Tuesday, 8 October 2013

When Will Real Madrid and Barcelona Stop Being So Good?

Madrid and Barcelona don't like each other very much, but none of the other clubs in La Liga like either of them. No wonder they look so angry. (source: theaustralian.com.au)

In September 2011, Sevilla president José María Del Nido invited all of La Liga's teams to Seville to discuss their financial future. The two excluded clubs were Real Madrid and FC Barcelona, Spain's two biggest clubs by all metrics, left at home to pout like brooding, unpopular teenagers. Del Nido's message was clear: the big two were cannibalising the rest of the league, turning La Liga into what he called a “crap league -- the biggest pile of junk in Europe.”

Two years on, and little has changed. Before their Supercopa match with Barcelona, Atletico Madrid manager Diego Simone issued a damning verdict. “Madrid and Barcelona play in a different league, and this is a boring championship. We'll have to wait until there is a change in the share of television revenue, because this is a two-teamleague." 

Simone is not wrong. The imbalance in Spain's TV revenues makes feudal Europe look equal. Under the latest deal, the negotiation of which Del Nido was trying to influence, Madrid and Barcelona between them take 35% of all revenues. Atletico and Valencia then are allowed 11%, and 45% is to be divided amongst the remaining 16 clubs (the remainder is to be used for league placement payments and such). This means that Real and Barca both take €140 million, almost three times the receipts of Atletico and Valencia (€46 million and €48 million respectively), and more than ten times that of the majority of clubs (seven teams receive €14 million, one €13 million and two €15 million). By way of comparison, in the far more equitable Premier League (in 2011/12), champions Manchester City earned £60million and relegated Blackburn Rovers and Wolverhampton Wanderers earned £40 million from the television deal.

The reason for this disparity is that the league does not negotiate its TV rights collectively, as the other major European leagues – including the Premier League, the Bundesliga and Serie A – do. The result is that Barca and Madrid, the most popular La Liga teams by far domestically and internationally, have greater TV rights income than any other clubs in the world. According to Deloitte, Madrid earned €199.2 million in total from TV distribution rights, and FC Barcelona €178.9 million. By way of comparison, the next highest earners were Chelsea, who received €139.4 million (in a bumper year where they won the Champions League) and Manchester United, who earned €128.5 million in total.

Spain's TV deal thus gives Real Madrid and Barcelona a structural advantage over their rivals both domestically and internationally. This is not their only one. Both clubs enjoy status as 'membership clubs', allowing them to register as not-for-profit organisations and receive significant corporate and property tax breaks. In 1990 the Spanish government ruled that all clubs besides Madrid, Barca, Osasuna and Athletic Bilbao had to become limited companies, waiving their tax advantages.

The result of these two structural advantages is that Real Madrid and Barcelona are vastly wealthy. They are not just the richest two clubs in Spain, but the richest two clubs in the world: their revenues of €512.6 million and €483 million respectively are around €100 million greater than the third-richest club (Manchester United, €395.9 million) and almost double the eighth-richest (AC Milan, €256.9 million). No other Spanish teams make the top twenty; indeed, Real Madrid and Barcelona account for almost 60 per cent of revenues generated by the 20 first league clubs, an unbalance far greater than can be found in the other European leagues.

This wealth is, of course, reflected in their on-the-pitch dominance. The brilliance is easily visible to anyone who has seen the teams of Messi and Ronaldo play. Both clubs routinely win by four or five goals, and have been ratcheting up record points totals in consecutive seasons. They also regularly reach the last stages of the Champions League, with Barcelona having won the trophy three times in the last decade. Pep Guardiola summed up the Madrid-Barcelona duopoly as “fucking barbaric”.

It is no coincidence that the last time a team other than Real or Barca challenged for La Liga was Sevilla in 2006/7. This was the last boom year before the financial havoc of the 2007 recession. As the big two have risen, the rest of La Liga has slowly sunk into the mire of the Spanish economy. Javier Tebas, president of the Spanish football league, compares the football market to the housing market: “The sector became inflated. It grew through debts. Then the crisis brought an end to all this money – and strangled us economically.” Professor José Maria Gay de Liébana of the University of Barcelona agrees: “Football is largely a reflection of what has been happening in our economy, with people spending way beyond their income, relying on fanciful growth forecasts and ending up with unsustainable debt and an asset pricing bubble.”

Football's asset pricing bubble has left much of La Liga in disarray. Many clubs have been through periods of governmental administration; almost all are heavily in debt. Professor Gay estimates that the debt of La Liga clubs was €3.5 billion, with half of them having negative equity (i.e. their reported liabilities are greater than their assets i.e. they're fucked). Around €700 million of this debt is owned in taxes to the Spanish government. With the bursting of the bubble, and the continued struggles of the Spanish economy, these debts have become a heavy burden for the league. For every club, excluding the big two (and Athletic Bilbao), footballing glory is no longer a target. They can only aim for survival.

Despite these problems, the clubs' chances of continued existence have improved recently. The first was the introduction, at the time of the last TV rights deal, of parachute payments for relegated clubs. Money would now be paid from the TV deal of the top division to those teams relegated into the second one, in order to help them deal with the far harsher financial realities one rung down the ladder. Francisco Roca, the chief executive of La Liga says that “If you get relegated in England, it is difficult. In Spain, it is catastrophic. You don't even get 10% of the revenue you used to have. We have doubled that amount, but we have to do more."

The arrival of necessary parachute payments came at a large cost: it was in this round of negotiation that Barcelona and Madrid quashed the Sevilla-lead rebellion and enshrined their televisual dominance. The problem the La Liga clubs face is that the big two's popularity is essential to making the league's TV rights seem appealing to prospective buyers. As much as Madrid and Barca are cannibals on their fellow clubs, these same clubs are parasites of the backs of the two behemoths. The clubs accepted a raw deal on TV revenues because they needed parachute payments to guarantee survival; they are trapped in a vicious circle that may well lead to increased big two wealth and popularity, and further little 18 financial jeopardy. All the parties know this, and Madrid and Barcelona use this knowledge to browbeat the league in negotiation. As Espanyol director Joan Collet puts it, “when Madrid and Barcelona stand before them, when Florentino [Pérez, the Madrid president] starts to talk, the other clubs shit themselves."

Nonetheless, there may be some hope for the future. Madrid and Barcelona (and Osasuna and Athletic Bilbao) may soon lose their tax advantage. The special status of the four clubs is under review by the European Commission's competition office, which is seeking to determine whether the tax-breaks the clubs' status allows qualifies as illegal government aid. So far, the commission has taken more than four years to come to a decision, and has still not announced what this decision might be (usually investigations with the same priority as this one are decided in one year, but the competition office have repeatedly overshot their deadlines). Increased pressure from several European clubs, most prominently Bayern München, however, has lead to the intervention of the European Ombudsman. The Independent reported that a spokeswoman of the EC competition office said that it was "in contact with the Ombudsman" over the issue of Madrid and Barcelona's member-owned status and expected "to take a position as regards state aid to professional sport in the near future".

The two outcomes seem to be either that the four clubs will lose their special tax privileges, or, as Inside World Football suggest, that the 1990 act imposing the limited company model on professional clubs will be deemed against the European Union's Directive on Services in the Internal Market, and will therefore be removed. Either way, the playing field should be slightly more level for everyone else.

There is some hope being generated by the clubs themselves. While it seems to have been a failure on a macroeconomic level, within the Spanish football market the policy of austerity is starting to have some success. La Liga teams have reduced their annual losses from €200 million in the 2011-12 season to under €40 million in 2012-13. Furthermore, the predictions for next year are good, with losses potentially falling collectively to just €10 million.

If La Liga continues to manage and reduce its debt, then there is hope that the teams can once again become more competitive with their divisional giants. At the very least, no longer being on the brink of annihilation should give the clubs a stronger bargaining position when the TV rights are next up for renegotiation.

The greatest source of hope, however, is the players themselves. Spain is currently enjoying an unprecedented quality and depth of professional footballers. One of the reasons Spanish clubs have been able to reduce their losses is the continual production of highly talented, and therefore highly priced, young footballers. Currently these players are being sold to fend off oblivion; in a slightly more stable economic environment, clubs may be able to hold onto their talented youngsters just a little longer. After all, Valencia had David Villa for five peak years; Málaga could only cling to Isco for two seasons. Isco is now only 21, and already cost Madrid €30 million. Undoubtedly, in classic Real Madrid style, he will be pretty good for a couple of seasons and then wastefully sold on abroad, at a loss, so the next idiotic president can splurge the next world-record transfer fee on the next unneeded glamour signing. Gerardo 'Tata' Martino, the current Barcelona manager, has recently said that Gareth Bale's transfer fee shows “a lack of respect for the world in general”, and he is completely right. The only problem is that Barcelona paid an equally disrespectful €57 million for Neymar.