Deloitte recently published its 24th Annual Review of Football Finance and it contained some surprising results. Historically, most teams in the English Premier League (EPL) have made accounting losses with any increases in revenues being offset by higher wage costs. However, this report found that in 2013–14 most teams in the EPL actually made accounting profits.
The Deloitte’s review reported that the combined operating profits of clubs in the EPL increased from £82 million in 2012–13 to £614 million on 2013–14 – an enormous increase of 649%. Nearly all of the teams (19 out of 20) in the league made an operating profit while 14 also reported pre-tax profits. Dan Jones, head of Deloitte’s Sports Business Group, commented that:
“The change in club profitability in 2013–14 was more profound than anything we could have forecast.”
Why has the profitability of teams in the EPL suddenly improved so dramatically? One important factor was the significant increase in revenue. The combined income of the teams was £3.26 billion in 2013–14 – an increase of £735 million, or 29% on the previous year. Although match-day and commercial revenue both increased, the majority of this growth in income (nearly 80%) came from the sale of broadcast rights. The 2013–14 season was the first year of a new three-year contract that raised over £1.7 billion per year from the sale of these rights in both the UK and overseas.
However, clubs in the EPL have received big increases in revenue from TV deals before and still made substantial accounting losses. For example, the broadcasting contract that ran from 2010–13 generated over £1.1 billion per season – a £243 million per annum increase on the previous deal. Significantly, in the first year of this deal (2010–11), 81% of this increase in revenue went straight into higher player salaries, whereas in 2013–14 this figure was only 16%. The ratio of wages to turnover also fell from 71% in 2012–13 to 58% in 2013–14
So why did a smaller proportion of the increase in revenue go to the players compared with previous years? The explanation appears to be the impact of two new controls and regulations that were implemented by the EPL at the beginning of the 2013–14 season.
One of these has received considerable media attention and is similar to UEFA’s Financial Fair Play regulations. The Profitability and Sustainability Rules allow the clubs to make a maximum cumulative loss of £105 million over three seasons before having to face sanctions from the league. The size of the permissible loss is significantly higher than in the UEFA regulations.
The other control that has received far less attention is called Short-Term Cost Control (STCC). This regulation places limits on the extent to which clubs can increase their total wage bill. It operates from 2013–14 to 2015&ndash16: i.e. it covers the same three years as the current TV deal. For the 2013–14 season it worked in the following way.
If teams had a wage bill of less than £52 million they faced no restrictions on their spending on players’ salaries. Only Crystal Palace (£46 million) and Hull City (£43 million) fell into this category. Unsurprisingly, the five biggest spending clubs, Man Utd, Man City, Chelsea, Arsenal and Liverpool, had much greater wage bills of £215m, £205m, £192m, £166m and £144m respectively.
Any of the 18 teams that exceeded the £52m limit would still not face sanctions if their wage bill increased by £4 million or less. For example, Stoke City’s wage bill only increased from £60m to £61m, while Tottenham Hotspur’s increased from £96m to £100m. Some clubs actually managed to reduce their total wage bill, including the champions, Manchester City, which managed to lower its from £233m to £215m.
However, there were still 12 teams with a total wage bill that was greater than £52 million in 2013–14 and which had increased by more than £4 million on the previous year. For these teams not to face any sanctions, they had to prove to the EPL that any of the increase above £4 million was either due to player contracts entered into before January 2013 or could by financed from the following two sources.
• Club Own Revenue Uplift
• Profit from player transfers
Whereas the profit from player transfers is straightforward, the ‘Club Own Revenue Uplift’ requires some explanation, as it excludes a very important part of teams’ incomes – Central Fund payments.
Some revenues earned by clubs in the EPL are referred to as ‘Central Fund payments’. These are, in effect, income payments from money that is raised centrally by the EPL on behalf of the clubs and then distributed to the teams using an agreed formula. The majority of the revenue generated under this category is from the broadcast deals, although some commercial income, such as the sponsorship of the league, also falls under this category. For some teams the money raised from Central Fund payments makes up the majority of their revenue.
‘Club Own Revenue’ in STCC calculations refers to all revenues other than those from Central Fund payments. This includes a number of income streams that the club has more direct control over. They include:
• Gate money/other match-day revenue
• Commercial deals negotiated by the individual club
• Income from playing in European competitions, including TV revenue.
The uplift refers to increases in revenue from these sources compared to 2012–13.
For example, assume a club has made no profit from its transfer dealing and did not enter into any significant player contracts prior to January 2013. If this club’s wage bill increased from £100m in 2012–13 to £110m in 2013–14 then it would have to provide evidence to show that £6m of this increase could be financed from growth in its Club Own Revenue. In other words, it would have to demonstrate how its income from gate money, commercial deals and playing in Europe was at least £6m higher in 2013–14 than it had been in 2012–13.
It will be interesting to see if (1) the profitability of the clubs continues to improve in future years and (2) the STCC regulations are extended when the new broadcast deal comes into effect in 2016–17.
The EPL Proves Cost Control Works The Judge 13 (4/6/15)
English Premier League clubs made more revenue than Spain and Italy’s clubs combined UK Business Insider, Lianna Brinded (4/6/15)
Premier League football club revenues and profits soar BBC News, Bill Wilson (4/6/15)
Deloitte Premier League list: Clubs’ revenue boom to £3.3billion as Tottenham record highest ever pre-tax profits after Gareth Bale transfer The Independent, Joanna Bourke (4/6/15)
Annual Review of Football Finance 2015 Premier League clubs generate over £3bn revenue in season of records Deloitte (4/6/15)
Premier League top of the rich list with record income of £3.26bn The Guardian, David Conn (4/6/15)
Questions
- What is the difference between an operating profit and a pre-tax profit?
- If a club reports that it is making an accounting profit, does this mean that it must be making an economic profit? Explain your answer.
- Give some examples of the economic costs of running a football club that might not be included in accounting calculations of profit.
- How is the profit/loss from player transfers calculated?
- Explain why the current rules may give teams that play in European competitions a competitive advantage.
John Nash was one of the pioneers of game theory and in 1994 was awarded the Nobel prize in economics for his work in this field. He was also the subject of the 2001 film, A beautiful mind, where the young John Nash was played by Russell Crowe, for which he won an Oscar.
Tragically, John Nash and his wife were killed in a car crash on May 23: he was 86 years old. Since his death there have been many tributes paid to him and his work.
As a student of economics you will almost certainly have studied the concept of a Nash equilibrium: a situation where everyone makes their best choice, given the choices of the other ‘players’ in a ‘game’. But a Nash equilibrium is not in the collective best interests of the participants in a non-cooperative game.
This is a very different concept of equilibrium from the simple equilibrium in a perfectly competitive market. In fact, in the complex world of strategic decision making, where firms are constantly looking at their rivals’ behaviour and possible reactions to their own behaviour, there are all sorts of Nash equilibria which are clearly sub-optimal. Competition may be highly destructive.
The following obituaries look at Nash’s contribution to the development of economics. As the Bloomberg article states:
The game theory concepts that Nash’s math[s] brought to the field were a true paradigm shift in economics. Macroeconomists, who continue to use the old Walrasian notion of equilibrium typically engage in hand-waving about how the macroeconomy is too big for strategic interactions to matter. But most of the economics profession has gradually shifted toward Nash equilibrium. The 2014 Nobel winner, Jean Tirole, is emblematic of the new economics. And many of the biggest successes in applied economics, like the auctions that power Google’s advertising, rely on Nash’s technique.
Do we owe him as much as Adam Smith?
Articles
Death of John Nash and His Beautiful Ideas Bloomberg, Noah Smith (26/5/15)
John Nash, economist and mathematician, 1928–2015 Financial Times, Ferdinando Giugliano (25/5/15)
Obituary: John Nash: Lost and found The Economist (28/5/15)
Remembering John Nash: Finding equations to explain the world The Economist (28/5/15)
John F. Nash Jr., Math Genius Defined by a ‘Beautiful Mind,’ Dies at 86 New York Times, Erica Goode (24/5/15)
Explaining a Cornerstone of Game Theory: John Nash’s Equilibrium New York Times, Kenneth Chang (24/5/15)
John Nash’s Indelible Contribution To Economic Analysis Forbes, Jon Hartley (25/5/15)
John Nash’s ground-breaking contributions to maths BBC News, John Moriarty (24/5/15)
From the archives: Nash’s Nobel prize The Economist (24/5/15)
A beautiful strategy: John Nash’s ‘game theory’ explained Hindustan Times, Gaurav Choudhury (25/5/15)
Interview with John Nash
Interview with John Nash Nobelprize.org (Sept 2004)
Questions
- What is meant by the ‘prisoners’ dilemma’? How is this a demonstration of a sub-optimal Nash equilibrium in a non-cooperative game?
- Why is it difficult to predict the outcome of a non-cooperative game?
- Give some examples of non-cooperative games played by companies competing with each other.
- Give some examples of non-cooperative games played by nations competing with each other.
- Why do competition authorities try to prevent cooperation between businesses?
- Why may a cooperative equilibrium between firms be an unstable one?
New Look was founded in 1969 and is an iconic budget retailer found on most British high streets. In its history, it has been a family business; it has been listed on the London stock exchange; returned to a private company and then had the potential to be re-listed. Now, it is moving into South African ownership for £780 million.
90% of New Look will now be owned by Christo Wiese who controls Brait and who has been linked with other take-overs of British retailers in recent years. The remaining 10% will remain in the hands of the founding family. The company has been struggling for some time and in 2010 did have plans to relist the company on the London Stock Exchange. However, volatile market conditions meant that this never occurred and the two private equity firms, Apax and Permira, appeared very eager to sell. New Look’s Chairman, Paul Mason, said:
“This is an ideal outcome for New Look. The Brait team demonstrated to us that they have the long-term vision to help Anders and the team grow this brand.”
It is not yet clear what this move will mean for the retailer, New Look, but with an estimated £1 billion debt, it is expected that changes will have to be made. 
It is certainly an attractive investment opportunity and New Look does have a history of high rates of growth, despite its current debt. Furthermore, the debt levels are likely to have helped Mr. Wiese obtain a deal for New Look. Fashion retailing is a highly competitive market, but demand always appears to be growing. It is still relatively ‘new’ news, so we will have to wait to see what this means for the number of stores we see on the high streets and the number of jobs lost or created. The following articles consider this new New Look.
South African tycoon buys New Look fashion retailer BBC News (15/5/15)
South African tycoon enters UK retail fray with New Look purchase Financial Times, Andrea Felsted, Clare Barrett and Joseph Cotterill (15/5/15)
New Look snapped up by South African tycoon The Guardian, Sean Farrell (15/5/15)
New Look sold to South African billionaire for £780m The Telegraph, Elizabeth Anderson and Andrew Trotman (15/5/15)
Questions
- Why might a company become listed on the London stock exchange?
- How would volatile economic circumstances affect a company’s decision to become listed on the stock market?
- What do you think this purchase will mean for the number of New Look stores on British high streets? Do you think there will be job losses or jobs created by this purchase?
- How do you think the level of New Look’s debt affected Christo Wiese’s decision to purchase New Look?
- Which factors are likely to affect a firm’s decision to take-over or purchase another firm?
For years, the UK consumer organisation, Which?, has exposed misleading supermarket pricing practices. These include bogus price reductions, ‘cheaper’ multi-buys, smaller pack sizes and confusing special offers. Claiming that these practices are still continuing, Which? has made a super-complaint (available to designated consumer bodies) to the competition regulator, the Competition and Markets Authority (CMA).
Commenting on this action, Which? executive director, Richard Lloyd said:
“Despite Which? repeatedly exposing misleading and confusing pricing tactics, and calling for voluntary change by the retailers, these dodgy offers remain on numerous supermarket shelves. Shoppers think they’re getting a bargain but in reality it’s impossible for any consumer to know if they’re genuinely getting a fair deal.
We’re saying enough is enough and using one of the most powerful legal weapons in our armoury to act on behalf of consumers by launching a super-complaint to the regulator. We want an end to misleading pricing tactics and for all retailers to use fair pricing that people can trust.”
The CMA will consider the issues raised under the super-complaint to establish whether any of them are significantly harming the interests of consumers. It will publish a response within 90 days from the receipt of the complaint on 21 April 2015. The possible outcomes include:
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recommending the quality and accessibility of information for consumers is improved |
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encouraging businesses in the market to self-regulate |
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making recommendations to government to change the legislation or public policy |
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taking competition or consumer enforcement action |
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instigating a market investigation or market study |
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a clean bill of health |
Some 40% of groceries are sold on promotion. Supermarkets are well aware that consumers love to get a bargain and use promotions to persuade consumers to buy things they might not otherwise have done.
What is more, consumer rationality is bounded by the information and time available. People are often in a hurry when shopping; prices change frequently; people are often buying numerous low-value items; and they don’t know what competitors are charging. People may thus accept an offer as genuine and not spend time investigating whether it is so. Supermarkets know this and use all sorts of tactics to try to persuade people that they are indeed getting a bargain.
Videos
Supermarkets Face Super-Complaint On Pricing Sky News (21/4/15)
UK supermarkets face possible probe over pricing practices Reuters, Neil Maidment (21/4/15)
Which? launches ‘super-complaint’ against supermarkets BBC News, Stephanie McGovern (21/4/15)
Articles
UK supermarkets dupe shoppers out of hundreds of millions, says Which? The Guardian, Rebecca Smithers (21/4/15)
Supermarkets face inquiry into ‘rip-offs’ The Telegraph, Dan Hyde (21/4/15)
15 supermarket rip-offs that led to an inquiry The Telegraph, Dan Hyde (21/4/15)
What does Which?’s supermarket pricing complaint mean for you? The Guardian (21/4/15)
Supermarkets hit back over Which? report on pricing Financial Times (21/4/15)
Press release
Which? ‘super-complains’ about misleading supermarket pricing practices Which? (21/4/15)
CMA case page
Groceries pricing super-complaint Competition and Markets Authority (21/4/15)
Questions
- Give examples of supermarket offers that are misleading.
- Why are supermarkets able to ‘get away with’ misleading offers?
- How can behavioural economics help to explain consumer behaviour in supermarkets?
- Identify some other super-complaints have been made to the CMA or its predecessor, the Office of Fair Trading. What were the outcomes from the resulting investigations.
- What is meant by ‘heuristics’? How might supermarkets exploit consumers’ use of heuristics in their promotions?
Many of the major industries in Australia are oligopolies/oligopsonies. Examples include banking, telecoms, supermarkets, insurance and iron ore. The dominant firms in these markets have been accused of exploiting their market power, both in charging high prices to consumers and driving down the prices paid to suppliers. The result, it is claimed, is that they have been making excessive profits.
But things may be changing. With the rise of online trading, barriers to entry in these markets have been falling. Many of the new entrants are established firms in other countries and hence already have economies of scale.
The first article below examines the challenge to established oligopolists in Australia.
Articles and blogs
The death of the oligopoly: Australia’s incumbents face new rivals Financial Review (Australia), Michael Smith (21/4/15)
Australian Oligopolies The Grapevine, Adam Dimech (27/12/14)
Paper
Breaking up Australia’s oligopolies Ashurst Australia (14/8/13)
Questions
- Find out which are the major firms in Australia in the five industries identified above. What is their market share and how has this been changing?
- What barriers to entry exist in each of these industries in Australia? To what extent have they been declining?
- What can new entrants do to overcome the barriers to entry?
- What technological developments allow other companies to challenge Foxtel’s pay television monopoly?
- To what extent are developments in the supermarket industry in Australia similar to those in the UK?
- To what extent does Australia benefit from increased globalisation?
