There is no avoiding the issue – Sport is Big Business

The English Premiership is the most successful football league in the world in commercial terms, thanks in part to satellite television and the exposure created by BSkyB. Supporters of the game may wish at times that this was not so and that the ‘beautiful game’ was left unsullied by business imperatives and realities, but this is like harking back to the good old days of amateurs competing in the Olympics. What really matters to most clubs in the Premiership is the bottom line rather than the goal line. In February 2010, I wrote in my blog about the perilous state of Portsmouth football club who were on the brink of administration. In that post I made the following statement, which is as true now as it was then:

No business, whether a bank or a fashion house like McQueen, can spend more than it earns for a long period. If costs are higher than revenues there will come a time when the business is financially unsustainable. A business may represent the heart and soul of a community or be the brand choice of Hollywood stars, but if it fails to make a profit it is dead.

At the time of the post, Portsmouth owed millions to the tax authorities and could not find the cash it required to pay these debts, nor secure a new buyer by the 25 February deadline set by the court representing its creditors. On 26 February 2010, Portsmouth went into administration and insolvency specialist Vantis was appointed to prepare a statement of the club’s assets and liabilities, which did not make good financial reading. On 17 March, Portsmouth were docked nine points for entering administration, relegated from the Premier League as a result and the administrator Andrew Andronikou revealed that the club would be looking to start the following season with a whole new squad. In May the manager, Avram Grant, resigned and later joined West Ham United as their new manager. So why bring this up again? Well yesterday, my beloved West Ham United were themselves relegated from the Premiership. In itself, my despair is of little relevance to you; what is of interest is the business black hole the club finds itself in, which goes further to support and illustrate the contention that ultimately sport’s clubs remain businesses governed by the same rules as any other business. Indeed, the cases of Portsmouth and West Ham football clubs provide excellent business case studies.

Sport is unable to extricate itself from financial realities and it operates in the same external environment as do other businesses. The recession and the credit crunch affected West Ham United particularly badly, because in 2006 they had been acquired by Icelandic owners, Eggert Magnússon and Björgólfur Guðmundsson who had plans to transform West Ham into a top-four club. Guðmundsson, the majority owner of Landsbanki, the second largest company in Iceland was ranked by Forbes magazine in March 2008 as the 1014th-richest person in the world, with a net worth of $1.1 billion.  Magnússon and Guðmundsson spent money at West Ham like it had gone out of fashion, buoyed by the same misguided optimism that prevailed in Icelandic financial markets at that time. New players were bought at inflated prices and offered wages that were completely unjustified for a club of West Ham’s size and revenues.  The world credit crunch saw a spectacular economic collapse and the crash of the Icelandic banking system, most notably Icesave and its parent company, Landsbanki. In 2009, Guðmundsson was declared bankrupt by the Icelandic courts with debts of almost £500 million. What followed was an unseemly game of pass-the-parcel, where the parcel contained something no recipient actually wanted – West Ham United. In June 2009, Icelandic CB Holding which is 70% owned by Straumur-Burdaras bank took over Hansa Holding, whose only asset was West Ham United and soon they too had to file for bankruptcy protection. As a result, Straumur were forced into a ‘firesale’ and, in January 2010, David Sullivan and David Gold acquired from CB Holding, a 50 percent share in West Ham for what was reported to be a very low sum, giving them overall operational and commercial control of the club.

Premiership clubs certainly have some unusual, and perhaps some may argue, unique features. There may be no other industry where the wage bill is such a high percentage of the total costs of the businesses within it. The majority of a Premiership squad are millionaires in their own right. Kieren Dyer, for example, who has played few actual games for West Ham because of long-term injuries is said to be worth £14million, up by £2m from last year, and shares 64th place in the Sport Rich List recently compiled by the Sunday Times, yet is still paid an astonishing £83,000 per week. The problem is that few football clubs manage to break-even over a season with the revenues of the majority of Premiership clubs significantly lower than their total costs, swollen by spiralling wage bills, which require ‘hobby’ owners to finance the deficits. Indeed, while the Premier League received £1.9 billion in income during the 2009 season, £1.3 billion of this was spent on wages. Even the largest clubs such as Chelsea and Manchester United rely on the largesse of their owners to survive. For example, at the end of  2009, Russian billionaire Roman Abramovich wiped out £340m ($546m) of debt at Chelsea football club, reducing Chelsea’s burden of debt to Mr Abramovich from a peak of a staggering £760m to almost nothing. Mr Abramovich converted £340m of interest-free loans owed by the club to him into equity. Nonetheless, Chelsea fans could not contemplate a situation where the owner decided to walk away from the club, as it simply could not continue to compete at the highest level without his on-going financial support.

 

The financial cost of relegation will be huge for West Ham, who reportedly have the eighth highest wage bill in the Premiership. More than half of West Ham’s 2009-10 turnover of £71.7m came from Premier League revenue distributions.  The minimum £40m of television and central sponsorship income for the bottom club this season will be exchanged for a £16m ‘ parachute payment’ season next.  Gate receipts, commercial and merchandising income, worth £33.1m in the past financial year, will also drop. Matchday, commercial and sponsorship revenues could fall by as much as £20m. England internationals Robert Green, Scott Parker and Carlton Cole are likely to be sold to make up some of the shortfall and other contracts will not be renewed. This may make financial sense in the short term, but in selling the club’s prized assets, the chances of returning to the Premier league becomes more remote as this process could be compared to a major manufacturing company selling its recently purchased high technology equipment and replacing it with well used, poorer quality machinery. David Sullivan, one of the co-owners of West Ham described the prospect of relegation as “absolutely horrendous – like Armageddon”. Now that the club has been relegated, it is likely to need a further injection of loans from the present owners of between £20 and £40 million to keep it afloat. If the owners walked away from the problem now, there would be no bank in the world willing to prop the club up with further loans; which begs the question whether this is RIP for West Ham United?

Class Assignment

Ask your students, individually or in groups, to investigate the finances of a major sport’s industry in your country and write a jounalist-style article, which:

  • compares the incomes and costs of the industry and assess the industry’s financial viability and debt structure
  • examines the nature of the financial backing and identifies the ‘key players’
  • discusses where the balance of power in the industry lies

Extension activity:  Students could develop their article with one or two case studies of particular teams or clubs in the sport’s industry and/or a summary of recent newsworthy events related to the ‘business’ side of that sport.

IB style questions

1.  Distinguish between ‘administration’ and’ liquidation’.

2.  Explain the importance of budgeting for all sports organisations.

3.  Using appropriate graphs, analyse the effects on the break-even point of a football club as the result of changes in both internal and external environments that affect its revenues and costs.

4.  To what extent can clubs in major sports industries, such as football, manage their finances prudently, while still remaining competitive?

Image source: skud’s photostream

Triple A Learning IB Blogs

Posted by Paul Clark

Crowdsourcing for profit – May 9, 2011

Broadcasting schedules are packed with a plethora of programmes about, or produced by, the general public. In times of economic austerity, the cost of programming is crucial to the profitability and survival of a network. From ‘fly-on-the-wall’ documentaries and viewer diaries to talent competitions, they all have one thing in common; they are relatively cheap to produce. In addition they are often extremely popular – take ‘X Factor’‘ or ‘American Idol’ as examples; the ‘Average Joe’ loves seeing himself on TV, however, awful he may be as an individual, or how talentless.

The world is more competitive than ever and innovation processes and systems in small firms often fail to keep up with rapidly changing markets and external environments. The cost of innovation is increasing while the returns are diminishing. Although, it is considered vital for firms to actively research their target markets to establish needs, wants, trends and preferences, this is usually a costly and time-consuming business and consequently only the larger corporations can research extensively, often using specialist agencies. Not surprisingly, therefore, organisations in both the profit and non-profit sectors have been attracted to the idea of using the general public in a more organic way to gain vital marketing and consumer information, using the power of the blogosphere and social media. As a result, the term ‘crowdsourcing’ has entered the business lexicon.

Crowdsourcing is the equivalent of Wikipedia for everything, with online communities providing the building blocks. The term has become shorthand for mass collaboration to achieve business goals, enabled by the use of web 2.0 technologies. The general public are invited to undertake a wide number of tasks on behalf of business; and what is more… for no monetary reward. Jeff Howe, one of the first authors to employ the term crowdsourcing, outlined the concept as ‘an open call to an undefined group of people to develop new technologies, collect and analyse data, design products and marketing materials, write computer code and reflect on business ideas and services’.  The process often attracts those best suited to perform these tasks: the serious users, the fanatics, the technical experts, the opinion-formers, the gatekeepers of information and/or those with a vested interest. In the same way that Wikipedia has been developed by the community, the public are solving complex problems and contributing relevant and fresh ideas to support the development of new and innovative goods and services. Businesses are applying open source principles outside of software development.

A search of the internet will bring up many stories and diverse links to crowdsourcing ventures and news reports, for example:

  • 99designs – a popular site where startups and other small businesses can crowdsource their graphic design needs.
  • Crowdsourcing a clinical trial to treat ALS –  PatientsLikeMe is using the increasing trend to share information by crowdsourcing a clinical trial, obtaining data on the effectiveness of off-label use of a drug to treat Amyotrophic Lateral Sclerosis (ALS); a pretty grim disease. Victims experience progressive muscle weakness, leading to death. Currently, there are no effective therapies. So it’s not surprising that when a preliminary study shows a hint of efficacy, patients will do what they can to get access to the drug and share their experiences with fellow patients.
  • The Guardian newspaper discusses whether the FBI was right to crowdsource a murder case.
  • Nina Maya is a forward thinker fashion designer and. but she has recently ditched her big name department store stockists in favour of turning the role of Head Buyer over to the public. Following the lead of designers like Derek Lam, Ms Maya is using crowd-sourcing to determine what designs get put into production; meaning the public can decide which styles make the grade for her Spring Summer 2011 collection.
  • Wikileaks has been crowdsourcing classified data. The release by Wikileaks of more than 90,000 documents about military operations in Afghanistan and a raft or other classified materials, revealing what it claims are unethical behaviour in their governments and institutions around the world, has been accompanied by the challenge to visitors to the site to crowdsource the information the documents contain.
  • The blog  ‘Crowdsourcing‘, focuses on how crowdsourcing is driving the future of business and includes the following video as an introduction to the topic:

This video was embedded using the YouTuber plugin by . Adobe Flash Player is required to view the video.

  • Storyful is a Dublin based business developed through the use of collaborative journalism. It bases its stories on information from social media sites such as facebook and twitter, but filters out the ‘noise’ of the real-time web. It leverages the wisdom in the crowd by identifying gatekeepers of  information and reputable credible sources to relay stories about world events. Every news story it claims creates a community:

Storyful’s golden rule is there is ALWAYS someone closer to the story. And in the last few months, we’ve worked with people at the heart of the action, capturing turning points in history in words, pictures and video.

Sometimes our sources are local journalists, amateur photographers, or filmmakers. But often the people with the best view of the action are citizens in the right place at the right time.

We believe that there’s a good chance that person is you.

Outsourcing has also been used recently to excuse certain potentially nefarious activities. For example, last month Apple responded to charges that it has been gathering location information about iPhone and iPad users by denying it was tracking each and every phone, but instead claimed it was ‘crowdsourcing’ data from Wi-Fi hotspots and cell towers and cacheing information that it received. The idea, they say was to get a representative sampling of groups of users, not to spy on individuals.

Class Assignment

Ask your students, individually or in groups, to select five potential business applications or opportunites from these sources:

Twitter Paid $6 or Less for Crowdsourced ‘Birdie’ Graphic

The Guardian newspaper Crowdsourcing section

The Daily Crowdsource reports breaking web news, analyses new implementations and trends, reviews new web sites and services, and offers crowdsourcing resources and guides and accepts breaking news reports from the general public.

InnoCentive connect seekers of innovation to internal and external communities of problem solvers to find solutions.

The students should then produce a report including some, or all, of the following:

  • a definition of crowdsourcing
  • the background to the five potential business applications or opportunities identified from the sites
  • a more detailed analysis on two of these applications or opportunities in the form of a marketing plan
  • a conclusion evaluating the role of crowdsourcing as a  marketing tool

Once the report has been written, students can present the key findings to the rest of the class.

Extension activity: Your students can investigate and report on ways that your school or educational institution can use crowdsourcing as part of its strategic development process.

 

IB style questions

1.  Define the following terms:

  • target market
  • social media.

2.  Explain the process a new business will have to go through to start up.

3.  Analyse the effectiveness of social media sites, such as facebook and twitter, as promotional tools.

4.  Evaluate the use of crowdsourcing, both as a method of market research and as a marketing tool.

 

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