For many decades one of the biggest problems faced by Emerging nations was the brain drain. To the extent that these countries had reasonable tertiary educational facilities and/or had invested in their brightest students and scholars (so that they could study abroad at prestigious top universities), the big problem was that a large percentage of those people did not return.
Things are improving. First, financial growth and incomes in Emerging countries increase much faster than in developed ones. And although the income gap is still large - higher growth from a lower base does not immediately catch up with lower growth from a higher base - future
prospects and huge dynamics do change things. The most entrepreneurial talents do now find opportunities to stay, start a firm or join as partners and 'create' themselves a brighter future.
One sector that struck us as always being in the news negatively when it comes to finances is the sports world (and to a lesser extent other parts of the entertainment world). Although we see that on the one hand revenues related to entertainment are growing everywhere, including
those in sports, the number of sports clubs (almost) collapsing under huge debts is growing. Why is that?
An example: Good old football
Let's take the football world as example. Although football (soccer) is still relatively small in the biggest entertainment market of all - the USA - it is in the rest of the world the most important component of this sector. Brands like Manchester United, Real Madrid, FC Barcelona, Inter Milan, Bayern Munich etc are technically large 'firms' with super brand value. Sometimes large enough to issue shares and be stock-market listed (see the chart below). But in most cases they seem to struggle when listed. OK, the chart presented here shows nice growth - especially for London-based Tottenham Hotspur -, but who didn't show nice numbers between 2003 and 2008.
One of the problems is that the football world is still dominated by management structures related to how football clubs were organized in the amateur zone: volunteers plus people from the local community with 'high prestige'. But being a visible notary or lawyer in the local
Rotary does not make you a good CEO/Chairman of an entertainment firm. Actually: if anything, we would link the sports world to the entertainment world. Rather have the Oprah Winfreys or Mark Zuckerberg's of this world run a club like Ajax Amsterdam or ManU than people that
are too often there for what we can euphemistically call 'indirect reasons'. Even when I am a big businessman with a firm 100 times bigger than a famous football team, my prestige goes up indirectly via the football team whose brand is so much bigger and more visible than my
own. After that, the businessman can try to earn from that exposure in his own firm. Technically: using the club as a bicycle with him being the bicycle racer, but participating in a different Tour de France!
Also: although big football teams with huge brand names have become truly 'professional' in terms of how they SHOULD BE run, way too often -when looking at the management structure - they are ran by part-timers. Like the chairman in our previous example. As often as possible at the club to be visible when there is a match, but during the week making the money in his own
firm. True, there are full-timers in the management of those clubs. But they are most of the time of similar quality as the people who work for political dictators. Half the time busy telling the chairman how fantastic he is and the other half of the time trying to fool critical journalists and/or worried fans.
Underestimating the Finance Function
One area that is always hurt most by this kind of leadership structure is finances. CFO's or director of finance roles are the type of roles where one has to be 'finance savvy', know about accountancy, investments etc. Yep, typically the roles for people who do not fit that well in a trendy entertainment environment. That is probably also the reason why you read dozens of stories about big stars being fooled by their manager/financial adviser.
What to do with that boring Finance Function?
Now, we hear you wonder: what has all this to do with Emerging Markets? Well, just analyze the composition of the best teams in the world and you will see that the bulk of players in the Spanish, English, German, Dutch, Italian or other top clubs is not local. The bulk of the players (later we will see them as 'ventures' in this article, actually the ones that are most attractive from a financial point of view!) are Brazilian, Argentinian, from big African nations, Eastern European etc.
Initially the game was simple: whenever you saw a top player from one of those Emerging countries at the World Championships, at the Africa Cup or even sometimes at Asian Championships - or because you had scouts traveling around those areas - you would simply offer them more than what their local team could offer. Yep: a talent drain similar to the brain drain that we started this article with.
Examples of a talent drain: Drogba (CIV) in England; Messi (ARG) in Spain
Legal changes: Clubs will have to take Finance seriously now!
But the world has changed. Legally there was the so-called Bosman ruling in the football world. Whenever a club sells a football player who still has a contract, the price they can ask for training and 'research and development' added to that player while at the club ('making him a better player') is a kind of goodwill that was previously only a function of supply and demand between one club and another. Actually: in that interplay between clubs and player advisers there were even examples of the clubs and advisers basically thinking about their own pockets and not about the players!
However, one not too important Belgian player - Jean Marc Bosman - went to court stating that this 'supply-demand' play between clubs and advisers technically led to a situation of slavery for the players.
Exaggerated, of course, because we are talking about people here that are free and make a decent or even rich living, but it is true that a totally free market could hinder the player from finding a job elsewhere. By definition the number of strong clubs is some 20-40 times smaller than the number of good players. And although that might be similar in other industries as well, don't forget we are faced here with a not so transparent, even shady business environment run by 'not-so-professionals'.
Judges decided that there should be some connection between player salaries and transfer prices charged. And this led to increased salary levels. Those players that were not sold for lottery-like prices benefited, increasing the clubs' debt levels but the idea was simple: knowing about the multiplier between salaries of potential stars-to-be on the one hand and transfer prices on the other one or two sold stars would make a living for the top clubs.
Running a football club is like running a venture capital fund
However, in combination with another trend, the growing importance of (international) television and other media rights and the opportunities created through merchandising it also led to a situation in which running a club became more complicated. When analyzing things that were happening without getting excited about the sports or the entertainment: doesn't this all sound like a transition of a club into a media-related venture capital firm?
The business model is now less and less about getting a large enough number of fans into the stadium and more and more about
a) qualifying for the big international tournaments and scoring the media rights; and
a') working together as clubs to optimize those media rights in terms of value; and
b) having a good acquisition and exit strategy in terms of creating value through the buying and selling of top players (i.e the ventures you invested in and worked on).
The fact that most teams struggle indicates that current management is not good at it. Problems are: the FIFA and UEFA, the world and european federations who both have a bad reputation with fans and pundits, are doing well. OK, they pay a lot to successful clubs and national teams. But when taking into account the value of media rights they don't pay enough! It is similar to what we see elsewhere in the entertainment world. Movie stars are doing well with incredible fees for playing in films, but the Steven Spielberg's and George Lucases of this world do far far better.
So when looking at a') above clubs do not stick together properly and suffer from a below-optimal allocation of created value to them. Be sure that in negotiations between media firms like national television stations, movie theaters and cable providers on the one hand and professional parties like Walt Disney, SKG (Spielberg Kohlberg Geffen) etc on the other the ball game during negotiations about allocation of wealth is a bit more even.
Leaves us with b): adding value via the buying and selling of players. Too many clubs were optimistic or not creative enough as a result of which they did not find the right formula. We know, it is not easy. Just like in investing the average investor cannot beat the market. But as you know, we started this article by concluding that clubs are not so well organized. Technical directors who tend to be enthusiastic about players who they or the trainer want and financial directors who are part-timers spending other people's money too easily, can easily fall for the trap of over-excitement about winning the lottery by selling top players 2-3 years later (or with those players finally qualifying for the Champions League) instead of monitoring cash flows properly. And those cashflows are also related to the monthly payment of salaries. This situation can easily translate into overpaying. Interesting fact: most good books about 'New Media' or business in which new media become more important teach you to properly manage costs. The sky is the limit, but monthly cost levels are far more certain than those skies! A good example is the excellent book 'Net Profit: How to Succeed in Digital Business' by David Soskin (Wiley, 2010).
And that is what is happening. Top brands in 'firms' that are poorly run and plagued by excess debt burdens due to high salary levels, lousy contracts and insufficient value creation via media rights and merchandising. And whereas real venture capitalists understand that their exit strategy is to a large extent not just a function of their bottom-up successes within the fund, but also related to external factors (how is the market environment at the time of potential exit?), football clubs did never seem to really incorporate those external factors in their financial strategies.
What will happen?
The bottom-line did not change: a growing industry, with a growing role played by star actors from Emerging Countries next to the stars from within the developed world. Can something be done? We believe so. And the answer is threefold:
1) PROFESSIONAL MANAGEMENT
Finally start structuring the clubs like a true company, and do not compare to regular industries. Compare yourself to venture capitalists who understand the media and entertainment industry. You are basically running a fund in which individual players are the ventures.
2) NEW TIMES; USE THEM
The world has changed. A lot of the potential value of merchandising and club brands is in NEW media. The internet. A lot of the fans are in markets that are just now getting online. 1+1 = 3. It is not just about your fans that come to the stadium in your city. It is also about the fans in Asia, Africa, Brazil. But at the moment in sports, too often it seems as if 1+1 =0.5
A few British football clubs know what I am talking about. Just ask ManU management or Arsenal about their 'value' to fans in Asia or the Caribbean & Latin America or elsewhere. In countries without strong competitions people watch the champions league and associate with tons of other teams and top players and not just with those that participate in local competitions. Far more teams or even National Leagues could do something with this globalization of the industry and the growth in new media. But they don't.
The external value of big football brands grows
in regions they previously did not really think about. The well-run ones do understand this already. And use the fact. The bulk of top 'brands' seems to be ignorant about it.