It's all about sports!!

With a large part of the Olympic Winter Games in Vancouver now behind us, it is interesting to notice that the Games continue their unbridled growth both in terms of participating athletes and nations as well as in the number of events. However, this comes at a expense. Whereas since 1980 (Lake Placid) the number of athletes and events have increased by 2.5x and 2.3x respectively, the expenses related to the games have increased by a staggering 13x and when compared to 1984 (Sarajevo) even by 20x! This exponential increase is clearly not sustainable going forward. Since Lake Placid the number of events, athletes and nations has more than doubled.

Vancouver, Canada is the pride host of the XXI Olympic Winter Games. After Calgary, it is the second time Canada is hosting the games. Since then a lot has changed, but what has not changed is that the Winter Games are continuing to witness unbridled growth in terms of events, countries, participating athletes, participating officials, TV coverage and revenues and expenses. So far the end is not in sight, albeit that growth is slowing down. This should not be surprising given the fact that two sources of growth seem to slowly get saturated. The increase in the number of participating countries is slowing down and more importantly the growth in the number of participating athletes and events is coming down. The table below shows that since Lake Placid in 1980 the number of participating countries, the number of athletes and the number of events has more than doubled, implying that compounded growth for each time Winter Games were organized on average exceeds the 10% figure. As can be seen the Torino and Vancouver Games have witnessed significant lower growth.

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The table below gives some more detailed information. Whereas in the past travel to another continent had an impact on the number of participating nations, this seems no longer the case. This is partly due to the fact that the IOC is subsidizing smaller exotic countries that want to participate. These smaller countries are only a small reason behind the enormous growth in the number of athletes. More important growth drivers are the growth in the number of female athletes and the number of events. When looking at the number of women that participate in the Games, we notice that since Lake Placid this number has increased by 355%, whereas the number of participating men only increased by 87%. Also in absolute terms the number of women has grown more rapidly. This is partly due to the increase in the number of events for women, which brings us to another growth driver. Both the number of men’s events and women’s events has more than doubled over this period. New popular events like snowboarding and snow cross have been added, whilst almost all events are now both for women and men. Clearly the new sports will continue to play an important role for the growth in the future. The success of the winter X-games shows the need for action sports and by allowing sports such as boarding and snow cross (which everybody seems to embrace), the IOC is aiming to embrace the younger generations. Ironically, in absolute numbers, the number of team officials has grown the most and now exceeds the number of athletes.

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Costs have grown exponentially. It should also be interesting to see how the games have done financially. In the table below the revenues, costs and profits are summarised in USD and at constant 2000 prices using the 2000 price index. Two quick conclusions can be drawn: 1. the figures (which exclude investments related to the venues and infrastructure) clearly indicate that the organising committees of the Olympic Winter Games have realised a deficit in most of the cases; 2. The increase in both revenues and costs have grown far more rapidly than the number of participants in the games. The Vancouver Games (we have used the budget numbers) are likely to be the most expensive; Vancouver 2010 is likely to be almost 13x more expensive in terms of costs than Lake Placid 1980 and even 20x more expensive than Sarajevo 1984. This is an astonishing increase when compared to the increase in the number of athletes (2.5x) and the number of events (2.3x). When allocating total expenses over the number of athletes active in the game, it implies that costs per athlete has risen by 414% from USD 107,612 to USD 553,171 using constant 2000 prices. Of course there are plenty of explanations, but it is clear that this exponential cost increase cannot continue in the future!

Looking back at the 33^rd edition of the Americas Cup, the conclusion is one of mixed feelings. In disgust over the countless courtcases, fights, manipulation, postponements and enormous egos of the two owners of both syndicates. In awe of watching the magnificent display of technology and raw power of the BMW Oracle and to a less extent Alinghi. And full of enthusiasm when watching the actual race. That pretty much sums it up. Clearly, awe and enthusiasm have taken the upper hand during the last week. In that perspective it is sad to conclude that the 33^rd Americas Cup will likely end up in the history books as one of the most controversial ones, very similar to the Americas Cup of 1988, when Dennis Connor won the cup with his Stars and Stripes. It is to hope that, again similar to what happened after1988, the 34^th Americas Cup will regain some of its lost reputation, a big responsibility for the parties involved.

The 33^rd edition of the Americas Cup is one to remember, a Cup which will go down as one of the most controversial ones in history. Controversial because of several reasons: 

Astonishing display of technology and yachtsmanship. Looking back at both races the image of a monster trimaran with a 68 meters high mast and a highly innovative 223 foot wing sail (easily exceeding the wing of a Boeing 747 airplane) will always be imprinted in the minds of those who have witnessed it. This wing sail was powering this unique piece of engineering equipment at three times the speed of the wind, sending its windward and middle hulls flying well above the water. These were the fastest, most technologically advanced sailboats built in the 159-year history of the America’s Cup. This giant boat made the crew like little midgets, of course safely guided by Jimmy Spithill at the helm. Talking about giants! Spithill, who at 30 became the youngest skipper to win the America’s Cup, has proven his great sailing abilities and absolute dedication (which even led him to take flying lessons). Russell Coutts is the other hero. The CEO of the racing team has done it again, he won his 4^th Americas Cup and hasn’t lost a Cup race in 15 years. Moreover, being a true leader he sacrificed himself for the best of the team by not participating in the first race. So far for the positives…..

Disgust over legal wrestling, manipulation and egos. The flip side of the coin is clearly that this Americas Cup will always carry a dark shadow of distrust, a lack of sportsmanship and enormous egos of both syndicate owners. The countless number of courtcases during the last 2 ½ years (and we haven’t witnessed the last one yet) has severely dented the credibility of the Americas Cup and the sport of sailing. Moreover, rumours have it that the SNG (the organizing yacht club) racing committee members refused to raise the flags and participate in the starting procedure of the last race, possibly following instructions of Alinghi. If true, it would be the ultimate of unsportsmanlike behaviour. Let’s hope this is not the case, but I would not dare to bet against it if I hear Alinghi owner Ernesto Bertarelli commenting: “They got a little help from the legal system in New York. That always makes things difficult for us Europeans to get the same advantages. It’s not the Europeans’ Cup; it’s America’s Cup. It’s very difficult for a European to win.” Such comments are childish and make you wonder how the guy has made his fortune. This brings me to the egos of the two owners, which are as big as their ……….enormous wealth I guess. Both business tycoons have prioritized their own ambition over the sport of sailing. Battle should take place on the water, not in court. Bertarelli seems to have the biggest ego. Rather than handing the wheel to his best helmsman, he wanted to steer the boat himself in the first race, showing his enormous cockiness. Moreover, he blamed Ellison to be not in charge of the BMW Oracle. By not helming the BMW Oracle, Ellison at least showed he is the better manager.

From major to sideline event; disappointing economic impact. In contrast to the last edition, the 33^rd Americas Cup has not been a financial and economic success. The buzz, the public interest, the teams and the business that was generated in 2007 have not been realized in this edition, which has not helped the Americas Cup brand. Both owners have spend around USD 200mln each on their campaigns, but it seems doubtful whether either will have a sufficient payback. BMW has already indicated they are not happy with this version of the Americas Cup and are re-assessing whether they will continue their support. From a sponsor part of view, it hasn’t been a success anyway. The mudslinging and the battle over every detail of the contest have driven away both sponsors and fans: the 2007 race attracted more than $200 million in sponsorship money, but the 2010 has pulled in just $11 million, whils the competition has certainly lost much of its charm. Only time will tell if the next competition will be able to attract as much interest as the series did back in 2007. In 2007 the Americas Cup was an enormous event; according to Professor Tom Cannon it even was the third-largest sporting event after the football World Cup and the Olympics in terms of gross economic impact. He emphasised that because of the lack of a challenger series, which last time attracted eleven challengers from nine countries along with major sponsorship opportunities, the overall economic impact was probably about one tenth of the 5bn euros ($7bn; £4.4bn) it was worth last time. The long-weekend event was not a draw for TV Companies or advertisers, with the races being shown on the Internet for the first time and the organising budget reduced from a record 230-million to just eight million euros for last week’s event! Additionally the host city of Valencia wasn’t happy either, in terms of what might have been. The 2007 event was a major attraction for tourists, sponsors, clients, business and the media bringing benefits of over two billion euros to the port and almost four billion euros net economic benefit for the city. This year, coverage on Spanish TV was very limited and with the event now finished, Carnival fiestas from Rio, the Canaries and around Spain totally eclipsed the couple of minutes seen about the America’s Cup. That sums it up and should be taken into consideration when organizing the next edition.

Big responsibility going forward. The Golden Gate Yacht Club announced that a challenge has been accepted from the Club Nautico di Roma, and that the Italian club will be the Challenger of Record for the 34th America’s Cup. The challenging team for CNR is “Mascalzone Latino” owned by world champion sailor Vincenzo Onorato. This leaves both him and the defender with an enormous responsibility towards the future and the sport of sailing. It is to hope both parties will make the right choices that the event needs to get back on track. At least both Russell Coutts and team owner Larry Ellison seem to be aware of the responsibility. Whether the next edition will take place with monohulls or multihulls is less relevant. In my opinion there are three essential elements for making up the lost ground:

1. The Americas Cup should be a multi-challenger event again
2. There should be upfront agreement on rules and regulations
3. It should be easier to enter the event

In this perspective Ellison’s comments are encouraging. He is promising an independent organising committee including an impartial jury and umpires, for the next multi-challenger event, agreeing it is important that there is a level playing field for all competitors to bring sponsors and fans back to sailing’s pinnacle event. If Ellison and Onorato practice what they preach, there is hope for the next edition of the Americas Cup. Still being the oldest sports trophy in the world and one of sailing’s biggest traditions, it is the least they can do!

Last week first division club HFC Haarlem filed for bankruptcy, no longer being able to fulfill its financial obligations. This should come as no surprise. Several clubs are in dreadful financial condition, mostly on the back of poor management and unfavorable economic conditions. Hence we expect more casualties along the way. We briefly explain and suggest some solutions.

Dutch footbal clubs facing difficulties. Last week, one of the oldest Dutch football clubs, the HFC Haarlem, filed for bankruptcy and hence this household name will disappear from Dutch professional football. In spite of several attempts, the club could not be saved. We are not surprised, Haarlem has been facing financial difficulties for quite a while and the club was placed on the watchlist (category 1) of the Dutch Football Association (KNVB). The problem is that Haarlem is no exception. Its situation is exemplary for many other clubs in particularly the lesser important first division (Jupiler League). It is believed that some 9 other clubs are on the same watchlist, with several more far from safe. At the moment Veendam seems to be the primary candidate to be next with a liquidity shortage of some EUR 600mln. Besides Veendam other clubs having difficulties seem to be AGOVV, RKC, RBC, Fortuna Sittard, MVV, Eindhoven and Cambuur. However, it is not only the first division which is facing difficulties, there are also problems in the Dutch Premier League (Eredivisie), where losses amounted to EUR 34m last year. Feyenoord, Willem II, Roda JC and Ado Den Haag are just a few names, which face a huge financial burden.   

Is this a surprise? No, not really. In our article Dutch Football: financial difficulties of Dutch clubs no surprise, we explained the problems behind the financial crisis. The main reasons for the financial disarray can be explained as follows: 

1. Poor management. In many cases Dutch football clubs are not properly managed. Professional football should be run like a business, not like a hobby. In a period of stagnating sales and rising costs, cash flow management is essential. I wonder, apart from the positive exceptions, whether all clubs have even heard of this. It is utterly irresponsible to buy new players or increase salaries by 25% in a period of economic crisis, particularly as income of many clubs is largely dependent on discretionary items like sponsoring, TV and ticket sales. In an environment of declining revenues, it is surprising that many clubs are working with flat or rising budgets. No wonder that problems arise. This is particularly the case for the first division clubs. If one realizes that clubs in the Jupiler League are largely dependent on sponsoring income (51% of total revenues), it is plain stupid and irresponsible to keep budgets flat. No wonder, casualties emerge, certainly in a high fixed cost environment such as in football. Football clubs should be run professionally. It means proper revenue management and proper cost management (remember that in many cases salaries and rent of the stadium already account for some 75-90% of sales!). It means creativity and contingency plans and it means accountability! If I still hear management of clubs saying “ I am sure many clubs largely depend on transfer sums” or “ why always look at finance, it is good players which are important and subsequently financing automatically will be allright”. Brrrrh,  it is exemplary for the limited mindset of some, which tend to be short term. Clearly there will always be friction between the technical and financial aspects of a football club but in the right setting (more long term oriented) they should peacefully co-exist.                  

2.  Limited viability for current number of football clubs. There are several ways to look at this, but the conclusion should be the same. The Netherlands is just not big enough to host 38 professional football clubs. Let’s first look at the map of The Netherlands. The Netherlands has a population of 16.3mln, which implies one professional football club per 429,000 habitants, which intuitively already seems not that many. However, it gets worse. These clubs are not spread properly over the country. For example Brabant counts 9 football clubs or 24% of total clubs, whereas Brabant only counts 15% of the total Dutch population; it means one football club per 268,000 habitants. No wonder many clubs in Brabant have financial difficulties. Hence mergers could be a solution here. Looking at a more financial angle, it is amazing that some clubs even still exist. Looking at the Jupiler League again, there are 8 clubs with annual turnover below EUR 2.5 mln. With a required minimum of 18 players under contract on say the average salary of EUR 35,000 and with additional staff and management, it means that the salary bill already accounts for some EUR 1.5-1.6mln.Come to think of it! And this is before stadium rental costs, variable costs, depreciation, selling costs, media costs etc. No wonder clubs are having difficulties to survive.

3. Declining community support. Whereas in the past many clubs always counted on community support (hundreds of millions have been invested) coming to the rescue, support for such action is rapidly declining. In the case of Haarlem, the local municipality was not prepared to bail-out the club and this seems increasingly the trend. In some cases there are still municipalities granting loans to clubs (which often is only temporary respite), but subsidies seem to be no longer in vogue, although in view that the European Union does not allow for such action (although there are always ways around). Although one can argue whether this is right or not, in the end a club should be able to survive on its own, also in view of creating a level playing field.

4. Economic crisis. Finally there is the economic crisis, which is leading to lower sponsor and tv income. But this is an easy one to hide behind. It is just proper business sense to build up a proper reserve for more difficult times. For many clubs the contrary has taken place, which brings us all back to management again I guess. Luckily there are good exceptions such as Heracles, Twente and several others. It is good to see that FC VVV is not immediately spending all the millions received for Honda on all kind of expensive players. The club is saving a large part of the money for its youth academy, the new stadium and possibly some players to be bought in summer.

So what could be the solutions? Clearly the current model is not sustainable and sooner or later more clubs will go down. In order to avoid this there are several alternatives (or rather a combination of them to accomplish this:

1. Bundling/merging of clubs; although not easy to realize (given the example of FC Limburg), mergers should be considered in some parts of the country given that the sheer number of professional football clubs is not sustainable in those areas.

2. Introduction of semi-professionalism in the first division. Salary bills are too high, whilst minimum wages are often not a viable option for professional players. The result is that many opt for a semi-professional career at a top-amateur club. With the introduction of semi-professionalism the first division could possibly merge or cooperate with the top amateur leagues.

3. Cross-border competitions. With the rich getting richer and the poor getting poorer, competitive balance seem to have long gone. Combining for example the Belgian and Dutch leagues should lead to a better balance and stronger competition. However, it should be realized this will not be acceptable to many clubs that would not be able to participate in this league as well as their supporters. Food for thought.

4. Improve quality of management. It seems many clubs are not managed properly, supervisory boards should carry part of the blame.

5. Salary adjustments. Wages are by far a club’s biggest fixed cost item. With the recent rise in salary costs this has become a heavy burden to many football clubs. Re-adjustment will take time, partly depending on the duration and mix of the contract portfolio.

6. Creativity and innovation. Many of the current clubs tend to think in the old traditional way rather than out of the box. New business concepts, flexibility of costs, revenue management, a new (longer term oriented) business model are just a few principles where improvements may be made.

So it is clear something has to be done! Sales are stagnating, costs are rising! This has to be turned around, one cannot always count on the community (government money) coming to the rescue….Is management in Dutch football capable of doing it? I sincerely hope so. I hope they will find creative ways to grow the top-line, I hope they will be able to reduce costs (recent reports at least suggest that clubs like Ajax and Feyenoord are going to reduce salary costs), I hope they will implement contingency planning procedures. The proof of the pudding will be in cash flow management. I am sure some clubs with good management will be able to do this properly but there are also examples of clubs where I have my severe doubts. This is also the reason why I expect more clubs to go bankrupt.

I do realise that better players will lead to better results and greater recognition, but reality tells us that we just will not be able to match the budgets of European clubs in the bigger leagues, which is a function of scale. Equal competition and a level playing field can only co-exist through rules of the regulators. In the mean time we have to start thinking longer term as in the end players are better off with a solid health of the clubs they are playing for. Holland has always been a producer of talent, our football schools are often examples for many clubs, this is a strength we should focus on. Financially it is also much more attractive then buying expensive stars from abroad. The youth is relatively cheap and by treasuring and growing talent in the right way and with the right values, the financial outcome will also be more attractive, a win win situation in my opinion.