Money Makes The World Cup Go Round

As the World Cup (excuse me, the 2010 FIFA World Cup) was officially declared open last week amid great colour and emotion, one man in particular beamed with pride. That man was Joseph “Sepp” Blatter, the long-standing President of FIFA, whose bold decision to award the most prestigious competition in world football to South Africa had paid off – in every sense of the term.

While Blatter somewhat unnecessarily reminded us that “the FIFA World Cup is in South Africa,” he could be forgiven for heaving a huge sigh of relief when it started on schedule. It’s not so long ago that experts confidently predicted that FIFA would make a loss on the 2010 World Cup in contrast to the large profits the 2006 tournament generated in Germany. The President had revealed his anxieties earlier this year in yet another of his bizarre outbursts when he accused the “Old World” of “anti-Africa prejudice” in response to the accusation that slow ticket sales were due to security concerns and high travel costs.

Although Blatter spoke movingly in Soccer City of “a dream coming true” and “the spirit of Mandela”, he had revealed his organisation’s priorities a few weeks earlier when he boasted that FIFA’s excellent 2009 financial report justified awarding the World Cup to South Africa as a “good financial and commercial decision.”

You can say that again. FIFA is now projecting record earnings of $2 billion, but this is in stark contrast to the losses that have been incurred by the host country. Financially, it’s a great deal for FIFA, as virtually all of its revenue is contracted in advance via the sale of television and marketing rights, while South Africa has to foot the enormous bill for infrastructure improvements. In fairness, FIFA has made a contribution of around $500 million to the Local Organising Committee and the South Africans retain the net income from ticket sales (the only risky revenue stream), but this is small change compared to the money needed to fund new stadiums, improved transport networks and better security. This financial imbalance has given the expression “a game of two halves” a whole new meaning in Johannesburg.

"You'll never walk alone"

So just how much cash does FIFA expect to pocket? It has budgeted truly impressive revenue of $3.2 billion with event-related costs of $1.2 billion, leading to a “surplus” (please don’t call it a profit) of a cool $2 billion for the 2010 World Cup. Some reports talk of a profit of “only” $1 billion, but that is after allocating half of the gross profit to the budget for development programmes, financial assistance to national associations and other events. In any case, it’s a shedload of money, but it was greeted with unusual understatement by Blatter, who said, “We are comfortable. I wouldn’t say we are rich. A good result has been achieved.” FIFA General Secretary, Jerome Valcke, toed the party line, “Yes, it’s a lot of money, but just to be clear, we are not sitting on profit. All the money is going back to be football.”

While this could be considered a feeble attempt to mask their discomfort at being thought of exploiting South Africa, actually they do have a point. Finance Director, Markus Kattner, said that 95 per cent of FIFA’s total revenue comes from the sale of rights relating to World Cup, leading to a “high exposure” and this was again confirmed by Jerome Valcke, “We are not rich. We are making quite good money thanks to the World Cup, but that’s the only money we have.”

These executives obviously have a vested interest in under-playing their large profits, but the independent analysts Sportcal have supported their views, “FIFA is quick to point out that its profits from the World Cup go towards funding its many other activities over the four-year cycle between World Cups, including less lucrative competitions such as junior and women's World Cups and the quadrennial Confederations Cup between continental national teams champions.”

These tournaments tend to make losses, which are only covered by the profits from FIFA’s premier competition. For example, in 2009 alone, FIFA incurred significant expenses for the Confederations Cup in South Africa ($44 million), the U-17 World Cup in Nigeria ($43 million), the Club World Cup in UAE ($30 million) and the U-20 World Cup in Egypt ($21 million). Not to mention $30 million for women’s competitions the year before.

If we take a look at FIFA’s complete profit and loss account, this is easier to understand. The budget for the four-year cycle leading up to this year has the $3.2 billion revenue from the 2010 World Cup, but the overall profit is only $0.2 billion after deducting costs for all events, football development and operational expenses. Of course, let’s not forget that these are very big numbers, so the profit is still a far from shabby $240 million, which every Premier League club would regard with envy. Having said that, this profit is actually considerably lower than the $0.7 billion recorded in the previous cycle, but then again the 2003-06 financial period was FIFA’s best-ever overall result.

Many of you might be wondering why I am presenting the financials for four years, but this is simply because this is how FIFA views its budget, given the total reliance on the World Cup for its revenue. It works with a four-year financial period, beginning on 1 January of the year following each World Cup. That’s why FIFA’s $2 billion profits from the 2010 World Cup are more than a little misleading, as they have to cover expenses for four years. Alles klar?

Revenue and expenses directly related to the 2010 World Cup are recognised in the income statement using the percentage-of-completion method, so 2009 marked the three-quarter stage in the 2007-10 cycle. Nevertheless, 2009 was notable for being the first time annual revenue reached the threshold of $1 billion, due to increased revenue from the sale of TV and marketing rights, which lead to a profit of $196 million last year.

Analysing the phased analysis above, I wouldn’t mind betting that FIFA’s revenue will be a good $0.5 billion higher than the budgeted $3.2 billion, but this may well be matched by a similar increase in costs, leaving the anticipated profit for 2007-10 unchanged.

Most of FIFA’s revenue is derived from the sale of broadcasting rights and this has increased by nearly 50 per cent for this World Cup to $2 billion, mainly due to improved contracts in the USA with the Walt Disney company (which owns ABC and ESPN) and Univision paying a combined $425 million for exclusive broadcasting rights for 2010 and 2014. The growth also reflects the success of FIFA’s decision to sell TV rights on a country-by-country basis for the largest European markets instead of the previous consolidated deal with the European Broadcasting Union.

These are considerable sums of money, but the television companies do get a lot of bang for their buck. According to FIFA, more than 26 billion viewers watched the 2006 World Cup. As Kevin Alavy of international analysts, Initiative Futures Sport + Entertainment, said, “No other media property delivers the same spikes in audience delivery, day after day, sustained over a month as the World Cup.” If I’ve understood that correctly, that’s a very good thing. The same agency believes that the final on 11 July could be the second-most watched live televised event in history – only behind the Beijing Olympics opening ceremony in 2008.

"Jerome Valcke in good company"

FIFA also earns $1.2 billion from the marketing of the World Cup rights, though there has been no growth since the previous event (unlike TV), as hospitality packages have been affected by the economic downturn and possibly fears of crime. Nevertheless, its new commercial strategy of classifying marketing partners into three categories (FIFA Partner, FIFA World Cup Sponsor and National Supporter) can be considered a success. In fact, some believe that it is likely to produce more money than budgeted with some estimates as high as $1.6 billion.

A Partner enjoys the highest level of association with FIFA, which means they own international rights to a broad range of FIFA activities as well as exclusive marketing assets. The six partners are Adidas (Jabulani!), Coca-Cola, Emirates, Hyundai-Kia, Sony and Visa, paying an annual fee of $24-44 million for the 2007-10 period. The eight Sponsors, including the likes of McDonald’s and Budweiser, pay $10-25 million a year over the same period, but their rights are limited to the World Cup. The lowest tier, National Supporters, pay $4.5-7.5 million a year, but their rights are only available in the host country.

Visa signed a $200 million sponsorship deal in 2006, leading to MasterCard suing FIFA for breaching their agreement, before this was settled out of court. As per usual, Blatter glossed over this minor inconvenience, “We also managed to end the contractual dispute with MasterCard, thus opening the doors to partnership with Visa and completing our pool of partners”, conveniently failing to mention that the settlement cost FIFA more than $90 million.

"Put your hands up for Cape Town"

Similarly, the collapse of FIFA’s former marketing partner ISL (International Sport & Leisure) in 2001, leading to losses of at least $42-46 million, was recently presented by Blatter as beneficial to the organisation, “It was for us, I would say, a very positive moment. We are masters of our own rights and we do not need any agency to work for FIFA. Our partners like the direct contact with us.” Right. You get the impression that he only just stopped himself from saying “masters of the universe” à la Bonfire of the Vanities, but he’s probably right to cut out the middle man, even though the circumstances were not the cleanest.

In fairness, FIFA needs to generate a lot of money to pay for its vast cost growth. Total expenses for the latest four-year cycle are budgeted at $3 billion, which represents a 58 per cent increase over the $1.9 billion in the previous period – more than double the 27 per cent revenue growth.

Almost half of the expenses are event-related at $1.4 billion. In terms of the 2010 World Cup, that includes a budget of $423 million for the Local Organising Committee, though this has been recently increased by $100 million following unforeseen costs on the teams’ training facilities. The other major expense is the prize money of $420 million, which is a 60 per cent increase from 2006’s total of $261 million and is almost three times as much as the $154 million paid in 2002. The winners will pocket a cheque for $30 million with $24 million going to the runners-up. Every team at the World Cup will receive at least $9 million: $1 million as a contribution to preparation costs plus $8 million even if they are eliminated at the group stage.

FIFA is keen to emphasise that the majority of its expenditure is on football, though it would be fairly surprising if it weren’t. In fact, their most recent financial report notes that 73 per cent of FIFA’s overall expenditure in 2009 was invested directly in football – defined as the World Cup, other events and development. This is entirely consistent with FIFA’s stated objective of “organising international competitions as well as constantly improving and promoting football.”

Of course, that’s not enough for President Blatter, who went much further in a recent magazine article, when he pompously wrote, “FIFA is no longer merely an institution that runs our sport. It has now taken on a social, cultural, political and sporting dimension in the struggle to educate children and defeat poverty.” Just in case, his doubters in England were unclear on his motivations, he also put the boot into the greedy Premier League, while extolling FIFA’s noble virtues, “Richard Scudamore is working to make money, while I’m working to have football as a social, cultural event around the world, being a school of life, bringing hope, bringing emotions. That’s the difference.”

So how well has FIFA done in its attempt to emulate Mother Theresa? To be fair, they have dedicated $700 million to the development of football in the latest four-year budget. Indeed, they take great pains to highlight the fact that spending on development programmes in 2007-10 was 50 times greater than the $14 million in 1995-98, while the revenue growth was “only” 12 times greater over the same timescale. Impressive stuff, but I can’t help noting that total expenses have risen by $1.1 billion since the 2003-06 period with only $0.2 billion of this increase attributed to development.

"Golden years"

It’s difficult to know how to react to this. On the one hand, there is no doubt that FIFA has spent a lot on development, but on the other hand, there is a feeling that it could have done a lot more with the funds available. Although there is no shortage of worthy-sounding projects, it does feel a little like this merely camouflages the relatively low investment and certainly not enough to support Blatter’s outlandish claims, “We resolved to instigate a range of projects designed to aid the entire African continent. Football is a force for change. For Africa, for the game, for the world.”

The snappily titled “Win in Africa with Africa” initiative is designed to leave the continent with a proper football legacy, including laying many artificial pitches, and has a hefty $70 million budget, but other projects seem less meaningful. For example, FIFA’s contribution to the Football for Hope centres in 2009 amounted to just $2 million, while the Goal programme, described as the “cornerstone of FIFA’s development work” has completed more than 400 projects in the ten years since its launch, but the expenditure averages out to only $17 million a year.

Blatter has frequently declared that FIFA can make a difference, but I would suggest that it could have an even stronger impact if it cut its own costs. After all, the organisation spends more on operational expenses ($0.8 billion) than football development ($0.7 billion), including $0.3 billion for “governance” (congress, committees and administration). That’s no surprise, if you have seen FIFA’s palatial new offices in Zurich, which cost around $200 million – or more than the $170 million spent on the Goal programme in its ten-year life. Of course, we cannot say whether FIFA’s 360 employees are over-paid, as they do not publish details of their salaries. Three years ago, Blatter confessed that his salary was “$1 million”, which admittedly does not seem that steep for a man in his position, but then again we only have his word for it.

"A load of ..."

FIFA is classified as a non-profit organisation in Switzerland, though, as we have seen, it has a highly commercial outlook, e.g. it has its own official range of FIFA branded merchandise. Its status allows it to enjoy a tax-free lifestyle, though this does oblige it to spend its profits on fulfilling its football objectives. This is probably why they say that the media should not describe the surplus from the World Cup as profit, but as a reserve to insulate the organisation from any unforeseen circumstances that may arise.

Fair enough, but do they have to sit on quite so many reserves? They budgeted an increase in equity to $800 million, but have already reached $1.1 billion. Furthermore, cash balances are an incredible $1.4 billion, up $0.7 billion in just one year. Franco Carraro, chairman of the internal audit committee, defended this amount, “While equity of over a billion dollars seems high, it is necessary as the financial risks exceed it many times over.”

The biggest risk to the financial position would clearly be the cancellation of the World Cup, as almost all contracts with commercial partners are related to this event, so FIFA has an insurance policy in place. However, since 9/11, it has been practically impossible to fully cover the revenue risk, so their $650 million policy now only covers the cost of postponement and/or relocation of the event in the case of natural disasters, war and acts of terrorism. The event’s cancellation is not fully covered by the insurance, so would have to be compensated by FIFA’s own reserves. The caution is therefore understandable, but I still think they could spare another $250 million on developing the game.

"Free Nelson Mandela"

Or they could give the poor host country some more cash. The South Africans do not share in the colossal television or marketing deals - the World Cup’s main money spinners – and their only direct funding comes from the net revenue from ticket sales and a predetermined contribution from FIFA. Although this could amount to $1 billion, it’s a drop in the ocean compared to the cost of hosting the event.

Around three million tickets were made available for the 64 matches of the World Cup and while FIFA’s eternally optimistic general secretary, Jerome Valcke, claimed that the tickets were at least 97 per cent sold out, many empty seats have been clearly visible in the sparkling new stadiums. This has been attributed to poor transport systems, but there is a suspicion that many tickets have been sold to international agencies who have been unable to shift them.

Even Valcke had to admit that FIFA had made mistakes in its ticketing procedures, most notably granting the Match agency the exclusive rights to sell tickets for the 2010 and 2014 tournaments. The high commission charged by Match to travel agents and hotels has been a spectacular failure, which should cause Sepp Blatter some discomfort, as the company is part owned by his nephew, Philippe Blatter.

At least FIFA have stepped in to boost the amount they will pay to the host country from $423 million to $523 million with the additional $100 million funding being used to help improve some of the training facilities, following complaints by some of the participating teams. Interestingly, only $40 million of that had been spent by May, leaving the remainder to be retained by the South African Football Association for the “development of the game”.

"Smile like you mean it"

As a popular supermarket’s advertising would say, every little helps, but the South African government has spent considerably more preparing its country for this footballing extravaganza. They have incurred major costs on building five new stadiums and refurbishing the same number, while every aspect of their transport network has been upgraded, including a new international airport in Durban and a high-speed train link between Johannesburg airport and the city centre. Estimates of the total cost vary, but the BBC calculated $5 billion, while some think it could be as high as $8.6 billion. In any case, it has clearly been one of the most expensive World Cups to stage.

Even though FIFA has thrown a few meaty scraps their way, there is understandable resentment in South Africa that FIFA will make so much money while their own country ends up with a huge debt. Furthermore, local street vendors have not appreciated FIFA’s strong-arm tactics in protecting their precious brand, while the limited availability of tickets for Africans is another source of anger, as the lack of internet access and credit card ownership prevented online purchases.

Stefan Szymanski, an economist who has been advising the South African government, complained, “It’s completely wrong and deeply improper that FIFA is making money out of this”, especially as South Africa has been forced to protect FIFA’s earning from tax. Meanwhile, a Sowetan journalist was even more outraged, “The World Cup is a colonial playground for the rich and for a few wannabes in the South African elite.”

"Two eyes good, four eyes better"

In contrast, former South African president Thabo Mbeki suggested that the 2010 World Cup would be the moment when the African continent “turned the tide on centuries of poverty and conflict.” The current president Jacob Zuma was rather more pragmatic, “we have an opportunity to promote foreign investment, tourism and trade”, as he focused on the boost to South Africa’s image worldwide, which would also be enhanced by the improvements in infrastructure.

In the past, host countries have relied on growth in tourism to help compensate the additional costs. The evidence from previous tournaments is that all the publicity adds at least 10 per cent to the number of tourists over the next 10 years. The accountants Grant Thornton initially estimated 483,000 visitors during the World Cup, but later revised that down to 373,000, largely because of the recession, while South Africa Tourism’s chief executive thought it might be as low as 250,000.

In fact, many now believe that the economic benefits of hosting major sports events are limited. Stefan Szymanski pointed out the opportunity costs to an economy, “The gain in sport is a loss on spending in cinemas.” While criticising FIFA’s excessive expenditure, he asserted, “There’s so much evidence that there’s not even an argument any more – mega events don’t deliver the financial extravaganza that is promised.”

However, FIFA’s gravy train shows no sign of being derailed with their provisional budget for 2011-14 increasing revenue to a staggering $3.8 billion, of which $3.2 billion is already contracted. Just in time for next year’s presidential election, Sepp Blatter promised to double the funding to national associations over the next four years. The healthy finances also allowed him to award each of the six confederations an extra $2.5 million, while every national association will be given a $250,000 bonus. Blatter smilingly explained, “It is a gift, if we can say this.” While others might find different words to describe these payments, Blatter was unperturbed, “The whole family of football is happy.” If you’re in FIFA, there’s absolutely no reason to disagree, though the South Africans might beg to differ.