The recent announcement of a Manchester City-led consortium purchasing Melbourne Heart has led to much speculation as to the future direction of the club. Journalists and fans alike have been examining the how the club’s new owners have rebuilt the English club into one of the world’s powerhouses in a relatively short period of time.

The injection of large sums of money is the most simplistic way to explain Manchester City’s meteoric rise. However, much of the strategic decisions will be based around the philosophy of their CEO, Ferran Soriano, who was recruited by the club’s Emirati owners in 2012. What attracted the owners of Manchester City to hire Soriano was his financial track record of increasing revenues during his time at FC Barcelona, as Vice-President and General Manager, from €123 million (€73m loss) in 2003 to €308m (€88m profit) in 2008.

How does one learn how Soriano operates a football club? Simple, he has written a book about it titled ‘Goal: The ball doesn’t go in by chance’, a strategy book based on his time at the Catalonian club.

The Product

Melbourne Heart fans can expect their new owners to focus on improving the product, that is, the football played on the pitch.  Craig Foster examined the possibilities on how the product can be improved, mainly through knowledge transfer, investment in technical expertise, specialised training facilities and also the use of Manchester City’s extensive scouting network. As Soriano explains in his book:

“So if you want a champion team, a team with a chance of regularly winning championships, you need to work consistently to have a big club that generates enough revenues to able to sign the best football talent available.”

The multiplier effect of winning titles is increasing attendances, memberships, merchandise sales, sponsorship, media attention, etc. It is what Soriano terms the ‘virtuous circle’:

“To continue to grow, signing the best players, winning championships, and bringing in more money that would allow them once again to sign the best and so win again.”

What Soriano understands is that sport is about entertainment. It competes with time and money with other leisure pursuits. What Soriano argues is the importance of winning in sport as part of its uniqueness in the market:

“There is still a fundamental difference between football and other forms of mass entertainment: and that is that the fans want to win more than they want to enjoy themselves. In other words, winning comes first, followed by enjoyment.”

One must bear in mind that these statements are made from someone who has operated large successful clubs where football is the dominant sport. Can success on the field rapidly increase attendances in the A-League? Academics Hans Westerbeek and Ramon Spraaij argues that AFL’s dominance is built from the competitive advantage it has is that all of the best players are right here in Australia – no other country plays the sport at elite level. Spectators want to see the best players. It explains the revenues the giant clubs such as FC Barcelona, Real Madrid and Manchester United generate; and the popularity of the English Premier League.

Also, the A-League is a somewhat unique competition when it comes to the correlation between attendances and results.  Melbourne Victory’s strong average attendances were birthed from the inaugural season whilst coming one place above the foot of the table. Sydney FC and Newcastle Jets had their highest aggregate and average attendance in Season 8, even though they finished 7th and 8th respectively. Also Adelaide United, Brisbane Roar and Perth Glory’s peak season in the stands, was not from the results on the field. Observing the data, winning helps sustain crowd levels. Will Soriano’s ‘virtuous circle’ principle work in the A-League?

Whilst Manchester City is launching a franchise in the US with New York City FC in the 2015 season, this is the first time the club will be operating under a competitive balance model that is a salary cap. It will be interesting to see how the club builds a continuous winning side under a system designed to give all of the participating clubs an ‘equal’ chance of winning a title. Will the strategies proposed in Foster’s column be the secret to ongoing success within a competitive balance model? Time will tell.

The Market

After the developing the product (the football played on the pitch), Soriano discusses the market a club should target and the size:

“You want to know how big it is and the current business models, their evolution, and their perspectives for growth.”

Soriano discusses three models for expanding into other markets: playing matches and selling television rights to overseas markets, opening football academies in foreign countries, or creating (or in Melbourne Heart’s case, buying) franchises in other leagues. The decision to enter these markets is based on three variables:

  • How big is the demand?
  • How much disposable income do the fans have?
  • What local competition is there?

There are many variables that impact on the size of a club in regards to average attendance and memberships – population size, football population, price, socio-demographic, star power, connection with community, stadium atmosphere, etc.

With a population of over 4.1 million, and the second largest football participants to Sydney, Melbourne provides a sizable market for the club to establish itself in. Year-to-date the combined average attendance of the two Melbourne clubs is 32,650, which provides plenty of scope for growth. Disposable income is not so much an issue in Australia, but the local competition – Melbourne Victory and the other codes – is where the challenge lies.

Manchester City has already made the right noises in regards to recruitment of players and star power (international and local marquee). Melbourne Heart’s has been known for their local community engagement. If Soriano’s ‘virtuous circle’ principle works in the A-League, then stadium atmosphere at AAMI Park should dramatically improve.

However, Melbourne Heart is clearly the city’s number two football team. Soriano provides some sanguine advice on how to compete in this situation:

“When you are responsible for managing a company that is not a market leader, especially when the market leader is twice as big as you are, it cannot do you any harm to learn from it and even to copy something it is doing better than you are.”

Whether Melbourne Heart copy their larger neighbour’s strategies, transfer all of the knowledge base from their new owners, or both, will be interesting to see. Clearly Soriano believes that the club should find its competitive advantage – what makes Melbourne Heart different – something the club has historically grappled with. Once this is advantage is found, it is up to the club to leverage this to outperform Melbourne Victory, and other clubs in the A-League.

Revenue and Costs

Soriano likes to keep things simple and focus on three major sources of revenue and costs.

Revenue sources are derived from:

  1. The stadium: Ticket sales, memberships and corporate packages.
  2. Broadcasting rights
  3. Marketing: Sponsorship, merchandising and friendly matches.

Broadcasting rights and marketing are the two largest growth areas for football clubs. It would be fair to say that Manchester City did their due diligence in understanding how television rights cover the salary cap. Melbourne Heart have done well to keep a major sponsor since its inception, but Soriano would be counting on the ‘virtuous circle’ to drive marketing revenue.

In an example comparing Manchester United, AC Milan and FC Barcelona (in 2009-10), Soriano explains how much each of these clubs derive revenue from these three main sources. The largest variation between the clubs was in regards to revenue generated from their respective stadiums. Manchester United generating €123 million and FC Barcelona €98 million, whilst AC Milan €31 million. The difference is the control over the stadium, rather than being a tenant, is key to driving revenues for the clubs. The clubs that have control can make the adequate investments to improve the facilities in line with their financial objectives.

Much speculation has been made about whether the new owners will build a stadium for Melbourne Heart. However, many things will need to be taken into consideration in whether this will provide an adequate return-on-investment. Is there enough critical mass to support the idea of building a stadium? Is there enough football content (i.e. games) to make it financially viable? A 27 round, 10-team competition, with 13 homes games is probably not the strongest cost-benefit analysis to be put in front of a financial controller. Some Asian Champions League and FFA Cup games could add to the content, but not substantially. Income generated from FC Barcelona and Manchester City FC have turned their stadiums into tourist and entertainment centres, but will Melbourne Heart stadium be able to do the same?

Manchester City recently announced a loss of £52m for the year to 31 May 2013, a reduction from the £98m loss made the previous year. In a statement made by Soriano:

“Growing revenues and controlled expenses are bringing the club to break even in the immediate future, and profitability thereafter.”

Growing revenues is the central to Soriano’s management beliefs – sport is a top line driven business. In controlling costs, he again focuses on three key areas:

  1. Salaries (mainly player’s wages)
  2. Amortization
  3. Operating Costs

Soriano explains that the benchmark for salaries in the football industry, should be between 50-65% of total revenues:

“The salaries/revenue ratio is an accepted indicator of the good management and financial health of football clubs.”

Salaries are by far the largest single cost for a club. The second is amortization costs, which is basically transfer fees. The video clip below shows how it is calculated.

If Soriano was reading Simon Hill’s yesterday’s article he would have learnt:

“That the net spend on transfer fees for all ten A-League clubs during the window, was…zero.”

Welcome to the A-League.

In examining Melbourne Heart’s books, Soriano would of seen that transfer fees have been used a source of revenue generation. Whilst Westerbeek and Spaaij lamented on why the A-League will never take over AFL as the top sport (but has the ability to be a ‘vibrant’ and ‘well attended’ league), they did draw comparisons with the Dutch Eredivisie:

“Like the Dutch competition, the A-League will remain an incubator of talent, feeding to the English, Spanish and German top competitions.”

If this is true, will Manchester City continue the practice of selling talented Melbourne Heart players to overseas clubs, or will they remain as part of the English giant’s player pool? Watch this space.

Building a Winning Team

Like a lot of management authors, Soriano could not help himself but to devise his own formula. Simplifying the complex is somewhat of a difficult task, but it does not stop many from trying. Soriano’s ‘winning formula’ is commitment multiplied by balance, raised to the power of talent. Seems self-explanatory.

More interesting was the analysis work done by FC Barcelona’s management on developing talent in-house, which has the potential produce players at a lower costs than buying them in, and also a higher rate of success. Soriano further explains:

“One of the first analyses we made when we started managing the club in 2003 was to calculate, based on the data from the ten previous years, the average cost of each player in the youth teams who eventually played in the first team, adding together all of the training costs of all the teams and categories and dividing them by the number of players who had played in the first team. This turned out be €2 million per player. That’s very good business.”

Conclusion

Until Melbourne Heart’s new owners make major announcements, or their actions become evident, much speculation will continue. In reading Ferran Soriano’s text, and examining his actions in operating football clubs, many patterns can be seen – the philosophy is guiding the actions. Focusing on improving the football played on the pitch, to develop a winning side, is central to Soriano’s principles in driving football club’s revenue.

This philosophy has worked well in cultures where football is the dominant sport. Whether it will be successful here remains the question.