Kieran Maguire, a lecturer in Economics, Finance and Accounting at the University’s School of Management, discusses the factors involved in the increase of spending during the recent summer transfer window.
“The 2016 summer transfer window closed at 11pm on August 31st with a record amount spent by English clubs of nearly £1,150 million during a two-month period. This far exceeds the previous record of £870 million which arose in 2015.
There are a number of factors that caused this huge increase in expenditure.
Money in = money out
Most football clubs get their income from three sources, broadcast, commercial and matchday.
This season, broadcast income has been boosted in the Premier League due to the new domestic TV deal with Sky and BT, as well as increased money from overseas TV rights.
This has increased the money in the Premier League by about £35-50 million per club, depending on where the club finishes in the table. The club that finishes bottom of the Premier League will earn more TV money in 2016-17 than the Champions Leicester earned in 2015-16.
It also means that of the 30 largest clubs in the world in terms of revenue, all 20 Premier League clubs will feature in the list.
This results in what are considered to be small clubs domestically such as Crystal Palace, Swansea, Burnley and Bournemouth now have greater revenues than famous European clubs such as Ajaz, Porto, Galatasaray and Napoli.
All this extra money in the game does not increase the number of players available to buy, merely means that there are more clubs willing to buy their services at a particular price point. Where demand exceeds supply, as any economist will confirm, prices rise.
Therefore a player who a year ago might have cost £8-10 million will now be priced at £25 million, as Everton found when signing Yannick Bolasie, a solid but unspectacular winger. Similarly Liverpool managed to sell Christian Bentecke for £32 million, despite being deemed a flop at Anfield.
Players are not three times as talented as a year ago, but the benchmark price for a Premier League regular has due to selling clubs being aware that buyers have far more money to spend.
The fourth dimension
Some clubs have an additional source of income, in the form of their owners. Over the last decade or so Chelsea and Manchester City have benefitted from billion pound investments by Roman Abramovic and Sheikh Mansour respectively. This has resulted in success in the form of trophies won both at home and in Europe, although both clubs have suffered significant financial losses during that period.
In the last 18 months a number of clubs have had either new owners or new investment, including Swansea, West Bromwich Albion, Aston Villa, Wolverhampton Wanderers, Bournemouth, Palace, Manchester City, Everton (and somewhat bizarrely Morecambe). Hull City and Liverpool are attracting interest too.
One common feature of all the new owners are that they are from overseas. Some (not all) had further funds earmarked for fresh player signings, which meant that player prices were driven upwards once more.
Mind the gap
The 20 clubs in the Premier League made a collective operating profit of £546 million in 2014/15, the last year for which we have accounts. This figure is likely to rise in 2016/17 due to the new broadcasting revenues.
One division below, in the Championship, clubs made an operating loss of £225 million in the same period.
The gap in terms of broadcast revenue is the main difference between the two divisions, averaging £125 million in the Premier League compared to £7.5 million in the Championship.
Chairmen of clubs in the Championship are desperate to join the elite, and share the financial and status benefits of being in the top league. To do this they have to spend, and spend big.
The clubs who were relegated from the Premier League last season, Newcastle, Aston Villa and Norwich City, have the benefit of what is referred to as ‘parachute payments’ from the Premier League, worth about £40 million. This had resulted in these clubs creating record fees for players signed in the Championship over the summer, with Villa, for example, spending nearly £30 million on two strikers who have never played in the top division.
The Brexit effect
Whilst the economic impact of Brexit has in many respects been better than anticipated to date, one consequence has been the fall in the value of sterling against other currencies.
This has increased the price for English clubs when buying players from abroad. In July 2015 £1 would have bought €1.42, compared to €1.17 a year later. Therefore when Manchester United signed Paul Pogba, France’s third best midfield player at the Euro 2016 Championships, for €105 million, this cost everybody’s favourite Cayman Island registered, NASDAQ listed Portuguese Managed, American owned club £89 million, whereas 12 months earlier the fee would ‘only’ have been £74 million.
In theory other European clubs would be keen to sign players from England, due to the exchange rate moving in their favour, but the high wages on offer in the Premier League have made this less beneficial.
Can the bubble continue?
We believe that there is scope for the current level of expenditure to be maintained or increased for the short/medium future.
The benefits that are brought to media companies by having exclusive Premier League TV rights are substantial in term of acquiring and keeping subscribers, who seem willing to pay ever increasing monthly subscription fees to see the product on display.
With overseas rights becoming increasingly important (overseas rights represent 40% of the total of £8 billion generated by the Premier League 2016-19, compared to less than 5% when it started in 1992/3), and demand in countries such as the US, India and China still relatively untapped, then expect to see billion pound summers being the norm rather than the exception.”