Thursday, August 8, 2013

Platform or Plateau

After the final match of the 2012/13 campaign, Arsenal supporters allowed themselves, if not happiness, pleased relief at achieving a fourth-place finish. I admit to a slightly more positive outlook, perhaps encouraged by my three-year-old daughter's singing unprompted that Monday, "And the boys from the Arsenal knocked one down!"

The club did its part to perpetuate the vibe. In early June, CEO Ivan Gazidis did the rounds with supporters and the press and said, "This year we are beginning to see something we have been planning for some time - the escalation in our financial firepower." He went on to suggest that not only could the club afford the transfer fee and wages of the likes of Manchester United's Wayne Rooney, but "we could do more than that."

The financials support these assertions: When the next annual results are publicized, the cash stake will probably top £180 million, which would include season ticket renewals and the first payment of the new Emirates shirt sponsorship. With a new kit sponsorship on the horizon, the club's buying power will have expanded considerably.

Nevertheless, the summer has seen growing discontent among the base as the wealth is not deployed.

This entry takes a step back from the daily dramas and looks at factors suggesting promise and stasis. In most instances, my inclination would be to compose an analytical narrative, tying these observations together into a larger argument. However, because I want this post to start a discussion and not produce a conclusion, I'm ranking the factors by their influence and describing them only briefly.

Ready to start

Here are the developments and forces that point to an era of enhanced competitiveness for the Arsenal:

  1. The club's own financial strength. After the kit deal is finalized, the club will be able to call on at least £65 million in additional annual cash flow from commercial deals, increasing a transfer fund that already stood at £70 million before the two major sponsorships (kit and shirt) materialized.
  2. The different level of transfer target. Reliable reports have linked Arsenal with Real Madrid's Gonzalo Higuain, Liverpool's Luis Suarez, Everton's Marouane Fellaini, and other top-notch talent. These would have been out of Arsenal's price range in recent years and do not depend on the misfortunes of other clubs, such as the financial woes at Malaga that forced the sales of Santi Cazorla and Nacho Monreal.
  3. Unrest elsewhere. Four of the Premier League's top six clubs will have new managers for the 2013/14 season, and the transitions could be fraught for Manchester United's David Moyes, Manchester City's Manuel Pelligrini, Chelsea's Jose Mourinho, and Everton's Roberto Martinez. Tottenham, alongside Arsenal the only top-six club to keep its 2012/13 manager, faces the real prospect of losing by far its best player. The uncertainties present a major opportunity for Arsenal...
  4. ...strengthened by the continuity in Arsenal's management and playing squad. The club will keep everyone it wants to keep this off-season, meaning the additions of the past two years will have experience together under the same footballing philosophy.
  5. The winning mentality of this squad. When faced with the gap famed in song and story, this group of players summoned the will and applied the technique to succeed. In the last nine matches of the 2012/13 season, it secured 23 points from 27 available, 15 of those away from home.
  6. The exits of unwanted players. At last count, 26 players have left the first-team squad, reserves, and youth since May. These include Andrei Arshavin, Sébastien Squillaci, Denilson, Andre Santos, Vito Mannone, Gervinho, and are soon to add Marouane Chamakh. These departures will free more than £10 million from the annual wage bill. That figure, added to the existing financial strength (point #1 above), primes the club to go after world-class players (point #2).
  7. The impact of Financial Fair Play (FFP). I place this last in this ranking because it is the factor least in Arsenal's control. UEFA will be gathering the second round of reports from clubs and assessing their compliance between October 2013 and March 2014. As this happens, it's possible that previously spendthrift clubs will slow their acquisitions. 


Stand in the place where you are

Despite these significant advantages, several forces are working to keep the club in place--that is, competing not for trophies but only for a Premier League finish that sends the team to the following year's Champions League. I would identify those as:

  1. The existing distance between Arsenal and the top of the table. The club finished the 2012/13 season 16 points behind Manchester United. Perhaps most telling, the team took just seven points from a possible 30 against the other top-six clubs (W1, D4, L5). This analysis from 7AMkickoff suggests the need to spend at least £100 million in one transfer season to get within smelling distance of the title, given the correlation between the outlay on transfers and wages and the likelihood of success in a season. (See the Play as You Pay blog for an in-depth study of the connection.) Considering the financial and performance gaps, can the seven advantages be decisive?
  2. The risk-averse transfer approach. In January, I wrote an entry about the club's risk calculus in transfers, observing that its decision-makers appear to have elevated mitigating transfer risk to the level of business strategy. That's short-sighted. It loses track of the potentially huge impact to the Arsenal brand, which could cost far more than the transfer fee and wages of a big signing who doesn't quite pan out. 
  3. Lack of experience in transfers at the high level. If Gazidis, manager Arsène Wenger, and their colleagues are backing off their risk aversion--and links to Suarez indicate they are--a significant amount of time has passed since Wenger (then accompanied by former vice chairman David Dein) operated in the upper echelons buying world-class talent from top clubs. Neither Gazidis nor lead negotiator Dick Law has. It's an unstable environment almost defined by its irrationality. The uninitiated may not have the skills to succeed there.
  4. Uncertain enforcement of FFP. Given the timing of clubs' submissions to UEFA, sanctions will not be possible before late spring 2014, meaning any bans on participation would not be effective until the 2014/15 UEFA competitions. (See this free report from Mondaq for details and analysis.) Some clubs, prominently Paris-Saint Germain and Monaco, have taken the opportunity to spend freely. They appear to be banking on the assumption that UEFA will not penalize them harshly. If that turns out to be the case, Manchester City and Chelsea will resume their mad outlays, if they even slow them in the interim.
  5. The composition of the Arsenal Board. The executive leadership of Arsenal PLC consists of six members, all white males whose median age is 72. Not only is its profile unrepresentative of Arsenal's fanbase, the group's small size and relatively long service to the club suggest that change, a challenging proposition for most organizations, is doubly difficult at Arsenal. Read the report and recommendations commissioned by the Arsenal Supporters' Trust for a fuller analysis. 


You know better, but I know him

An additional consideration is important, but I hesitate to identify it as an indicator of opportunity or status quo. That's the future of the manager. Wenger's contract runs only through the end of the upcoming season. Many supporters frustrated with the lack of titles will say that as long as he remains in charge of the playing personnel, preparation, and game execution, Arsenal will remain stuck in an unattractive place.

The matter is hardly this simple. Wenger is a lightning rod because he is the club's most public face and has been so for a long period of time. He also is an agent, perhaps a very influential one, of a system and not the sole force for good or ill that the more simplistic, personalized analyses would suggest. With or without Wenger, many of the other factors I describe above will still be at work.

Can you read the signs

The next month will be telling, if not decisive, as we assess whether the club is entering a new era of opportunity or is embarking on more of the same. A successful transfer season, driven by softening the risk aversion and characterized by top-notch acquisitions, will show that the club is ready and able to use the financial resources at its disposal. It's a tremendous amount of pressure, intensified by the absence of activity thus far.

Although the club's leadership has brought this pressure on itself through decisions and communications, I have to think there's a plan to capitalize on the opportunity. It would be unusual for a sensible group like this to endure the constrained years since the stadium construction only to balk when the constraints are off. Unusual, but not impossible. How's that for Arsenal-like decisiveness?

Thursday, July 25, 2013

Extraordinary Popular Delusions and the Madness of Even Small Crowds

Transfer season is upon European football again, and with it come the delusions and madness. 

Arsenal supporters have been infected, with some actually contacting the club via social media to demand the immediate deployment of the large cash stake on new players; the new Manchester United manager David Moyes has experienced the epidemic of crazy as well, having thus far failed to sign any of his high profile transfer targets; the denizens of the blue side of Liverpool have been flummoxed that Everton's new manager Roberto Martinez sees players from his former and relegated team Wigan as his main solution to improve the Toffees.

Although distinctive dynamics are at work in each club, all have more to spend thanks to the explosion of television rights money, which is increasing from £3.5 billion in 2012-13 to more than £5 billion in 2013-14. Meanwhile, Financial Fair Play (FFP), whatever impact that may have, will not come into full effect until at least mid-2014, so some clubs may be taking a last run at profligacy. Then there's the peculiarity of the system of player exchange in Europe and the illusion that this system creates a "market" for players, especially at the highest levels.

The infernal design

Bizarre individual and group behavior is almost unavoidable given the twisted nature of the transfer window, the structure through which clubs exchange player services. Viewed among other systems of moving professional athletes, the transfer window has three distinguishing characteristics:
  1. It limits activity to only three months (January and July-August)
  2. It overlaps with the most crucial period of the season
  3. It is dominated by cash deals
The brevity of the open transfer window not only produces a mad rush of activity, it means that club managers and executives have little opportunity to improve their charges' fortunes based on observed evidence. If they see a shortage or a surplus in a particular area, they can only address that in January or between seasons. That leads to questionable decision-making. (See Samba, Christopher, and Redknapp, Harry.)

Improving a side through transfers is more difficult because the primary period of player movement occurs during the pre-season and the first few weeks of the season. This schedule can keep a team from developing a full collective understanding, which is a vital quality given the flow of a football match and the relative self-regulation of  its participants. The degree of player autonomy in manager Arsène Wenger's philosophy and flurries of transfer activity in the important weeks of August have at least partly caused Arsenal's early struggles in the past two seasons.

This summer's transfer period will again see big money move among the European football clubs, unlike transactions in U.S. sports. In Major League Baseball and the NBA, for example, cash is often a secondary component of a deal; it's the exchange of players themselves that drive most transactions. Some parties in those deals are even motivated by "anti-cash," or the savings enjoyed from unloading a large contract and the flexibility that brings under league-wide spending caps.

Cash, the dominant currency of football transactions, gives the appearance of free exchange: One club doesn't need to employ a player sought by the other party to do a deal, it just needs enough money to persuade the other to sell.

A market for crazy

But the freedom, flexibility, and comparability cash theoretically provides do not make player exchanges informed or their pricing transparent. I'd suggest that these transactions don't add up to a market at all. They're instead a number of discrete exchanges giving off the illusion of market characteristics because cash is enabling the transfer of similar services for a price.

Close observers of the Arsenal, particularly Elliott of @YankeeGunner, have argued that the issue of a player's "worth" is beside the point. If Arsenal wants a player, CEO Ivan Gazidis, chief negotiator Dick Law, and Wenger have to be willing to pay what the other club demands. I'd take this logic a step further. Because there are so few transactions among top clubs for world-class talent, I'd say that each transaction bears almost no relationship to any other.

Here are the summer 2013 transfers to date between Champions League clubs for world-class talent, defined as members of national teams (figures from transfermarkt):

  • Edinson Cavani, striker, from Napoli to Paris-Saint Germain for €64.5 million
  • Mario Götze, attacking midfielder, from Borussia Dortmund to Bayern Munich for €37 million
  • Henrikh Mkhitaryan, attacking midfielder, from Shakhtar Donetsk to Borussia Dortmund for €27.5 million 
  • Mario Gomez, striker, from Bayern Munich to Fiorentina for €15.5 million 
  • Carlos Tevez, forward, from Manchester City to Juventus for €9 million
  • David Villa, striker, from Barcelona to Atlético Madrid for €2.1 million
That's it. Only six national team players have moved from one Champions League club to another during the current transfer period.

What if we expand the borders and look at national team players from top-four clubs outside the European leagues? None qualifies.

My point is that this handful of transactions doesn't serve as much of a market. There just aren't enough comparables to determine what prices should be, and each exchange seems distinct from the ones before and after it.

The only exception I would make is for moves in which one club is participating in another transaction. Even then, thanks to their resources, Bayern Munich, Barcelona, Real Madrid, Chelsea, Manchester City, and PSG can conduct multiple, megamillion-euro or -pound acquisitions without concern for offsetting the costs.

Add the intensification of player power, and you have a hugely distorted "market." Players tempted by moves elsewhere, regardless of their contractual status, can threaten to go on strike, leaving their current employers with little recourse but to sell. That changes the supply-demand dynamics and the prices of transactions, which makes connections from one deal to the next even more tenuous.

If it's hard to discern a clear relationship among exchanges during one transfer window, connections from one period's transactions to what went on in previous periods are positively opaque. For that reason, any meaningful conclusions about trends--"prices are going up" doesn't count--are suspect, and models based on those trends seem flawed. 


For at least 10 years, Arsenal as a club resisted the excesses of the transfer system. I wrote in January that risk aversion seemed to be the guiding principle of the club's transfer dealings. This approach took the club away from acquiring world-class players from other Champions League sides, so it did not act as a buyer in those rare transactions. The sensible image of the club and its decision-makers therefore persisted, though I argued that their risk calculus was suspect.

Now that money is less of an issue for the club, it's seeking top talent from top competitors. The question is, are Gazidis, Law, Wenger, and their colleagues prepared to act in this different environment? They have been reasonable to apply economic principles to the host of transactions in the €20 million and less range, where the set is large enough to render the cash comparisons among player assets meaningful. Can they bend those principles to succeed in a different setting, one in which it's unreliable to compare asset values and unreasonable to expect selling those assets for a higher price later?

We'll have our first indication by September 2.

* - title an homage to Charles Mackay's seminal work

Monday, January 21, 2013

Whiffing on Risk

Since the start of the 2011-2012 season, Arsenal CEO Ivan Gazidis has regularly and famously said the club has "kept some powder dry," and the cash on the balance sheet shows it. There's most likely about £75 million available for player acquisitions and new salaries right now, if you set aside a good chunk of the club's £154 million cash position (at May 2012) for debt service and a Champions League contingency fund. The new five-year, £150 million shirt and stadium sponsorship deal with Emirates Airlines will add another £30 million to the pot in the coming summer.

That creates a 2013 transfer kitty of more than £100 million, which supporters can reasonably expect to be deployed, given the obvious shortcomings and poor form of the current team. (Read the January postings of the 7amkickoff blog for insightful analysis of where the club should be adding.) 


A single-minded focus on personnel risk


Gazidis says a lot of things, and to pick out the image of the dry powder might unfairly characterize the club's thinking. But it's an image that sticks for several reasons:
  1. The club has not brought in new players whose fees have exceeded those of players sold by the club, having registered profits on player sales, since at least 2007 (source: The Swiss Ramble)
  2. Prior to this month's re-signing of Theo Walcott, the club has sold marquee players rather than exceed the existing wage ceiling
  3. The highest reported transfer fee in the history of the club is the £14.5 million for Andrei Arshavin in 2009 (per Arsenal Report's Transfer Centre)
  4. Manager Arsène Wenger's statements, such as "We are open to strengthening the team, but the difficulty is to find what strengthens us," indicate skittishness about incoming transfer activity
This evidence in word and in deed suggests that the club's leadership considers the failures of new signings to be a primary risk to be mitigated. It's not difficult to understand this position given the long need of the club to pay off the burdensome aspect of the stadium debt and the transfer flops of Marouane Chamakh, Sebastien Squillaci, and Park Chu-Yung.

The problem is that the club's leadership has elevated the risk of personnel mistakes to a level of strategic priority. Often it seems like the only priority.


Ignoring the damage


In the process of focusing on the possibility of acquiring poor individual performers, which I would consider a tactical business risk, the club is now running a risk that is much more damaging--the risk to the Arsenal brand.

The Arsenal brand has been 125 years, or at least 85 years, in the making. Certainly beginning in the Herbert Chapman tenure in the 1930s, the club has worked to establish its brand as a distinctive and successful balance of sensible and innovative, of English and cosmopolitan, of street smarts and class. The most visible manifestations of this brand have been the exciting playing styles at the peaks of the Chapman and Wenger eras.

That's all being jeopardized by the approach to transfers and the near obsession with ensuring the precise value of new playing personnel.

As a result, a growing--and unfortunately not unfounded--perception of the club is emerging: It's stubborn and doddering, a full turn from the image hard-earned and well promoted over the years. When's Triangle blog recently published a Downton Abbey-to-EPL converter, Arsenal was equated with Robert Crawley, the Earl of Grantham, who is "electing to remain stuck in his ways as the modern world passes him by."

The history of brands indicates it's difficult to reverse the fundamental perceptions of a brand once they've been turned in a negative direction. The examples of Toyota, whose massive vehicle recall damaged its reputation of quality, and the Susan J. Komen Foundation, whose public split with Planned Parenthood called its focus on women's health into question, should serve as cautionary tales. Perhaps more to the point, Sony has stood still while such rivals as Apple, Panasonic, and Microsoft have usurped its prime positions in the laptop, television, and video game markets, respectively.


Where the pain will come


As has been the case with Sony's gradual decline, don't expect a single event to signal the downward shift of the Arsenal brand. Instead, each disappointing transfer period, followed by a stretch of subpar performance on the pitch, will represent a step in the worrisome direction. Eventually, the trend will show up in the club's finances, as sponsors drive harder bargains and ticket sales lag.

I was admittedly much more concerned about the potential damage before the new Emirates sponsorship deal was announced. Still, the positive effects of that agreement could be wiped out by weakening match-day revenue, failure to secure secondary and regional sponsorships, and prolonged absence from the Champions League.

As Arseblog wrote on 9 January, "How long before that [a combination of high prices, under-performance and refusal to invest] has a knock-on effect on revenue in other ways, such as sponsorships, advertising, endorsements and so on? Do you want to pay for a pitchside ad running in front of swathes of empty seats?" 

Here's hoping that majority owner Stan Kroenke, Gazidis, and their colleagues recognize the risk before the effects hit the finances. By then, it'll be too late.