Diversification and our future growth strategy

As the more forward-thinking clubs look for growth away from traditional broadcasting & commercial income sources, what will Everton's response be?

Paul The Esk 03/02/2019 20comments  |  Jump to last
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Way back in 1992, the Premier League was created and built on the back of Sky’s desire to use football as their unique selling proposition as Sky strove to build a subscription-based satellite service in the UK. As competition grew for domestic broadcasting rights, their value increased exponentially, fueling huge increases in football wages and transfer values, creating a massive inflationary environment that benefited a few select clubs and their owners.

As a result, serious and significant global investors were attracted by the relatively low-value entry cost, location (the UK has always been viewed as a safe haven for global capital) and levels of cash swimming around the Premier League and belatedly European competitions.

A rising tide…

There’s a common misconception that in business all ships rise equally on a rising tide. That’s far from the truth though. The very best businesses take advantage of the favourable macro-conditions to improve their relative and competitive positions. The evidence for this in the Premier League is stark. The very best businesses (clubs) have improved their finances relative to their competitors in as many ways as they possibly could have.

Off the pitch, all the leading English clubs have used the surety of broadcasting revenues to draw capital from their owners or external financiers to build or significantly improve and expand their stadiums, thereby generating ever-increasing matchday revenues and in particular, building significant corporate entertainment businesses through the expansion of corporate hospitality and premium seating facilities in each of their grounds, thereby increasing income and the yield per customer orfan.

Thus the surety of increasing broadcasting revenues gave their owners and backers the confidence to build or expand their stadia, thereby creating a second competitive advantage – higher match day revenues than those clubs trying to compete and join the clubs at the top end of the league.

They invested in people also. Drawing in commercial talent from the worlds of finance, retail, property, technology and entertainment plus other sectors. As a result (as on the pitch) bigger budgets meant a concentration of the best talent permitting those clubs with the highest revenues to further expand their commercial operations far and wide.

Yes, you’ve guessed it – this results in higher revenues, higher global exposure, and ultimately developing the clubs’ brands such that other world class global brands wished to associate with.

The extra-ordinary prices paid by the global sportswear giants such as Nike and Adidas, do not reflect shirt or kit sales (which are a tiny percentage of their overall turnover) they reflect the desire to associate their brands with the leading global brands of the Premier League. It’s a marketing strategy designed to add value to their own brand by association. It’s a marriage of alpha organisations.

Thus, the competitive position of the Premier League becomes imbalanced as the huge advantages of income multiples make it almost impossible to join the group of leading clubs.

Continued revenue growth

The question for all successful organisations and indeed even more so, for those wishing to challenge, is how to continue your revenue growth, thereby giving you continued access to capital, talent and the aforementioned competitive advantages?

This is a particularly challenging question against market conditions that now suggest the market is maturing and growth in terms of broadcasting income, and perhaps to a lesser extent commercial and sponsorship, is more difficult to come by.

The answer lies in what the successful clubs have done to an extent already: diversification away from broadcasting revenues. The most successful clubs are those least reliant upon broadcasting revenues.

Many will argue as to whether their significant non-broadcasting revenues are a result of their success, or is it that their success is a result of them growing alternate revenue streams? Personally, I lean more towards the latter. Grow the revenues in order to achieve the success. Without the revenues, success is very unlikely.

The Premier League is not only competitive in itself, it competes with all the major European leagues for talent, and for the glory and financial benefits of the UEFA competitions. As a result, cost pressures will continue to increase even if the traditional revenue sources for Premier League clubs may appear to be plateauing.

New revenue sources?

Therefore, what do the top Premier League clubs and the more forward-thinking European clubs do to generate new revenue sources?

Quite simply, they diversify and expand their areas of operation to seek additional revenues and capital gains.

There’s clear evidence already that the most forward-thinking clubs, having dominated and exploited traditional revenue pools, are now looking elsewhere. Let me give some examples:

Manchester City’s parent company CFG (City Football Group) announced only a couple of days ago an investment of US$115 million in an investment fund (Sapphire Sports Invest) that specialises in technology and digital sports startups. What’s interesting is the investors alongside them, Adidas, along with the owners of the NBA’s Indiana Pacers, the New York Jets and San Francisco 49ers of the NFL and the NHL’s San Jose Sharks and Tampa Bay Lightning. All looking for growth opportunities and diversifying away from their core revenue and capital sources.

“Challenging the conventional approach is at the heart of our ethos at City Football Group,” said CFG CEO Ferran Soriano. “Investing in Sapphire Sport, a first-of-its-kind fund, is a natural extension of our original global model, which pairs teams in six countries and five continents with football-related businesses, which help drive our growth and success.”

There’s an old adage in investing: you concentrate your investments to grow your capital and you diversify your investments to maintain your position. Perhaps there’s an opportunity to diversify and grow relative to our competitors.

E-sports

E-sports. At first glance, doesn’t sound too exciting, yet generated more than US$900 million in revenue in 2018, and is forecast to reach US$2.4 billion by 2020. Traditional sport’s organisations and investors are looking closely. Alisher Usmanov was an early investor investing more than US$100 million in Virtus.pro. In the US, many of the basketball teams including Philadelphia 76ers and the Houston Rockets have invested in League of Legend teams. In football, West Ham, Manchester City and Schalke 04 have professional FIFA players and the Premier League have launched their own ePL.

The audiences (and therefore the potential for sponsors and other commercial arrangements) are huge and growing – more than 10 million for the Overwatch league, and a projected audience for competitive gaming of over 270 million by 2022 (equal to the current NFL audience).

Peter Moore

Annoyingly for Blues, Liverpool’s CEO Peter Moore continued the theme of looking beyond traditional football thought processes (and therefore revenue opportunities) with the view that technology has to be used to maintain football’s core audience:

“90 minutes is a long time for a millennial male to sit down on a couch,” Moore told the Arabian Business magazine. “When I look at viewing and attendance figures of millennial males, I’m concerned as a chief executive of a football club that relies on the next generation of fans coming through.

“If we don’t build technological prowess as a club we will lose them. There’s so much pressure on time now and only 24 hours in a day…”

Where do Everton fit into this?

The point of all this is where do Everton fit in? Clearly, we lost out on the first expansionary phase within the Premier League. We never had the capital to expand facilities or attract the best talents to grow our income. The results of which are very clear for all Evertonians.

The question now is whether or not we get left behind again? As the major clubs look to diversify their income and capital generation away from traditional sources, where do Everton sit?

Yes, we must continue to try to grow our share of conventional revenues matchday (through Bramley-Moore Dock), sponsorship and commercial partnerships, but perhaps we must also turn our minds to alternative sources of exposure, revenue and capital growth opportunities, as our forward-thinking competitors are doing?

To miss two expansionary phases will be beyond negligence; we missed the first but – through Moshiri’s ownership and access to capital – we have the potential to participate in another growth opportunity. The cynics and realists will point to our inability to exploit existing opportunities, let alone future ones.

My own view? I hope the club by some miracle, can be more forward-looking and seek to make up lost ground by diversifying into new growth markets. I’d qualify that with: Do we have the people, skills and vision to enable this?

If we are ever to close the gap with those above us, we need to think “smarter” and ensure we have the people in the club to exploit the opportunity.

Comments most welcome.


Reader Comments (20)

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Phil Greenough
1 Posted 03/02/2019 at 21:24:29
Thank you for your article, Paul, it left me bamboozled. Not by your content, but by my lack of comprehension of Everton's financial situation at what I consider, board level. To be honest, I can't contemplate beyond Wednesday night, never mind the financial position of the club in the coming years.

Sometimes I think I'm better off being a mushroom, because that's what EFC has done to me over the last forty odd years, fed me shit and kept me in the dark. At least your articles inform and educate us, about the higher levels of finance within our club.

Don Alexander
2 Posted 03/02/2019 at 21:58:37
What concerns me is that, with genuine respect, Farhad Moshiri just isn't that wealthy in comparison to those current folks owning any of the top six. In fact he's way behind, so to me, very much a layman, he's seriously hampered before he starts trying to find the right people to make his, or anyone's, money work to the maximum advantage.

In football he's already made significant errors in expenditure. If he can recover, literally and figuratively, can he or we be confident in those he has in the boardroom? Hmm.

Denis Richardson
3 Posted 03/02/2019 at 22:04:04
Paul - thanks for taking the time to right the article. However, when I think about the clubs that have done really well since the prem was formed, the only two that for me stick out as having succeeded from mainly sound management are Arsenal and Utd - and to a lesser extent Spurs.

Chelsea would not be anywhere near where they are now without Abramovich's billions (they were incredibly close to going bust before he come in). City are owned and funded by a petro state and before that got a massive leg up being given a brand new stadium thanks to the 2002 commonwealth games as well as a few million from Shinawatra a few seasons later. Them across the park were a basket case for many years until their current ownership took over.

So I guess my point is, it's not necessarily sound management that has the top 6 where they are, most of them are there due to billionaire owners pumping shed loads of cash into them. This has allowed them to consistently attract the best players, win more trophies, gain more fans, get more TV money - repeat.

I'll admit the current management teams at these clubs puts ours to shame and god only knows what we can do to catch up. However, simply put, any club that didn't get a billionaire owner some time over the last 20 odd years (except Arsenal/Spurs) are nowhere near the top of the tree. Even Spurs are owned by Joe Lewis, himself a billionaire, and also have the advantage of having Levy in charge and not Kenwright.

We missed the boat over the last two decades by not getting in a loaded benefactor, athough, money alone won't get you there - look at the likes of Villa, Sunderland, 'Boro, QPR etc and half a dozen other clubs with wealthy owners who didn't amount to much. Their wealth was simply not enough compared to Russian or UAE billions.

Arsenal have punched above their weight recently having been saddled with the costs of the Emirates but its been many years since they seriously challenged for top honours. Utd are the only ones who've been consistently near the top without needing billions from a benefactor - but they did win the lottery with the class of '92 and never looked back. Also happened to have the best manager of all time.

Dave Lynch
4 Posted 03/02/2019 at 22:05:16
Know what Paul.

As much as I admire your obvious acumen, knowledge and understanding of business investment, if that's what football has come to be then I think I want out.

This is a sport that has totally lost its way with regard to its values, history and integrity.

The FA should hang their heads in shame, they have sold out one of, if not the only true working class sport in this country, if not the world.

Paul [The Esk]
5 Posted 03/02/2019 at 22:26:16
#1 Thanks, Phil.

#2 Don, I share your views completely.
#3 Denis, whilst I agree with almost all your comments, I think it's fair to point out that Joe Lewis, Levy, Enic have only once (2011 from memory) put capital into Spurs, £15 million. Everything else they've achieved has come from their own resources.

#4 Dave, football sold it soul time and time again in the last 25 years. Whilst I dislike that intensely, I'd much prefer Everton to be competitive than not.

Bobby Mallon
6 Posted 03/02/2019 at 22:33:45
I agree with Dave @4.
Brent Stephens
7 Posted 03/02/2019 at 22:52:17
And this is why Martin Mason has always been right (if I've understood his posts) – that football is a business, not just a sport. And requires people with business acumen.

I hate it but it's the reality.

Paul [The Esk]
8 Posted 03/02/2019 at 23:00:45
#7 Brent I've always rationalised it as football is the demand side (ie, says what is required to be successful) and the business is the supply side (provides what is required).

Despite Moshiri's millions, we are desperately short of income generated by the business and completely missed the Premier League boat in that respect.

If we are not to miss the second boat (so to speak), we have to innovate like our competitors are doing in income and capital creation.

Brent Stephens
10 Posted 03/02/2019 at 23:29:15
Paul "If we are not to miss the second boat (so to speak), we have to innovate like our competitors are doing in income and capital creation".

And "human capital" (ugh!) is always the trump card, especially where creativity is required. Does DBB (or anybody else) give us that? Or will she be transactional rather than transformative – more of the same?

Karl Masters
11 Posted 03/02/2019 at 23:52:08
I understand why some people recoil at all this and just want to think about the football (and God knows that ain't easy just now), but the World keeps evolving.

For a Club currently residing in a rundown district of a relatively poor City to compete financially with the elite, some remarkable things are needed.

We have one in Moshiri, but he won't be around forever sadly and the Club simply has to broaden its thinking to stay competitive. If we want to be in the top 3 or 4 clubs in the country and win things consistently there is no other way.

Just as Dave and Bobby own things now they could have only dreamed of when kids (and could any of us have had the foresight to dream about just the smartphone for starters in say 1975) the world of football is on another level. Embrace the change fellas, don't get left behind. We are all still humans, it's just new skills and thinking we have to learn to keep evolving.

Paul [The Esk]
12 Posted 03/02/2019 at 23:53:38
Brent I have no doubt we have a human capital deficiency in the board room and senior executive team.
Don Alexander
13 Posted 04/02/2019 at 00:16:17
Speaking, again, as a layman I just wonder how Moshiri is now viewed by monied institutions he seeks to "help out" his ambition. Up to now, as far as we know, he's got himself saddled with a bank in China and a betting company in a small part of East Africa. Hmm.

Any further approaches to "the money" will by now inevitably, I suggest, incur very penetrating questions by the loaded one/s, whoever they may be, as to who precisely was responsible at Everton for the quarter billion pound expenditure fiasco on players and managers since our Farhad took over. Hmm.

Of course it might just be that the dazzling smile of DBB will make the money swoon I suppose, in the way that Kenwright did.

Here's hoping.

Paul A Smith
14 Posted 04/02/2019 at 06:33:56
I think Don Alexander pretty much sums it up. Sadly that is the case. Football is not how we knew it.

This report also spells out why all the best tactics in the world won't bring us anything without the big names. Reading this, those names seem further away again. The one plus is people starting to realise.

Ken Kneale
15 Posted 04/02/2019 at 09:32:32
Paul, as ever, a very fine article and great summarisation of need.

My question with your business acumen is the same as I post for the football side – how on earth do we get this message through to those in charge that we are surely slipping away from football's elite without this type of insight at Board level for business decisions?

Mark Taylor
16 Posted 04/02/2019 at 12:31:51
I very much enjoy your articles, Paul, they may not be directly about football but you cover issues that will certainly go a long way to dicatating our success, or lack of it.

I agree with your basic diagnosis. Traditional revenue streams are tailing off. I think there is pretty obvious scope for non-domestic broadcast growth; however, that will be offset by what I suspect might be a decline in domestic growth.

My impression is that Sky are realising they have put too many eggs in one basket and that they badly overpaid last time around. It used to be justified on the back of driving subscriber growth, but not any more, Sky are pretty much at critical mass already. Moreover, there is a risk any non-domestic revenue growth it is disproportionately corralled into the coffers of the so-called big 6. That is the other problem of mature markets, you tend to see cartels forming.

Your solution is, in essence, diversification. That makes sense when the markets you operate in become mature. But it is also highly risky and when you go outside the core area of your expertise- to the extent we can even claim that much for the core business! - then your outcome might just as easily be losing a lot of money, not making it.

You also have to factor in your diversification strategy. Are you choosing maybe a single option, ideally with some synergy to your business, or trying to spread your risk, probably across a broader range of activities mostly unrelated the core business, in a venture-capital type manner?

To do the former risks wipeout. To do the latter requires a willingness and capacity to play the long game. Here comparisons to Man City, Abu Dhabi are stretched. They can afford 'losers'. Look up the history of Masdar for example. I've worked in business for decades and how many times have I seen consultants propose expanding the offering, only for more consultants – even sometimes the same ones – arrive years later with a plan to sell non core business and re-focus on the main business.

That is not to say don't do it – your diagnosis makes sense- more a summary of the pitfalls. There is an alternative – do your core business more efficiently than anyone else, and though we are a long way from claiming that, it is possible.

The other traditional option is to expand geographically, though maybe that option is more limited by ownership rules in foreign leagues, plus you won't get that much in economies of scale. And you still have to figure out a way to break the cartel type environment I can see emerging in the Premier League.

Thomas Lennon
17 Posted 04/02/2019 at 13:30:19
Sky's current business model is already evolving – we can get one month subscriptions now with no need for long tie-ins or even a skybox. Part of the problem for Sky is that Amazon & Netflix are cutting their business from under them – and that is going to include sports very soon.

Increased competition for what is still a fantastic offering in the Premier League will surely only force up the value rather than reduce it?

Will we see another massive hike in payments for the Premier League? I think what we will see is fragmentation of Premier League offerings of some sort, and the Premier League will come up with packages. Most obviously packages focussing on buying all the matches of a particular team and offering a 'season ticket' could be one way to do it - that way every match is sold twice.

One model is fading, another will become popular.

That said – the ridiculous situation whereby players' agents watch each successive deal and drive up prices & wages to suit is likely to go on too, so in real terms, clubs get no richer. Where then is the value for shareholders?

Despite all that, I have to agree with most of what Paul wrote – we have to develop new differential revenue streams in order to compete and that is going to need big partners in business. Cue USM?

I assume Moshiri is here to make the club into a brand USM can buy into in a much bigger way. Safe to assume there is some way to go yet. Over to you, Silva & Brands.

Paul [The Esk]
18 Posted 04/02/2019 at 14:55:56
Thanks for the kind comments, much appreciated, and some excellent points made by all adding to the debate, thank you.

The issue of what happens to broadcasting revenues in the future is more acute for Everton than it is for any of the largest clubs in the Premier League for the simple reason that broadcasting revenues form a much greater percentage of our overall revenues than our larger competitors (69% as against 34.5% for Manchester United and 40% for Manchester City).

It could be argued that those 6 clubs have successfully diversified their income streams for many years, and that the activities I describe above are the second growth phase which is the natural response to maturing markets.

I'm aware that there are risks in looking at new areas and that we need fresh skill sets within the business to maximise their potential.

My hope is that the board commits to the above and plans the appropriate strategies and recruitment of individuals in the near future. I say hope as I'm not convinced we are anywhere near to doing so based on the discussions I've had with board members.

There is a bandwidth issue within the club, and it's possible they're running beyond current capacity with the cost challenges, their attempts to increase existing income streams and the issues surrounding Bramley-Moore Dock.

Mark Taylor
19 Posted 04/02/2019 at 16:04:02
Thomas,

To answer your question on Sky, I personally believe it is fragmentation that will kill revenue growth. You don't need Sky so badly if you can get some football elsewhere.

It really only had mega value to Sky when 1) they had exclusivity, so basically a monopoly, which always helps with price setting; and 2) their main pre-occupation was adding customers, for which football was maybe the biggest driver, and the acquisition budget could be ample based on incremental revenue derived from that.

It is very much harder to justify the money when you are effectively mostly doing it to hold on to the customers you already have. There's never so much of a budget for retention.

Amazon are already getting into sport. From 2019, they will be showing some live Premier League games. It's a modest package of c 20 games but I suspect they paid buttons for it because, tellingly, the bid was undisclosed. They already have the rights to the ATP tennis tour.

I say all this as someone who is thinking of moving from Sky. For the first time, there are options and my experience is that, having blown their cash on footie, Sky are increasingly losing other sports because they have no remaining budget.

As a tennis fan, losing the ATP was a big issue for me. I now subscribe to Amazon and what I cannot do with fragmentation is buy everyone's offering, so I have to choose. I like footie – not so much this season! – but there will be some on BT and Amazon so it is now a viable option.

Your idea of 'season tickets' may well come to pass but if so, it will not be via Sky. If the customer demand model changes, so will the sales model. There won't be pooled broadacast rights of the type that attract broadcasters. The clubs will sell them individually. That is very much what the top 6 want.

It would be bad news for a club like Everton as it stands. Also bad news for the Premier League organisation; I wonder if that is why Scudamore has left and his replacement from Discovery subsequently decided in the end not to join – maybe they can read the runes...

My own view is that, even with the potential growth in overseas rights, this huge exponential revenue growth for clubs is coming to a close. Actually I can see a re-focussing on cost containment. So in the medium term, things will not I suspect look so rosy for agents who are an obvious cost area to cut that adds precious little value.

In fact, I can even envisage an end to transfer fees in the longer term. They don't apply anywhere else in life and it is only a matter of time before they are legally challenged. In a way, it's a form of trafficking, admittedly a high class one.

It follows from the above that a European league or even a world league is only a matter of time. Again that won't be good news for a club like ours.

I think all this only re-inforces the point Paul was making in his article but while inaction is dangerous, we are heading for some very risky times in taking action, because we are starting from a poor position with a lot of ground to make up. If Paul is correct in believing that our board lacks the vision even to see the evolving picture, then we will be an also-ran.

Filipe Torres
20 Posted 04/02/2019 at 21:35:36
This article is spot on!

Everton have a lot of ground to recover, but times... "they are a changing"!

I was searching YouTube the other day and looking for highlights and I got vids of Fifa games instead that have massive number of views, so there is a market, and I suspect a big one.

The guys who created Football Manager have been mentioned as Evertonians, the Collyer bros; or something like that, and they created the Angry Birds games... can´t they help? Moshiri has spoken about this partnership several times, as sleeve sponsors, so I guess we aren't that behind and I hope he expands and endorses some investment.

Other thing that has always spring to my mind is the millions online bookies make of football, using clubs name and games to profit, like a leach.

Betway had a partnership with the hammers, and there a few clubs out there who have done so, but the sponsorship are peanuts to cover the millions they make.
the club should pursue creating their own online bookie, call it evertonia.com, goodison.com, with a special detail on Everton games and all things Everton.

It's time to stop all those bet-something people using EFC's name to profit and take legal action, I mean come on — Football Manager can´t use the logos or names for a guy to have fun and the bookies can have a profit?

one of the thing that bugs me is that Jorge Mendes (Fifa agent) makes a small fortune every summer transfer window, this greedy fucking bastard should be working for a living... Why can't Everton, probably not as EFC, but create a branch as a commercial partner that does exactly what agents do? Find and sign players, promote and develop footballers and get their profit.

Don't they do that with their own academy players, finding clubs for them to continue their career, loaning, to some extent that's what a DOF already does. Didn´t brand ship all those guys out on loan? We could get some world class footballers for peanuts if we detected them and managed their own careers.

I don't know if we could infringe some of the current rules, but I guess we could somehow find a way to bend them.

Someone wrote here a few days ago that Wenger once said that in the future transfer fees would end and the players would sing for whoever they want and clubs would only renew their contracts or not.

Jerome Shields
21 Posted 08/02/2019 at 15:00:49
A very good and informative article, though I think you know the answer to the Everton situation regarding growth and the ability of Management to implement such a plan. The divergence from the path that other clubs have developed and that of Everton's is the result of mismanagement over years and the maintenance of a comfortable status quo on Premier League media revenue.

I always wondered what it would be like to find a Goose with a Golden Egg. Now I know, having seen the outcome at Everton over this past four years. I think you should be able to work out my view of the capability of Everton Management regarding future growth.

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