Friday, January 25, 2013

Arsenal FC, Financial Restrictions: Is FFP going to validate their long run strategy?

Arsene Wenger has acquired the title Le Prof, for his overall knowledge and understanding of the game of football.  He is also one of the few football managers who has an economics degree.

Arsenal's early successes (1996-2004) under Wenger largely came due to the fact he was a master at finding arbitrage opportunities.  In addition to preparing tactically for matches, Wenger keyed in on a lot of other smaller metrics like player stamina, sprinting speed, scouting networks, player diets.  With these arbitrage opportunities Wenger was able to make huge profits in the transfer market when his players wanted to leave, and when they stayed, they were a force to be reckoned with. 

However, recent years have seen other teams catch up to Arsenal and overtake them without much resistance.  The big examples are Chelsea and Manchester City, who managed to attract wealthy investors who paid off the clubs debts and thrust them into the highest echelons of English football along with established clubs such as Arsenal and Manchester United.  It was a combination of this, as well as updated expectations by competitors who started implementing similar practices.  More competitive training sessions, more foreign players, a greater use of statistical analysis, etc.

Planning for the Future
Arsenal's board, and particularly Arsene Wenger have come under a lot of fire for their unwillingness to spend.  Whether they have the money to spend on top players and keep up with the Manchester clubs and Chelsea is another issue, and there are literally thousands of articles on the subject.

What I want to talk about is whether Arsenal's financial policy of spend what you earn is sound.  Why wouldn't it be?  Spend what you earn?  You don't need to be a football manager or an economist to know that. 

It looks like Arsenal is treating this as a two-period economic game.  In a nutshell, Arsenal's dominant strategy in the first period will be to save money.  That means do what it takes to keep the revenue stream consistent.  If players want more than what is affordable, then they should leave.  The hope is that in the second period the teams who got ahead of them by paying inflated wages and transfer fees courtesy of a sugar daddy  would be restricted financially or severely hampered by the reality of their debts similar to Leeds United in 2003-04.  

Arsenal seems pretty confident that clubs like Chelsea and Manchester City would be reigned in soon because UEFA's Financial Fair Play rules are set to take effect shortly.  The hope is that clubs would have to spend only what they earned from club revenue alone, otherwise they cannot compete in the Champions League.  Wealthy investors wouldn't be allowed to use their money to buy players at will.  In this environment, Arsenal would be able to financially compete with the richest clubs for players and wages.

Problems with Arsenal's strategy
However there might be a few issues with this.  If this was Arsenal's strategy all along, results wouldn't pan out quite as nicely as they would have hoped. The Financial Fair Play rules are rudimentary and have easy to exploit loopholes.  It's no secret that Manchester City are primarily run by the Abu Dhabi United group who bought them out in 2008, and that FFP would constrain the club's spending.  However, to avoid those restrictions the Abu Dhabi group signed a 350 million pound deal with Etihad Airlines for stadium naming rights and shirt sponsors.  Etihad, however is based in the United Arab Emirates like the Abu Dhabi group so there is some legitimacy concerns.  Since Financial Fair Play cannot sufficiently prove that the investors are still pulling the strings behind the sponsorship deal, Manchester City wouldn't be violating any rules and would still have their investors money to operate under legitimate means.  Likewise Chelsea and other clubs with wealthy investors would get around this easy restriction.  So in this two period game, Arsenal's long run outcome would be identical to what it has been for the past 8 seasons: Profit, but no sustained success. 

Another problem is player power.  Wage demands are higher than ever, no question and in my opinion, this is what Financial Fair Play should be focusing on more rather than limiting clubs' spending potential.  Arsenal's upper bound for wages is Chelsea's lower bound for instance.  Since Financial Fair Play will have a marginal wage effect on Chelsea and Manchester City, they will only let go some of their unused players who would still demand top dollar but wouldn't command any value.  

Of course, there are some silver linings for Arsenal.  Their stadium debt is considered entirely manageable, so that will free up some additional funding and they have consistently qualified for the Champions League so they can attract top quality players.  I don't think their two period game strategy is wrong, I actually quite admire it.  It's just that they shouldn't pin their hopes on Financial Fair Play as vindication for their short run strategy because it is not the beginning of the second period so to speak.  

Note:  When I mention clubs like Manchester City and Chelsea, I only intend to highlight their financial strategy in comparison to Arsenal.  They are simply examples and there are several equivalent clubs in other leagues such as Zenit St. Petersburg in Russia and Paris Saint-Germain in France.   I do not intend to berate them or trivialize their successes.  I am merely speaking from a strategic and economic sense and how their actions could introduce new variables in planning for the long term.