UEFA's Trans-Europe Express

The Euro 2012 tournament has started very promisingly with many decent matches, including a rollercoaster of a draw between Poland and Greece, a dazzling display from Russia against the Czechs, an upset victory by Denmark against the much fancied Dutch and a sublime tactical tussle between Spain and Italy.

UEFA’s courageous decision to break new ground by staging the European Championship in Poland and Ukraine has so far been justified with the football good enough to satisfy the most jaded observer. Off the pitch, doubts remain over the wisdom of this choice, as the long travel distances and high prices have once again penalised many football fans. Even Michel Platini, the UEFA president, described some Ukrainian hotel owners as “bandits and crooks.” More importantly, a few violent and racist incidents have left a nasty taste.

Only in a few weeks will we be able to say whether Euro 2012 has lived up to the grandiose vision outlined by Platini in UEFA’s last annual report, “Our mission is always to put football first, to run our competitions as efficiently as possible and to provide the best possible stage on which the top performers can generate the emotions, intensity and entertainment which, in times of crisis and anxiety, have an even greater value within society.”

"Pole position"

Although that sounds like the height of romanticism, UEFA has become a highly pragmatic organisation that is fully aware of the commercial opportunities offered by such events and recognises the need to “create income which UEFA can re-invest in the game of football.”

Amusingly, it almost seems embarrassed by this financial imperative, as can be seen by the reference to the Beatles’ “money can’t buy me love” in their financial strategy, though this is followed by the assertion that it “can be used in ways which nurture love for the world’s most popular game.” Last year they went back even further to make the same point, quoting 17th century diarist Samuel Pepys, “It is pretty to see what money will do.”

This begs the question of how UEFA actually does make its money and indeed what they spend it on; so let’s dig deep into its finances.

In 2011 they reported a net result of minus €86 million, which on the face of it is not particularly good, but this is misleading for three reasons:

(a) As a not-for-profit organisation, UEFA is not about accumulating money, but is duty bound to re-distribute its income, essentially either directly to the teams participating in its tournaments or to the 53 national associations that comprise its membership via so-called solidarity payments.

(b) The result was heavily influenced by currency movements, especially the devaluation of the Euro against the Swiss Franc, as many of UEFA’s operations are located in Switzerland, which resulted in €50 million of unrealised exchange losses. Indeed, this has hurt UEFA’s figures for the last four years.

(c) The results should be reviewed over a four-year cycle, so that they can incorporate the European Championship. This is invariably a money-spinner for UEFA, which creates reserves that can be used to fund shortfalls in future years, e.g. €106 million was used from provisions in 2011.

It is therefore better to consider UEFA’s performance at the operating level, where the €77 million profit in 2011 was 71% higher than the €45 million posted in 2010. Revenue of €1,385 million grew €76 million (6%) with broadcasting rights of €1,086 million representing the lion’s share (78%) and €275 million (20%) coming from commercial rights. The remaining €23 million includes money from FIFA’s Financial Assistance Programme €6 million, hospitality €5 million, tickets €4 million and fines €6 million.

"Old songs are the best"

The solid revenue growth was to some extent offset by an increase in distributions to participating teams, which broke through the €1 billion barrier for the first time, and staff costs, which rose 26% from €35 million to €45 million. The growth in personnel expenses was partly because of currency movements, as most staff are based in Nyon in Switzerland, but also due to an increase in headcount from 281 to 318.

The operating profit of €77 million was virtually doubled by a net increase in non-operating items of €75 million, made up of €19 million interest income less €50 million exchange differences plus €106 million from provisions.

The resulting surplus of €152 million was then used to make solidarity payments to national associations, which remained unchanged at €238 million, leading to the €86 million annual deficit.

All in all, this is a pretty satisfactory performance. As Platini put it, borrowing from Sepp Blatter’s vast stock of nautical analogies, “In a period of exceptional turbulence in the European and global economies, UEFA managed to negotiate the stormy waters on an even keel.”

Just because they can, UEFA include an alternative presentation of their finances in the form of a source and use of income statement. The source of income is essentially the revenue of €1,385 million plus financial items and release of part of the Euro 2008 provision, which gives €1,453 million income. For the first time, the financial items reduced the amount of total income, due to the adverse currency movements.

At least this format clearly highlights the three main uses of income, namely distributions to participating teams (66% of total), solidarity payments (15%) and organisation of competitions (12%). The remaining categories cover just 7% of the total expenditure.

Although UEFA claim to be “committed to maintaining and enhancing the balance between national team and club football”, by far the most important share around €1 billion) was distributed to clubs participating in the Champions League (€831 million) and Europa League (€158 million). Although UEFA is “very satisfied that solidarity payments (made to national associations) occupy second position in terms of use of income”, the €238 million allocated here is considerably lower than the amount given to club sides.

UEFA are also at pains to emphasise the relatively low €62 million spent on its own governing expenses, which “should not be allowed to exceed 4% of revenue.” This covers staff, travel and the maintenance and running costs of offices in Nyon, including a second building, La Clairière, which was inaugurated in October 2010 to add capacity to the splendidly named House of European Football, and a third office, Bois-Bougy, opened this year. Also bundled into this category are the costs of the various committees and panels, including disciplinary proceedings, but it should be noted that it excludes costs allocated to a specific competition or project.

UEFA’s annual revenue of €1.4 billion is impressive enough, but what is really striking is the growth over the last few years, which they explain in their annual report, while throwing aside any false modesty, “Thanks to the concept of central marketing and, of course, the ever-increasing popularity of UEFA’s flagship competitions, it is possible for UEFA to generate substantial revenue.”

Revenue has risen from €659 million in 2005 to €1.4 billion in 2011, which is the second highest revenue ever, behind the €1.9 billion earned in 2008. That year was boosted by the European Championship in Switzerland and Austria (plus €36 million from revaluing office buildings), so in real terms 2011 is UEFA’s best ever year.

The underlying trend can be seen by looking at the three-years excluding the Euros with the revenue generated in 2009-11 of €3.6 billion being 43% more than the €2.5 billion in 2005-07. This is largely due to the €280 million increase in annual revenue from the Champions League, which started a new three-year cycle in 2009/10, and the creation of the Europa League, which generates €150 million more revenue than the UEFA Cup.

In this way, broadcasting revenue has surged from €485 million in 2005 to €1.1 billion in 2011. Rights for the Champions League are particularly lucrative, e.g. Sky and ITV last year renewed their three-year deal for £400 million.

Similarly, commercial revenue has doubled from €135 million to €275 million in the same period, as UEFA have attracted a veritable plethora of multinational sponsors. The Champions League benefits from five main sponsors (Mastercard, Heineken, Ford, Sony and UniCredit), while the Europa League has one main sponsor (SEAT). In addition, they run a Eurotop sponsorship programme that includes rights to all national team events with five partners (Adidas, Coca-Cola, McDonald’s, Hyundai-Kia and Sharp), while five other companies have signed Euro-specific deals (Carlsberg, Orange, Canon, Continental and Castrol).

Looking at UEFA’s profitability by competition in 2011, it’s all about the Champions League, which generates about 80% of the revenue and contribution after the clubs have taken their share. Its revenue of €1,145 million is more than five times as much as the Europa League’s €210 million, while the contribution of €246 million is significantly more than the junior tournament’s €53 million.

About three-quarters of the revenue goes directly to the participating teams via hefty distribution payments with the remainder covering UEFA’s costs and distributions to national associations. After these expenses are deducted, the Champions League provides a net contribution of €78 million to UEFA, but the Europa League requires €2 million of funding. UEFA is a little defensive about the performance of the Europa League, noting, “It should always be borne in mind that the Champions League took some years to acquire its current status and standards.” All other competitions organised by UEFA run at a loss, including women’s football, Under-21s, youth events and Futsal.

Of course, to get a clear picture of UEFA’s finances, we need to look at the four-year cycle from one European Championships to the next. In the first year, when the Euros take place, there should be a substantial surplus (€236 million in 2008), followed by three years of losses. As UEFA is a not-for-profit organisation, theoretically the cumulative result should be zero, though 2008 to 2011 actually produced a surplus of €56 million.

In that period UEFA generated €5.5 billion revenue, the majority of which (70%) was from the Champions League (€3.9 billion) with €1 billion from the Euros (note that total revenue from the Euros was actually €1.35 billion, but this analysis only includes revenue earned in 2008) and €0.5 billion from the Europa League. We can also see how UEFA set up a revenue provision in the year of the Euros to be utilised in subsequent years.

Also evident is the enormous amount of money distributed by UEFA: €3.4 billion to participating teams (all but €184 million to club sides) and €0.9 billion to national associations. In terms of profitability, the European Championship (€253 million) actually delivers a little more than the Champions League (€214 million) over a four-year cycle, though this is partly down to decisions taken by UEFA regarding the size of distribution payments.

So, the Champions League has proved to be a major success story with Platini boasting that, “There is nothing like the setting, the stage, the experience of a Champions League night.” Revenue has grown like gangbusters from just €45 million in its first season in 1992/93 (yes, I know that the European Cup existed for many years before that) to €1.1 billion in 2011, which would make it the sixth highest revenue generating league in Europe.

Most of this revenue (€831 million in 2011) is distributed to participating clubs. Each of the 20 clubs involved in play-offs received €2.1 million, while the 32 group stage clubs received participation payments of €7.2 million. Performance bonuses included: in the group stage €800,000 for each win and €400,000 for each draw; €3 million for reaching the group stage; €3.3 million for quarter-finals; €4.2 million for semi-finals; €9 million to the winners; and €5.6 million to the runners-up.

Participating clubs also receive a share of the TV (market) pool based on the commercial value of their domestic TV market, the number of Champions League matches played in the current season and their final position in the previous season’s domestic league table.

In 2010/11 the two finalists, Barcelona and Manchester United, each collected over €50 million. Although UEFA argue that this is a relatively small amount of a leading club’s total revenue (11-16% for English teams), this does not include gate receipts, which are kept by home clubs, or the boost in sponsorship and other commercial income. There is little doubt that the current Champions League distribution methodology reinforces the status quo at the top of the football pyramid, as the top clubs earn big bucks year after year, leading to suggestions that this should be reviewed if UEFA genuinely wanted to create a more level playing field.

UEFA have constantly tinkered with the format of their premier competition in order to increase revenue – or “to make the Champions League even more attractive to broadcasters and sponsors.” This was confirmed by Niall Sloane, ITV’s head of sport, who said that UEFA show “a flexibility and willingness to work with broadcasters that is not always present in other sports associations and indeed football bodies.”

Recent initiatives include: (a) four additional match days in the second round; (b) moving the final from Wednesday to Saturday; (c) 20 additional matches in the play-off round included in the package; (d) adding the Super Cup, played between Champions League and Europa League winners, to the package.

Domestic leagues are not happy with UEFA’s growing calendar, especially as many of these matches have to be shown on terrestrial television, but as The Jam said, “the public gets what the public wants.” This is evidenced by the Champions League final overtaking the Super Bowl in 2009 as the world’s most popular televised event in club sport.

In comparison, the Europa League is very much the poor relation with revenue of €210 million and distributions to clubs of €158 million, less than a fifth of the money available from the Champions League. The highest amount paid out in 2010/11 was €9 million to Villarreal with the most received by English clubs being the €6.1 million received by Liverpool and Manchester City. In fairness, the money is significantly higher than the old UEFA Cup, partly due to the expanded format (12 groups of four teams, rather than eight groups of five teams), but it might well have risen anyway.

In addition, the money from the Europa League can be important for clubs from smaller countries or those that enter European competitions infrequently, plus the it offers valuable experience of playing in Europe. Nevertheless, it suffers from a poor image with the influential Franz Beckenbauer referring to it as “the losers’ cup”.

Although UEFA’s annual report stated that they were “optimistic” that it would “eventually be able to break through”, Michel Platini has reportedly been considering the possibility of scrapping this competition in favour of expanding the Champions League to 64 teams. That might make financial sense initially, but there is a danger of killing the goose that lays the golden egg, as this would almost inevitably damage the brand of UEFA’s top event.

Revenue from the last completed European Championships in 2008 in Switzerland and Austria of €1.4 billion was 58% higher than the €854 million generated in 2004, living up to UEFA’s statement that, “As is the case very four years, the Euro event leaves its marks in the books.” Note that all income generated during the qualifying campaign remained with the national associations.

However, the net result of €253 million was “only” 13% higher than 2004’s €223 million, largely due to much higher operating expenses, though it should also be acknowledged that no solidarity payments to clubs were made in 2004. Profit from Euro 2012 is expected to be smaller than the risk-free 2008 tournament, mainly due to higher expenses, as confirmed by David Taylor, chief executive of UEFA Events, “The actual net left for UEFA will be less than Euro 2008, but the actual operational performance in terms of revenue will be at or about the same level.”

Taylor believes that this represents a fine revenue performance given the venture eastwards, especially in the current tough economic climate, “At the outset we were unsure how our sponsors would react to go to Eastern Europe, and going to these countries in particular, but the reaction has been positive.” That makes perfect sense, but must be a little disappointing after the spectacular growth witnessed at previous tournaments. Indeed, the €1.4 billion revenue from 2008 was nine times higher than the €147 million from Euro 1996 in England.

Broadcasting revenue has been responsible for the majority of that growth, reaching €801 million in 2008. In contrast to 2004 the rights were sold on a market-by-market basis and no longer through an EBU agreement. Commercial rights have risen to €290 million, while there is also a much higher number of hospitality packages.

Distributions to participating teams in 2008 amounted to €184 million with the eventual winners Spain receiving €23 million. Every team at the tournament received €7.5 million plus €1 million for each win and €500,000 for each draw in the group stage. Quarter-finalists received €2 million, semi-finalists €3 million, the winners €7.5 million and the runners-up €4.5 million.

The prize money for 2012 has been increased to €196 million with the allocation being the same as 2008, except that each team receives a participation fee of €8 million (€0.5 million higher) and the third place team in each group gets €1 million (“to act as an incentive if the top two qualifying places are already decided”).

In addition, the amount that the clubs receive for releasing players for Euro 2012 has more than doubled to €100 million from the €43.5 million distributed in Euro 2008, a significant increase on the €55 million initially proposed. Furthermore, this will rise again to €150 million for Euro 2016 in France.

While UEFA will be able to bank a sizeable profit from Euro 2012, it is far from clear what the impact will be on the host countries. Estimates of the amount invested vary, but the Austrian bank Erste Group has it at €30 billion, split between €20 billion in Poland and €10 billion in Ukraine, which is equivalent to 5% and 9% of Gross Domestic Product (GDP) respectively.

It has become an accepted wisdom that such investment provides little more than a temporary boost to the economy with the legacy being “white elephant” stadiums that “tend to stay and rust”, according to Simon Chadwick, professor of sport business at Coventry University. As an example, Forbes magazine discovered that 21 of the 22 venues used for the Athens Olympic Games in 2004 had “fallen into disrepair.” It is also true that the global economy is a lot scarier than the boom times back in 2007 when UEFA awarded the championship to the former Communist states.

However, there is some cause for optimism this time round, as very little of the investment is actually on the stadiums. Erste Group estimated this as less than 10% with the vast majority of investment on infrastructure modernisation, such as roads, urban transport, railways and airports.

"Heart of Glass"

In addition, in Poland nearly a third of the funding was provided by the European Union. Marcin Herra, head of the Polish organisation committee, said, “Euro 2012 has been a very concrete motivator for development. We ended up completing projects three to five years earlier than they would have happened.”

It’s a similar story in Ukraine, where four new airports have been built and roads connecting the largest cities have been completely renovated. Furthermore, two of the state-of-the-art stadiums have been funded by wealthy football club owners: Rinat Akhmetov at Shakhtar Donetsk and Oleksandr Yaroslavsky at Kharkiv.

The impact of more tourism will not be that significant (Erste estimates €400 million for Ukraine and €400-560 million for Poland), but the infrastructure should benefit the economy for many years to come.

Solidarity payments “represent a cornerstone in UEFA’s philosophy” with the overall aim of “developing the European football family as a whole and promoting the social values of the game.” There are two specific objectives: (a) reduce financial gaps in order to reduce sporting gaps; (b) open up the elite competitions to a maximum number of associations and teams.

That’s all very well, but the reality does not necessarily live up to the dream for two reasons: (a) the sums of money are not that big, e.g. most countries receive less than €3 million a year; (b) the top five countries in terms of solidarity payments are the most important in Europe: England €15.8 million, Italy €10.5 million, Spain €10 million, Germany €9.4 million and France €9.4 million.

This is the logical result of the allocation methodology, which is split between payments financed by national team football and club team football. The former is based on UEFA’s HatTrick programme, which allows up to €2.5 million for infrastructure investment (increased to €3 million for 2012-16 cycle) and various solidarity payments. The latter is financed by the Champions League and Europa League, mainly based on number of clubs eliminated in those tournaments before the group stage plus “substantial” incentives for clubs not involved in Europe for youth development.

To be fair to UEFA, although this is small beer, they have been increasing solidarity payments in line with revenue growth, rising from €55 million in 2001 to €156 million in 2007 and €238 million in 2011, but they are still significantly lower than the distribution payments made to the elite clubs involved in the Champions League.

Considering at UEFA’s balance sheet, which they themselves describe as “very solid”, the impression is that they could do more for the “football family”. Equity stands at just under €500 million, even after the 2011 negative result, partly because of the once-off favourable currency impact of converting it from Swiss Francs into Euros. Thanks to the surplus generated by Euro 2012, this will “increase substantially” in 2012.

Furthermore, UEFA are holding cash and cash equivalents of €1,069 million. If long-term securities of €420 million (invested with top-rated international banks) are added, their financial assets amount to a thumping great €1.5 billion (or 82.5% of UEFA’s assets).

So UEFA are in rude financial health, but how do they compare to other elements of the football fraternity?

FIFA are also a money-generating machine, but, maybe surprisingly to some, they do not produce as much revenue as UEFA, mainly because they only have one real cash cow, namely the World Cup, as opposed to UEFA who have the Champions League every year and the European Championship every four years. As FIFA’s General Secretary Jérôme Valcke said, “We are making quite good money thanks to the World Cup, but that’s the only money we have.”

In 2001 FIFA’s revenue was $1,070 million, which is equivalent to €856 million at the current exchange rates, so over €500 million less than UEFA. For the latest four-year cycles, UEFA’s €5.5 billion is nearly €2.2 billion higher than FIFA’s €3.3 billion ($4.2 billion). Platini 1 Blatter 0.

How about the leading clubs that have been dining at UEFA’s table for so long? That’s a different story, as just three clubs in terms of revenue generate almost as much as UEFA. Real Madrid (€479 million), Barcelona (€451 million) and Manchester United (€367 million) earn a total of €1.3 billion compared to UEFA’s €1.4 billion. As money talks increasingly louder in the beautiful game, that’s a delicate balance of power.

UEFA are not resting on their laurels and continue to seek further revenue growth. Sometimes this backfires, as when the high ticket prices at the 2011 Champions League final were widely criticised, not helped by UEFA’s complacent response, “That’s the market price. Why should we sell them for less?”

More encouragingly, they have already secured large increases in TV rights for the 2012-15 Champions League cycle, as noted by David Taylor, “It is a must-have property for major broadcasters. I think we’ll be about 15% up.” Although some markets like England paid about the same, increases were seen in France, Italy, and Spain with “considerable growth outside Europe in South America, Brazil and certain parts of Asia.” Indeed, Umberto Gandini, an AC Milan director, confirmed that the final increase was 21%, which would mean TV rights of over €1 billion and annual Champions League revenue of €1.3 billion.

The subsequent increase in prize money should be enough to placate the leading clubs, who had been expressing their unhappiness with UEFA and FIFA. Last year, Karl-Heinz Rummenigge, chairman of the European Club Association (ECA), complained, “UEFA have already sold the television rights to the Champions League until 2015 without having the mandate of the clubs beyond 2014.”

"Rummenigge - I didn't know that you cared"

This was a reference to the ECA agreement to recognise the jurisdiction of football’s governing bodies until July 2014 with a not-so-veiled threat that the contract would not be extended if there were “no radical changes in favour of the clubs.” However, the threat of clubs forming an alternative to the Champions League and refusing to release players for internationals was seemingly averted when a new agreement was signed in March with an extension until 2018.

Rummenigge’s comments after the signature were conciliatory, but also hinted at the iron fist in the clubs’ velvet glove, “Today is a historic day for European club football. With this agreement, UEFA clearly recognises the importance of clubs and the significant contribution they make to the success of national team football.”

For the time being, the Europa League struggles on, though the sense is that UEFA are exploring other possibilities that might enhance its earning potential. Taylor admitted, “The Europa League is more difficult, but we will still see some increases.”

Another potential cloud on the horizon could be found in the courts of law, as the European Union has suggested that selling TV rights in separate EU states is against European law. If UEFA were forced to sell rights on a Europe-wide basis, the impact on the overall revenue might be negative.

"Ocean Blue"

In terms of the European Championships, UEFA’s grand plan is to expand the format from 16 to 24 teams, based on the simple equation that more matches should equal more money. However, this focus on the commercial side at the expense of sporting integrity might be a bridge too far, as it would ruin the Euros’ unique selling point of being competitive from the first whistle. A (likely) format of six groups of four teams with the top two and four best third-placed progressing is a recipe for a boring tournament.

It would also require a host country with substantial infrastructure, which might explain why there has not been a rush to host Euro 2020, though the feeble state of the global economy has also played a part. Indeed, UEFA has had to amend the rules of engagement, so that countries can still bid even if they have not expressed their interest, as the list of candidates to date is pitifully thin: Turkey, Georgia and a combined Scotland, Wales and Ireland. To paraphrase Dorothy in The Wizard of Oz, “We’re not in Kansas anymore, Michel.”

UEFA have also adopted a central marketing model to sell rights from 2014 for qualifying matches to the European Championship and World Cup. Their General Secretary, Gianni Infantino, gushed, “This will have a seismic effect on the football landscape. It is all about the promotion of national team football. To see the benefits of such a centrally managed competition, just look at the Champions League.” This should not only increase revenue, but should also provide more predictable, possibly larger, revenue streams to smaller nations.

"L'entente cordiale"

The plan is to spread matches over six days with teams playing double headers over either Thursday and Sunday, Friday and Monday or Saturday and Tuesday, again following the Champions League’s tried-and-trusted method of increasing the number of match days. According to TV Sports Markets, UEFA has estimated that it could earn up to £1 billion over a four-year cycle, significantly higher than the £590 million currently earned by the national associations, but that may prove to be optimistic in today’s economy.

If there is a shortfall, this could be a problem for UEFA, as they have guaranteed each association a minimum level of revenue, including increases for smaller nations, in order to gain their acceptance. In such an eventuality, they would have to dig into their (substantial) reserves.

This is part of UEFA’s constant balancing act, whereby they have to tread a fine line between doing what they believe is good for the game, while ensuring that they cater to the interests of their members.

"Orange Crush"

Another good example would be their Financial Fair Play (FFP) regulations, which are designed to encourage clubs to live within their own means and reduce their spending. Michel Platini was quick to emphasise that this was introduced for the clubs’ benefit, when he launched the initiative, “It's mainly the owners that asked us to do something – Roman Abramovich, Silvio Berlusconi and Massimo Moratti. They do not want to fork out from their pockets any more.”

However, now that the FFP era is actually here, many have expressed misgivings about the implications. For example, if these rules resulted in leading European clubs losing their star players to Asia, where the wages on offer might be considerably higher, then those same owners might suggest some “fine tuning”.

Many clubs now have foreign owners that are not just in it for the love of the game, but also expect a return on their investment. In particular, the American owners might actively look to set up a Super League along the lines of the highly lucrative NFL. Although the forecast Champions League revenue of €1.3 billion is impressive, it pales into insignificance compared to the NFL’s projected €8 billion ($10 billion). In particular, NFL TV rights will increase to €4.2 billion ($5.2 billion), compared to the Champions League’s €1.1 billion. Two tournaments, both featuring 32 clubs, but one earns nearly four times as much TV revenue: you do the math.

"Left to my own devices"

Of course, there are many aspects of the NFL model that would not easily translate into the football world, such as stringent wage regulations, revenue sharing and the draft method of player recruitment, but the size of the prize is immense. There is a feeling among football club owners that there is still a lot of untapped financial potential, so a Super League cannot be ruled out.

As far back as 2009, Real Madrid president Florentino Pérez was banging this drum, “What we need to work out with UEFA is a European Super League that guarantees all the top teams play each other all the time. That is something that does not happen in the current Champions League.” Closer to home, the example of the Premier League is a constant reminder that breakaway leagues can and do happen.

From a sporting perspective, it might actually be no bad thing, as it might increase competition among Europe’s clubs (“on any given Sunday, anything can happen”), while the increased revenue would lead to more money available to drip down into the lower leagues. OK, that last point might be a little naïve, but it could be a condition of Super League teams being allowed to remain in their domestic leagues.

"This is a happy house"

That’s all future music, but there is no doubt that UEFA’s challenge is to strike the right balance between commercial and sporting needs. While defending the soul of football, pushing for fair play and fighting the corner of the smaller nations, UEFA also have to ensure that the leading clubs and nations are happy and kept on board. This means that they have to constantly look for ways to grow their revenue – which they then largely distribute to the richest in their “football family”.

To date, they have largely succeeded in managing this tricky proposition, mainly due to football’s enduring popularity. As MLS commissioner, Don Garber, said, “Content is king and sports content is the king of kings.” In this era of mass entertainment and limited attention spans, live football is one of the few events that still hold a TV audience.

That has worked in UEFA’s favour with their hold on the rights for the Champions League and (to a lesser extent) the European Championships, but there is no guarantee that the status quo will remain unchallenged. For an indication of what might happen in the future, we need look no further than Deep Throat in “All the President’s Men”, whose sage advice was to “follow the money.”

Milan - Warning Signs

By most people’s standards Milan have just enjoyed a pretty good season. They were runners-up in the league, only behind an undefeated Juventus; they reached the quarter-finals of the Champions League before being eliminated by the mighty Barcelona; and lost in the semi-finals of the Coppa Italia. However, it was still a disappointment, as they had established a healthy lead in the race to the scudetto, and it was a backward step compared to the previous season, when they had won Serie A for the 18th time.

Last year’s triumph was particularly noteworthy, as it was under the guidance of the previously unheralded Max Allegri, who won the title in his first season – just like his more famous predecessors Arrigo Sacchi and Fabio Capello. However, this year Milan have been plagued by injuries, losing the likes of Mathieu Flamini, Antonio Cassano, Alexandre Pato, Thiago Silva and Kevin-Prince Boateng for lengthy periods. As their talisman Zlatan Ibrahimovic lamented, “Injuries have followed us for the whole season.”

Ibra himself had done his utmost to secure another title for the rossoneri, as his 28 league goals earned him the capocannoniere(top scorer) award for Serie A, though this was not enough to continue his remarkable record of gaining a league winners’ medal every season since 2003 (with Ajax, Juventus, Inter, Barcelona and Milan).

"Partial to your Ibracadabra"

However, whether it was down to injuries, second season syndrome for Allegri or the simple fact that the team was not quite good enough, the fact remains that Milan did not win any silverware – unless you count the 2011 Supercoppa, the curtain raiser to the new season. “Close, but no cigar” is not good enough for a side that has a fantastic record in winning trophies, including the Champions League on an incredible seven occasions (only bettered by Real Madrid) and the European Cup Winners’ Cup twice.

No matter how impressive Milan have been in the past – and they can lay claim to having the best side of all time under Sacchi – they are now facing daunting challenges, both on and off the pitch.

Many of the old guard have left the club this summer, including the elegant defender Alessandro Nesta, the prolific Pippo Inzaghi, the tigerish Rino Gattuso, Mark Van Bommel and Gianluca Zambrotta. In addition, there are question marks over the veteran Clarence Seedorf, who is mulling over a one-year extension, and the club has not exercised loan options for Maxi Lopez and Alberto Aquilani (though the latter may yet sign on a reduced package). That’s a lot of experience to try to replace in one fell swoop.

"Allegri - Mad Max"

This mission is made more difficult by Milan’s financial situation, which is by no means disastrous, but is bad enough to give the club pause for thought. Their traditional modus operandi has been to operate with substantial losses, which are then covered by the owners, but this will not be possible in the new world of UEFA’s Financial Fair Play (FFP) rules where clubs will have to live within their means without the assistance of a wealthy benefactor.

This will test to the limit the negotiating skills of Milan’s vice-president Adriano Galliani, who has proved himself to be a wily old fox in the past, especially when he snapped up Ibrahimovic from Barcelona for around a third of the price that the Catalans paid a year before. The need for Milan to find bargains was further emphasised this summer when they signed two international midfielders on Bosman free transfers: Riccardo Montolivo from Fiorentina and Bakaye Traoré from Nancy.

Ibrahimovic of all people highlighted the club’s financial woes, “Milan’s problem is economic. There is no money to buy five players, or even the ones we need. We made a couple of signings, maybe there will be a third.”

When you look at the club’s most recent accounts (for the year up to 31 December 2011), you begin to understand what the big Swede is talking about, as these reported a thumping great loss of €67.3 million. Amazingly this actually represented a slight (€2.4 million) improvement on the previous year’s loss of €69.8 million, an indication of Milan’s structural weaknesses. The losses in both years would have surpassed €80 million without the benefit of substantial tax credits, €15.7 million in 2010 and €13.3 million in 2011.

Revenue grew by 7% to €234.8 million, but this was matched by a €13.7 million increase in the wage bill to €206.5 million, a record high for Milan. Note that this definition of revenue excludes €23.6 million profit on player sales and €8.4 million increase in the value of fixed assets (shown elsewhere). If these are added back, we get the €266.8 million of revenue mentioned in the club’s press release.

This produced operating an operating loss of around €100 million level for the second consecutive year, which is distinctly uncomfortable for a club aiming to be self-sufficient in the near future.

I should clarify that this analysis is based on the accounts for the consolidated Milan Group, as opposed to just the football club AC Milan SpA, as these are the accounts that will be used for UEFA’s FFP review. The group accounts include Milan Entertainment SpA and Milan Real Estate SpA, but there is not a significant difference. In fact, the loss of €67.3 million for Milan Group is €8.2 million better than the €75.5 million registered by AC Milan SpA.

Milan’s poor financial performance is nothing new. The last time that the club made money was 2006 and even then the €11.9 million profit was heavily influenced by once-off factors, namely the €40 million profit from selling Andriy Shevchenko to Chelsea and a €27 million once-off payment for an option on future TV rights. Since then, there have been five consecutive years of losses, adding up to a combined deficit of around a quarter of a billion Euros.

The only recent year that looks good on paper is 2009, when the loss was “only” €9.8 million, but this was almost entirely due to the hefty €74 million profit on player sales, arising from the transfers of Kaká to Real Madrid and Yoann Gourcuff to Bordeaux. As we have seen, it is difficult, if not impossible, to raise similar sums form player sales every year, not to mention the detrimental effect it would have on the team.

In each of the last two years Milan have generated €23-24 million from this activity, much of which has been derived from the special relationship that they appear to have with Genoa, who have contributed over €30 million in this period, including €17 million in 2011: Alexander Merkel €9.9 million, Nicola Pasini €3.3 million, Mario Sampirisi €2.0 million and Sokratis Papastathopoulos €1.8 million.

One more technical point: for profits on player sales I take the plusvalenzeless the minusvalenzeto give a net figure, e.g. in 2011 €23.6 million minus €0.3 million (to release Onyewu Oguchi) gives the €23.3 million in my schedule.

If we exclude tax movements and profit from player sales, then the adjusted loss for Milan over the last four years would add up to a colossal €386 million with three of those four years coming in over the €100 million mark. In other words, with the sale of a world class player Milan make losses; without such a sale they make large losses.

Of course, Milan are not the only leading Italian club to find themselves in this situation. Indeed, in 2010/11 the losses were even higher at Juventus (€95.4 million) and Inter (€86.8 million). The big three contributed 89% (€252 million) of the total Serie A losses of €285 million. Note that I have used Milan’s 2010 loss in this schedule to be consistent with a survey prepared by La Gazzetta dello Sport, but the loss is around the same level in any case.

More encouragingly for Italy’s top flight is that the number of clubs making a profit in 2010/11 doubled from the four in the previous season to eight (Bari, Lazio, Palermo, Catania, Napoli, Udinese, Parma and Brescia). This list includes two clubs that qualified for the Champions League (Napoli and Udinese), so sound husbandry of a club’s finances need not necessarily mean lack of success, though it should be acknowledged that some did benefit from substantial player sales.

Over the last three seasons it has been more or less the same story of colossal losses at both Milan clubs, who are by some distance bottom of Italy’s profit league. Juve’s losses over the period are virtually all because of 2010/11, mainly due to not qualifying for the Champions League and investing in their new stadium, while Milan and Inter’s figures have been consistently poor. At least Milan win the financial Derby della Madonnina with Inter’s astonishing losses of €310 million in this period being more than twice Milan’s €146 million. In truth, neither club has much to write home about on this topic.

But surely all the top football clubs lose money, right? Actually, that’s not really the case, as a few did report profits in 2010/11: Real Madrid made a sizeable €47 million, thanks largely to their enormous revenue; Arsenal €14 million, boosted by property sales; and Manchester United €11 million, as their awesome cash generating capacity was enough to cover interest charges on their massive debt. Bayern Munich only recorded a small profit of €1 million, but this represented their 19th consecutive year of profits. Even big spending Barcelona’s loss was relatively small at €9 million.

Of course, some leading clubs abroad also employ the sugar daddy model, such as Champions League winners Chelsea, who made a loss of €75 million, while Manchester City’s attempt to gatecrash the party cost them €219 million. Even so, it is clear that Juventus, Inter and Milan all face more serious issues compared to the others, as their ability to generate additional revenue in the short-term is more constrained.

 That said, Milan’s revenue is not too shabby by Italian standards. In fact, for 2010/11 (the last season when all clubs have published accounts), their revenue of €220 million was the highest with only Inter anywhere near them (€211 million). The other clubs were miles behind with only three others earning above €100 million: Juventus €154 million, Roma €144 million and Napoli €115 million. This is despite the leading lights effectively transferring some of their revenue to the others after the collective TV deal was implemented.

However, as John Donne said, “No man is an island” and Milan also have to look beyond their borders at other European clubs. At first glance, Milan appear to be sitting pretty at seventh place in Deloitte’s Money League, but problems begin to emerge on a closer inspection, as they are a long way short of their peers abroad. In particular, the Spanish giants generate significantly more revenue with Real Madrid (€479 million) and Barcelona (€451 million) earning around twice as much as Milan, benefiting from huge individual TV deals.

Both Manchester United (€367 million) and Bayer Munich (€321 million) earn around €100 million more than the rossoneri, the English taking advantage of significantly higher match day revenue, while the Germans’ commercial expertise puts everyone else to shame. In fact, at the latest exchange rates United would also break the €400 million barrier. This vast revenue discrepancy makes it difficult to compete, especially when that shortfall in turnover occurs every year.

Eagle-eyed observers will have noticed that Milan’s revenue figure of €235 million is different to the €253.2 million included in the club’s accounts for 2010. There are two reasons for this. First, in order to be consistent with other countries, Deloitte excludes: (a) player loans €0.5 million; (b) profit from player sales €25.5 million; (c) change in asset values €7.6 million. Adding those to the €220 million shown in my analysis gives the €253.2 million reported in Italy.

Second, Milan’s accounts cover a calendar year (up to 31 December), while the majority of clubs’ figures coincide with the football season, so the accounting close is in June. Because of this anomaly, Deloitte adjust Milan’s figures based on information provided by the club, leading to the €235 million in their league table.

Regardless of all these technical adjustments, the underlying themes for Milan (and Italian football) are very much the same. A recent report from the Italian Football Federation (FIGC) concluded, “The current business model is difficult to sustain and not very competitive.” Its president, Giancarlo Abate, noted that in particular match day income, sponsorships and merchandising were in need of urgent attention to reduce the reliance on TV money.

These problems have been reflected in the lack of revenue growth of Italian clubs. Since 2005 Milan have managed to grow their revenue by just €20 million (9%), which is only ahead of Juventus among leading European clubs. In that period they have been overtaken by Barcelona, Bayern Munich and Arsenal. Most strikingly, Barcelona’s revenue was €7 million lower than Milan in 2005, but is now far over the horizon at €216 million higher, while the investment in new stadiums at Bayern and Arsenal has really paid dividends. As Galliani put it, “Twenty years ago Milan invoiced more than Real Madrid, today only half. That’s the real problem.”

Essentially, Milan’s revenue has been flat for the last few years, though this disguises two opposing factors: TV revenue has fallen by €29 million since 2006 to €114 million, largely due to the move to a collective deal, while commercial income has increased by €23 million to an impressive €91 million.

Match day revenue has also risen by €3 million, though it remains a feeble €29 million, just 13% of total revenue, which, in fairness, is typical of all Italian clubs and helps explain their relative revenue weakness. Despite the decline in TV revenue, it is still the most important revenue stream, accounting for just under half of Milan’s revenue. This is partly due to the higher payout from the Champions League, which rose €16 million in 2011, more than offsetting the €7 million fall in domestic TV money.

The €114 million earned from television in 2011 comprised €78 million from the domestic deal and €36 million from the Champions League (a combination of the last 16 in 2010/11 and the group stage in 2011/12). They received the third highest domestic money, just behind Juventus and Inter, but a fair bit more than other Italian clubs, e.g. Napoli and Roma got around €60 million; Lazio about €50 million; and Fiorentina, Palermo and Udinese around €40 million.

This represents an improvement for mid-tier clubs following the implementation of the new collective agreement in 2010/11. Under the new allocation, 40% is divided equally among the Serie A clubs; 30% is based on past results (5% last season, 15% last 5 years, 10% from 1946 to the sixth season before last); and 30% is based on the population of the club’s city (5%) and the number of fans (25%).

The result is a reduction at the top end, so Galliani is not a happy customer, “In football big teams have to share income with other sides and this is an anomaly.” This may be a bitter pill to swallow, but it has been sweetened by the distribution formula, which still favours the top clubs to an extent with the allocations based on historical success and number of fans. Even now, Milan’s TV income is the sixth highest in Europe.

Furthermore, the decrease would have been even higher if the total money negotiated in the new deal had not been 20% higher than before at around €1 billion a year. This cemented Italy’s position as the second highest TV rights deal in Europe, only behind the Premier League, but significantly ahead of the other major leagues, despite the Bundesligaincreasing its rights by over 50% for the next four-year deal. The new French contract has actually fallen from €668 million to €612 million, considered a good result in this harsh economic climate.

As you might expect for a club with media magnate Silvio Berlusconi at the helm, television income has always been important to Milan, climbing as high as €140 million in 2007, the highest in Europe, partly due to a sensational domestic deal, but also thanks to the payment received for winning the Champions League.

Qualification for the Champions League is imperative for Milan with the accounts identifying this as a key risk for the club’s economic prospects. This can be seen in 2008/09, when Milan earned just €0.4 million from the UEFA Cup, compared to €25.8 million from the Champions League in 2010/11. This was made up of €7.2 million participation fees, €2.4 million for performances in the group (2 wins at €800k plus 2 draws at €400k), €3 million for reaching the last 16 and €13.2 million from the TV (“market”) pool.

The money received for 2011/12 should be much higher: (a) Milan progressed further (to the quarter-finals); (b) they will receive more from the TV pool, as they won Serie A in 2010/11 (half is allocated based on finishing positions in the previous season’s domestic league).

The size of the prize is now enormous, as we can see from the finalists in 2010/11 (Barcelona and Manchester United) each receiving over €50 million, not including additional gate receipts or increases in sponsorship payments. Financially, the Europa League provides little compensations, with the four Italian clubs only receiving around €2 million each.

Furthermore, there has been talk in the English media of Champions League revenue significantly increasing in the next three-year agreement, citing David Taylor, UEFA Events’ chief executive, “We have at least achieved triple-digit growth.” Unfortunately the Italian league has lost a place to the Bundesliga, due to lower coefficients, so now only the top two teams in Serie A are assured of direct entry, while the third-placed team goes into the preliminary qualifying round.

The most glaring revenue weakness for Milan is match day revenue. Even though this is the highest in Italy at €36 million (ahead of Inter €33 million, Napoli €22 million and Roma €18 million), it is dwarfed by major clubs in other countries, especially England. Chelsea earn more than twice as much €81 million, while Manchester United €130 million and Arsenal €112 million generate around three times Milan’s figure. Granted, they have staged more home games, but United earn €4.5 million a match compared to Milan’s €1.4 million.

Although Milan have the highest average attendance in Italy of 51,400, this was a 4% reduction from the previous season and means that only 64% of the stadium’s capacity was filled. In fact, Milan’s crowds have dropped significantly from the 64,500 average achieved in 2002/03. In fairness, this is a generic problem in Italy, where total attendances in Serie A have slumped from 9.4 million in 2008/09 to 8.9 million in 2010/11 (per the  FIGC), despite low ticket prices, due to a combination of obsolete stadiums, poor views and, let’s be frank, the suspicion of match fixing.

This is why Milan have been exploring opportunities for moving to a new stadium that could maximise their revenue earning potential. It’s not just that the club currently pay the council over €4 million rental a year under a 30-year lease ending in 2030, but the lack of ownership means that they miss out on profitable opportunities like premium seating, corporate boxes, restaurants, retail outlets, naming rights and non-sporting events. As Galliani explained, “A new stadium is essential for a club that wants to compete in the future. Look at Bayern Munich: since they built a new stadium, their revenue has increased by €60 million.”

Closer to home, Juventus have just moved into a fabulous new arena, but are the only leading Italian club to own their stadium. Although it cost them around €150 million to build, much of the funding was sourced from innovative deals, e.g. 60% of the money was derived from a naming rights deal. Milan would undoubtedly require substantial funds to do the same, but the benefits would be substantial, e.g. Juventus believe that their match day revenue will at least double,

Galliani recently revealed that the club had tried to buy San Siro, but the price quoted by the council was too high, so they have instead turned their attention to modernising the ground in order to develop an “elite stadium”, ready for the 2015 Champions League final. However, he admitted that this was not ideal, due to “the problems that follow when you share it with another club.” Any new development will be a long-term project, e.g. even Juve’s new stadium took more than 10 years to complete after the first discussions with their local council.

"Silva and Gold"

It had been hoped that new stadiums would be developed as part of Italy’s bid for Euro 2016, but unfortunately this was lost to France, as was the catalyst for government intervention. Galliani warned, “Germany have overtaken us thanks to the wonderful new stadiums they built for the World Cup in 2006. Thanks to the new stadiums being built for Euro 2016, I predict that the French will also overtake us.” This is why Italian owners hope that new laws will be introduced to facilitate new stadium construction.

Whatever the solution, something must surely be done, as this massive revenue shortfall means that Milan are not competing on a level playing field, especially with the advent of FFP. As Galliani lamented, “The rankings for revenue and sporting success tend to coincide. The gap comes from different points of departure: in the case of Milan the gate receipts do not reach €30 million a year.”

Where Milan have really begun to motor is in their commercial operations, as revenue here has really taken off in the last two years, rising by €10 million (13%) in 2011 alone to €91 million. This is not only the highest in Italy by some distance (Inter and Juventus are the closest challengers at €54 million apiece), but is also the fifth highest in Europe. That said, Milan still only earn half as much as Bayern Munich’s astonishing €178 million and are a long way behind Real Madrid’s €172 million and Barcelona’s €156 million.

Commercial revenue was inflated by once-off payments in 2009 and 2010: the former contained €20 million for the sale of Milan’s image archive, while the latter included €5 million for the sale of some apartments. Excluding these once-off items, the underlying growth since 2009 has been a very impressive 50%, partly due to the partnership with Infront, who handle all sponsorships except kit deals. Progress can be measured by the raft of new sponsors signed up in the last 12 months, including Taci Oil, Indesit, United Biscuits and Nivea for Men.

Milan have long-term deals with their shirt sponsor and kit supplier. The Emirates contract runs until 2015 and is worth a guaranteed €12 million a season plus performance related bonuses (€2.7 million in 2011), while the Adidas kit deal has been extended to 2017, generating €17.5 million last year, including a €1 million performance bonus.

These deals compare pretty favourably with those at other Italian clubs (a) shirt sponsors: Inter – Pirelli €12 million, Juventus – BetClic €8 million, Napoli – Lete €5.5 million and Roma – Wind €5 million; (b) kit suppliers: Inter – Nike €12 million, Juventus – Nike €12 million, Roma – Kappa €5 million and Napoli – Macron €4.7 million.

However, these agreements are still worth much less than those at foreign clubs, e.g. Manchester United, Barcelona, Real Madrid, Liverpool, Bayern Munich and Manchester City all have shirt sponsorships worth more than €20 million a season. Similarly, the first four of those clubs have penned kit supplier deals for over €30 million a year,

Milan reportedly sell between 400,000 and 600,000 shirts a season, which would put them in the top ten clubs worldwide and around the same level as Inter and Juventus, though the likes of Real Madrid and Manchester United sell nearly three times as many. The rossoneriare now looking to make more from global opportunities, e.g. this summer they will play prestigious friendlies against Real Madrid and Chelsea in the United States.

Fundamentally, the most important challenge for Milan is the wage bill, which rose €14 million in 2011 to a totally unsustainable €206 million. Even though most of this increase was due to higher bonuses for winning the scudettoin 2011, the fact remains that this is the highest wage bill in Milan’s history and the second highest ever for Serie A, only surpassed by the €234 million paid out by Inter in their 2009/10 treble winning season.

Since 2006 wages have grown by 50% from €138 million to €206 million, while revenue has actually decreased by €3 million in the same period, leading to a rise in the important wages to turnover ratio from 58% to 88%. This is much worse than UEFA’s recommended maximum limit of 70%, though Milan are far from alone in struggling to confront this issue in Italy, as seen by Juventus (91%) and Inter (90%).

In Italy only Inter come anywhere near Milan’s wage bill. In 2010/11 they were just behind Milan’s €193 million with €190 million, while the next highest were Juventus €140 million and Roma €107 million. To place Milan’s wage bill into context, it is around the same as Fiorentina €55 million, Genoa €52 million, Napoli €52 million and Lazio €39 million combined. An analysis by La Gazzetta last summer suggested that the cost of Milan’s first team squad of €160 million was far above Inter’s €145 million, but it’s far from certain that their figures are accurate.

Milan’s wage bill also looks excessive in comparison with foreign clubs, only surpassed by Barcelona €241 million (including other sports), Real Madrid €216 million, Manchester City €209 million and Chelsea €202 million. Strikingly, it is higher than Manchester United and Bayern Munich, who have been more successful recently. It is also apparent that most of these clubs have a much better wages to turnover ratio than Milan, because of their higher revenue, e.g. Real Madrid 45%, Manchester United 46%, Bayern 49% and Barcelona 53%.

Galliani has recognised the problem, “Both Fininvest and I are trying to reduce the amount of money spent on wages.” However, we have heard this before. Last year, he said, “Milan absolutely have to reduce the wage bill. It is difficult to increase revenue, so we have to act on the salaries and hope that the players understand, especially with financial fair play.” The problem is that it is difficult to cut the wage bill without reducing the competitiveness of the squad.

That said, Allegri appears to be on message, “We had 33 players in the squad this season, but that was because we had to make some adjustments in January because of injuries. We’ll have a 25-26 man squad, including three goalkeepers, for the new season.” Many senior players have left this summer, while others will be only be given contract extensions on reduced terms, e.g. Flamini has reportedly been offered €1.75 million instead of his current €4 million, while any offer to Aquilani will also be much lower. Using salary figures from La Gazzetta, the gross saving would be at least €30 million. Clearly some players will need to be replaced, but the cost should be much less, e.g. Van Bommel and Gattuso were both costing €7 million.

The other element of player costs, namely amortisation, has also been rising, having doubled from €22 million in 2006 to €45 million in 2011, though it is still lower than Inter €52 million and Juventus €47 million – and miles behind a big spender like Manchester City €101 million. In addition, the club has written-down €9 million in player values in the last two years for the sales of Ronaldinho and Ricardo Oliveira.

As a reminder, amortisation is the annual cost of writing-down a player’s purchase price, e.g. Ibrahimovic was signed for €24 million on a 4-year contract, but his transfer is only reflected in the profit and loss account via amortisation, which is booked evenly over the life of his contract, i.e. €6 million a year.

This growth is a reflection of Milan’s activity in the transfer market, which can be divided into three periods in recent times. First, the boom time with €237 million net spend in the four years up to 2003; then the age of austerity with net sales proceeds of €18 million in the seven years up to 2010, when Milan had to “sell before we can buy” per Galliani; finally a return to investment with net spend of €51 million in the last two years.

Milan might be shopping at the cheaper end of the market, e.g. Stephen El Shaarawy for €10 million and Kevin-Prince Boateng for €7.5 million, but this has still been enough to make them the third highest spenders in Serie Aduring this period, only beaten by Juventus €101 million and Roma €58 million.

The annual deficits have resulted in net debt doubling in the last five years to stand at €292 million, comprising €156 million of bank loans plus €136 million owed to factoring companies based on future income. Most of this is short-term debt, but is supported by a €390 million line of credit from Fininvest. On top of that Milan owe other football clubs €30 million, mainly €16 million to Barcelona for Ibrahimovic and €10 million to Manchester City for Robinho, though are themselves owed €16 million by other clubs.

In fairness to Milan, this is a problem throughout Italy with La Gazzettacomplaining that clubs were “buried under a mountain of debt”, following the 14% increase last year to €2.6 billion, but it is worth noting that Milan’s debt breaches one of UEFA’s warning indicators, as it exceeds 100% of revenue.

In fact, Milan’s balance sheet is the weakest in Serie A with net liabilities of €77 million, even after an improvement from €97 million the previous year. This is a little misleading, as the value of the players in the accounts of €136 million is smaller than their worth in the real world (€271 million according to Transfermarkt), but it is nevertheless an indication of the club’s financial fragility.

This has necessitated the support of the owners with Fininvest pumping in €210 million in the last five years, including €87 million in 2011 alone (plus a further €25 million in March 2012). As Galliani put it, “The losses have been completely covered by Fininvest. I thank the president for his passion. Without Fininvest, we couldn’t be an example of sporting excellence the world over.” Berlusconi wryly echoed these thoughts in a message to new Roma owner Thomas DiBenedetto, “You spend lots of money and earn nothing.”

Although the cash flow statement suggests that Milan are fine at an operating level, the reality is that they cannot afford to purchase players without increasing debt and/or additional funding from the owners. Incidentally, player purchases are much higher in cash terms than has been reported in the media, presumably due to the nature of some of the rights sharing deals with Genoa.

These difficulties have raised the prospect of Berlusconi selling Milan, especially as Fininvest is not exactly thriving in today’s tough economy, exacerbated by the €560 million fine following a court ruling that it bribed a judge during the Mondadori takeover battle. His daughter Barbara, who joined the board in 2011 “to reaffirm and strengthen the tie between the team and the family”, has said that her father has no intention of moving on, but there has been talk of selling a 40% stake to an overseas investor, though they might be put off by the stadium issue.

Even if Berlusconi did want to return to the good old days with a few extravagant purchases, he needs to be mindful of UEFA’s Financial Fair Play regulations, which will ultimately exclude from European competitions clubs that continue to make losses.

Fortunately for Milan, all of the losses made to date are not considered for FFP, but they have to get their act together immediately, as the first monitoring period will taken into account losses made in 2012 and 2013. However, they don’t need to be absolutely perfect, as wealthy owners will be allowed to absorb aggregate losses (“acceptable deviations”) of €45 million, initially over two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions.

Getting to break-even will be an arduous task for Milan, because they will need to radically overhaul their strategy, as conceded by Galliani, “FFP hurts Italy. There will no longer be patrons that can intervene. Until now people like Berlusconi and Moratti would be able to support us, but with the fair play it will no longer be possible.”

"Duck Rock"

Barbara Berlusconi underlined the need for change, “Soccer teams will have to transform into proper companies. If you can only spend what you get, then you have to keep costs in check and increase revenue. It’s a challenge that can become an opportunity.” That’s undoubtedly true, but, given Milan’s limited scope to increase revenue, that effectively means cutting the wage bill, which Galliani accepted, “No question, we’ll need to reduce our expenses.”

Alternatively, Milan could boost profits by selling players and both Thiago Silva and Ibrahimovic are much in demand, though the dilemma was neatly summarised by club legend Paolo Maldini, “If you want to win something, then you can’t do without them. If the objective is to balance the accounts and have a decent campaign, then you can sacrifice one of the two.” On the other hand, the club might be willing to listen to offers for Robinho or Pato, who are not indispensable.

"KPB - a prince among men"

In a certain sense FFP might actually point the way forward for Milan, as the break-even analysis excludes costs for stadium development and the youth academy. The latter has proved a little disappointing in recent years, especially when you consider that Milan’s greatest teams have always included many in-house products like Franco Baresi, Billy Costacurta and that man Maldini, but Galliani only last week stressed the importance of youth players breaking into the first team.

Right now, Milan will need to show some fancy footwork to improve their finances, while maintaining their ability to challenge at the highest levels. Ibrahimovic has already voiced his disquiet about the change in direction, “There used to be a great Milan project, now we’ll have to see if they take it forward”, but the Berlusconi-Galliani axis really don’t have too many options. If they do manage to pull this off, then we will have to accept that the devil really does have all the best tunes.