Players’ wages are driving the need to grow revenues at Premier League clubs, reports Alex Turner

FOOTBALL is big business – and big businesses are required to allow clubs to compete at the highest levels.

The Premier League clubs spent more than £1bn in wages for the first time in 2007-08, and the correlation between spending and success is stark.

This lunchtime, Everton FC chief executive Robert Elstone will take part in an LDP Business live debate on the business of football, which will be broadcast on www. liverpooldailypost.co.uk from 12 noon, with a live blog preceding it at 10am.

His club has gained a reputation in recent seasons for careful, steady growth, and for over-achieving on the pitch.

But it is worth recalling how much the Premier League has changed since it began in 1992.

Alan Shearer had just become the most expensive footballer when Blackburn Rovers paid £3.4m to Southampton for the services of the 22-year-old striker, while the TV deal with BSkyB was worth £191m over five years.

The 22-club division, which included Coventry, Ipswich and Oldham, attracted 9.76m fans in its first season, at an average of 21,125.

Fast forward 17 years and, while Manchester United are once again the champions, the league has changed almost beyond recognition.

Despite only having 380 matches, compared with 462 in the league’s early years, the aggregate attendance was 13.7m, and the average gate up 70%, at 36,076.

And while increasing capacities have made a significant difference, there has also been a huge uplift in the lowest attendances.

The Premier League’s lowest attendance was at Wimbledon in 1993, when just 3,039 fans turned up in a season where they averaged a mere 8,405. By contrast, Wigan Athletic had both the lowest attendance and lowest average gate in 2007-08, but they were 14,169 and 19,046 respectively.

Sponsorship has rocketed – Carling signed a £3m-a-year deal in 1993 to be title sponsors, but Barclays are now paying nearly £22m each year.

Even that uplift is nothing compared with the exponential rise in broadcast rights. The annual value of the TV deals have increased by a factor of 20 – the current three-year deal is worth £1.7bn, with overseas broadcast rights adding another £625m.

The massive increase in revenues has led to what former Tottenham Hotspur chairman Alan Sugar described in 1997 as “the prune juice effect”, where what goes in one end comes out the other.

And this relationship between increased revenues translating immediately into increased wages is still true today, said James Dow, of Daresbury corporate finance firm Dow Schofield Watts.

Dow, who was involved in takeovers at Manchester City and Everton in the 1990s and has also advised Barcelona, Ajax and Celtic, argues that this is not a new phenomenon and it is not a relationship that will be broken.

“What's the raison d’etre for being a football club?,” he said. “Is it really to build infrastructure?

“It's not, it’s to supply the best football team and so naturally the income that comes in – and it always has been the way – the income has come in and has gone out to players.

“And it's always going to be the same. All the income comes in, and it all goes on to the players.”

Deloitte’s annual review of football finance, published in June, found that, in 2007/08, wage costs in the Premier League went above £1bn for the first time, reaching £1.2bn. Significantly, they had increased by £342m in the two previous years, almost exactly matching the £351m increase in broadcast revenue.

The review says the relationship between Premier League performance and the wage bill shows a “strong correlation”. Spending more money than other clubs is therefore the simplest – although clearly not a guaranteed – way of improving on-field results.

The graph, above, shows the Premier League performance mapped against the wage bills for the 2007-08 season.

The four biggest spenders filled the coveted top four places, which provide qualification into the Champions League, while the three smallest spenders were relegated.

While hugely disparate revenues between clubs are not new, Mr Dow argues that what has changed is that it is now prize money, rather than the size of a club’s stadium, which is producing the difference in revenue between clubs.

He said: “Traditionally, your point of differentiation was how big your stadium was because that drove your revenues.

“That's why the big clubs are big, because they have bigger grounds, bigger gate money, they've got the best players. It’s just that they've got different sorts of income streams coming in to football now.

“The main advantage the big four have got is participation in the Champions League.

“The differentiator that gives them is access to a different prize money pot.

“They're gaining probably on average, the bigger ones, £20m-£25m per annum extra and that gives them the differentiator so they’ve got that much extra money to spend on their playing squads.

“It will drive other revenues in terms of merchandising, but the real profit that comes out of it is from the prize money for the Champions League. That's the sole differentiator between the big four and the rest.

“The BSkyB money is actually quite evenly spread. It does favour the top teams but why we’ve got a big four is Champions League money.”

Last season, England’s Champions League clubs earned between £20.4m (quarter-finalists Liverpool) and £33.7m (finalists Manchester United). The four clubs, which also included Chelsea and Arsenal, shared £316.9m in prize money and TV revenues last year, with the lowest, Liverpool, receiving £72.3m.

However Everton, the best-rewarded non-Champions League club, earned just £49.5m.

The gap between the earnings of the two Merseyside clubs – £22.8m – was bigger than the £17.6m that separated fifth-placed Everton and bottom club West Bromwich Albion.

And while getting money from performing well in competitions can prove quite difficult, clubs – along with many businesses – are finding it very difficult to source finance.

Accountants and business advisers PKF have released their latest survey of football club finance directors in England and Scotland.

It found there was “almost universal agreement” that it is getting more difficult for football clubs to source finance, which was blamed on the general reluctance of banks to lend and also the high risks in the football industry.

Billy Cairns, a partner in PKF, said: “We are now starting to see signs that the credit crunch is now starting to bite into the industry, which is giving increasing pressure from banks.

“They are looking at what the agreements are, but if clubs start breaching their covenants then the banks are going to have to take a serious view.

“It’s very emotive, as we all know football is a very emotive game, but they have got to look at the facts and figures.”

But the fact remains that in the Premier League, while the chance of success is mouth-watering, the costs involved are eye-watering.

alex.turner