Sponsorship Revenue of Football Clubs

Introduction to the business of Football Clubs

Firstly, it needs to be said that Football is not a profitable industry as such. It generates a lot of revenue (it is a big ‘money spinner’ – according to the Deloitte ‘Money League’, for a football club to gain a place as one of the top 30 highest revenue making clubs in the world, it had to generate in excess of €100m), but very few football clubs actually make a profit every year.

Even where profit is made, very few clubs pay out dividends to the owners. Usually profits are reinvested into the football club for use in paying wages, player transfers and other expenditure. (Football clubs generally spend about 60-70% of their revenue on wages, and sometimes a sizeable amount in paying transfer fees to recruit new players.)

Taking the example of Chelsea FC, their most recent figures for revenue in the 2012/13 financial year was €303.4m, yet they had a pre-tax loss of around £49.3m. Similarly, Manchester City had revenue of €316.2m, yet made a loss of over £90m for the same financial year. In fact the 20 English Premier League clubs made a loss of £291m collectively in 2012-13. Only 8/20 PL clubs recorded a profit in 2012/13, most of this being nominal in comparison to the size of the revenue.

Clearly Football is not a business where the owners invest capital for short-term gain, or sometimes for any direct gain at all.

In fact, since the introduction of the Financial Fair Play rules by the European governing body UEFA, which ultimately mean that the owners of a football club cannot inject capital freely into the clubs they own (so as to promote self-sustainability of the football clubs), the amount of money that clubs can ‘borrow’ from their own owners has decreased.

The sources of Revenue

There are three main ways in which a football club ‘makes money’:

1. The Matchday revenue and merchandising (for example through the sale of tickets and other related packages that all adds to the match-going experience)
2. Broadcasting income
3. Corporate sponsorship

Out of the three main sources of income, Matchday revenue is stagnating. Football clubs have already been charging very high prices, hence much further increases are not possible without driving fans away from the stadiums.

Broadcasting revenue is rising rapidly, with the broadcasting rights to live football matches being bought by TV companies for ever increasing amounts of money – recently Sky and BT spent £3.018billion on the right to show live Barclays PL matches until 2016. Most of this money will be paid out to the clubs on a sliding scale depending on the position they finish in the League up until the 2015/16 season.

Sponsorship:

However, our focus is on probably the most lucrative of the three types of incomes: corporate sponsorship.

As the popularity of the sport has increased, all the major companies of the world want to be associated with the sport so as to increase the exposure of their own brand to the football fans. The companies are willing to spend a lot for the chance to be associated with football.

It is not just football clubs who are sponsored by the large companies, but the football competitions themselves have major sponsors which are their main source of revenue. For example the English premier League is sponsored by Barclays, the rest of the Football League (making up the lower divisions) is sponsored by Sky Bet, the FA Cup is sponsored by Budwiser, the League Cup sponsored by Capital One, and the UEFA Champions League has 6 major sponsors including Gazprom, Sony and Heineken.

Commercial sponsorship is a major part of the revenue of the clubs. For example, 55% of German Club Bayern Munich’s revenue of €303.4m is generated from commercial activities. Furthermore, PSG’s (Paris St Germain) commercial revenue of €254.7m is the record amount a football club has ever earned in one season through sponsorship related streams.

The major methods of sponsorship in football are usually:

• Selling the naming rights to stadiums (for example Arsenal have been receiving major sponsorship revenue from Fly Emirates in consideration for naming their stadium the Emirates Stadium until 2028. Similarly, Manchester City receives sponsorship revenue in exchange for naming their stadium the Etihad Stadium, and Bayern Munich also receive sponsorship income due to selling the naming rights to their stadium to German Insurance giants, Allianz).
• Kit sponsorship (all clubs are sponsored by major kit manufacturers in order to wear kits produces by them. Currently the largest deal is Chelsea FC’s Adidas sponsorship of £30m per year for the next 10 years, though Manchester United are close to agreeing a larger deal).
• Shirt Sponsorship (Clubs sell the right to advertise the logo or name of a company in their football shirt).
• There are also many other minor sponsorship methods. For example a club may have a designated airline, designated energy partner, etc. However, the amount of revenue the club receives from these minor sponsors, is much less than the amount received from the major methods of sponsorship.

Stadium, kit and shirt sponsorship decisions are purely commercial decisions. The sponsor will obviously want the link to the football club and the exposure that comes with it for as little money as possible.

The football club will want as much money as it can get in order to remain competitive off the playing field. Though the football club will want the security of securing a sponsorship deal on the long-term, it needs to be aware that the deal could become outdated in a short period of time (in the sense that other clubs may agree much more favourable sponsorship deals in the meantime). Therefore the length of the sponsorship deal is probably as crucial a negotiating point between the club and the sponsor as the amount of sponsorship money.

Shirt Sponsorship – Restrictions and Future Developments

Spanish club Barcelona FC were the first club to actually pay an organisation (the charity UNICEF) £1.25m-a-year in order to display their name on their shirt. This deal was recently extended until 2016, however, Barcelona has moved the name and logo of the United Nations Children’s Fund to the back of the shirt and replaced them from main shirt sponsor after agreeing a sponsorship deal with Qatar Airways that earns the club €30m per year for three years.

Barcelona were also the first club to sell an advertisement space on the inside of their football shirts displaying the trade mark ‘Intel Inside’ belonging to computing company Intel.

However, football clubs are restricted on how much advertisement they can display on their playing kits. Though Spanish clubs like Barcelona are permitted to display numerous advertisements on their kits, the FAPL in their Kit and Advertising Regulations prohibits more than 200 cm² of advertisements used on the front of the shirt and no more than 100 cm² on the back of the shirt, the back of the shorts and on the socks comprising the football kit. This does not include the logo of the club itself and the logo of the kit maker which may be additionally displayed.

However, it is clear that a club is restricted in the amount of advertising space it can sell to sponsors, and a football club playing in England could not follow Barcelona’s example and sell advertisement space on the inside of their shirts. The FAPL reserve the right to issue disciplinary proceedings against any club that breaches the advertisement rules.

In the future, in order to increase sponsorship revenue, football clubs may become more creative: maximising advertisement whilst staying within the rules. One possibility could be to sell advertisement space on the tracksuits worn by players before the start of the match. Another, as Manchester United has recently found out, is to sell the right to advertise on their training kit (Manchester United’s training kit sponsor is Aon). However, the exposure of the companies through these means is minimal, so this is unlikely to become another major type of sponsorship income.

By Andi Terziu

Does the prevention of Third-Party Ownership of Footballers in England breach Competition Laws?

In this article I will focus on third-party ownership (‘TPO’) of football players and will analyse whether the prevention of the phenomenon in England whilst it is allowed in other EU Member States breaches Article 101 of the Treaty on the Functioning of the European Union (‘TFEU’). To understand TPO, it must be stressed that there are different rights that arise out of a footballer’s contract with his club. According to the Court of Arbitration for Sport (‘CAS’) decision in the case of Espanyol v Atletico Velez, there are distinctive federative and economic rights in relation to all football players. The first right refers to the club’s ability to register a footballer into the national league or federation so that the footballer can play in the official competitions of the said federation. The club gains this right automatically as a result of the employment contract it has entered into with the footballer. At the same time, the club has the right to sell the player’s registration to other clubs for a transfer fee (‘the economic right’). This economic right can be assigned partially without affecting the federal rights. In simple terms, TPO refers to the concept of the economic rights of a footballer (or a proportion of it) being owned by a non-footballing entity (such as an investment fund). The entity owning the economic rights would then ‘loan’ the player to a club (that is, the club would register the player’s federative rights) so as to give the player the highest exposure possible. As such, with the player progressing and his transfer value increasing, the entity will be able to sell the economic rights to another club at a large profit.

TPO originates from less economically developed countries in South America where football clubs cannot compete with the wages on offer to young players in Europe. Therefore this led to the conception of non-footballing entities that sponsor the football clubs in return for ownership of the economic rights of the most promising footballers. By selling proportions of the economic rights to third parties, these clubs can raise finance and still manage to keep hold of the talent for longer periods. As a result they may be able to offer higher wages to players and therefore provide enough of an incentive so as to delay the departure of the player to more prestigious clubs in Europe. The phenomenon of TPO has also become widespread in European football, with clubs in Portugal and Spain in particular regularly fielding players owned by investment funds. For example, famously a large proportion of the economic rights of Colombian striker Radamel Falcao was owned by GestiFute fund, a subsidiary of Quality Football Ireland Ltd, whilst he was registered to and played for Spanish club Atlético Madrid. As a result, GestiFute fund received a substantial percentage of the £55m transfer fee that was paid by AS Monaco during the summer transfer window of 2013. Similarly the Benfica Stars Fund owned 25% of the economic rights to Brazilian defender David Luiz, and received 25% of the transfer fee that Chelsea FC paid to sign the player from Portuguese club Benfica.

Though TPO is capable of benefiting many football clubs, it is prohibited in some European leagues such as the French Ligue 1, English Premier League, and the Polish Ekstraklasa. For example in England TPO is prohibited by the Football Association Third Party Ownership Regulation. In fact the English Premier League has set the precedent that clubs fielding TPO players will be fined heavily, as was shown when West Ham United received a fine of £5.5m for fielding Javier Mascherano and Carlos Tevez who at the time were partly owned by Media Sports Investments, Just Sports Incorporated, Global Soccer Agencies and Mystere Services Limited, all entities that were ultimately beneficially owned by football ‘fixer’ Kia Joorabchian. The fact that TPO is allowed in some of the EU countries but prohibited in others means that there are issues of competition being distorted.

Article 101(1) TFEU prohibits a decision by associations of undertakings which may affect trade between Member States and which has as its object or effect the prevention, restriction or distortion of competition within the internal market. The Football Association Premier League by definition is an association of English football clubs who compete in the highest tier of English football. A decision by the FAPL to ban TPO players from playing for their affiliated clubs is clearly a decision that falls within Article 101(1). The trade of football clubs has been held to include transfer dealings (i.e. for tax purposes the transfer of players which involves a transfer fee is trade and not the acquisition of capital), and English Clubs regularly ‘trade’ with football clubs based in other EU Member States, so the regulation banning TPO in England is capable of affecting trade between member states. Article 101(1)(d) states that where the agreement leads to the creation of dissimilar conditions for some undertakings to equivalent transactions with other trading parties, and the said undertakings are placed in a competitive disadvantage, then competition in the internal market would be distorted.

The effect of the ban of TPO of players in England is that the English clubs are at a competitive disadvantage to other continental clubs in light of the Financial Fair Play Regulations (‘FFPR’) that have been introduced by the European football governing body UEFA in order to restrict the amount of money that can be spent by football clubs to within their revenue. For the purposes of the FFPR, amounts spent by a club on a player are amortised over the length of the contract of the player. For example if Club A signs Player X for £50m and ties him to a contract of for 5 years, the value that appears on the books of the club for each of the 5 years is £10m in relation to the sum spent on the player. Now, if the player had been partly TPO and a Portuguese or Spanish club signed him, then they could register the player without purchasing the share of the economic rights owned by the third-party fund. In modifying the scenario above, imagine Club B signs 75% of Player Y whose market value is £50m on a 5 year deal, with Investment Fund 1 keeping hold of the remaining 25% of the economic rights of Player Y. The value that Club B would need to put in their books in relation to the purchase of Player Y in this scenario, would be £7.5m per each of the 5 years during which the contract will run. Though Club B would need to account for how much of the player’s economic rights they own, and must disclose the identity of the owner of the rest of the rights, they are at a clear advantage compared to Club A. If Club A and Club B have the same exact revenue, for the same year, Club B would be able to spend more money on player acquisitions that Club A and still remain within the FFPR. This means that competition between the two clubs will be distorted.

What are the implications of this potential effect of the ban of TPO of players in England? First of all, English football clubs may be able to argue that the ban by the FAPL to TPO affects them by applying the above argument. Moreover, investment funds involved in TPO may also challenge the ban of TPO in England as it prevents them entry to the English market (i.e. they cannot sell their players to English clubs directly). As a result it is possible that the ban can be uplifted if it is challenged. The alternative would be for TPO to be uniformly banned in all EU states. UEFA has acknowledged the possible competition issues, and president Michel Platini has recommended complete prohibition of TPO in UEFA affiliated associations. However, for the foreseeable future, until TPO of players is completely prohibited uniformly, some clubs will be at a competitive disadvantage to others.

By Andi Terziu

Buy-out Clauses in Football Players’ Contracts: A means for greater player freedom?

Since the commercialisation of football in the late 19^th Century, the sport has continuously grown so as to become an industry which attracts a lot of investment and generates massive revenue. Due to the huge financial stakes the issues in football which have legal implications become relevant for discussion. Though there has been wide discussion on the employee status of footballers, and the relationship of employment law with the sport, some modern aspects of a footballer’s contract have not been discussed. One such aspect is the buy-out clause. This type of clause is theoretically supposed to allow greater freedom to footballers, something which has been the goal of the players’ trade unions since long before the famous Bosman case was decided. However, in an age when the footballer has a stronger bargaining position vis-à-vis the club he plays for, the use of buy-out clauses is still rare in English football. The buy-out clause is seen to be advantageous for the player because it is an agreement between him and the club that the payment of a specified sum will be enough to release the player from his contract. As such the buy-out clause is capable of forming the basis of a quantifiable measure of damages due to the club for a breach of the playing contract by the footballer.

The football world governing body, FIFA, has recognised this and Article 17(2) of the FIFA Regulations on the Status and Transfer of Players states that the damage for a breach of contract ‘may be stipulated in the contract or agreed between the parties’. However the Court of Arbitration of Sport (‘CAS’), which has jurisdiction over sporting disputes, found in the important case of Matuzalem that there is a clear distinction between buy-out clauses (an arrangement between player and club to quantify damages in the event that the player unilaterally breaches his contract) and what is referred to as ‘minimum transfer fee’ (clauses which are the minimum a club would accept in a transfer for a player). Therefore, though a clause that obliges a club to accept a transfer offer for a player is not recognised by the authorities of football, an agreement between the club and player that the payment by the player of a certain sum would release him from his contractual obligations is recognised. But if FIFA does recognise buy-out clauses, why are they not used more widely in English football?

            One major issue with the buy-out clause is the belief that this type of clause would be unenforceable in the English courts. In English law, though the courts have allowed parties to pre-agree damages for a breach of contract, they have taken it upon themselves to limit the use of penalty clauses. The English courts have generally held that a clause imposing the obligation on the defaulting party to pay an extravagant sum for the breach of contract is a penalty clause and hence is void and unenforceable. Conversely, a genuine pre-estimate of damage would be an enforceable liquidated damages clause. It must be noted that a pre-estimate of damages does not need to be a correct prediction of the damage that will be caused by a breach; it must simply be a genuine attempt to estimate the amount of damage likely to occur to the innocent party. It is unclear what would constitute a ‘reasonable’ pre-estimated damage calculation for a football contract. The value of a player in footballing terms is usually determined by the market , and so is not quantifiable. In most cases the transfer value of a player is much higher than the value of his contract to the club, so it is difficult to establish what the actual damage to a club is, if a player does not honour the terms of his contract. Most clubs, if they are to agree to include a buy-out clause into the footballer’s playing contract, will demand that they set the value in the clause. Hence, they usually set the value to the perceived market value of the player (or sometimes even higher than this). Because of this, the values usually contained in buy-out clauses are extravagant sums. As a result, a buy-out clause containing the ‘transfer value’ of the player is more akin to a penalty clause than a liquidated damages clause.

             However, the English Courts are generally unwilling to conclude that a clause is oppressive, particularly when it has been agreed by two parties with equal bargaining power, and it can be argued that in the current age of superstar footballers, some players at the top of the game have equal bargaining power with the clubs they play for. Also if the agreement is such that the player will pay monthly sums (the damages spread over time) for terminating his contract, the courts will be unable to find this to be a penalty clause even where the overall sum agreed is equal to a transfer fee and not therefore a true attempt at calculation of damage. This suggests that there could be ways for players and clubs in England to make use of enforceable buy-out clauses. Indeed in recent times, though the terms of footballers’ contracts are usually confidential, there have been confirmed reports in the press of the use of buy-out clauses in the contracts of footballers such as Demba Ba and Joe Allen, though the enforceability of such clauses has not actually been tested.

Another problem with buy-out clauses is the fact that it is not clear whether they actually offer any greater freedom to footballers. In Spain, where it is a requirement by the Real Decreto 1006/1985 of 26 June (For the Regulation of the Employment of Professional Sportspeople) for buy-out clauses to be inserted in every player’s contract, Spanish clubs insert over-inflated buy-out fees on the player’s contracts so as to deter other teams from bidding for their important players. For example, according to information released from the clubs themselves, Portuguese star Cristiano Ronaldo has a €1Bn clause in his contract with Real Madrid, and star players Lionel Messi and Sergio Busquets have €250m and €150m value buy-out clauses respectively in their FC Barcelona contracts. Clearly the large value of these buy-out clauses make it very difficult for the players to leave the club and are therefore of no assistance to a player who becomes disillusioned in his current employment and wants to leave. But not every footballer is a big star with an almost priceless transfer value. Most players are affordable in football market terms. Could buy-out clauses work widely for these players?

The fact is that there are problems even where buy-out clauses include reasonable values for the players. Privity of contract ensures that only the footballer and the club he plays for are party to the playing contract. As such a breach of the terms of that contract, that is, by the player deciding to leave the club early, would lead to the player being liable primarily. Despite earning large sums, most footballers would not have the capital to pay for their own transfer value and therefore release themselves from their playing contract. It is therefore the prospective club they want to play for who would need to fund the release of the player. As stated above, the buy-out clause has been distinguished from a ‘minimum release clause’ by the CAS; therefore an offer equal to the buy-out value does not have to be entertained by a club if the bid is hostile. That is, if the club is not prepared to sell a player they will refuse to do so, regardless of an offer equal to the buy-out value being made by another club. As a result, the player seeking to move may have to apply to court to enforce the clause. This will inevitably take time; not an ideal scenario for players seeking to move immediately. Furthermore, as it is the player that has to pay the buy-out value to release himself from the contract, any money given to the player by a prospective club, will be treated as income for tax purposes. Therefore any amount given to the player to release himself would be liable to income tax as soon as it is received by him. Once tax is removed, the value would diminish and there would not be enough to pay the release sum, unless the prospective club is willing to fund the tax liability as well. As such, unless the club is willing to allow their player to leave, the value of the player could escalate to above market value. This makes the use of buy-out clauses unattractive commercially, and explains why they are not used widely. Though the concept of the buy-out clause is attractive to footballers, not many would make an effort to negotiate the insertion of such a clause into their contract as it may not really be of much help in the future.

 

By Andi Terziu