What Is The Champions League Worth To Arsenal?

As Manchester City faced Spurs last week in what was virtually a play-off for the final Champions League place, the media’s hyperbole machine went into overdrive about how much qualification would be worth to the winners. However, if you looked at a variety of newspapers, you would end up very confused about the size of the prize. The Times and the Telegraph were relatively sober, talking about possible extra revenue of £20m, while the tabloids were more aggressive with the Sun describing the match as a “£50m clash” and the Mirror labeling it “the £60m showdown”. The headiest estimate actually came from the Independent, which provided a detailed break-down that apparently added up to “£70m for winning the Champions League”.

Rather than attempting to work out exactly how much revenue Spurs will earn from their unaccustomed foray into Europe, I thought it would be more appropriate to calculate how much the Champions League is worth to Arsenal for a number of reasons. First, as Arsenal have been in the Champions League for more than a couple of days, we actually have some genuine financial data to review for the Gunners.

Second, it is far from certain that Spurs will reach the Champions League. In fact, they have only qualified for the right to play a Champions League qualifying match. In years gone by, this would have effectively been a walk-over against a team from somewhere like Slovenia, but UEFA has recently modified the qualification format in order to help teams from the smaller nations reach the lucrative group phase. This has the added effect of making it more difficult for teams from the more established nations to progress and Spurs could find themselves facing tricky opponents like Lyon, Sevilla, Werder Bremen or Sampdoria. For Spurs fans, this could be horribly reminiscent of when Everton broke into the top four in 2005, only to fall at the first fence, crashing out to Villareal in the third qualifying round.

Third, Arsenal are my team, so there.

"Crouch's £50m header"

Before we try to quantify the value of getting into the Champions League, we need to think about what is relevant to this discussion. To my mind, there are five revenue streams: (a) participation and performance; (b) television; (c) match day; (d) sponsorship; (e) increase in value of the squad.

The first two of those areas come from revenue distributed by UEFA. Since the birth of the Champions League, the amount of revenue that UEFA generates from broadcast and sponsorship deals has increased exponentially from €45m in 1992/93 to €1.1 bln this season. Despite the difficult economic market, this growth shows little sign of slowing down. In fact, 2009/10 is the first season of a new, improved three year deal, which will deliver a 29% increase in the amount of revenue available for distribution to participating clubs. Net of costs and payments to national associations, this has gone up from €583m in 2008/09 to a jaw-dropping €751m in 2009/10. This pot is divided into two parts: (a) fixed sums based on participation and results (rising from €308m in 2008/09 to €413m in 2009/10); (b) variable amounts dependent on the value of the TV market of the associations represented in the Champions League (from €275m to €338m).

The above table lists the fixed sums payable to the 32 teams that qualify for the Champions League and highlights the significant increases this season. Right off the bat, each team is awarded €3.8m for participation plus another €550,000 per match played in the group phase, regardless of the result. Assuming that a club fulfills its six group fixtures (a fairly safe assumption), that’s worth €3.3m. This means that each team is guaranteed €7.1m for qualifying for the group stage, even if it loses every single game.

There is also a performance bonus of €800,000 for each victory in the group stage plus €400,000 for a draw. So, if a team really puts its pedal to the metal and manages to win all six of their group matches, they will get €4.8m. If a team qualifies for the first knock-out round (the last 16), they are awarded a further €3m. In other words, if a team gets through the group phase and wins all six group matches, it would receive the princely sum of €14.9m.

There are additional performance prizes for each further stage reached: quarter-final €3.3m, semi-final €4m, final €5.2m and winners €9m. So if you go all the way and win the damn thing, you would earn a total of €31.2m, which is serious money in anybody’s book(s).

In addition to these fixed sums, the clubs receive a share of the television money from the so-called market pool. This is a variable amount, which is allocated depending on a number of factors: (a) the size/value of a country’s TV market, so the amount allocated to teams in England is more than that given to, say, Spain, as English television generates more revenue; (b) the number of representatives from your country, so an English team (with four representatives) might receive less than a German team (with only two representatives); (c) the position of a club in its domestic championship in the previous season, so if two teams from England both reach the quarter-final, the one that finished ahead of the other in the Premier League would get more money; (d) the number of matches played in the current season’s Champions League.

This complicated, but logical system, throws up some interesting anomalies. If we examine the table above, which lists the revenue distributed by UEFA in 2008/09 for the top ten teams, we can see that Manchester United (€38.3m) actually earned more than Barcelona (€31m), even though they were absolutely hammered by the Catalans in the final, purely because they were allocated €10.6m more TV money. Similarly, Bayern Munich, who were eliminated in the quarter-finals, also earned more than Barcelona with €34.6m, as they secured the biggest slice of the TV pie with €21.5m. This is because the German TV market is among the most valuable and the revenue for the German association only had to be shared between two clubs, In comparison, the English revenue had to be split between four clubs. This factor also explains the presence of PSV Eindhoven in eighth position in the money table, even though they did not make it out of their group, as they were given all €19.6m of the Dutch revenue, being that country’s only representative.

This opens up an intriguing possibility for the red and white half of North London. If Spurs are beaten in their qualifying match, there would be a double whammy for Arsenal fans, as they would not only have another opportunity to laugh at their North London neighbours, but there would also be more money heading Arsenal’s way, as England’s TV pool would only have to be shared between three teams instead of the four usual suspects. That pot was worth €55.5m in season 2008/09, but is likely to increase to at least €70m for next season, so this would be very handy.

"Robin Reliant"

Enough of these general facts, how much have Arsenal actually earned from the Champions League? The UEFA analysis for 2008/09 lists Arsenal at sixth place with €26.8m, comprising €15.5m for participation and performance and €11.3m from the TV pool. For the current season, we don’t yet have the figures for television, but we can already work out the fixed fees, as we know the results. Arsenal will be given €3.8m for Champions League participation, €3.3m for group stage participation (six matches at €550,000), €3.6m for group performance (four wins, one draw, one loss), €3.0m for reaching the knockout stage and €3.3m for reaching the quarter-final. That adds up to €17.0m, which is more than the €15.5m earned the previous season, even though the team went out a round earlier (quarter-final vs. semi-final), which highlights the revenue growth.

Assuming that Arsenal’s share of the TV pool rises in line with the total TV revenue (€275m to €338m), ceteris paribus they would get an additional 23%, increasing their variable revenue from €11.3m to €13.9m. Therefore, a reasonable estimate of Arsenal’s revenue distributed from UEFA would be €17.0m fixed fees plus €13.9m variable fees, giving a total of €30.9m.

As anybody who has opened a newspaper recently will know, the exchange rate can also have an impact. In particular, the weakening of the Pound against the Euro over the last two years has significantly increased the UEFA revenue in Sterling terms. If we take our estimate of €30.9m, this is worth £26.9m to Arsenal at the current exchange rate of 1.15, compared to just £20.6m when the rate was 1.50. That’s a notable difference of £6.3m.

"Two greats for the price of one"

In addition to centrally generated revenue, clubs directly benefit from match day revenue. Arsenal do not separately analyse this between different tournaments, but we can still come up with a sensible guess. In the past, directors have stated that the Emirates brings in more than £3m a match, while Deloittes Football Money League estimated €25.7m for Arsenal’s 2008/09 season. We know that Arsenal played six home games that year (three group matches, last 16, quarter-final and semi-final), so that implies an average of €4.3m. At the exchange rates used by Deloittes, that suggests that each match is worth £3.6m. This is a little more than we might expect, but this figure also includes merchandise plus food and drink, so is not completely out of court. Let’s call it £3.5m a match, which would produce £17.5m match day revenue this season, based on the five matches played (three in the group, last 16 and quarter-final).

That would mean a total so far of £44.4m Champions League revenue for Arsenal this season (£26.9m distributed from UEFA plus £17.5m match day directly generated by the club).

Importantly, most of this money goes directly to the bottom line, which is why some clubs are so desperate for Champions League qualification, as it can make an enormous difference to their business model. In Arsenal’s case, Deloittes calculated that Arsenal’s Champions League revenue accounted for 20% of the club’s total revenue, which was second only to Werder Bremen (23%). In other words, although this might not be critical to Arsenal’s financials, it’s still pretty important, especially when you consider that Real Madrid’s direct revenue from the Champions League is less than 10% of its overall total.

"From Russia with love"

In addition to this tangible revenue, other revenue is also likely to increase, but is very difficult to quantify unless you’re a football club insider. Indirectly, Arsenal’s participation in the Champions League should boost their sponsorship and other commercial revenues, both in the short term through contractual bonuses, and longer term by strengthening the club’s brand attractiveness through increased exposure and profile. However, a former Barcelona vice-president admitted, “What is harder to put into figures is the impact it has on your brand. That is very difficult to discern. There is no doubt we got a massive boost from winning the competition. We were on television and on the front of all newspapers all around the world, but that increased exposure and interest doesn’t lead to an immediate increase in the value of your sponsorship deals.”

I would be surprised if Arsenal’s sponsorship contracts did not included some sort of incentive clauses rewarding the club for reaching the later stages of the Champions League, but my guess is that they’re not overly lucrative, given that Arsenal’s commercial deals were negotiated primarily to secure front-loaded funds to help pay for the construction of the Emirates. However, going forward, this could easily be worth another £5-7m.

"In the Nick of time"

Finally, the value of Arsenal’s players should have increased as a result of competing among Europe’s best and placing themselves in the shop window. As an example, Nicklas Bendtner is officially the fourth highest scorer in this season’s Champions League with five goals, only behind Barcelona’s Lionel Messi, Real Madrid’s Cristiano Ronaldo and Bayern Munich’s Ivica Olic. That must have added a few million to his transfer fee. Of course, this will only generate additional revenue if the player is actually sold, which Arsenal may not want, but I think you understand my point. On a related theme, taking part in the Champions League helps the club to attract and retain players, hence so much interest in what will happen to Fernando Torres and other “stars” at Liverpool now they have failed to achieve the qualification “guaranteed” by their manager.

A study commissioned by MasterCard suggested that the winners of the Champions League could make up to €110m, though this included €30m from sponsorship bonus payments, €14m commercial revenues and €15m increased squad value, all of which seem highly speculative to me. This heady estimate does makes sense when you appreciate that MasterCard is an official sponsor of the Champions League, so clearly has a vested interest in calculating as high a figure as possible. Having said that, it is difficult to argue with the man who conducted the research, Professor Simon Chadwick of the Sport Business Strategy department at Coventry University, when he said, “The competition continues to be an important source of revenue and commercial activity for clubs, especially for those that qualify for the knockout phase of the competition. This inevitably makes a significant contribution to the annual turnover of the clubs involved.”

"It's worth this much"

What about if Arsenal just missed qualification to the Champions League? Surely the Europa League would compensate the revenue shortfall to some extent? Not really. If you manage to battle your way through that interminable competition and end up with the trophy, you would still only receive €6m, compared to the €31m awarded to the winners of the Champions League. Or, to put it another way, the prize money at the Champions League is more than five times as much as the Europa League. Given the paltry attendances “enjoyed” by Europe’s secondary tournament, it is hardly surprising that some teams effectively sabotage their own chances in this competition by playing their reserves. From a financial perspective, it’s obviously much better to focus your limited resources on trying to qualify for the Champions League.

Furthermore, the revenue gap between the Premier League and the Champions League is also closing. In the Premier League all clubs receive £14.6m for participating, £10.1m for overseas rights plus another £2m from sponsorship and licensing deals. On top of that, the winners receive £16m for winning the competition plus £500,000 for every match of theirs shown live on TV (a guaranteed minimum of ten appearances, but let’s assume there were 15, giving £7.5m). That produces a grand total of just over £50m for winning the Premier League.

How about the Champions League? First we have the €31.2m participation and performance fees we listed above. To that, we need to add an estimate for the TV pool. As a proxy, let’s take the €18.8m earned by previous Premier League champions Manchester United in 2008/09 and uplift it by the 23% projected increase in total TV money in 2009/10 to give us €23.1m. That produces a total of €54m for winning the Champions League, which is equivalent to £47m. That’s only a whisker away from the £50m for winning the Premiership. The difference is that one takes 38 games to win, while the other one only requires a “lucky” 13.

"Not so super?"

There is little sign of this gravy train being derailed. According to a report by Futures Sport + Entertainment, the Champions League final overtook the Super Bowl as the most-watched sports event last year with a “reach” of 206m people compared to 162m, even though that was the best ever figure for the NFL’s flagship. The analysts said that the Super Bowl “is still growing, but, extraordinarily, the Champions League is growing faster with room for significant expansion.” That probably refers to UEFA’s decision to move the final from its traditional Wednesday evening to Saturday, which makes it more convenient for Asian and American viewers. Indeed, this year’s final between Inter and Bayern Munich will be televised live in China on CCTV-5 and Fox Television in the US, virtually guaranteeing an increase in the viewing figures.

We can now understand why the economically savvy Arsene Wenger is so proud of Arsenal’s record in Europe’s premier competition. After the comprehensive defeat of Fulham on Sunday, he argued, “I believe there are two big trophies in England. The Premiership and to qualify for Champions League, and that’s what we have done. For me it’s not enough but it is the minimum requested, and we’ve done that 13 years on the trot now which is not too bad.” Many fans would prefer the team to win an actual trophy, but you can see where Wenger is coming from.

"We've qualified again"

Arsenal’s chief executive, Ivan Gazidis, says of the Champions League, “It is hugely prestigious, one of the competitions you have to win if you want to be thought of as a great club. Financially it is important over time, but it is not life or death.” That may be true, but we have seen that with a reasonable run, the competition delivers at least £44.4m revenue to Arsenal – and that does not include any additional sponsorship revenue, which could bring in a further £5-7m, or any increase in the value of the squad. Therefore, anybody suggesting that the Champions League is worth around £50m to Arsenal will get little argument from me or, indeed, Arsenal’s board.

Does Arsenal's Policy Make Sense?

After a deeply dispiriting, hugely disappointing end to the season, including two abject performances against the might of Wigan and Blackburn Rovers, it is hardly surprising that some Arsenal fans are beginning to question whether Arsenal’s policy is still the right one. By this, I don’t mean that they are questioning whether the 4-3-3 formation is preferable to good old-fashioned 4-4-2 (though they are), but whether the club’s policy of shunning big money transfers, while focusing on youth development will produce success.

Actually, when we talk about the transfer policy, that effectively also covers the wages policy, for these are two sides of the same coin at Arsenal with Arsene Wenger controlling an overall budget for transfers and wages. In particular, Wenger has admitted that Arsenal cannot afford to follow a policy that involves both high transfers and high wages. The first part of this was already obvious to the club’s supporters with little money being spent on bringing new players in, but what might have been less obvious is that Arsenal have found enough money to substantially increase the wage bill – even though the wage structure is as tight as it ever was.

Interestingly, their North London rivals Tottenham have adopted almost exactly the opposite approach, namely spending a huge amount on purchasing new players, while having a payroll about half as large as Arsenal’s. A better comparison for Arsenal might be another team from the Big Four (at least one that’s been there longer than five minutes). Given that Chelsea operate in a different financial plane, maybe the best comparative for Arsenal is Manchester United, who have outspent Arsene’s team on both counts. Over the last four years United have spent about £55m more on salaries, while their net transfer spend is also £45m higher (£125m if Cristiano Ronaldo’s world record £80m sale to Real Madrid is excluded as a spectacular one-off). So, United have spent at least £100m more than Arsenal in this period, but they do have a lot of silverware to show for it: one Champions League and three Premier League titles, which is precisely four more trophies than Arsenal.

"The anti-Arsenal: Shirty Harry"

In fact, the Gunners have consistently spent less than their rivals over the last few years in the transfer market. Since the 2005/06 season, Arsenal is the only club in the Big Four (and the nearest challengers) to make money from buying and selling players. Incredibly, their net transfer spend surplus of £28m is at least £100m better than their peers – with the exception of United, because of the Ronaldo deal. The other clubs’ net spend is significantly higher: Chelsea £94m, Liverpool £84m (rubbishing Benitez’s claim that he has lacked funds), Tottenham £92m (the famed Redknapp effect), Aston Villa £90m (thank you, Mr. Lerner) and, of course, Manchester City with a barely credible £236m (“money can’t buy me love” – or indeed 4th place).

For Arsenal to spend not just less, but so much less than these clubs and still remain competitive is testament to the incredible job that Wenger has done with the funds available. The manager has steadfastly refused to endanger Arsenal’s financial security by splashing out large sums on over-priced, big name players. If there were any doubt, the club’s stance was clarified by new chief executive Ivan Gazidis last September, “We believe transfer spending is the last resort. That’s a sensible view to have. Re-signing players is a far more efficient system.”

These comments were very revealing. As we have seen, the transfer budget is only part of the story at Arsenal, but here was Gazidis explicitly eulogising re-signing players in the current squad. In this material world, that effectively means awarding the players improved terms and this was confirmed in the last interim accounts, when chairman Peter Hill-Wood described the re-signing of 17 first-team players on long-term contracts as an “investment in a very talented group of players” and as the “best means of protecting the value of one of our most important assets.” While Arsenal’s activity in the transfer market last summer was minimal, they were extremely busy building the team from within, announcing new deals for Van Persie (£60,000 to £80,000 a week), Walcott (£40,000 to £60,000 a week), Song, Denilson, Bendtner, Eduardo and Fabianski (!) amongst others.

"Theo gives thanks for his pay rise"

While explaining how the move to the Emirates has helped boost the club’s profits, director Danny Fiszman actually boasted, “the wage bill is very similar to Manchester United’s and substantially above Liverpool’s. It’s substantially below Chelsea’s, but that is expected.” Not only that, at £104m it’s considerably more than the payroll at the chasing pack: Manchester City £83m, Villa £61m, Spurs £59m, Everton £49m. Boosted by massive growth in match day receipts and broadcasting income, Arsenal’s annual wage bill has increased by almost 60% in the last five years from £66m to £104m. Despite this, the wages to turnover ratio has actually fallen from 57% to a highly respectable 46%, which is the second best in the Premier League.

In this time, Arsenal’s headcount has risen by 30% from 293 to 384, but this is almost entirely due to (cheap) ground staff and administrators. The number of players is virtually unchanged at 62, so the increase in wages is purely down to significant inflation. All these figures are from accounts that are a year out of date and the salaries growth in the interims implies that Arsenal’s annual wage bill will rise to £120m, which is probably reaching the upper limit if the club wants to remain prudent.

We can be reasonably sure that this is the case, for Arsenal have a very conservative wage structure. At least they do to the extent that they very rarely pay top dollar for the best players, which can be seen by the list of the top 50 footballers’ salaries, featuring just one player from Arsenal: Andrei Arshavin down in 47th place. Cesc Fabregas has almost certainly joined this august list, but other clubs still feature far more often: Barcelona 8, Chelsea 7, Real Madrid 6, Manchester City 6 and Manchester United 4. Arsenal’s approach is different: the top players might not earn that much, but the rest of the squad is relatively well paid.

"Worth £10m of anyone's money"

Does this egalitarian ethos make sense? One result is that average players like Almunia, Denilson and Diaby earn more than their talents deserve, which is a double whammy, as it would also be difficult to sell them with other clubs unwilling to match their inflated salaries. The other implication of the rigid wage structure is that Arsenal will struggle to attract world-class players like Fernando Torres or David Villa. This can be demonstrated empirically by the number of high transfer fees paid, assuming that this is what it takes to purchase a world-class player (though admittedly such a list will include a few duds). Arsenal have only bought seven players with a fee over £10m (Vermaelen, Arshavin, Nasri, Hleb, Reyes, Wiltord and Henry), while Chelsea have bought three times as many (21), Manchester United have bought more than twice as many (16) and even Liverpool have bought more (9).

What is really striking about the wage bill is the allocation, as much of it is given to the youngest players, who earn much more at Arsenal than other clubs. For example, it was reported that Aaron Ramsey was offered £850,000 by Arsenal compared to £350,000 by Manchester United. Granted, that now looks like money well spent, but it is indicative of the different wage policy. From a financial perspective, this is a shrewd strategy, as it protects the players’ value in terms of future transfer fees, but it does mean that there is less money available to improve the first-team squad. Another benefit of this plan is that it encourages loyalty to the club (or Arsene) among young players, but there is also the risk of complacency setting in. While many fans understand the strategy, it still goes against the grain to reward these players for: (a) not winning any trophies for five years; (b) spending lengthy periods in the treatment room with assorted injuries and ailments.

The problem is that it is very difficult to cut wages, unless you live in Greece. As Arsenal’s annual report said, “There continues to be significant upward pressure on players’ wage expectations and the activities of other clubs in the market and the introduction of the 50% income tax rate from April 2010 mean this looks set to continue.” This is compounded by the weakness of Sterling, which has declined from €1.50 to €1.15 to the Pound over the last couple of years.

"Suited and booted"

Let’s take the example of a foreign player who earned £60,000 a week two years ago. His annual gross salary would have been £3m with take-home pay of £1.8m (€2.7m). Following the increase in the tax rate from 40% to 50%, net pay would fall by £300,000 to £1.5m. That is further reduced in Euro terms from €2.250m to €1.725m, thanks to Sterling’s decline. In total, the annual salary has effectively been slashed by almost €1m (from €2.7m to €1.725m). I don’t care how well paid anyone is, a 35% cut in your salary has to hurt. So, what’s the player going to do? That’s right – ask for more money.

Some have argued that this does not matter, as many footballers in Spain have not actually been paid by their clubs, which is one way of cutting wages. This has resulted in the Spanish players’ union threatening to strike. This may be a factor for smaller clubs, but I’m not sure that it is that relevant for Arsenal, as they should theoretically be competing with the likes of Barcelona and Real Madrid for the cream of the crop – and they are paying their players.

The market is also artificially inflated by the presence of extremely wealthy benefactors like Roman Abramovich and Sheikh Mansour, leading to the so-called “financial doping” so despised by Arsene Wenger. We know all about Chelsea’s enormous wage bill (about £150m), but it surely won’t be long before Manchester City get close to this. Their last accounts reported a 50% increase in salaries from £54m to £83m, but that does not include their spending spree last summer, when they attracted many big names (Adebayor, Tevez, Barry, Lescott, etc) to the club with generous packages. Conservatively assuming £100,000 a week, City’s payroll has probably risen by over £40m to around £125m this season.

"The artful dodger"

This is why Arsenal have developed a squad-building technique that is very different from their main competitors in the Premier League. As explained by Wenger, “The club’s strategy is to favour the policy of youngsters ahead of stars and to count on the collective quality of our game.” Rather than buy established players, Wenger would prefer to search for unpolished gems, so he has set up a worldwide scouting network. The financials are compelling: instead of spending £15m on a transfer fee plus £20m on wages (five-year contract at £80,000 a week), the club can get several teenagers for minor compensation fees, say, £250,000. Not all of them will make the grade, but those that don’t are usually sold for a tidy profit. Arsenal are now recognised for their youth development programme and state-of-the-art training facilities, while former player Gilles Grimandi, now scouting in France, adds, “We are able to attract the most promising prospects, because we have a calling card stamped ‘Arsene Wenger’. They know they will get the chance to play. It is one of our principal arguments.” And, of course, the great money paid to youngsters at Arsenal helps.

What most people don’t appreciate is that there are, in fact, two elements to Arsenal’s youth policy. The one that everyone understands is buying young players from other clubs, developing them for a few years, hoping that they will ultimately become a fixture in the first team, but selling them for good money if they do not. You could argue that the emergence of Cesc Fabregas is enough on its own to justify this policy, but there have been other success stories. Alex Song is a case in point, especially as Wenger saw potential that most others didn’t, but Nicklas Bendtner is another good example.

However, given that there are only 11 places available in a team, the law of averages would suggest that most prospects are sold. The process was explained by one of Arsenal’s scouts, Tony Banfield, “If it is felt they might not be good enough, they are sent out on loan to get more first-team football with the idea that it might improve them. When they return, if they are better, they might stay, otherwise the club look to sell them.” So, not only does a loan player benefit from playing experience, but he is also placed in the shop window to enhance his transfer value. In this way, Sebastian Larsson and Fabrice Muamba were first loaned then sold to Birmingham City in 2007. In addition, the club profits from sell-on clauses, the best example being David Bentley, who was sold to Blackburn for an initial £2.5m with a further £7.5m going Arsenal’s way via his subsequent transfer to Spurs.

"JET - do you wanna be in my gang?"

The second strand is what you might describe as the extreme youth policy, which was outlined by Wenger two years ago, “If you want to completely develop a player, ideally you take him at the age of five and you bring him right through to the first team. I have tried to build an academy that will recruit young local lads. At present, we have exceptional under-14s and under-16s. Technically, they are extraordinary.” He continued, “My priority will always be to keep the players I already have, because above all I believe in the virtues of teamwork. I want to have success by building a team with a style, a know-how, a culture of play specific to the club.” The idea is to bring a talented group of players together for sustained success. This is the approach that Barcelona, and Ajax in days gone by, have adopted. Some argue that this is too much of a gamble and it’s certainly a courageous long-term strategy in this most short-term of industries. However, as the great Johan Cruyff said, “If you have a good youth development system, then it is obvious the first team will one day be good too.”

The great hope for Arsenal is the exciting group of players that passed their way to a glorious success in the FA Youth Cup last season, most of whom have been together since they were 11 (or younger) at the Hale End Academy. Nine of the starting team that demolished Liverpool in the final are English, fulfilling Wenger’s vision of nurturing local talent. Many of them have already emerged in the Carling Cup, but are not quite ready for regular starting places in the first team, so have been loaned out with a fair degree of success: Jack Wilshere (Bolton), Jay Emmanuel-Thomas (Doncaster), Henri Lansbury (Watford), Kyle Bartley (Sheffield United), Gilles Sunu (Derby) and Sanchez Watt (Leeds). Meanwhile, Craig Eastmond has made a handful of appearances for Arsenal in the Premier League.

The importance of developing players and keeping them together, as opposed to trying to integrate new buys, seems intuitively correct, but luckily for Arsenal fans it has also been proved by statistical analysis. In their intriguing book “Soccernomics”, Simon Kuper and Stefan Szymanski used twenty years of research on football clubs to demonstrate that “spending on salaries explained 92% of their variation in league position”. In plain English, the higher your wage bill, the greater your chance of success. On the other hand, there is almost no correlation between transfer spending and doing well. Their analysis only goes up to 1997, but this year’s Premier League tells the same story. With one game remaining, the top three positions are filled by the three teams with the largest wage bills – in exactly the same order. Chelsea pay the most and lead the table, followed by Manchester United with the second largest payroll and then Arsenal whose salaries are third highest. In fact, the top seven places in the Premier League are occupied by the first six teams in the “wages league” plus Tottenham (who are 8th).

But it’s a double-edged sword, as wages are also the largest cause of clubs going into debt. The first sign that Portsmouth were in trouble came when the players’ salaries were paid late. As a director at one of Europe’s top clubs said, “We’re a great business, except for our players’ wages.” This has led to a widespread belief that footballers’ salaries should fall, but this seems unlikely, given the simple reality that the more a club pays players, the more matches it will win.

Billy Beane, the legendary general manager of the Oakland Athletics baseball team, has praised Wenger’s methods. The subject of Michael Lewis’ wonderful “Moneyball”, Beane is one of the world’s most influential sports executives, having used statistical data to find new ways of valuing baseball players, and is a great admirer of the Arsenal manager, “Nothing strangulates a sports club more than having older players on long contracts, because once they stop performing, they become immoveable. And as they become older, the risk of injury becomes exponential. It’s less costly to bring on a young player. If it doesn’t work, you can go and find the next guy, and the next guy. The downside risk is lower, and the upside much higher.”

As they say, imitation is the sincerest form of flattery and many other clubs now strive to emulate Wenger’s policy. Even those perennial big spenders, Chelsea and Manchester City have lauded Arsenal’s youth set-up as the way forward. Admittedly, Chelsea’s compliments came from Guus Hiddink, just before he exited stage left, and the source of City’s praise was Garry Cook, their appalling chief executive, but even Fabio Capello lavished fine words on Arsenal’s structure, “I’ve had the opportunity to look at Arsenal’s academy and their work is incredibly good. It’s a very important example for the other English academies.”

"Thumbs up for Arsenal's academy"

But is it successful? In terms of winning trophies, obviously not (or not yet). Nor can you say that the youth policy is a complete success when your central defenders have a combined age of 67 (Sol Campbell 35, Mikael Silvestre 32). However, Arsenal have qualified for the Champions League ten years in a row, which hardly any other club in Europe has managed. Furthermore, their record in the Champions League since the break-up of the “Invincibles” (after losing to Barcelona in the 2006 final) is no worse than that exalted team. If you allocate 5 points for winning, 4 points for reaching the final, 3 for semi-final, 2 for quarter-final and 1 for last 16, the current team acquired 8 points in the last four seasons, which is exactly the same as their more experienced predecessors. Yes, I know anyone can play with numbers, but it still suggests that the team is not on a downward trend.

The team’s performance should also be considered in the context of the dramatic changes in the football landscape post-Abramovich. Arsenal have been competing against billionaires for whom money is no object, who have tried to buy immediate success, e.g. Chelsea spent nearly £400m in the first three years after the arrival of their Russian oligarch; Manchester City splashed out over £250m following the influx of Arab money. Some clubs, notably Manchester United and Liverpool, have decided that it does not matter if they don’t have any money, opting to build up substantial debt instead, while other clubs have adopted a “see no evil, hear no evil” approach to potential saviours, which has predictably ended in tears, e.g. Portsmouth, West Ham.

This relative financial weakness has been compounded by the constraints arising from the construction of the Emirates stadium. In the future, this will generate significant profits, but there is no doubt that Wenger has been operating with one hand tied behind his back over the past few years, forcing him towards the youth policy. Making a virtue out of necessity, Wenger advised the board, “We have good youngsters and can still compete at the top level.” This was in stark contrast to comments he made in the 2003/04 season, “I'm convinced that up front now you need to be young. A goalkeeper is best between 30 and 35. Central defence, I would say best age 26 to 34. Midfield between 26 and 32 and a striker between 24 and 30. Those are the top ages.”

"Wengerball"

At least Arsenal will not fall foul of UEFA’s financial fair play initiative, which will be phased in from 2012. Clubs will have to comply with these new rules before they are allowed to take part in the Champions League. As it stands, Chelsea and Manchester City do not qualify, though cynics might say that this is before their lawyers get involved.

In any case, there should be great respect for what Arsene Wenger has done at Arsenal these last few years. He has guided the club through the substantial upheaval of leaving its spiritual home of Highbury for the Emirates; developed a squad of exciting young players; and kept the team competitive, while playing the most attractive football in the country. All of this despite having to operate under major financial constraints at a time when other clubs have been flush with new money (both legitimate and dodgy). This is no mean feat, but there is a risk that Wenger has become too focused on the club’s finances, which is presumably why Michel Platini chided him for having a business mentality, rather than a football one.

Now that we know that the club has a large transfer budget, it may be that the emphasis on youth is tweaked this summer. The team is too inexperienced, though this has been exacerbated by the numerous injuries, and there is optimism that this will be addressed. Only yesterday, Wenger said, “We have plenty of young players. If we bring some players in, then they have to be experienced players. The additions will be minimal, but if there are some, they have to be really top class.” So, not a major over-haul of the policy, just a fine-tuning.

How Big Is Arsenal's Transfer Budget?

Come with me, if you will, back to the beginning of this season, a time when most pundits graced us with their opinion that Arsenal were the club most likely to drop out of the top four positions in the Premier League, having spent very little and sold two of their established stars. With the team now virtually assured of third place, you would therefore think that this was cause for celebration, but most fans still feel a sense of disappointment. The humbling by Barcelona in the Champions League quarter-final was followed by defeat in the North London derby (the first time that Spurs had beaten Arsenal in the Premiership for over a decade) and the desperate collapse against a feeble Wigan side.

If it wasn’t evident before, it has become abundantly clear that Arsenal need to strengthen the side during this summer’s transfer window. We are not talking about a major rebuilding programme, but most supporters know where the priorities lie. First, no team is ever going to win the title with goalkeepers of the calibre of Manuel Almunia and Lukasz Fabianksi. There could also be significant changes to the central defence. The hapless Mikael Silvestre should be allowed to leave, while William Gallas’ contract is due to expire and at the age of 35 Sol Campbell cannot be a long-term solution, despite his sterling efforts since he returned. The squad would also benefit from another powerful defensive midfielder to cover for the much-improved Alex Song. After crashing out of the Champions League, even the loyal Arsene Wenger admitted that his side needed reinforcements, “We have to add something, for sure.”

"Good arguments for strengthening the squad"

The club has always maintained that it has the funds to compete in the transfer market and this was confirmed by chief executive Ivan Gazidis when commenting on the most recent accounts, “We have money available to invest in the transfer market when we can identify the right players to add into the mix that add something to the squad.” A couple of weeks ago, chairman Peter Hill-Wood gave an explicit green light for a spending spree this summer, “We have got more money than we’ve had for a long, long time and we would like to spend it. But we want to spend it sensibly. There is plenty of cash, although not in comparison to Manchester City.” His normally circumspect manager was just as bullish, “We can match Chelsea and Manchester United in any bid. They can’t buy all the top players.”

But exactly how big is the transfer budget? For obvious commercial reasons, the club has not divulged how much money it has, but you would expect a considerable surplus to be available from playing in a 60,000 sold-out stadium with some of the highest ticket prices in the world, especially when the club’s wages to turnover ratio is among the lowest around. The newspapers certainly appear to be completely confused. The Daily Telegraph announced this week that “Wenger gets £18m war chest”, though did not bother to explain how they arrived at this figure in the accompanying article. The Daily Star typically went big with “Arsene Wenger’s £60m spree”, while the Sunday Times was more oblique, “If Wenger wants to sign two £20m players on £80,000 per week this summer, he has the means to do so”. Even John Cross at the Mirror, normally so authoritative on all Arsenal matters, seems unsure, saying that “the club has £50m plus to spend” last October, only to reduce this to a “£30m plus budget” this month.

"Time to open the cheque book"

So, let’s take a look at the accounts to see if we can work it out, as the Beatles once said. The starting point is an impressive cash balance of £101m, but that includes £22m which must be maintained on deposit as security that future payments of interest and principal can be made to bond lenders, leaving £79m. Much of this will have come from season ticket money paid in advance, which will be needed to cover operating costs in the second half of the accounting year. As we do not know when expenses are incurred (or other income is received), we cannot say for sure how much cash is required for this. Your guess is as good as mine, so let’s just take the estimate of £35m from the esteemed Arsenal Supporters’ Trust, which would leave the club with net cash of £44m - still pretty good by most standards.

Half of this came from last summer’s profitable player trading. The annual report boasts “all proceeds from player sale transactions are made available to Arsene Wenger for re-investment back into the development of the team”. This is reinforced by the terms of the stadium financing deal, which states that 70% of all net sale proceeds must be used on buying players or placed into a ring-fenced Transfer Proceeds Account (TPA). This protects lenders by ensuring that the club continues to invest in its core asset, i.e. the playing squad. The sales of Emmanuel Adebayor (£25m) and Kolo Toure (£16m) to Manchester City less the purchase of Thomas Vermaelen (£10m) from Ajax produced a net surplus of £31m, so £22m went into the TPA.

"Pointing the way forward"

Importantly, this fund can also be used to improve players’ contracts and this has become key to Wenger’s approach to investing in the squad. Most fans probably do not appreciate that the manager controls a budget covering both transfers and wages, so just because money is available to him does not necessarily mean that he will use it to purchase new players. Instead, he can allocate cash to increase the wages of the existing squad, which is a route he has clearly followed. The interim accounts highlighted an £8.6m rise in player wages, despite the departure of Adebayor and Toure, who were on very high salaries. This reflected the re-signing of 17 first-team players on long-term contracts, which the chairman described as an “investment in a very talented group of players” and as the “best means of protecting the value of one of our most important assets”.

That may well be true, but it implies an annual wage bill of £120m, which is admittedly £30m less than Chelsea, but is now over 50% of turnover. Although that’s lower than most other clubs, you would not really want to push it any higher, even though there will be pressure to do so for a number of reasons. This month’s increase in the top income tax bracket from 40% to 50% has compounded the currency effect of Sterling’s weakness against the Euro, making England a less attractive proposition for foreign players, which can only be compensated by increasing gross salaries. At the very highest echelons, the market might also continue to be artificially inflated by the presence of extremely wealthy benefactors like Roman Abramovich and Sheikh Mansour, not to mention the Spanish giants Real Madrid and Barcelona.

"Money talks"

Hence, the so-called “golden handcuffs” deal to keep Cesc Fabregas away from the Catalans’ clutches, which not only increased his salary from £80,000 to £110,000 a week, but actually back-dated it for two years, resulting in a “signing-on” fee of £3m. It is strongly rumoured that Wenger’s first addition to the squad this summer will be Moroccan forward Marouane Chamakh from Bordeaux. This is presented as a free transfer, but he will reportedly be on a five-year deal worth £50,000 a week, which is a £12.5m commitment. See how important wages are to the overall cost of buying a player? A straightforward point, but one that Harry Redknapp did not seem to grasp at “pay up” Pompey.

What might be worth considering is whether the allocation of the wage bill is the right one, as much of it is currently given to younger players, who earn more at Arsenal than other clubs. In one sense, this is a shrewd policy, as it protects the players’ value in terms of future transfer fees, but it does mean that there is less money available to improve the first team squad. If the balance were fine-tuned, this could facilitate the purchase of the players who would make the difference between challenging for and winning trophies.

From a purely financial perspective, it is difficult to criticise Arsenal’s transfer strategy, as player trading has proved to be a very profitable activity in recent years. In the four seasons since the club moved to the Emirates, their net transfer spend has been a negative £35m. As a comparison, the net spend at their North London rivals Tottenham was £78m, even after the big money sales of Dimitar Berbatov and Robbie Keane, which is an incredible £113m more. Of course, any sales this summer would increase Wenger’s transfer pot and there has been media speculation about some departures, such as Eduardo to Lyon for £8m and Tomas Rosicky back to the Bundesliga for a similar sum. However, one potential barrier to clearing out some of the dead wood is the relatively high wages paid to the likes of Almunia, Eboue, Diaby and Denilson. Which other clubs would be willing to match their salaries?

"All in the past?"

On the other side of the coin, the club has provided £9m for “probable” additional transfer fees payable to other clubs after existing players make a certain number of appearances. It is not clear exactly when these payments will be made, but the prudent approach would be to deduct this from the available cash. On top of that, there are another £11m contingent liabilities for similar performance-related clauses, though these payments are considered less likely.

The really good news in the last set of accounts came from the property side. Although there had been considerable uncertainty arising from the market downturn, Peter Hill-Wood confidently announced, “It is clear that the next couple of years will see our property activities deliver excess cash”, while Ivan Gazidis confirmed, “We will soon be delivering a profit back into the football side of the Group”.

At the time the interims were published, 524 of the 655 private apartments at Highbury Square had been sold and recent reports indicate that there is only a limited number still available. We do not know how much money they sold for, but we can estimate the value of the 131 remaining apartments as between a conservative £33m (using the on-line starting price of £250k) and £54m (based on the average price of sales to date of £414k), which would produce net proceeds of £20m to £41m after clearing the outstanding debt of £13m (at the time the accounts were published). It’s a bit rough and ready, but if we take the mid-point for our calculations, that would produce £30m, though we do not know when the money will be given to Wenger. As Hill-Wood said, “This is very good news, although I would not want to speculate on the exact quantum or timing of this.”

"Welcome to Highbury"

Furthermore, the club’s other three property assets (Queensland Road market housing, Hornsey Road and Holloway Road) are now free of debt following the sale of Queensland Road social housing, so any future sales here represent pure profit. I have no idea what that could be worth, but let’s say £15-20m. The reason that I have guessed those figures is that it would result in total once-off property gains of £45-50m, which is in line with the £45m estimate from the Arsenal Supporters’ Trust and the £50m “surplus from sales” expected by the Times. Everyone seems to think that this money will be produced “over the next two years”, so it is far from certain that it will be on tap in the next transfer window. While we are being cavalier, let’s assume that half of the Highbury Square money is available now, leaving Queensland Road as future music, which would give Arsene another £15m now.

Given that Arsenal made a £5m profit from the core football business in the last six months, having stripped out player trading and amortisation, we could potentially add this to the transfer budget, but let’s be conservative and leave that untouched, so it can be used to cover other costs.

After all that, how big is Arsenal’s transfer budget? Well, we start with £44m cash, having allocated £22m to the security deposit for lenders and deducted £35m for second-half running costs, and then should reserve £9m for probable additional transfer fees, leaving us with £35m net cash. To that, we could add the estimated £15m from property development, giving us a grand total (drum roll) of a nice, round £50m.

"If we build it, they will come"

Even if that figure is not completely accurate, there is definitely a lot of cash available. It is equally clear that Wenger will have additional funds next year as well from a combination of solid football profits plus the remaining property development. However, if the club wishes to maintain a similar level of transfer funding beyond that, it will have to go down the old-fashioned route of increasing revenue (or cutting costs). Is that feasible?

The most obvious potential for revenue growth is in the commercial area, where Arsenal’s income lags way behind their peers, according to the Deloittes Football Money League 2010. Arsenal’s commercial revenue of £48m is much lower than the other teams in the so-called “Big Four” (Manchester United £70m, Liverpool £68m and Chelsea £53m). Understandably, Arsenal tied themselves into long-term deals with Emirates (stadium naming rights until 2021, shirt sponsorship until 2014) in order to provide security for the stadium financing, but recent deals by other clubs highlight the size of the opportunity, which is probably worth another £20m a year.

Gazidis is well aware of this and has recently restructured and strengthened his commercial team to explore new partners and overseas markets in order to “unlock value” (in his terms), though the thorny issue of more lucrative pre-season tours to America or Asia is on the back-burner until the club has a clear strategy for these regions. Arsenal’s transfer activities are also relevant to this area, as a new star would generate more shirt sales à la Ronaldo, Messi, Torres and Rooney.

"Gazidis unlocking value"

Other revenue streams are relatively fixed, though we know that broadcasting income will rise by £7.5m a year following the new Premier League deal for overseas rights. It is also difficult to see how match day revenue could be increased, given that Arsenal’s ticket prices are already among the highest in Europe, and there are some slightly worrying signs that demand at the higher end is not as strong as it has been. This is important, as the 9,000 premium seats generate approximately 35% of match day revenue. This may well have resulted in pressure on the manager from the board to buy some established stars, in order to improve the team’s chances of success, thus reducing the risk of a drop in crowds.

How about a spot of cost cutting? There certainly seems to be scope for some judicious efficiencies, as the annual costs of £55m for “other operating charges”, i.e. excluding salaries and amortisation, is actually higher than the total costs at seven Premier League clubs. Unfortunately, the club does not provide much detail for these costs, but they must include items like stadium operating costs, travel and training. What we can see is that these costs represent 25% of football turnover, which seems on the high side to me.

Hang on a minute, don’t Arsenal have a huge amount of debt to pay off? Yes and no. The astonishing advances on property sales have enabled the club to reduce net debt by circa £160m in the last twelve months to around £175m with the property developments now being essentially debt-free. This represents gross debt of £275m less £100m cash with the remaining debt being for the Emirates stadium, via a mixture of fixed rate and floating rate bonds that are due for final repayment in 2031. Total annual cost to service these loans is £20m (£15m interest and £5m principal reductions). It’s not clear whether it would be possible for Arsenal to pay off this debt early in order to reduce the interest charges, but my guess is that they are in no hurry to do that, as Gazidis has argued that not all debt is bad, “The debt that we’re left with is what I would call ‘healthy debt’ – it’s long term, low rates, very affordable for the club, and it’s effectively a mortgage on our stadium, which generates revenue.”

"Money spinner"

You might therefore conclude that all the funds will be invested in the team, but Peter Hill-Wood struck a slightly contrary note (not for the first time), “In addition to investing in the team, I think we will examine investment in club projects and infrastructure … into the next phase of growth.” Not sure what that might mean, but it inspires visions of adding a new tier to the Emirates like the San Siro before the 1990 World Cup – though somehow I doubt it.

Those fans that would prefer to see the club put money into the “Arsenalisation” of the team rather than the stadium, would be comforted by Gazidis’ comments after the results, “We have delivered a profit before tax of £35m for the first half of the year, but it’s important to note that this isn’t our primary objective. The reason we run a responsible, profitable and self-sustaining business is so that we can deliver success to the club and invest in the club and ultimately deliver success on the pitch.” While Arsene Wenger believes he “would not be doing his job well if the club lost money”, he is at pains to emphasise that “the sporting side is always the most important thing.”

There is no doubt that the move to a new stadium has limited Arsenal’s transfer budget over the past few years, which Wenger finally admitted this week, “The construction of the Emirates Stadium meant that for many years we could not spend a lot of money. Our financial situation has greatly improved. We are finally able to buy the players we think we need”. This is a much more transparent response than the previous obfuscation, but there is still a suspicion that Wenger would prefer to build rather than buy, so much of the low spending was out of choice.

"How much?"

Every summer, Wenger has repeated the mantra: “We are not short of money. I am not scared to spend money. We have a squad that is good enough to compete. I will spend for a player that we need.” Even though he clearly has money this year, Wenger seemed to be preparing supporters for another summer of low spending, when he told the club’s magazine, “I feel we have made huge steps forward this year compared to last year”, while also pointing out the dangerous consequences for the club’s wage policy of buying a top star on top dollar. Last summer, he also showed his hand when discussing Real Madrid’s galactico policy, “In my opinion, to recruit more than three new players in a transfer window, as Real plan, is taking a technical risk.” Wenger may feel vindicated after the lack of success for the Spaniards (and indeed Manchester City) this year, but critics would point to the improvement shown in the Champions League by Bayern Munich and Lyon, who were among the biggest spenders last summer.

There are two other factors that might influence Arsenal’s transfer targets. First, injuries have been a major dynamic this season with key players being lost at different stages (Robin Van Persie, Cesc Fabregas and Alex Song in particular) and the squad suffering a barely credible seven fractures. If they all return hale and hearty, that will be like making several “new signings”. Second, the Premier League has introduced a new home-grown player rule, which means that all clubs must register a squad with a limit of 25 players of which eight must be aged 21 or under and qualify as home-grown. The consensus seems to be that Arsenal are well placed to satisfy these quotas, but it might influence the club’s manoeuvres in the transfer market.

"Mind over matter"

Whatever signings Arsenal make, we can expect them reasonably soon, if you believe Wenger’s comments to the club magazine, “I have definite transfer targets and have been talking to people, but I will not tell you who. I believe the earlier you settle your teams the better it is and the less anxiety you have.” While some might cynically note that this announcement neatly coincides with season ticket renewals, there is a precedent for this approach, as he signed Rosicky before his goal scoring feats for the Czech Republic in Germany (and before his price was artificially inflated). It should also be noted that Wenger is going to South Africa to cover the World Cup for French television.

One final factor is that Arsene Wenger’s own contract expires next summer. The chairman has reiterated his support for the enigmatic Frenchman, “We want him to stay for as long as he wants, and we hope that will be for a considerable time yet”. Wenger’s sense of moral decency would not allow him to go on a spending spree if he felt that he was likely to leave, as a new manager will usually want to bring in his own players. From this perspective, the arrival of several new players would be doubly pleasing to the majority of Arsenal fans.

However, a few supporters are getting restless at the lack of trophies and reluctance to spend big in the transfer market, because Wenger’s reign has been like the proverbial “game of two halves”, winning three Premier League titles and four FA Cups in his first nine years, followed by nothing in the last five years. He is an outstanding manager, probably the best that Arsenal has ever had, but he might need to modify his transfer policy to ensure that he goes out with a bang.