Can Football Be Saved?

The sport is more popular than ever -- but the losses keep mounting. What can be done to fix the business?

There was no way European football fans could miss Adidas' (ADDDY ) new Roteiro ball during the month of June. Thanks to a deal between Adidas-Salomon and the Union of European Football Assns., the silver and black Roteiro was the only ball to appear on the pitch during the European football championship in Portugal from June 12 to July 4.

Beckham bent it, Zidane juggled it, and even the animated logo that appeared during programming transitions often displayed the Roteiro -- and prominently, too. The payoff: Inside of a few weeks the Herzogenaurach, (Germany)-based Adidas sold 6 million balls, top models of which feature a seamless outer skin and retail for over $120. "You get exposure you simply couldn't achieve without an event like this," says Adidas CEO Herbert Hainer.

Adidas' success was testament to the awesome commercial power of football. European clubs probably topped $12 billion in revenue in the most recent season, while football teams in Britain, Germany, France, and Italy have tripled sales since the mid-1990s. Worldwide, the game generates some $3.1 billion annually just in sales of brand-name, football-related products such as jerseys or shoes. The British football club Manchester United has annual sales of $317 million, handily topping the $280 million earned by the New York Yankees, according to Deloitte Touche Tohmatsu. Players such as midfielders David Beckham and Zinédine Zidane, both with Real Madrid, are household names in China and India as well as Europe.

"RUNAWAY SALARIES"

Great business, right? For top players, a handful of teams, and a few sponsors such as Adidas, Nike Inc. (NKE ), and Vodafone Group PLC (VOD ), it sure is. Yet many of the organizations at the core of the sport -- the roughly 400 first-division teams from Ireland to Ukraine -- are in dismal financial shape. Clubs typically have a shot at turning a profit only if they qualify for the elite UEFA Champions League or the UEFA Cup, the two main postseason tournaments.

Even top teams in football-crazy countries lose money. Deloitte estimates that Italy's first-league clubs collectively lost $485 million in the 2002 season on sales of $1.4 billion -- and probably lost at least $360 million last year. It all adds up to a crisis which, if left unchecked, could leave the whole game permanently weakened. Even in the much-admired British Premier League, probably only five teams out of 20 made a pretax profit in the season just ended. "Football is not just a game, it's a tough business," says Erwin Staudt, former chief executive of IBM (IBM ) Germany and now boss of VfB Stuttgart, which plays in the top-tier Bundesliga.

What's wrong with the way the game is played? "The problem is runaway salaries," says Stephen Schechter, owner of Schechter & Co., a London firm that helps football clubs issue bonds as a way to retire bank debt. Powerhouse Real Madrid paid $42 million for David Beckham last year, after paying $86 million for Zidane in 2001. And even teams far down the league tables spend huge sums on players in an often-futile bid for elite status. VfL Wolfsburg, which is majority owned by Volkswagen, paid $11.4 million for midfielder Andres D'Alessandro in 2003, but still finished 10th last season. Real Madrid's massive investment in Beckham and Zidane was only good for a fourth-place finish in Spain's first division.

Germany's Borussia Dortmund shows how teams get in trouble when they overstretch. The club paid $31 million in 2001 for forward Marcio Amoroso. But he was sidelined with a knee injury and released by the team in April. Then Dortmund failed to qualify for the UEFA Champions League last season and lost early in the UEFA Cup. Without the extra revenue from television rights that those pan-European tournaments bring, sales fell 38%, to $62 million, in the six months to December. The team reported a loss of $35 million, compared with a profit of $8.7 million a year earlier.

Despite the Amoroso fiasco, Dortmund, which has the best stadium attendance in Germany, has good prospects to rejoin the elite. Not so lucky are teams such as TSV 1860 Munich or Eintracht Frankfurt, which, because of their poor performance, were relegated to the second Bundesliga for at least a season. "It's gloom and doom in the lower reaches," says Robert S. Collins, a professor at Swiss business school IMD International.

The very organization of the system boosts the risks. Membership in every country's first league is fluid. In Germany, the bottom three teams out of 18 drop down to the second league at the end of the season and the top three second-league teams move up to the first league. That adds to the drama. But it's hell from a business point of view: Revenue can drop by half if a team slides to the second league. "The parameters are totally different than any other business," says Robert Müller von Vultejus, managing director of Hamburg-based sports marketers Sportfive.

The full depth of the financial problems isn't known; most teams are privately held. But one team executive says that few German banks will lend to pro teams because of the risk. Teams in Italy, Spain, and France are believed to be in even worse shape.

The rewards get richer, and the winners fewer, when the game is played at a European level. A few superteams almost always qualify for pan-European play, such as Italy's Juventus, AC Milan, Real Madrid, Bayern Munich, and Manchester United. A berth in the UEFA Champions League final can add more than $50 million in revenue from TV, merchandising, and ticket sales, Deloitte estimates. In fact, some in the industry predict that football is moving toward a pan-European league that will hog the big sponsorship and TV money. "Club owners that can support the costs will keep moving ahead. Others won't be able to and will have to give up," says Paolo Taveggia, a former manager of Milan Associazione Calcio, better known as AC Milan.

Football's problems have nothing to do with its popularity, which is on the rise. In Germany, the number of spectators at live games has soared almost 70% since 1990, to 10.7 million, while ticket sales have nearly tripled, to $175 million. TV viewership for the European championship in Portugal, known as Euro 2004, was up 26% over the last tournament in 2000, according to UEFA. What hobbles many teams is the lack of professional management. Others are immune to the laws of the marketplace because of wealthy owners such as Russian oil tycoon Roman Abramovich, who bought Britain's Chelsea Football Club. In Italy, AC Milan belongs to Prime Minister Silvio Berlusconi's media empire, while Juventus is controlled by the powerful Agnelli clan. These deep-pocketed owners have a keen interest in making sure their clubs remain among the international elite.

Some observers are sounding the alarm about the impact of super-rich owners. Sean Hamil, deputy director of the Football Governance Research Centre at the University of London's Birbeck College, says that Abramovich has put Chelsea's British rivals at a severe disadvantage. Last summer, Abramovich spent over $230 million snapping up players like midfielders Damien Duff and Juan Sebastian Veron, according to Soccer Investor Ltd. in London. "Abramovich could end up bankrupting the league," Hamil warns. An Abramovich spokesman says the criticism is unfair, and that the spending will moderate: "Last year, we were playing catch-up with Manchester United and the other clubs that had more spending power."

When the seemingly wealthy owners get into financial trouble themselves, so do the teams. Rome club Società Sportiva Lazio, is looking for new owners after its majority shareholder, Cirio Finanziaria, collapsed under $1.4 billion in debt in 2002. And Parma Associazione Calcio, owned by the insolvent food conglomerate Parmalat, is bankrupt. Both teams will struggle to meet new licensing criteria imposed this year, which could force them into a lower division. From there, they would have to spend years fighting back to the top.

Many of football's problems could be fixed by better marketing and old-fashioned financial discipline. Managers, often ex-players, lack basic business expertise. Teams fail to fully exploit merchandising or sponsorship opportunities. "There are ways to make money in pro football, but not many clubs are using them," says Björn Bloching, a Hamburg-based partner at Roland Berger Strategy Consultants. At least the upper reaches of football are being infiltrated by professional managers, such as Staudt, the ex-IBMer at VfB Stuttgart. Berlin's Hertha BSC, whose unpaid president is ex-Bertelsmann executive Bernd Schiphorst, has installed about 90 "business boxes" and thousands of premium seats in its renovated stadium, boosting revenue as much as $11 million a year.

BRAND POWER

In France, ex-Adidas CEO Robert Louis-Dreyfus has helped engineer a revival at the Olympique de Marseille club. After buying the team in 1996, Louis-Dreyfus hired professional managers such as former Adidas France marketing director Cédric Dufoix. They exploited a berth in the UEFA Cup last season to increase sales of team uniforms, which retail for $80, to 250,000 from 20,000. The club also cut its payroll to $40 million from $45 million.

Manchester United is the industry standard. The team builds a global fan base by playing exhibition games abroad. International markets account for 40% of sales of Man U jerseys, largely because of a $520 million deal with Nike under which the sports-apparel maker handles all of the team's merchandising. Man U also limits player salaries to 50% of revenue. And Manchester survived the departure of international star/sex symbol Beckham to Real Madrid. "The Manchester United brand is more powerful than the Beckham brand," says Marco Forato, a London-based director of consultancy FutureBrand.

Now other teams are copying the Man U playbook. Marseille is scouting for players in China to attract fans there. Turin-based Juventus Football Club will open a shopping center inside its new stadium, including a Nike store. Thanks to such measures, there are signs of a financial recovery in some areas of the sport. Sales in England's Premiere League rose 7% last season, to $2.4 billion, outpacing the rise in costs, according to Deloitte. Figures for the other big soccer nations aren't in, but all probably saw sales increases while losses narrowed in France and Italy. Player salaries could begin to go down as existing contracts expire.

Sponsorship revenue has also been rising. Companies paid $3.5 million to get their names on team jerseys in Europe's six biggest football markets in the 2003/2004 season, according to Cologne-based market researcher Sport+Markt. German electronics giant Siemens (SI ) decided to sponsor Real Madrid, in part to reach potential customers in China. "It's a very cost-efficient way to advertise," says Rolf Beisswanger, chief of global sponsoring for Siemens' mobile telecommunications division.

But teams popular only in their home regions risk slipping into a vicious circle in which declining revenue makes it difficult for them to afford top players. That hurts playing performance, which in turn further depresses sponsorship and ticket sales. Take Karlsruher SC. As recently as 1997 the club was sixth in Germany's top division and qualified for the UEFA Cup. But the team fell apart the next season and dropped into the second division. Two years later it dropped another level to the Regional League. Cut off from TV revenue and deserted by many fans, the team reached the brink of insolvency in 2002 and had to be rescued by the city of Karlsruhe and local banks.

Starting in the coming season, UEFA will bar clubs from competition if they fail to meet basic criteria, such as paying players on time. The new rules are designed to prevent rogue team owners from signing players from other teams for big sums -- which they then fail to pay. European Union antitrust authorities are also expected to crack down on hidden subsidies such as tax breaks for teams, which are perceived to be widespread in Italy and Spain. The measures should help keep player salaries in line. Football associations may also do more to share TV revenue from international competition.

There is little chance European leagues will soon change their multi-tier structure and create a permanent elite league, as with major league U.S. teams. But pressure is building to create something in between, such as an elite league that would occasionally add up-and-coming teams and eject perennial cellar dwellers. Few companies can survive unscathed the huge cuts in revenue that occur when a team slips out of the elite. "The success of the company can depend on the two centimeters that determines whether the ball went over the line or not," says Schiphorst of Hertha. Winner take all? That approach makes sense in a brutal, Darwinian way. But it's also a good way to trash an entire sport.

By Jack Ewing with Laura Cohn in London, Maureen Kline in Milan, and Rachel Tiplady in Paris

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