The Bull market has ended. It always does. The tragic events of the Covid-19 pandemic have brought a closure to more than a quarter of a century of unbroken growth in Premier League revenues, inflated values and even greater inflation in costs.

At the turn of the year, when we (Evertonians) were thinking of a late assault on European places and with a planning application made in relation to Bramley-Moore, to find ourselves in this position was unthinkable.

As Warren Buffet famously said “A bull market is like sex, it feels best just before the end”.

The human cost of Covid-19 is enormous, each death a personal and family tragedy. The attempts to mitigate infection rates and thus fatalities, by isolating huge swathes of the developed world will have a cataclysmic impact on the global economy. Despite the desperate attempts of many Governments offering unparalleled support, businesses starved of revenue will go bust. As a result employment and income levels fall – we, from Merseyside, know the story all too well – those that lived through the 1980’s need no explanation of the impact of mass unemployment. With no hyperbole, comparisons with the economic wreckage of the Great Depression of the early 1930’s are also entirely feasible.

In the US (the most up to date statistics available – they provide weekly stats) more than 10% of the workforce (16.8 million) have made new unemployment claims in the last 3 weeks.

The immediacy of the rise in unemployment is very significant. From around 4% 2 weeks ago, unemployment in the US is heading for 15% and much higher in the weeks to come. For comparative purposes the Great Depression saw unemployment peak at 24.9%, albeit it took 3 years to get there (and from a lower base than just pre Covid-19). UK figures are not available until 21st April but will see huge rises (already 1.2 million new claims for Universal Credit for example)

Germany, the European powerhouse, has forecast unemployment growing for the next 15 months, doubling from 4 to 8% and possibly as high as 12% or more further out.

That’s just the developed world. The lesser developed nations often with higher population densities, poorer health and significantly poorer healthcare provision face an even bleaker future given how Covid-19 thrives in such environments. Anyone with experience of India, Sub-Saharan Africa and Indonesia for example, will understand the scale of the problems facing their populations. Additionally, from an economic (let alone health) perspective, those that sell to the developed world in order just to barely exist, what becomes of them when the developed world stops buying? – as it surely will.

What relevance does this have to football, particularly the Premier League?

For 2018/19 – the last year full accounts for all teams have been published, the Premier League collectively generated the following revenues:

With just over £5 billion of income the 20 Premier League clubs had an aggregate EBITDA of £944 million and an aggregate net profit of £82 million. Before the impact of  Covid-19 hit, most analysts expected to see the aggregate EBITDA and net profit figures fall as clubs continued to spend and charge the P&L account with greater amounts than the growth in income.

Let’s analyse the two largest elements broadcast and commercial. Firstly, a few general comments. Almost all commercial and broadcasting revenues ultimately are driven by consumer spending around the world. Either through subscription, advertising on TV/internet, shirt, ground and other media sponsors, it’s all dependent on consumers having the ability to pay subscriptions or buy the products, support the brand that is advertised.

Early evidence from China, after their initial shut down, shows that in their greatly controlled economy whilst freight and coal use (a good proxy for power generation and therefore economic activity) are recovering, consumer spending is still heavily suppressed. Consumer spending globally will shrink enormously.

I looked at the number of broadcasters who pay the Premier League for rights to show games, more than 70 broadcasters in over 80 regions (composing of multiple countries) and individual countries. Broadcasting revenues are split into domestic (Sky, BT and BBC) and overseas. Additionally Amazon have acquired rights to stream over the internet. Domestic rights were negotiated to the value of £ 5 billion over the 3 years 2019-2022, and overseas rights an incredible £4.2 billion.

In France, Ligue 1 has already seen Canal + withdraw their next instalment on their domestic rights (this is a company whose parent company had annual revenues of almost €14 billion). BeIN have acted similarly .

It’s almost impossible to believe that the economic damage of Covid-19 won’t adversely affect subscription numbers and advertising levels for many years to come.

One of the impacts of a recession or depression on TV rights is an increase in piracy. That immediately reduces revenues to the rights holders. But it does something else too. It makes the value of the rights themselves less.

Yousef Al-Obaidly, BeIN Media Group’s chief executive has consistently argued that the level of piracy directly affects the value of future rights. An increase in piracy driven by consumers not being able to afford the genuine product, impacts the future value of rights and therefore the Premier League revenues

Thus for a multitude of reasons, I would argue strongly that whilst domestic broadcasters have a greater shared interest with their domestic leagues, overseas broadcasters would find the decision to either claw back revenues from an incomplete season (should that happen) or demand much reduced future fees based on the factors mentioned and an inability or unwillingness to pay. The prior reliance on overseas broadcasters to fund the Premier Leagues excesses may be a significant factor in coming months and years

Broadcasters rely upon subscriptions or advertising or both.  In the economic conditions which are quickly evolving, consumers cancel subscriptions and companies stop advertising. (Channel 4 in the UK has seen an immediate 25% reduction in advertising revenues in less than a month). Faced with such a challenge, at best broadcasters will seek to renegotiate existing contracts. Many may not survive. The bidding for 2022-25 will be significantly different to previous rounds.

Not only will broadcasting revenues fall, but the prospect of fewer viewers, and a  customer base with significantly less disposable revenues will reduce the attractiveness of many of the ancillary deals. A cash starved company in Malaysia can no longer afford to be Manchester United’s official pillow partner.

Commercial revenues were worth £1.392 billion in season 2018/19 with more than 300 commercial relationships between the 20 clubs. These include shirt sponsors, sleeve sponsors, naming rights and the multitude of partnerships regional, national and international. They represent many sectors including financial services, automotive, airlines, beverages and gambling. Not all of these companies are AAA rated. Whilst the top 6 typically have sponsors with (by necessity) huge revenues and strong balance sheets, the less commercially attractive clubs (including Everton) swim in a far more insecure pool.

For example, gambling as main shirt sponsors are worth nearly £70 million per annum in the Premier League – add in the shirt sleeve sponsors and that figure rises. The absence of any live sport has hit the sports gambling industry extremely hard, especially in developing markets. Turnover in East Africa for example, has fallen by 99% since live sports ground to a halt. Most of the gambling companies sponsoring Premier League clubs are opaque by nature – often domiciled in the Isle of Man or other offshore centres, they must be vulnerable to the market forces currently applied to them.

As is always the case, it is a reasonable assumption that outside the top 6, the remaining clubs will be most vulnerable.

So what is the solution?

Ultimately, it is to reduce costs. Spend less on acquiring players and less on retaining them. All of the above is going to have a massive deflationary effect on football. It has huge consequences.

Despite the huge increase in revenues, clubs typically have increased expenditure at a higher rate than the growth in income. To make good the shortfall in this model, clubs have used players as assets, constantly trading them at ever inflated values, thereby covering running losses with asset sales.

This is plate spinning at it’s best (worst). Ask the banks post 2008 when their previously inflated (and ridiculously valued) balance sheets turned to dust overnight. Football is in a similar position, except that football is not too big to fail. Other than a relatively small number of exceptionally wealthy owners, sovereign States and oligarchs who will possibly support their trophy assets it is difficult to see where the support comes from.

FIFA has suggested emergency funding for the game, from its $2.7 billion cash pile. That’s a lot of money, but it’s not enough. FIFA can cover short term cash flows, make sure the players get paid but can’t cover the ridiculous structural issues surrounding the game.

Football needs to bite the bullet. It needs to recognise its cost base is totally inconsistent with the new economic world in which we live.

It can survive, but only if it and all the participants start living within their means. Not the inflated means of even a couple of months ago, but the means of a sport surviving in economic conditions not seen since the early 1930’s.

What does that mean for Everton?

Well we, even in the very good times of the last few years, have spent beyond our means. We cannot continue to do so, that is clear, regardless of shareholder support.

For Bramley-Moore? As I’ve indicated previously, a debt funded stadium is less likely than previously thought. There’s no appetite for risk from debt funders and the business case with higher financing costs and less secure, smaller future income is a difficult sell.

Football is not as important as the challenges we all face, real life and death challenges, but it’s still of great interest and great hope for when better times return. However, when they do return, financially & economically they will be very different.

Stay safe all.