Soccer fans protest plans for a European Super League.
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The ESL was set to be one of the most elite and wealthy breakaway football leagues ever.
Despite the league's collapse, it's triggered a fan-led review into clubs' financial situations.
Two football finance experts told Insider how clubs earn money and why they get into so much debt.
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The new European Super League (ESL) came crashing down recently after nine football clubs pulled out of the plans following huge backlash from fans, politicians, and players.
The 12 teams that were about to join the elite breakaway league would have been handed between 100 million to 350 million euros ($120 million to $420 million), the Financial Times first reported.
The ESL was also planning to receive $4.2 billion in debt financing from JPMorgan over a 23-year period, before the US investment bank said it "misjudged" the deal after the majority of the teams withdrew from the league within 48 hours.
Now, a fan-led review into English football will take place to assess clubs' finance, ownership, and supporter involvement in the game.
But it begs the question: where does all this money come from in the world of football? Overall, there are three main sources of revenue: broadcasting, commercial, and matchday revenue.
TV broadcasting revenue
TV deals are one of the most important sources of income for football clubs. which can be sold domestically and internationally. Leagues, such as the highly popular English Premier League, own the television distribution rights of all their games.
TV channels bid for the rights to air the matches and the football leagues sells them to the highest bidder. For the Premier League, this happens every third season and is typically Sky Sports, BT Sports, and most recently, Amazon Prime.
Robert Wilson, football finance expert and lecturer at Sheffield Hallam University, told Insider that broadcast revenue typically makes up around 70% of the income of most Premier League clubs.
Although each club gets an equal share of the deal from the Premier League, they also receive merit payments – if they're shown on TV more, they get paid more.
Wilson said that last year, Liverpool, who won the Premier League, earned around £150 million ($208 million) from the domestic TV rights deal, while Norwich City, who came last, earned around £110 million ($153 million). Relegation is therefore a costly and daunting prospects for clubs near the bottom of the league.
Read more: What Wall Street bankers really thought about JPMorgan's $4.2 billion European Super League deal
The rights to show Premier League matches between 2019 and 2022 were sold for nearly £4.5 billion ($6.2 billion) in 2018, with Sky Sports getting hold of the majority of the games. This was a drop from £5.1 billion ($70 billion) in the 2016-2019 seasons.
Reports suggest that when broadcasters bid for 2022-2025 TV rights this summer, they won't be prepared to spend as much as they did in previous years. Since BT Sports and Sky Sports agreed to a content-sharing deal in 2017, competition dropped between TV channels for the need to bid big, The Guardian reported in January.
"They were trying to produce – in my view – more football and the market was probably saturated," Wilson said.
Commercial revenue
Another big money pot for football clubs is commercial revenue – in other words, income from sponsorship and merchandising, ranging from shirt sales, license holders, and retail outlets.
Big brands, such as Adidas, pay license fees to football clubs to stick the club's logo on their shirts. As an example, Wilson said Adidas pays Liverpool a flat fee of £75 million ($10.4 million) to license the production of their replica jerseys.
"It doesn't matter if they sell one shirt or a hundred million shirts, they still get £75 million," Wilson said.
He also said the shirt sponsor, which is stuck on the front of the football shirt, is also a source of commercial revenue, as well as shirt-sleeve sponsors. Some of this revenue goes into the other parts of the club, such as the women's club, he added.
The merchandising aspect of commercial revenue was hit hard during the COVID-19 pandemic because of the closure of shops, Dr. Nicolas Scelles, senior lecturer in sports management at Manchester Metropolitan University, told Insider.
"They can still sell online, but of course it affects the commerical revenue," he said.
Matchday revenue
The final major source of income for clubs is the money they earn on the day of a match. This includes matchday sponsorship, the sponsor on the ball, and most importantly, tickets sales.
The expensive corporate boxes, which business people use to entertain clients in, contributes to the total income, as well as food and drink sales.
It's important to note that matchday revenue varies depending on the size of the club stadium – a bigger stadium with more fans, such as Arsenal's Emirates stadium, will generate more revenue on a match day.
Scelles said this type of revenue has been affected the most by COVID-19 considering that stadiums were forced to close for the majority of 2020.
Transfer fees can also be income, Scelles said, as well as club owners' injecting in their own money, but these two factors aren't consistent sources of revenue that keep every football club up and running.
So why do clubs end up drowning in debt?
Player transfer fees and players' salaries are the two main things that football clubs spend their money on, and they're not cheap, especially when there's no cap on how much players earn.
The most expensive transfer fee so far was Neymar da Silva Santos Júnior who transferred from Barcelona FC to Paris Saint Germain (PSG) for £200 million ($277 million) in 2017.
Wilson said it's not uncommon for a number of clubs to spend more than they earn, and many have 140% of expenditure to turnover. The expenditure usually gets underwritten by future revenues, he added.
"Because the TV deals and the sponsorship arrangements are multi-year, they've got some guaranteed future revenue. But then they tend to accrue large debts and that's why we see frequent instances of ownership change," Wilson said.
Ownership transition can happen when a club ends up in millions of dollars of debt and a new owner takes over from the previous one to inject more money into the club. But this starts the cycle all over again, Wilson said.
The piles of debt stem from the huge competition between the teams. They're all fighting to win the most trophies, nab the best players and be the best in the league. As a result, they hike up players' salaries and transfer fees.
This "winner takes all scenario" sets benchmarks for other clubs, Wilson said. For example, Neymar being transferred for £200 million lifted the entire ceiling for how much transfer fees should cost, he said.
Wilson believes football's financial system isn't sustainable. "These losses are almost accepted as part and parcel of the financial model," he said. "There's loopholes and grey areas," he said.
The only reason why there's a review into the finances after the European Super League is because the clubs involved are some of the biggest in the world and the logistics of the league sparked uproar from loyal fans, Wilson said.
From a business perspective, Scelles doesn't think clubs being in debt is a bad thing as the money is being used to generate more revenue, develop the club, and extend it internationally. But he said there needs to better financial management in place, even though this is hard to regulate in football.
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