Clubs fight for survival as cash dries up

LONDON (Reuters) -- Soccer's financial bubble finally burst in 2002 as many of the industry's new-found media benefactors pulled the plug on lucrative deals, leaving clubs struggling to cope with a mountain of debt.

Only last year money pouring into the game had seemed limitless with clubs across Europe continuing to pay vast sums in transfer deals and wages.

England's Premier League, the richest league in the world, had income of more than a billion pounds, fuelled by television contracts, and the industry had never looked healthier.

But the past 12 months have seen the collapse of ITV Digital in Britain and Kirchmedia in Germany, while Italian Serie A club Fiorentina, once a major force in European football, went bust.

Across Europe the transfer market came to a virtual standstill as boards tightened their belts.

South American soccer was hit hard by a brutal economic recession in Argentina, while players in Chile, Bolivia and Uruguay walked out on strike after waiting months to be paid.

Brazil has not escaped financial hardship either, despite the country winning a fifth World Cup in South Korea and Japan in June.

The writing had been on the wall in terms of television deals, however, with the realisation at the end of last year that the vast sums paid for soccer content at the height of the media boom in 2000 could not be sustained.

Media firms, already hit by a slowdown in the advertizing industry, saw that they could not recoup what they had invested as pay-TV failed to catch on.

By March, ITV Digital admitted it was not able to fulfil its obligations under the terms of the 315-million-pound, three-year deal to screen matches from England's first, second and third divisions and offered a reduced sum of 50 million pounds for the remaining two years of the contract.

The offer was rejected outright by the Football League who, after ITV Digital shut down in April, instigated legal proceedings to force the pay-TV firm's owners Carlton Communications and Granada to honor the remaining 178.5 million pounds of the deal.

New deals

Their case failed when a high court judge ruled the broadcasters were not liable and the 72 clubs were left in a worse position than before and fearing the very real prospect of bankruptcy.

As yet no club in England has hit the wall. The League has been helped by new deals made since with BSkyB and ITV worth a total of 100 million pounds.

But several clubs, including Leicester City, are in administration and many have taken measures such as cutting player wages and not renewing contracts.

German clubs have been similarly hit after Kirchmedia collapsed. The company had paid 1.5 billion euros for the rights to screen top-flight German matches in a four-year deal due to end in 2004 but amassed huge debts after its pay-TV investment failed to take off.

Italy's Serie A delayed the start of its season in September after half of its clubs had failed to reach agreement with satellite broadcasters over new rights deals.

"The rights deals for television, rather than being a boost has in fact brought chaos," said Perugia president Luciano Gaucci earlier this year.

The collapse of media deals has not been entirely to blame for soccer's current financial problems. Clubs were already under pressure from escalating player wages and the industry has never been known for its business acumen.

Between 1998 and 2001, wages rose by 75 percent in the English first division with, in 2001, an average wages/turnover ratio of 101 percent, according to accountants Deloitte and Touche Sport.

A report published in July revealed that Italy's four divisions had racked up total losses of more than a billion euros in the 2000-2001 season, more than half of which were attributed to Serie A. It is unlikely that the amount decreased last season either.

Lazio and Fiorentina received ultimatums about the state of their finances and were threatened with being barred from this season's championship. Fiorentina, which was twice Italian champion and was playing in the Champions League just three years ago, were unable to meet the requirements and ais now effectively defunct after being relegated to the third division as a result.

In a more recent twist Lazio, riding high at the top of Serie A, has been put up for sale.

Crime rates

Argentina's brutal economic recession has meant players' earnings dropping by more than 300 percent following the devaluation of the peso, while many are living in a culture of fear as crime rates have soared with cases of players being robbed or kidnapped.

Latin American countries have experienced riots and growing poverty as their financial crisis deepens. The region's football clubs have slashed player wages, forcing many out of work altogether.

Soccer's ruling bodies are taking steps to resolve some of the financial problems. The G14 group of leading European clubs are seeking a players' salary cap of 70 percent of club turnover. England's Football League approved a motion last month to keep wages to a maximum of 60 percent of income.

Italy's Football Federation in September announced a review of how the sport was run, saying clubs running up large debts would risk stiff sanctions such as being deducted points in the championship.

Most importantly, soccer clubs worldwide have had to start adopting the most basic of business rules: that they should not spend more than they can afford.

"Those charged with the operation of sports clubs have many obligations and responsibilities -- and it isn't an easy life," said Deloitte and Touche Sport in their comparative review of sports finances last month.

"One overriding business imperative is for a club to spend what it can afford such that the viability of the club can be sustained for future generations."

Jorge Dominguez, general secretary of the Argentina Players' Union, made a similar reflection on the situation in his country last month.

"Clubs have to know what they can spend in a year and run the institution on that basis," he said.

"If you spend more than you can pay you will accrue incalculable debt, then comes the legal action, the court cases and the losses. And it's always the players who lose out."

 

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