Why was Premier League transfer spending way down this summer?

The GOAT of football finance bloggers, Swiss Ramble, recently ran through a veritable horror show in his newsletter, and the numbers make for grim reading. Operating losses more than tripled, from £413m ($542.3m) in 2018-19 (the last year pre-pandemic) to £1.338bn ($1.75bn) in 2022-23. Factor in player sales — some of which is down to all that player swaps and amortisation stuff you hear about — and the numbers improve, but not by much: from a £181m ($237m) loss in 2018-19 to a 2022-23 loss of £710m ($932m).

The upshot? Owners need to put their hands in their pockets — whether by loaning money to their club or by injecting capital — to keep the lights on. Indeed, the £1.1bn ($1.45bn) of owner funding in 2022-23 was the most ever recorded.

Now, there are fundamentally three reasons you invest in a business:

1. You enjoy being involved to the point that you’re not fussed by losses. Maybe it’s because you’re a fan, you like the status it brings, or because it’s part of a long-term project funded by really, really deep pockets. We can all think of a couple of clubs where this may be true, but it is most definitely not true for the vast majority.

2. Your business is profitable. The Premier League, the world’s richest and most profitable league, right now is most definitely not.

3. You think your business will be worth more in the future, so you’re OK with enduring losses today. You’ve no doubt seen all those “enterprise value” rankings of clubs that some folk salivate over. The problem is that recent events suggest otherwise. The Glazers reportedly thought they could get someone to buy Manchester United for as much as £8bn ($10.5bn) — they ended up selling just over a quarter of it at a valuation of around £5.25bn ($6.9bn). Fenway Sports Group thought they could sell all or part of Liverpool for £3bn ($3.95bn) — nobody bit. Elliott Management did find somebody to meet their €1.2bn ($1.3bn) valuation of Milan — but they had to lend them a sizable chunk of the asking price to make it happen.

Reason 1 owners are very rare, and folks have stopped believing that Reason 3 is a thing, at least for the time being. So clubs focus on Reason 2, possibly to get to Reason 3: becoming, if not profitable, at least sustainable, without having to write a big check every year. That’s the macro-reason. They’re realising that the massive spending of past years has outstripped the growth in revenue. That too makes sense.

Again, there are (fundamentally speaking) three ways clubs make money: match day receipts, broadcast revenue and commercial revenue, which includes sponsorships. You can only squeeze so much out of your stadiums: they can only be so big and you can only charge so much before fans revolt.

Most of Europe’s top clubs already have state-of-the-art grounds, and they can’t really squeeze much more out of match-going fans. Especially if they’re not in places like London or Paris or Munich, where they can sell oodles of boxes and match-day “experiences” to corporate clients and the very rich.

Broadcast revenue? Again, the Premier League, the gold standard, is getting nearly a third less today from its new domestic deal than it did nearly a decade ago. TV rights are, basically, flat. The fact that they’re signing longer deals (relative to the usual three-year agreements) suggests the league prefers stability rather than betting on itself.

As for commercial revenue, yes, that’s up nearly 40% compared to 2019, which is good, but some of it is down to bookmakers and crypto-shops, both of which are in perennial danger of being legislated out. In any case, it doesn’t come close to covering the increase in player wages, which have ballooned by nearly a billion pounds in the Premier League alone since 2019.

Wages rising faster than revenues equals losses, and when folks stop believing there will be some golden tomorrow that sees someone will pay billions and billions for their club — well, that’s when they cut back. The Premier League Profit and Sustainability Rules (PSR) and their equivalents in UEFA competitions are not the cause — they’re the consequence. Clubs — most of them, anyway — put them in place so they could all scale back together.

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The good news? Being sustainable isn’t that hard. On average, roughly 70% (sometimes a lot more) of a club’s costs are players, both in terms of wages and transfer fees. The nice thing about footballers — unlike, say, unionised factory workers — is that they’re on fixed-term contracts. Each year, roughly a quarter of your squad goes out of contract, and presto! You no longer have to pay their wages and you can replace them with somebody cheaper. And, of course, sometimes somebody will actually pay you money to take your high earner away, saving you money in wages and netting you a nice little bundle: we call that a transfer fee.

In other words, the path to profitability — or, at least, getting closer to break-even — isn’t that difficult to figure out. And clubs have figured it out. They’ve gone to extreme lengths to try to shed high earners. From Chelsea sending Romelu Lukaku, Ben Chilwell, Federico Chiesa, Victor Osimhen and Raheem Sterling off to train by themselves to “encourage” a move, to Ilkay Gündogan having his Barcelona contract rescinded months after a stellar season, to veteran free agents like Adrien Rabiot, Memphis Depay, Mats Hummels and many others going the whole window with no interested clubs, just about everybody is cutting back.

Teams are also getting smarter, which and this is a good thing. Many are realizing that you’re better off spending £40m on a 21-year-old on a five-year deal at £3m a year than £30m on a 30-year-old on a four-year deal at £6m a year. They may cost about the same, but the 21-year-old can get better and will have resale value; the 30-year-old probably won’t. You can thank the tag team effort of accountants and analytics staff for busting some long-held beliefs about “proven players” and the “value of experience.”

Over the long term, the sport will be just fine precisely because there is little in the way of capital investment — you’re not building airports or bridges here — and costs can be cut very quickly. But, for now, it’s time to tighten those belts because, while football will continue to grow, it’s not going to be the exponential, vertical growth some were expecting a few years back.