What Cristiano Ronaldo tells us about the economics of football
The 2018 World Cup in Russia may seem like a distant memory, but with less than a month having passed since France lifted the trophy, football fans haven’t had to wait long before the European leagues start to return to action this week. Many will have their eyes on Serie A, Italy’s top league, which played host to the biggest story of the summer: Cristiano Ronaldo’s move from Real Madrid to Juventus.
The Portuguese striker was signed by the Italian giants in July at a cost of €112 million - the sixth most expensive transfer of all time. Ronaldo is considered one of the world’s most marketable athletes, and in the days following his move, the Turin club had reportedly sold €52m worth of club jerseys. Surely that enormous transfer fee would be paid back in no time?
Well, no. To make this assumption would be to ignore the economics of running a football club. Indeed, Business Insider have already shown that Juventus will only receive 10-15% of the revenue from shirt sales, meaning the club would need to sell well over 5 million Ronaldo jerseys before his transfer fee is recouped, and even that wouldn’t cover his wages. The reality is that making money running a football club relies on a complex mix of on-field performances and off-field rights and deals. And this is what makes Ronaldo such a good case study for the economics of football today.
It’s worth thinking about professional sports teams as entertainment companies. While that won’t please the purists, the reality is that the more eyeballs on the product, the more money can be made. There are generally no more than five income streams for a sports team: broadcasting, sponsorship, matchday revenue, merchandising and player sales.
Broadcasting rights are the biggest revenue-generating item on a club’s balance sheet. This comprises broadcasting of domestic games, competition matches, as well as ancillary revenue that clubs can generate, for example by repackaging matchday content or selling subscriptions to an in-house TV channel. Broadcasting revenue tends to be collectively negotiated by the leagues, who then portion it out to the clubs according to their performance. On average, according to Deloitte, English, French and Italian clubs generate at least 50% of their income from the television and radio rights to their games.
Sponsorship makes up 20-30% of a club’s income and can come from deals with kit manufacturers, shirt sponsors or naming rights to stadia. Matchday revenue is generally the next-biggest form of revenue, followed by merchandise and non-sporting income (renting out the stadium or hosting club tours), which together typically make up less than 5-10% of a club’s revenue.
The greatest variance tends to be found in player registrations - in other words, the sale of players. For smaller clubs in lower leagues, selling talented players to bigger teams can be a major revenue stream, while the most prestigious clubs rarely make money from transfers because they can afford to keep players until they are no longer worth holding on to.
However, incurring costs in football seems to be much easier than bringing in cash. Aside from the operational expenses of running a club, after spending significant sums on buying players, the clubs then have to pay their salaries.
Indeed, a rising concern in football is the ratio of wages to turnover. The overall wages to revenue ratio across the main European leagues currently stands at 58%, but other running costs make it difficult to turn a profit in football. Even Manchester United, the highest-grossing sports team on the planet, only generated about €63m of profit on an income well over €600m. According to the latest data, 45% of the club’s turnover was used to pay wages.
So signing a star like Ronaldo isn’t the equivalent of a long ball in football - a quick route to a goal. Rather, it should be viewed as patient build-up play that will result in a series of good opportunities. And over time, Juventus will need to ensure that the costs of buying Ronaldo - his signing fee, salary and the running costs required to keep him at the top - will be outweighed by the money he can help generate.Juventus will start by doing everything to ensure that purchasing Ronaldo will edge their income in the right direction.
Ronaldo is widely considered one of the greatest ever players - aside from the success he is expected to bring, he also comes with more than 300 million followers across various social media platforms, something that Juventus will attempt to monetize by appealing to fans in both established and new markets. The club’s accountants will be hoping that this boosts the team’s broadcasting, sponsorship and matchday income, which together made up over 64% of Juventus’ revenue, according to the club’s most recent financial statements(these components were equivalent to almost 80% of all income in the previous season).
A team that consistently performs well in as many competitions as possible will be able to command a greater share of broadcasting, sponsorship and matchday revenue. This in turn can help attract better players, who hopefully reinforce this winning cycle - helping the club become a money-making machine. And both broadcasting and sponsorship contracts are negotiated in three-to-five-year cycles, so performing well over time puts a club in a good position to negotiate better deals.
Juventus might be the richest Italian club with an income of over €400m, but they still lag behind other European giants such as Manchester United (€676m), Real Madrid (€674m) and Bayern Munich (€588m). It might not be too long before Ronaldo's arrival in Turin shakes up the order of this ranking.
Courtesy : World Economic Forum