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Some more thoughts on the Manchester United business

Last week, my friend Jonathan Pearce made some observations on the impending takeover of the Manchester United football club by Malcolm Glazer. This led to a lengthy comments thread that I was going to add to, but the comment in question got a little long, so I thought I would turn it into a post. In particular, I wanted to address the key question, which is simply is there any way Mr Glazer can get enough revenue from the club to pay of the large debt that has been accrued, and if so, how.

As I see it there are two sources of value in the club that the present management is not presently allowed to exploit, and to make a success of his bid Glazer needs to gain control of at least one of them. One is that television rights are sold collectively, and as a consequence the share of television money that is going to Manchester United as not comensurate with their popularity and fan base. The other is that Asian and particularly Chinese television markets are not presently competitive and as a consequence Asian television companies are paying far less for the right to show football than the matches are actually worth. I will address these two issues in turn. Manchester United gets a far smaller percentage of total TV rights money than it would be entitled to merely by the level of its popularity. Of the various competitions that Manchester United play in, the governing bodies of the two that matter (The Premier League and the UEFA Champions League) sell the television rights of the competitions collectively. The Premier League sells the rights to all its matches in bulk and then shares the money amongst its clubs. So does UEFA. If Manchester United were able to sell the television rights to its own home matches directly to television companies, the club would receive a lot more money than it does now. There have been some mentions in the press that Glazer might try to have this happen, but I chances of this happening strikes me as relatively low.

There have been lots of suggestions over the years that the biggest clubs in Europe might break away from their national leagues and form a super league where they control their own TV rights (and there have been more in recent weeks as the bid for Man U has gone on), but this is always a non-starter. National leagues have too much history and are too important to fans. It might be possible to argue that collective selling of TV rights is anti-competitive, but I don’t think the courts would agree. (Membership of the Premier League is voluntary). And I think a court would probably be susceptible to the argument that the three or four top clubs in England are dominant enough already (whether or not this would have much to do with what the actual law says) . If clubs in the Premier League could sell their own rights, then I believe that about 75% of the total television money would go to the top four clubs, and I tend to think there would be legal and political objections to that, regardless of their merit. (Seriously, think about it. You are a television company. Once you have the rights to the home matches of Manchester United, Chelsea, Arsenal, and Liverpool, what else do you need?)

One might be able to make this argument more strongly in the case of the Champions League, but it wouldn’t help quite as much, mainly because Manchester United aren’t dominant in that competition, having only won it twice and only once in recent years, and not having looked like winning it in any other recent year. Of the 32 teams that play in that competition every year, probably ten have claims to be as big or nearly as big as Manchester United, and another ten are good enough to win it if things go their way. (And Manchester United’s recent record of making the later stages of the tournament isn’t that great). Inevitably, the television money of this competition would have to be divided up in more ways than for domestic football, even in a situation where clubs were permitted to sell their own television rights. (And in any event, bigger and more successful clubs get more money than smaller and less successful ones do now, although the means for dividing the money is perhaps a little eccentric, depending as it does on performance in national leagues).

Which is not to say that Manchester United’s share would not increase considerably if they could sell their own television rights. It would, but not as much as it would if they could sell the rights to their own home matches in the Premier League. But in any event, once again I think the political and legal objections are likely to be too great for there to really be much chance of that happening. UEFA gains its power in the labyrinthine world of football politics largely through the television revenues of the Champions League,and saying it wouldn’t give this up without a fight is a vast understatement. Of course, one possibility would be for the top European clubs to break away from the Champions League and instead form their own international competition, but if they did that UEFA would try very hard to prevent them from playing in national leagues as well. While I think if UEFA tried to do this and the clubs challenged it in court the clubs would win, it would be a dreadful fight, and at least ten of the top European clubs would have to act in concert in the first place for this to happen. And I think many of them would shy away from trying it because of the size of the fight that would be involved.

So, while I do see hidden value in England and Europe for Manchester United, I can’t see any great way for Malcolm Glazer to extract it. My Samizdata and ubersportingpundit colleague Scott Wickstein commented on the Glazer takeover of Manchester United a week or so ago, and he observed that he thought that the takeover would have worked a decade ago, but that now is too late. His argument there was essentially that European television changed in the 1980s and 1990s with the rise of private television companies (particularly pay television companies) in competition with the traditional cozy state owned and state regulated television stations, which meant suddenly that football leagues and clubs could extract something like the fair value of their television rights, whereas previously they had been in markets where little money was paid for television rights due to a lack of competition due to state ownership and state regulation. (At the same time, football clubs and teams got a lot of media and marketing related expertise from the television companies in general, and this led to them marketing themselves better in other ways, such as getting more money from merchandising replica shirts and the like).

Scott’s point is that there was lots of hidden value in Europe in 1985, and that there was money to be made by people who noticed this, but that this is now being extracted and this is priced in. And after considering the sort of stuff above, I tend to think that he is pretty much right.

But Europe isn’t the whole world. The question is whether there is value outside Europe that can also be extracted. And that is the second point that I want to discuss. The popularity of football in East Asia (especially Japan and China) is often commented on, and it is certainly true that diehard fans in Manchester often do not realise this. As someone who is (a) a Manchester United supporter, although not a very avid one and (b) an Australian, I found myself discussing this with a few locals in a pub in Manchester last year. In particular they had no idea that a major reason why Manchester United games often kick off
around midday is that this is peak television viewing time in east Asia. (In the case of Saturdays, this also has to do with the FAs rules about what time live television broadcasts of matches are allowed in Britain).

So the Asian following is real, but the question that needs to be asked is whether clubs are actually making any or much money from fans in these markets. And the truthful answer to this, perhaps surprising given the level of exposure of the clubs in this markets, is actually “Not much”. In terms of merchandising, the Asian market is far smaller than that of Europe, at least partly due to tremendous amount of counterfeit goods being in circulation. (This will change as certain markets get richer, but this will be over a longer timescale than Mr Glazer’s). In terms of media rights, things may happen faster. lack of competition in the Chinese TV market means that although lots of people watch Premier League football there, the rights are bought by state controlled television networks that do not face competition in bidding for the rights, and so which get them for close to nothing. The rights are probably worth quite a lot in terms of advertising that they generate – the Chinese middle class is at this point in the hundreds of millions, depending on how you measure it – but little of this is flowing through to the clubs. The question is whether it is possible to make some of it do so within a relatively small number of years. That means competitive auctions for rights in China.

This doesn’t strike me as impossible. In India, multiple bidders now bid huge amounts of money for the rights to cricket matches. India is still a lot poorer than China. (Of course, India is also a lot freer than China, which means that the Chinese government is rather more concerned with controlling the media than is the Indian government). But in financial terms, if it can happen in India, then it can surely happen in China. And if it does, the money is potentially a lot more. But “a lot more” is still relative. The Chinese middle class is still a lot poorer on average than the population of Europe. The total amount of television money that could come from China in the immediate future, even in a free market, is a lot less than can come from Europe. Probably if the television rights were sold collectively in China and Asia, Manchester United’s share would still not be enough to pay for Mr Glazer’s debts, even if the rights were sold in a free auction.

But there is still another side to this. If we had a free market in television rights in China and Asia, and Manchester United and other British clubs were allowed to sell their television rights individually rather than collectively, then the total amount of money that Manchester United could gain might just compare favourably with their television income in Britain. There are quite a few big ifs in there, but if all this were to happen then I could see Manchester United’s income increasing dramatically and the club being worth what Mr Glazer has paid and more. This does strike me as more feasible than the various other possibilities. The Premiership is more likely to be willing to give up collective selling of TV rights for Asian markets, because firstly it doesn’t make much money now and it doesn’t really know how much they are worth. Secondly, there is scope for competition between European Leagues here. If Real Madrid are free to sell their TV rights individually in China, then Manchester United can plead disadvantages against its European rivals as an argument as to why it should have similar freedom. There are relatively few short term losers in making such a change, which is why it is more possible.

But the question is whether this can all happen in a short period, that is within five years. If it can, Mr Glazer might make money – conceivably even a lot of money. He needs help from someone to free up the Chinese television market. The obvious person is actually Rupert Murdoch, who has extensive Hong Kong based Asian satellite television interests, and who has been sucking up to the butchers of Beijing for years now. Murdoch himself attempted to buy Manchester United a few years back but was foiled by British competition authorities. It may not be that Glazer and Murdoch like or even know each other, but now that Glazer owns the most valuable football club in the world, they certainly do have common interests.

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5 comments to Some more thoughts on the Manchester United business

  • Well you know more about China then I would, but I put it to you that a lot of Manchester United’s support in the Far East is predicated on two things- the club’s success and David Beckham. Both of which are now gone.

    I suppose with clever marketing, they could make Christiano Ronaldo something of a new poster boy, but without an infusion of new talent they are not going to be able to keep up.

    Glazer is massively leveraged just to buy the club; they are going to have to squeeze the pip to keep the bankers at bay; where are they going to get the money to buy/develop new players?

    The sums just do not add up. Glazer’s problem is that he’s (just) rich enough to own Manchester United, but he’s not rich enough to make a success of it.

  • James Dudek

    Michael you wrote: “India is still a lot poorer than China. (Of course, India is also a lot freer than China, which means that the Chinese government is rather more concerned with controlling the media than is the Indian government).”

    Are you certain that India is (or ever was) a lot poorer than China?

    Do you have any idea of the penetration of satellite TV in India versus China? Are we overlooking India as a market for Football – It is the second most popular sport there after cricket, which still means it is HUGELY popular.

    It’s my understanding that the Indian population is growing faster than the Chinese and so soon India will be the most populous country in the world.

    Thoughts on India as a market?

  • toolkien

    Soccer has already been added to the scroll at the bottom of ESPN News here in the States. There already has been some adverts for Soccer more broadly on other cable stations. I sense a big push coming in the media (including MISL the indoor soccer league) for soccer in general. I think the big wigs see a whole generation growing into their early twenties who have grown up on playing soccer and see a potential market. So, if the US is involved, and a even a portion of the ad revenue pie is allocated to soccer, it could go a long way in boosting Glazer.

    But, IMO, the average viewer finds soccer boring. Baseball, considered by many casual folk as boring, is declining in many markets and contraction is always a possibility. American Football is still popular as ever, but the contracts are overextended as is and they take up so much of the sport advertising dollar and aren’t going to want to give it up, so if they feel any heat they will fight back and any soccer coverage will be pushed off onto late night ESPN or NBC.

    Suffice it to say that international soccer is likely to be about as popular as NFL Europe is in Europe and the funds needed from the US market will not materialize.

  • John K

    I think this is a reasonable view of the situation. It is very hard to see how Glazer can hope to run the business profitably with the level of debt he has taken on. He has no background in football, or the way in which the game is run and financed in Europe. If he thinks things will change to suit him, he will be disappointed.

    I would expect that in future European football will make money from the sale of TV rights to India and China, but I cannot see this happening on a timescale which will help Glazer, as he only has 5 years before he needs to start repaying the bondholders. Utd might be able to cover the interest on these bonds, but how they are expected to repay the principal I do not know. Even a sale and leaseback of Old Trafford will not raise enough cash.

    What really galls me about this awful business is the way in which a profitable and solvent company can be taken over by a predator using borrowed money, who then transfers his debt on to the company he has bought. Things like this are a disincentive to companies who do not wish to leverage their balance sheet. If Utd had had huge debts, Glazer would not have been able to finance his bid. His debt fuelled takeover only worked because his target company had no debt. Now, the company has a massive debt, incurred purely for the joy of having Glazer as its owner. There is something about that which does not seem right to me.

  • great post, i like Manchester United very much