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Wednesday, 13 July 2011

Arsenal at the Crossroads of Destiny

Lest we forget, Arsene Wenger knows how to build a Championship winning football team. In 1997-98 he led Arsenal to the double, a feat he repeated in 2001-02. Two seasons later, Arsenal were again crowned champions without losing a single match in a remarkable run of 49 league games undefeated. Importantly, these successes were founded upon a mix of English steel and European flair, of established stars and emerging talent, of youth and experience.

Since then his acumen in both buying and selling players is proven beyond question. How many players have moved from Arsenal and improved themselves? At the same time his project of building a team of young players that have developed together has created a string of new stars coveted by leading clubs – Barcelona want Fabregas, Chelsea, Manchester City and Manchester United want Nasri, Manchester City have signed Clichy, Chelsea want Walcott, and Wilshere has emerged as a key figure in the new generation of England hopefuls.

Underpinning the above has been a pay policy that sees wages more evenly distributed across the squad than is the case with the clubs leading competitors. The logic is that this binds the players closer together, that petty jealousies are reduced, and the impact of not playing regularly in the first team is not as great – your importance, as part of the squad, is recognised and rewarded.

The difficulty however is that there is less money to reward the very best players, so they are vulnerable to the temptation of higher wages on offer at other clubs. In the same way it becomes more difficult to attract the very best players because Arsenal are unable to match the wages on offer from their major competitors and, conversely, when it comes to selling some of the fringe players the wages they’re receiving are too high relative to their ability, making it difficult to find other clubs willing to pick up the burden.

If the team were winning trophies it might be less of a problem however it’s now six years since Arsenal won anything. The promise is always ‘this next season’ as the young team matures, but a career in football is short and when the opportunity appears to earn more money at a club that is already winning things who would refuse and if they did, on what logic? Nevertheless, it is hard to argue that the policy has not been successful given that throughout the rebuilding or ‘maturing’ period Arsenal have consistently finished in the top four.

Of course the competitive landscape changed when Abramovich bought Chelsea. Not only was there an additional serious contender but here was a club with comparatively unlimited resources and ambition. Then Manchester City trumped Chelsea. With Liverpool’s new owners also investing heavily in their team, and Spurs showing genuine ambition, Arsenal find themselves under severe pressure as the competition for a top four finish and entry in to the lucrative UEFA Champions League intensifies. If Arsenal are to be competitive going forward, and retain their prudent business model, then they have to increase their revenues substantially.
Deloitte’s annual review of football finance showed that 42% of Arsenal’s income is generated through gate receipts – by far the highest of any major European club, and in absolute terms only Real Madrid and Manchester United earn more from this source. Ticket prices are already the most expensive in the Premier League at a time when many of the supporters seem to be having a crisis of confidence in the club’s leadership and direction: there appears little scope for further increases in ticket prices. If revenues are to grow in this area then the club needs more matches and these can only come through success in the domestic cup competitions and in the UEFA Champions League.

Achieving an increase in broadcast and associated revenues is similarly success dependent. Progress in the Champions League, achieving a high finish in the Premier League, and doing well in the FA Cup and Carling Cup, will see more matches broadcast earning additional fees and higher ‘bonus’ payments. Other than winning more games there’s little the club can do to increase revenues from this source. That said, they rank second to Manchester United in this area, and seventh in Europe – in terms of broadcast and ticketing revenues combined only Barcelona, Real Madrid and Manchester United achieve more...

This leaves commercial income: sponsorships and merchandising etc. In terms of total revenues Arsenal rank fifth in the Deloitte’s European ‘money league’, but thirteenth in respect of commercial revenues. The kit deal with Nike was extended and runs for two more seasons. The stadium naming rights agreement with Emirates continues until 2020/21 and the associated shirt sponsorship until 2013/14. With Liverpool and Manchester United both securing shirt sponsorship agreements valued at an annual Euros 24.4 million Arsenal are to some extent disadvantaged until the Emirates shirt sponsorship expires. That said there is substantial compensation in the form of non-recurring profits from property development that bridges the gap.

There is no question that increasing commercial revenues is the major area of opportunity for Arsenal. The value in the leading brands is in their global appeal with the popularity of the Premier League giving its top clubs a significant advantage over their European rivals. Traditionally Arsenal have not focused on exploiting this by sending the team to Asia, the USA and other important markets where the team enjoys substantial support. This pre-season the trips to China and Malaysia signify a recognition that they have to abandon this reticence and be far more outward looking. If the football team is under pressure to deliver results on the field the commercial team is under no less pressure to do the same off it. The problem of course is the timeframe – it will take them some years to bridge the distance between thirteenth and top four.

Conversely, Arsene Wenger has weeks in which to build a team that can compete effectively against Manchester United, Manchester City, Liverpool...and in Europe, Barcelona, Real Madrid, the two Milan’s. It appears at least, that there is a crisis of faith among some of the key members of the team – having failed so consistently last season to translate potential to trophies the other contenders appear to some to play on greener grass. Clichy has gone. Fabregas and Nasri are perhaps the litmus test – if they also go then arguably the project is over. If they stay and retain the faith, if Nasri signs a new contract and Fabregas commits his heart and soul, then with a few key additions perhaps Wenger and Arsenal can prove the doubters wrong.

The stakes could not be higher. If Arsenal falls out of the top four they will lose in the region of Euro’s 30 million in Champions League revenues alone. Their capacity to compete in the wages and transfer market will be further reduced, as will their ability to attract the players they would need to turn things around. There is a real possibility of a downward spiral. In this scenario, the distance between Arsenal and their key competitors – notwithstanding the introduction of UEFA’s Club Licensing and Financial Fair Play Regulations, or the performance of the club’s commercial team – would grow and could become unbridgeable if the present policy of financial prudence remained in place. 

With his own position more vulnerable than it has ever been during his time at the club, Arsene Wenger has mounted an articulate, intelligent and passionate (in his own understated way) defence of his project, insisting that captain Fabregas and key-man Nasri would be staying and not under duress. The team will be strengthened. It was close last season, it will be stronger, better equipped this. The sooner he is able to do this the easier it should be to persuade Fabregas and Nasri that they should keep the faith and see the project through. After all winning with this team, given their development together, should be something special.

Arsene Wenger knows what it takes to win championships and cups – the question that remains is whether or not he has the necessary resources, and the will to commit them, to bring in the key additions now that will add steel to the flair, established stars to the emerging talent and greater experience to his still young side. This is a pivotal season for Arsenal and for Arsene Wenger – the outcome will constrain or enable revenue generation and dictate the ability of the club to compete over the next decade. For football more generally, it is also a key battle in the war for financial sanity.