Earlier this week the Guardian Data Blog published financial data for the English Premier League. They chose to go with the obvious story about how in debt the clubs are (and it’s true, it doesn’t look good) while others have decided to look at the relationship between wins and wages (also true, there is a correlation between the two). I decided to break things down a bit further to see if anything else interesting is going on.
First, a note about the data: the financial data is for FY2010 which means that it mostly covers the 2009-2010 season. I looked at the correlation between wages and points for both seasons and there wasn’t a significant difference so for the most part I went with this years points totals. For anything related to points I excluded Blackpool, West Bromwich Albion and Newcastle United since they were dealing with Championship level funds. Oddly enough, Newcastle was indistinguishable from a Premiership club from a financial standpoint. Blackpool and WBA were noticeably different. Arsenal also has extraordinary income due to their real estate development of the old Highbury grounds. I have excluded the income and expenses related to this project. Additionally, I have excluded interest payments from expenses. This is somewhat controversial given the huge interest payments that Manchester United has to deal with as a result of the Glazers’ leveraged buy-out but it is common practice in financial statement analysis. Interest payments are the result of capital structure and since we want to compare teams as equally as possible, we remove interest payments to level the field. Think of it this way, Chelsea would be in the same boat if they were paying interest on Abramovich’s “loans”.
To start things off I wanted to look at how wages relate to points for myself. I decided to use a logarithmic model because no matter how much you spend on players you will never be able to earn more than 114 points in a season so there are diminishing returns to spending on wages. The R-squared for a linear model and the logarithmic model were extremely close but I prefer logarithmic because I think it models reality more closely.
I’ve previously shown that offensive and defensive production are correlated to points and here again we see that wage bill is an indicator of what a team’s offensive and defensive production will look like. The highest spending teams are in the magic quadrant for both offensive and defensive production.
Ok, so if points are correlated to wages and the better you do the more revenue you will get through TV rights, Champions League, etc, then a wise investment strategy would be to spend on players, and make a lot of money. Sports is a business, right? Well, while there is a weak correlation between wages and revenue, there is no correlation between wages and earnings and no correlation between earnings and points. That means that if you invest in players you won’t necessarily be profitable and if you are profitable it doesn’t mean you will have a successful team.
Who uses their wages to generate the most profit? Arsenal, followed by Wolves and then Manchester United. Not surprisingly, Manchester City are the worst when looking at the ratio of profit to wages. Manchester City are in the process of a major overhaul that sees them investing in a variety of areas, most notably in player transfer fees and those investments come at a price. Often, long term investments can be beneficial to a company. Spending hundreds of millions of pounds on a depreciating asset like a player might not be a good long term investment, but investing in youth programs or facilities might be. The majority of expenses for all clubs comes from player wages, but are there clubs that are investing in potential long term benefits?
The teams that do well spend big (denoted by blue color) and spend a relatively small portion of that on player wages. The other expenses are coming from a mix of overhead, marketing, transfer fees and youth development however we don’t have the data to break it down further. Given that youth development investment is exempt from Financial Fair Play rules, teams might not be in as bad shape as many are predicting and smart teams will spend big in this area. Also, since transfer fees are amortized over the life of a player’s contract, teams would be smart to invest in bringing in young players before the FFP rules go into full effect. They will take the hit for the first year or two, but assuming the player renews and sticks around for a while, most of the hit will occur before the rules were even in place. Manchester City’s lavish spending over the last two years in the face of FFP may not look so foolish anymore. They have a good squad with loads of young players. Arsenal meanwhile, for all over their bragging about financial responsibility, have set themselves up for some big problems. Their squad needs some massive improvements but they weren’t forward thinking enough to buy players early on so they’ll be taking a full hit on transfer fees (if they buy anyone). They have invested in youth, but will it be enough?