Money, Money …. Money?

Many people are getting excited about the new Premier League TV deal, announced yesterday, and what it means to clubs like Reading. Local media have been sensationalising this as much as possible, using words like “TV windfall” – so let’s have a brief look at what this actually does mean for a club like Reading.

As has been well publicised already, this deal, for domestic TV rights, is for a total of £3.018bn over 3 years, which is a 70% increase on the current package, which is worth £1.773bn over 3 years. To have confounded the general economic pattern of gloom and depression so dramatically is a major achievement for the Premier League, and is largely down to an increase in the number of TV companies bidding for these rights. In any auction, the higher the number of bidders the higher the likely selling price, and this was the situation here, with Sky TV winning 5 of the 7 match packages and BT winning rights for the first time and winning the other two packages. The annual cost to these two companies is £760m a year to Sky and £246m a year to BT. For their part, the companies know that the wide appeal of Premier League football is one of the few products in TV guaranteed to drive subscribers towards a product offering. Sky themselves based their whole business model on this in the early years of the Premier League.

So what does it mean for Reading? Well, of course, the majority of the extra income will be distributed amongst the Premier League’s shareholders, its 20 member clubs, in the form of competition prize money and facility fees (the fees clubs receive for the televising of matches). Currently, Premier League teams receive money in 4 different ways :

  •  An “equal share” payment, which is worth £13.758m to each club
  • A share of overseas TV rights, which is again shared equally and is worth £18.764m to each club
  • TV facility fees, worth £577k for each live Premier League match in which the club pays. However, there is a minimum payment equivalent to 10 matches, so a club televised fewer times than this will still receive at least £5.77m. Having said that, clubs which have far more “TV appeal” and are shown more times receive much more – in 2011/12 Arsenal, Spurs, Liverpool and the two Manchester clubs both received over £10m in TV facility fees.
  • Merit payments, which are based solely on final league position, with an increment of just under £800k for each position. So, whilst in 2011/12 Wolves received £755k for finishing 20th, and West Brom received £8.3m for finishing 10th, Manchester City received £15,191m for winning the title.

So, using those figures for the current TV deal, a club finishing 20th is guaranteed to receive payments of over £20m from the domestic TV funding, excluding the £18+m from overseas TV rights. The sale price of overseas TV rights have yet to be announced, but as these have been steadily rising over recent contracts it’s safe to say that these are unlikely to fall, so that makes a minimum income of over £38m. Assuming that the 70% Increase in the domestic rights is fully passed onto the member clubs, that would mean the “domestic” £20m minimum increasing by £14m, taking the notional minimum income from £38m a season to £52m. Plus, of course, overseas TV rights could continue to increase, further increasing this total.

Yes, this does appear to be a ”TV windfall.” But is it, and will Reading benefit from it? Firstly, don’t forget that any increase in payments will take effect when this contract starts, which is the 2013/14 season, so firstly Reading have to stay up to benefit from this windfall.

But, assuming they do, I’m sceptical that they will actually gain much advantage from it. Certainly, it will help fund infrastructure like the proposed Category One Elite Player Performance Programme (EPPP) Academy, which can only be good in the long term. But in the shorter terms, there’s hardly anything to be gained in terms of competitive advantage from this money, for the simple reason that it goes to all Premier League clubs. So all 20 clubs will have bigger transfer “war chests”, and the competition for players will be just as fierce as they are now – except that each club will have so much more money to spend on transfer fees and, most significantly, player wages. So I’d expect that the only noticeable effect from this extra money will be a further fuelling of the Premier League wages “arms-race”, with no noticeable effect on competitive balance.

Even worse for a club like Reading, the financial distribution system outlined above means that that higher up the table you go, and the more attractive you are to TV broadcasters, the more money you get. This will inevitably mean, assuming that all these payments increase proportionately that a greater share of this “TV windfall” will go to bigger teams, those higher up the league and those who are televised the most times. So an increase of 70% won’t be equally spread so that every team is 70% better off – some teams will get a proportionately higher share of the extra income than others, and Reading are unlikely to be one of those who will benefit the most. So, if anything, competitive balance in the Premier League will get slightly worse.

For me, though, the biggest and most worrying effect of this increase in Premier League TV income is that it will increase the size of the financial gap between the Premier League and the Football League. It’s already a chasm, and if I knew what was bigger than a chasm I’d say it will increase to that. And that’s a major, major, danger in two ways.

Many, many clubs have experienced major financial problems after relegation from the Premier League because of this financial gap, and, of course, the larger this gap has become the greater the impact of losing that income. If you have a wage bill of £48m (the average Premier League wage bill in 2010/11, according to the May 2012 Deloitte Annual Review of Football Finance) and increase this by £14m because of the extra Premier League funding, that means you now have a wage bill of £62m.

Get relegated and you face a sudden and dramatic reduction in income, even after parachute payments. Reading’s wage bill in the Championship in 2010/11 was £21m (the fifth highest in the division) and the year before it was £20m, whilst the Championship average wage bill for these two seasons was £16 and £15m) . At the same time the average income across all Championship clubs was £17.6m. (Source : May 2012 Deloitte Annual review of Football Finance)

So that’s a whole big reduction a relegated club would need to make to avoid suffering major financial problems, at a time when banks and HMRC have been so hurt by the behaviour of other clubs that they have a zero tolerance approach to football finance. Yes, there are parachute payments of two years at £16m a year and a further two years at £8m to soften the blow but softening the blow is all they do – the club would need to shed wages costs quickly and big time.

And, as many clubs have found out, that’s not always so easy to do. Many players are reluctant to move on if they are not likely to get the same money elsewhere, and at the same time a club will suffer vocal criticism from supporters enraged at “having to sell the best players”. Whilst there are relegation clauses in player contracts, these often aren’t worth much in reality – the requirement is that each player’s contract has a clause in it saying what will happen to the player’s wages in the event of “change of division”. I was recently told that what actually appears in these clauses is legalese to the effect of “we’ll talk about it if that happens” – which satisfies the requirement for a relegation clause to exist!

So, relegation could be even more of a financial disaster once there is a sharp increase in the level of Premier League income. But it’s a bleak choice faced by Reading and other clubs in similar positions. Once this money kicks in, the more of it they use to stay in the Premier League, the greater the impact they’ll suffer if they fail. And the other clubs will be doing the same, in a self-fulfilling prophesy – the more money you stand to lose if you’re relegated, the more money you are tempted to throw at the problem to make sure that doesn’t happen. And if you do turn out to be one of the three teams that does fail to stay up in any season, that’s the time you discover that the impact of losing that money is proportionate to how much you spent to try and avoid discovering that impact.

And this money also makes things worse in the Championship, and not just for relegated clubs. Extra money in the Premier League being spent on wages will only serve to drive up wages across the whole pyramid, as it always does trickle down the leagues – so further increasing financial pressure for all clubs outside the Premier League. So if Reading are relegated and don’t return to the Premier League before parachute payments run out, they then face the same miserable reality as other Championship clubs – the difficulty of gaining promotion whilst competing financially with clubs receiving parachute payments. They’ve done it twice, but how easy would it be to repeat once the effect of four-year parachute payments kick in?

So, despite the media hyperbole, I can’t see how this increase in Premier League TV income will be of any benefit to Reading at all, or to any of the clubs for whom the objective each season will be to avoid relegation. Sadly, as with so many other things in football finance, the main beneficiaries will be the clubs who already have the most money already – not to mention the players, their agents, and the purveyors of Mercedes, Bentleys, Ferraris and gold-plated bathroom suites.

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