Thursday, October 4, 2012

Numbers and the Game

Last week, Arsenal Holdings released its financial results for the year that ended May 31, 2012. Immediately, a corner of Twitter exploded with commentary about how this or that number confirmed an existing opinion--that the Board's parsimony is the biggest threat to the club's identity, that there's a conspiracy to foist a mediocre product on credulous fans, that in an attempt to prove his own genius Arsène Wenger is purposefully steering the club away from the highest quality talent.

Perhaps I exaggerate, but only a little.

Leave it to The Swiss Ramble to bring some rationality to the conversation. Tuesday's entry analyzed and illuminated the numbers, giving credit to the club for its sensible approach in an increasingly irrational environment but calling the leadership to task for some serious failings.

High on that list is the "miserable" growth of commercial revenue, which at £52.5 million is not even half what Manchester United earns from that stream. Because existing ticket prices and stadium capacity are taking the Arsenal close to its upper limit on match-day revenue, commercial partnerships have to be the foundation of any substantive increase in payroll.

Strategies at Odds

The analysis also makes it obvious that the annual profitability of football operations increasingly relies on player sales. Last year, without the £65.5 million from the sales of Cesc Fabregas, Samir Nasri, and Gael Clichy, the club would have posted an £18.5 million operating loss from football operations. Many others have observed that after the exhaustion of the major property sales at Highbury Square, the business's "self-sustaining model" now requires player sales and wages out to exceed player acquisitions and wages in, at least until presumably more lucrative commercial arrangements come good in 2014.

A fundamental problem with this approach is that it brings the business strategy into increasing conflict with the football strategy. Wenger's system is not focused on detailed tactical instruction, positioning, and feedback; instead, the manager gives players considerable freedom to exercise judgment and succeed as a unit. As a result, the group has to train and play together for an extended period to develop the necessary collective understanding and trust. This puts a premium on continuity of personnel.

When the team is in synch, the result is a joy to watch. The extended run of unbeaten league games that the team achieved between late January and mid-April 2012 shows what happens when the group gels. Unfortunately, this streak only came when there was no margin for error after a frustrating and disjointed start to the season, while three starters were gone or leaving and eventually vital elements were arriving.

Where We Are Now

The results seem slightly better this time around, though nine points from the first six league matches may have made another long run imperative if the club is to contend for the title or perhaps even to qualify for the Champions League. That scenario is the clear consequence of the misalignment of business and football strategy. Supporters may have to endure it again next season if the priority continues to be annual profitability.

There seem to be two conceivable alternatives:
  • Keep the current squad in tact with changes only at the margins. Even that tack could increase the payroll because it will generate a new contract for Bacary Sagna at the very least
  • Call on part of the £150 million cash reserve during the final year before the expected increase in commercial revenue to fund meaningful acquisitions, while taking what the club can get for players deemed superfluous
The second course of action seems to be the preferred one among supporters who focus on the financials. Yet it does not serve squad continuity. And if the current lineup falls short in its performances, the first option could be a disaster for the brand while new commercial deals are being negotiated.

No easy answers, unfortunately. I guess that's why Ivan Gazidis pulls in more than £2 million each year.

Sunday, August 5, 2012

The Brand's the Thing

My previous entry described the rational risk calculations that have flowed from The Arsenal board's strategy, and it touched on the strong relative and absolute financial results that the club has delivered. Sound business and all that. Somehow, to many supporters, this performance has become evidence of the board's or Kroenke's greed, shortsightedness, or worse, apathy.

That's the thrust of much of the Twitter chatter coming, for example, from Arsenal Supporters Trust PR man Tim Payton. Arsenal, Payton and others protest, is more than a business.

We love you ... Chevrolet, oh, yes we do

They're right--in a sense. Arsenal and other high-profile clubs aren't like companies in other sectors; they aren't Unilever or Procter & Gamble. The loyalties and passion they inspire go far beyond what other businesses, even entertainment businesses, can hope for even from their most ardent adherents.

Take the auto industry, which probably has deeper emotional resonance than most. Can you imagine tens of thousands of people all across the world tied up in knots over the outcome of a company initiative? Start with New Coke, and count them on one hand.

Yet we know well the passion that connects to sports franchises. It creates great entertainment for all of us, emotionally invested or not. As examples, let's revisit the scenes in the waning moments of the last campaign. If I distance myself from the proceedings and set aside my utter distaste for both Man United and Man City, I'm captivated by the reactions of their respective supporters, assembled in this video. (We'll leave the matter of who'd be filming themselves or others during such moments for another discussion of irrational behavior.)

Closer to home, this diatribe against Robin Van Persie, launched after the striker's inartful appeal for a transfer, shows how much developments off the field can stir the masses.

The emotions are deeper, wider, and more raw with sports franchises; in other words, the appeal of their brands is much stronger.


Brands--the stories, promises, and passionate reactions that organizations call forth--are difficult to measure. This much is certain: They render inadequate the cold mathematics of the income statement and the black-and-white evidence of the balance sheet, especially when we're trying to determine the value of a sports franchise.

Owners and stewards of the sports organization need to acknowledge and account for the disproportionate influence of brands on their charges. After all, the potential capital gain from the ownership and eventual sale of a club such as The Arsenal is based on what the buyer is willing to pay for all its assets, tangible and intangible, as well as for its future cash flows.

To many buyers, the intangible assets are most important. Those are the sentiment buyers, who I'd say are more prevalent in the sports business than in others. Whether because of outsized egos, a desire to relive youth, connections to the community, or some other reason, these owners tend to look at their sports franchises as more than a calculation of financial measures.

Should Kroenke get crazy?

No one would accuse Stan Kroenke of falling into that category, but the arbiters of his investment's value may well be in that group. That means that in assessing how much his stake in the club is worth, he has to think like a sentimental buyer--that is, someone not like himself.

This exercise requires imagination and empathy. Those qualities aren't on obvious display in The Arsenal's leadership. Kroenke and Gazidis could nod to potential sentimental buyers and to many fans by:

  • Making a bigger splash about their vision for the club
  • Showing a little more passion about match or even season results
  • Emphasizing that the self-sustaining model doesn't necessarily mean a surplus each year
  • Appearing tougher in negotiations with agents, other parties, and players
I think Kroenke and Gazidis can rightly be criticized for not deploying these methods and others that would make sentimental buyers value the club more highly. Kroenke and Gazidis appear to be extremely rational businessmen in an obviously irrational marketplace.

In my interpretation, they aren't greedy, shortsighted, or apathetic. They might just be too damned sensible. But, really, could the brand of The Arsenal tolerate leadership that wasn't that way?

Tuesday, July 24, 2012

Clarity at the Top

In four decades of following the sports business, a period that included the dawn of Major League Baseball free agency, numerous labor stoppages, and the introduction of arcane designations brought on by collective bargaining agreements, I can't remember a more compelling case study than The Arsenal. It raises so many issues about governance, strategy, individual decision-making, and brand development, and the club is pretty transparent about these matters.

Thanks to the club's openness and FA and UEFA requirements, we can draw a clear picture of the structure of the business and the strategy driving it. I believe this analysis can help us understand what's going on in the day to day, including the distinctive style of play that makes discussions about the business even more fascinating.

A very public private corporation


Arsenal Holdings, PLC, the club's holding company, is a privately held corporation with a limited number of shares that rarely change hands. According to its July 2012 report, American investor Stan Kroenke owns 66.83 percent of the holding company, while Red & White Securities, itself jointly owned by Alisher Usmanov and Farad Moshri, owns 29.72 percent. Sources suggest that between 600 and 700 individual shareholders, most through Arsenal Fanshare, own the remaining 3.5 percent of the company.

This ownership structure took shape over the past five years, Kroenke having begun his involvement with a 9.9 percent stake in 2007. The key moment came in April 2011, when Kroenke took majority control by buying out major shareholders Lady Nina Bracewell-Smith and the late Danny Fiszman, as well as smaller shareholders headed by Peter Hill-Wood, still the club chairman. The takeover triggered an automatic bid from Kroenke for Usmanov's stake, which was rejected. See The Guardian's football blog for a detailed account of the transaction.

Kroenke has sat on a six-member Board of Directors since September 2008. Despite his dominance now, he has not fundamentally changed the direction of the business, as some other relatively new owners of English clubs have done. Indeed, recent statements from CEO Ivan Gazidis reaffirm the board's unanimity about the company's strategy, a strategy that took shape before Kroenke became a controlling influence.

Usmanov, who does not have a seat on the board, has made public his disagreements with the board's decisions, but corporate governance in the capitalist system being what it is, Kroenke and the rest of the board can orient the business the way they see fit. Its goal, as it should be with any responsible corporate governing body, is to create the most valuable company it can.

A strategy obvious, yet not

In addition to a set of choices about how to allocate resources, strategy, the experts emphasize, is as much about what organizations don't do as it is about what they do. In the case of Arsenal, the board made a clear choice not to rely on the wealth of an owner who would fund operational losses; that was the option chosen by Chelsea when Roman Abramovich took over in 2003.

Instead, the club's leadership oriented it to live within its means, or in a more technical description, to keep its operating income positive. You'd think that was basic business, but in the modern world of professional football, it is extraordinary: Arsenal's record of annual profitability since 2002 is unparalleled among top-level English football clubs.

This "self-sustaining model" is pure Arsenal: understandable, sensible in a 20th-century English sense, functional, and, to a certain degree, consciously righteous.

Elements of strategy: calculated risks

The approach seems so sensible on its face and so in line with perceptions of the club that many observers overlook the quite considerable risks the board is willing to take. Instead of equating risk-taking with a willingness to spend outsized amounts on individual players, let's look at the risks the board has taken in service of the strategy.

The two most prominent examples of the board's risk-reward calculus are the decision to finance privately and build the Emirates Stadium and the decision to shape the accounts in anticipation of UEFA's Financial Fair Play (FFP) standards. It's worth noting that no other Premier League team has embarked on a stadium project of the scope of the Emirates. This gives Arsenal a significant competitive advantage, in that it supports the club's tradition of setting a high standard, it creates a platform for the league's second-highest (to Man United's) match-day revenue, and it could in theory work to attract and keep players.

In some ways, the plan to adapt early to the stipulations of Financial Fair Play is an even bigger risk, because the club is relying on the governing body to enforce its stated regulations to the letter. It remains to be seen whether UEFA will put any force behind FFP, penalizing those clubs that do not live within their means. See the PudTheFirst blog for a particularly clear analysis of the prospects. If UEFA goes weak, Arsenal will be at a competitive disadvantage as the monied clubs continue to rely on the largesse of their owners and expand their payrolls.

There is a strong argument that joining the FFP-skirting feeding frenzy of Man City, Chelsea, and now PSG would leave Arsenal empty at its core. It would be presumptuous of me to say; however, it seems to me that this choice supports the club's core identity, which the board has rightly determined to be its most valuable intangible asset. I hope that some people reading this will be able to call upon many more years of club knowledge and support to testify to this interpretation.

This analysis of strategy leads to a discussion of how the club's leadership is positioning and managing the brand. If it's successful, that process capitalizes on the notion that football clubs are "more than a business." That will be the topic of my next entry.

Wednesday, July 18, 2012

Try To Tell Us Something We Don't Know

Come the silly season, come yet another know-it-all spouting wisdom related to the Arsenal. How could that possibly be interesting or different?
The Rationale

I'm hoping this project will be distinctive in a way that mirrors the club's distinctiveness. By that I mean it will focus on strategy and analysis at a high level, which to me is where Arsenal really sets itself apart.

Not every thought I have will be original--how could it be with the fiercely active supporter base on Twitter, in other blogs, on podcasts, in the Arsenal Supporters Trust, not to mention the intense coverage of the club in UK, and increasingly in US, media--but I do hope to synthesize those sources and provide my own viewpoint in ways you'll find interesting.

I'm bringing to this effort experience as a sports journalist and financial analyst, as well as the perspective of a historian. That doesn't mean somebody who looks for chronology, causes, and effects; rather, it's someone trained to take disparate pieces of information, make choices about what's important, and create a coherent account of how it all fits together.

Points of Deferral

Treading over ground that others have covered well doesn't seem like a particularly interesting exercise to me. So I will try to resist the urge to provide tactical analysis: I'll defer to Michael Cox of the excellent Zonal Marking in general and often to Gingers4Limpar, which is not to be missed in this respect, either, and to The Arsenal Column.

Many, many voices can be heard analyzing and criticizing individual performances, which can be revealing but don't often get at the big picture in the way I'd like to. Arseblog and SamsMatchReport are comprehensive on player performances. If you don't want to read a lot, Jules, @TheRealGunner, posts a vlog after almost every match. And even from Stateside, 7amkickoff and the podcasts of Arsenal Review USA and Arsenal America offer revealing insights and commentary about each contest.

Transfer speculation won't get a lot of coverage here, either, I hope, except insofar as it illuminates the club's strategy on the business and football sides. Any search of twitter will get you plenty of purported transfer scoops and hyperventilation. Among the measured and honest sources are The Guardian's football staff (@DTguardian, among them) and the Lady Arse Gossip blog.

Perhaps the most overlap will be with individuals who delve into the club's finances and business decisions, though the intent isn't to address only the numbers and business decisions clinicallly. I admire The Swiss Ramble immensely, and I'll be referring to his analyses often. Taking those viewpoints all the way through the business and onto the pitch, where the real passion comes from, will be the charge I'm setting for myself.

The Storylines

I'll also be trying to unpack some of the broader trends I see in discussions about The Arsenal, such as the tendency to attribute total control to an entity called "Wenger." That will be the subject of an upcoming entry. Also in the works are an examination of the club's approach to Financial Fair Play, the ownership structure, and reflections that emerge from yet another summer of crisis. By my count, that makes 14 in succession.

Thanks to everyone who's willing to humor me and contribute.