The Glass Ceiling (Part Four)

This is the long delayed fourth and final article in my discussion of whether Southampton is blocked by a glass ceiling from ever competing for a Champions League spot and, if so, whether there is a practical way to shatter that glass ceiling.  In my last article I said that I would discuss what Southampton could do to make more money available under the Financial Fair Play (FFP) rules and the BPL’s salary cap. The earlier articles are found here, here, and here.

This article has been delayed, in part, because new information has come out which has required me to reconsider my analysis.  At least two well informed articles about Southampton FC were published by The Telegraph.  (Here and here.) A video of Les Reed’s speech to the 2014 Global Sportstec Innovation Conference was posted on Youtube.  Les Reed’s speech can be found here. 

While interesting in several ways, the articles’ primary relevance to this discussion is that they make it quite clear that Southampton intends to operate with, what I called in Part Two, sustainable money.  In other words, Katharina Liebherr wants to stop putting money into the team and have it start paying its own way.  This presents a significant barrier to our European ambitions.  If we are to get into the Champions League we must compete successfully with teams like Manchester City and Chelsea.  The owners of both teams still appear to be willing to put money into their teams, but are limited in how much they can put in by UEFA’s Financial Fair Play (FFP) rules.  Rounding off to the nearest million pounds and using recent Euro-Pound conversion rates, clubs are allowed to lose £24 million pounds every three years—which amounts to allowing owners to kick in £8 million pounds a year.  But this is not the end of the permissible contributions because UEFA FFP does not count all expenses as expenses.  Clubs do not have to count infrastructure development, youth development, and community development costs in calculating their losses.  Thus, Roman Abramovich can directly fund Chelsea’s youth program and any stadium expansion out of his own pocket without creating any FFP problems.  Our undoubtedly expensive academy could be paid for the same way, but, instead, will have to be paid for out of profits from the rest of the club.

On the other hand, a decision to operate on a sustainable basis, if executed, means that FFP is completely irrelevant to Southampton.  If the club breaks even every year we will never come close to exceeding the allowable FFP losses.  (In fact, our player trading profits for this year probably means that we will have no FFP problems for the next three years.)  This means that the only financial limitations on Southampton are the salary cap rules and the self-imposed need to break even.

As I have discussed before, the BPL salary cap is £56 million this year and £60 million next year but can be increased by the amount of the “Club’s Own Revenue Uplift” which is defined as

any increase in a Club’s revenue in a Contract Year when compared with its revenue in Contract Year 2012/13 (excluding Central Funds fee payments from its revenue in both the Contract Years).

(BPL Handbook 2014-2015 Rule A.1.35.)

In other words, all of the club’s revenue except the money it receives from the BPL directly—primarily TV money—can be used to increase the salary cap.  In the alternative, the salary cap can be increased by the profit from player trading, or the two combined.  Southampton starts out at a disadvantage relative to the bigger teams who are already receiving European TV money.  But there is nothing that can be done about this.  Instead, Southampton will have to compete by increasing its other revenue.    

In order to figure out where Southampton stands—relative to other BPL teams—I looked at the financial summary of BPL teams published by The Guardian.  The 2012-2013 results are here.

I have taken the liberty of creating this chart.  Amounts are in millions of pounds.

Club                       Match Day          Commercial        Total Non-TV Revenue

Arsenal                 93                           44                           190

Aston Villa           13                           16                           36

Chelsea                 71                           84                           155

Everton                 17                           14                           31

Fulham                 12                           11                           24

Liverpool             45                           98                           143

Man City              40                           143                         183

Man U                  109                         153                         262

Newcastle           28                           17                           45

Norwich               17                           8                              25

QPR                       8                              9                              18

Reading                 9                              5                              15

Southampton    17                           7                              25

Stoke                    10                           8                              23

Sunderland         19                           13                           32

Swansea              10                           6                              16

Tottenham         33                           57                           90

West Brom         7                              10                           17

West Ham           18                           20                           29

Wigan                   5                              2                              12

As I discussed in earlier posts, if Southampton is to compete for Europe, we need to both punch above our salary weight and increase that weight.  Surprisingly, we are not as far from that target as it might appear—Everton is only £6 million ahead of us.  On the other hand, Manchester United, Arsenal, Chelsea, Liverpool, and Manchester City are probably beyond our reach.  For that reason, Tottenham should be our target.  Tottenham has finished fourth twice in recent years.  If Southampton can increase its revenue to the Tottenham level, and continue to do an outstanding job with its academy and transfer business, the club would have a shot at getting into the Champions League some years and would be competitive for Europe in most years.  We would also avoid the annual relegation battle.

One problem with this goal is that it is a moving target.  As my recent post about stadium expansion discussed, Tottenham is planning to build a new stadium which will bring in at least £15.3 million a year in increased match day income and probably a lot more.  Tottenham has also increased its commercial income since 2013, but figuring out by exactly how much is not easy.  I am guessing they have increased it by £10 million, but who knows.  You can check some of the articles here, here, and here. Combining the numbers, Tottenham’s non-TV revenue will hit at least £115 million.  Is there any way for Southampton to grow its non-TV revenue by £90 million?  (Keep in mind that Tottenham will continue to grow their income while we try to do the same.)

I think the answer is clearly no.  Our ability to increase match day income is minimal, if we do not expand St. Mary’s, and I do not believe such an expansion is financially viable at this time.  (See my stadium capacity blog post here.)  Because Tottenham is a London team it has clear advantages in increasing attendance and charging higher ticket prices.  We will never be able to match that.  Plus, they are more famous than us so they are more desirable to commercial sponsors.  We can certainly increase our commercial income significantly, but probably not by £90 million—at least not unless we are appearing in Europe regularly.

This is not to say that significant increases in income are not available.  Southampton can play a more profitable set of preseason friendlies by going to the United States.  If we maintain our league position from last season and our reputation for an attractive style of play we ought to be able to draw crowds in the United States next summer.   While we are unlikely to fill The Big House with nearly 110,000 people like Manchester United and Real Madrid did on August 2, 2014, we can certainly make more money than we did by visiting Brighton, Bournemouth, and Swindon. (Although our preseason schedule certainly prepared us well for the new season and that must be the priority.)

Southampton could try to set up some kind of profitable relationship with a club in the United States.  I would suggest Seattle, Vancouver, Portland, or San Jose. Last year Seattle averaged 38,500 fans per game and their stadium can hold 67,000. A west coast tour could be profitable and create more Southampton fans in the United States.  (Plus, a visit to San Jose or Los Angeles would let me see the team play in person—the highest of priorities.)

More and more people are watching the BPL in the United States.  There might be American sponsors who cannot afford Manchester United, who would like a BPL link.  I am relatively confident the club is already working on this, but that should be a high priority.

It would also help if we had someone paying us to make our kits—although I assume that is the plan and this year was an aberration.

Southampton can increase its income to be more competitive with other established BPL teams like Aston Villa, Newcastle, and Everton.  However, we are unlikely to be able to compete with the biggest teams.  In fact, the only way we can hope to compete with them, at least in the foreseeable future, is by doing what we did this year—selling players at a profit, buying new, good players cheaply, and using the proceeds to fund our academy, our scouting system, and increased salaries for the players we keep. 

However, this limitation is not the result of a glass ceiling created by FFP and the salary cap.  It is a limitation that is imposed by not having a very rich owner who is willing to spend insane amounts of her own money on the team.  If our owner were willing to spend money like Roman Abramovich and Sheikh Mansour, FFP and the salary cap would limit her ability to do so, but there is no reason we should expect her to spend that kind of money.  (Assuming I have read the official club accounts properly, in the fiscal year ending on June 2013, she made a capital contribution of £25,988,244 and bought one share of stock for £11,999,999.  That is a pretty generous contribution to the club although I would avoid characterizing it as insane.  There is no reason to expect that to reoccur every year.)

Going back to the original question which triggered this series of posts, Martin Samuel is right that there is a glass ceiling that blocks our progress, but wrong about it being imposed on Southampton by FFP.  He is right that it is risky to sell good players every year, but wrong when he says we should not do it because it is the only way we can grow the club.