lenders less likely to lend them money, which just like the subprime crisis will cause a vicious circle all the way down.

Football is dying right before our eyes, but will they take broadcasters into bankruptcy with them? It might have already claimed one victim in BT. Whilst it won't go into bankruptcy, the company is in big financial trouble right now and may need a bailout of its own from its shareholders.