Our club, along with others, has been privately pressing the issue of the competitive opportunities of Melbourne-based clubs for some time. We welcome it now being both formally and publicly on the AFL agenda. If our club had more publicly talked up the issue in recent times, it could readily have been portrayed by some as an "excuse" or a diversion for our on-field performance, or some special bargaining tactic. But we are encouraged that the new Chairman of the AFL, Mike Fitzpatrick, and the CEO, Andrew Demetriou, have both publicly acknowledged that the state of competitiveness of Victorian teams, and the domination of non-Victorian teams is more than cyclical, and a review is now underway to see how the imbalance might be corrected more sustain ably, and speedily. The results are due in September.
The imbalance is not entirely new, nor is the AFL's cognisance of the issue: for some years now the league has provided additional financial support -- ie additional beyond what all clubs receive directly and indirectly -- to some clubs, including MELBOURNEfc, under its Annual Special Distribution fund. This seeks to help clubs through periods of unstainable debt, or competitive disadvantage in areas such as memberships, stadium economics and facilities. To underpin our strategy to overcome MELBOURNEfc debts of nearly $6 million in 2003, and annual losses of close to $2.5 million a year, that support has been pivotal to our strategy to get our club back onto a more sustainable footing.
But the bottom line is that while our club, along with others, has improved its performance on a range of fronts, and is now close to eliminating debt and being marginally profitable without ASD support, so too has the strength of many of our competitors also improved, especially those interstate. So we are getting better, but it is in a rising tide.
It is testimony to the hard work of many people across the Club -- board, management team, football department -- that in the past three to four years we have lifted membership by 40%, total revenue by 50%, improved our net asset position by $3 million and experienced a $5 million improvement in our debt position.
Equally, however, it is a pointer to the hard work that lies ahead when we confront the reality that our record membership level is, in Victorian terms, now only ahead of the Kangaroos – a club which is openly canvassing options interstate - and almost 50% less than the biggest clubs. Our revenue lines across many areas of activity are a long way from being up with the strongest Melbourne-based clubs, let alone the whole competition. The gross revenues of bigger clubs are some $300,000 a week ahead of clubs such as Melbourne. While we are working hard to get a zero debt balance, other, wealthier clubs are investing in a string of commercial operations, and even the stock market, in order to generate even further revenues. Collingwood's Eddie McGuire is not alone in targeting $100 million annual revenue a year: this is currently nearly four times what lesser clubs now have.
It is also testimony to the hard work of many across the Club that, with the exception of Essendon - which had its worst on-field year last year but still reported a $1.6 million profit - MELBOURNEfc has been in more finals than any other Victorian side over the past nine years, and has been best performed of the Victorian clubs in the past five years. This is not a bad result when one considers the draft penalties of 1999 and 2000, and, until recently, a plethora of financial, board and management issues.
So, arguably, our return on the Club's football department spending has been first-rate, but against that, it is now well over 40 years since we won a flag. The non-capped areas of football department spending remain an "arms race", and the bigger spending clubs account for most of the Grand Final appearances and premierships.
Such financial issues are not being used as an excuse or explanation for being 0-9 this season. We have been savaged by injury, causing us to have an average of eight of our top 22 players out each week. We have used more players this season than any other club (36, vs AFL average of 30.5, and interstate club average of 28.83), and have had fewer players play all games than any other club (seven). But the injuries might have had less impact if we had the same strength that other clubs have to spend more money, time and resources in recruiting, player development, player support services, medical and welfare services, and training facilities. The successful clubs on-field are those that figure highly in the various football expenditure ladders.
As the AFL has noted in a discussion paper, “The higher expenditure for non-Victorian clubs directly represents a greater ability to invest in the team, coaching, administration and marketing of the club." It is noteworthy that this comment was in fact made in a discussion paper eight years ago. Since then, we have witnessed an increasing domination of the competition by non-Victorian clubs. In other words, notwithstanding all the efforts made by individual clubs - and the AFL - in terms of various financial and non-financial strategies, the financial/competitive issue is more aggravated now than it was when that comment was written.
SO WHAT ARE SOME OF THE CONCERNS, OR REALITIES, THAT THE AFL MIGHT CONSIDER IN ITS UPCOMING REVIEW?
Here are some that come to mind:
1. The increasing evidence that the competition is tighter, but not more even.
2. The probability of non-Victorian teams winning the flag for six consecutive years, as has occurred, is about ¼ of 1%. Mathematics confirms that the competition is not even.
3. Ladder positions, finals appearances, and GF wins are increasingly mirrors of football department spending and club revenues.
4. Non-Victorian clubs are all in the upper end of football department spending.
5. Between 1970 and 1989, five Victorian clubs won all 19 flags (the first interstate club in the GF was the Eagles, in 1991). As the national competition expanded so did the shift. Between 1989 and 2006, Victorian teams filled approx 65% of GF slots, and non-Victorian teams filled 45%, which broadly reflects the 10-6 split between Victorian and non-Victorian clubs .
6. But, between 2000 and 2006, the competitive shift has become more acute: Victorian teams filled approx 33% of Grand Final appearances, while non-Victorian teams filled 66%. No Victorian team has played in a Grand Final since 2003, and there has not been a Victorian team win a Grand Final since Essendon defeated Melbourne in 2000.
7. In 1999 the AFL reported that the gap between the most and least wealthy clubs was increasing. This has not changed.
8. In 1999, the AFL reported that the $ gap between Victorian and non-Victorian clubs was growing. This has not changed.
9. In 1996, the AFL reported that AFL distribution (as % of football revenue) amongst the least wealthy clubs was 24%, and averaged 18% across all clubs. In 2006 - just a decade later - the AFL reported that AFL distribution (as a % of football revenue) amongst the least wealthy clubs was 40%, and averaged 24% across all clubs. In other words, more clubs are relying more on AFL revenues.
11. In 1999, the AFL stated, “The higher expenditure for non-Victorian clubs directly represents a greater ability to invest in the team, coaching, administration and marketing of the club”. This has not changed.
12 In 1985, 50% of clubs were technically bankrupt. In 2006, 25% reported losses. But excluding ASD and non-football extras such as gaming, approximately 50% of clubs were in loss, and five clubs (33%) had negative assets. Of seven clubs with zero or negative assets, six are Victorian. Half the competition does not generate sufficient revenue to cover the average running costs of a club, and only one interstate club (Port Adelaide) is in that half.
13. Over the past five years, the top four profitable clubs from 2002 to 2006 (Adelaide, Brisbane, West Coast and Collingwood) have averaged a total of $10.6 million in profits, and accounted for seven of the ten Grand Final slots, and three of the five flags. These clubs have averaged 5.6, 5.6, 5.4 and 7.8 in ladder position (overall average 6.1).
14. Over the past five years, the four least profitable clubs from 2002 to 2006 (Kangaroos, Melbourne, Carlton, Bulldogs) have averaged $4.4 million in losses and accounted for zero Grand Final appearances, as well as averaging 8, 9.6, 11.4 and 14.8 in ladder position (overall average 10.9).
15. There is an imbalance in the player development capacity for Victorian clubs, in that the current second-tier setup - which is also under review - has competing agendas for the AFL and VFL clubs, and is a competitive imbalance and not sustainable. It is easier for the West Coast Eagles, and the Crows, for example, to have more players on a genuine and structured development path, which means that replacement players are better positioned to move into senior positions.
16. There is an imbalance in non-capped football spending. In 2006, the total football department spending of interstate clubs averaged $13 million, between $2 million and $4 million more than all Victorian clubs except Collingwood. Extra money does not always equal success, as evidenced by Collingwood's premiership record in the past decade. Equally, lack of money doesn't always negate success - see Kangaroos in 1996 and 1999 - but it takes sustained competitiveness, and/or sustained financial strength, to remain viable. But, like most hotly competitive markets, 1% difference here and there can be the difference between profit and loss, success or failure. So too in football 1pc advantages in coaching, development, recruiting, facilities, support staff, sports science, innovation, fitness, and opposition analysis can make that difference if the right choices are made. Money equals options, and handled properly those options can create rewards. As Woody Allen once said, wealth beats poverty, if only for financial reasons.
17. The average cost to run a football club now is around $15 million. Half the clubs cannot generate sufficient net revenue, even when Annual Special Distribution and non-football income, such as gaming, is included. All Melbourne clubs - with the exception of Collingwood and Essendon - fall into this bracket. All interstate clubs fall into the positive bracket, except Port Adelaide. There is a $30 million gross revenue gap, and a $10 million net revenue gap, between the top and bottom clubs. Clearly with strong cash flow and assets it is easier to grow bigger and faster than your competitors. (It is an interesting historic sidenote that, when the Melbourne-Hawthorn merger was put on the table just a decade ago, the underlying reason for the then Melbourne board to vote for the merger was that the cost of running a football team was predicted to get to $15 million a year. That was concluded to simply not be affordable.)
IN RECENT YEARS the AFL has put out somewhat mixed messages to different audiences. These ranged from opining that interstate clubs' domination in finals was a cyclical aberration that would be corrected in time, that most Victorian clubs needed only short-term special financial assistance to allow them to become more competitive, and that increased football spending did not equate to winning records. The record, and the AFL's own review initiative, shows fresh thinking on all three fronts.
The AFL has, quite rightly, pursued a very strong, competitive league with uncertainty of outcome as a key pre-requisite, as being in everyone's best interests. Current AFL economic modeling is based on seeking to achieve that theoretical state where every team has a chance of winning a flag every 16 years, and that current caps on player salaries and other targeted financial support, will help ensure same.
What is now implicitly on the table with the AFL review of the competitive position of Victorian clubs is a question mark. The review will clearly explore why the current economic modelling and strategies have not sufficiently addressed or sustained the competitive evening of the competition, and without change the extent of likely exacerbation of the competitive issue. This, in turn, would eventually lead to increased economic pressures on Victorian clubs and consequently more pressure on the AFL overall.The AFL clearly does not want an emerging league within a league, as exists in most elite sporting competitions, such as the NFL, EPL, Formula One and NBA. The AFL currently risks a league within a league in Victoria, and a league within a league nationally.
SO WHAT ARE SOME OF THE ADVANTAGES WHICH MOST INTERSTATE CLUBS ENJOY?
To be fair, this is something of a generalization, as Port Adelaide is a poorer cousin amongst the interstate clubs, just as Collingwood and Essendon are richer cousins amongst the Victorian clubs. But the underlying facts and trends still prevail.
Here are some that come to mind:
1. Capital city populations per AFL teams favour interstate clubs. For example, in 2006, nine Melbourne clubs had 408,000 persons per club, against 751,000 Perth; 567,000 Adelaide; 1.848 million Brisbane; 4.294 million Sydney. From now until 2026, the population gap is projected to widen. For example, population forecasts suggest that, by 2026, there will be 1.4 million Western Australians per club, as opposed to 600,000 persons per Victorian club.
2. Capital city economics per AFL teams favour interstate clubs. For example, in 2006, gross state product per AFL team in Western Australia is $50 billion per team, $30 billion per team in South Australia, $22 billion per team in Victoria. From now until 2026, the GSP gap is forecast to widen. For example, economic forecasts suggest that, by 2026, there will be $146 billion per Western Australian team, as compared to $50 billion per Victorian team. That equates to a growth from double to triple the economic clout per team in Western Australia as opposed to the situation for Victorian clubs.
3. The percentage of the population supporting an AFL team is, in fact, lower in Melbourne (37%) than the national average (52%) - and lower than other cities - Perth 72%, Adelaide 53%, Brisbane 47%, Sydney 43%. These may be percentages of a lower population, but when the population of South East Queensland and Perth, in particular, will easily outstrip Melbourne for the next 20 years, there is an inbuilt growth advantage.
4. When the population-per-club data is combined with the support data, the advantage is accentuated. Ie in Melbourne 37pc of the population of 3.7 million supports an AFL team, which translates to 151,000 per club. This compares with Perth where 72pc of the population of 1.5 million residents support a team, or 541,000 per club. The interstate club supporters to every Melbourne-based club supporter is a margin of 2:1 in Adelaide, 3.6 Perth, 5.8 Brisbane, 12.2 Sydney. Feed in the GSP data and the economic advantage is accentuated again.
5. In a world where more of the bigger marketing decisions are global, and after that national, followed by local, then teams representing a single city or state as a monopoly or duopoly, have some advantage. Melbourne, for example, not only has nine AFL clubs, but also three racing clubs, two basketball clubs, two netball teams, rugby league, soccer, the highest per capita golf course infrastructure, and the most intensive major events calendar in the world. This makes the battle for mind and wallet share amongst the most intense in the world. This and the population-economic data provides a flipside to the argument mounted by Brisbane and Sydney that they do not operate in a "natural" AFL environment, or Perth and Adelaide that they operate in smaller markets.
6. Cities with greater populations and GSP per club also face less competition for government and corporate support , as well as public attention, and the public share of mind, money and time.
7. Greater population/less competition drive membership, reserved seating, corporate boxes, merchandise and brand identity. Stadiums and clubs make money where demand exceeds supply: the MCG’s strength of size is an economic constraint on MELBOURNEfc. Pricing capacity for memberships, reserved seating, corporate boxes is limited.
8. Favourable stadium deals, for example, those held at Subiaco, AAMI Stadium and the Gabba, even Skilled Stadium at Geelong, all drive major commercial advantage, such as that gained from corporate box and signage revenue.
9. Interstate clubs have a fixed home ground, where they have home ground training access/knowledge/advantage, as opposed to the Victorian situation, excluding Geelong, where local grounds have been sacrificed for the benefits of the more generic MCG and Dome.
10. Interstate clubs play fewer games on “hostile” grounds, and more games on their “advantageous” home-ground venues, with pre-game training access, home crowd advantage and atmospherics. This should be contrasted with Melbourne-based clubs playing at those same hostile interstate venues. The same one-sidedness and packed stadium also generates a stronger ground atmosphere, which is more rewarding to members and sponsors. And a case can be made that one-sided crowds can influence 50-50 umpiring decisions.
11. Interstate clubs finishing high on the ladder get the double benefit of the second chance and a home final with all the above home ground advantage plus travel saving, as outlined above.
12. When the AFL cannot have a 100% neutral fixture – which means that either each team plays each other either once or twice per season - any inbuilt advantages for any team are magnified, and cannot be adequately offset by fixture juggling over more than a single season.
TO ITS CREDIT, THE AFL, having secured a very successful broadcasting revenue outcome, and notwithstanding the distractions of the drug debate, seems willing to face economic facts. The national competition has undoubtedly been of enormous benefit to the growth of the game itself, as well as the AFL. This naturally includes clubs in Melbourne, but it is an evolving competition, and therefore an evolving economic model.
The core issue is that, despite all the headline publicity about record AFL crowds and memberships and revenues – and thank goodness they are so healthy – some other realities are to be addressed.
• The reality is that the combined profitability of the clubs, or AFL Franchise Inc, if you like, has not improved since 2003. That represents a poor return on investment economically, and for the clubs, fans and players it risks undermining the core “uncertainty of outcome” basis of any successful competition.
• The reality is that the "pure" football business is simply unprofitable for half the competition, ie most Victorian clubs.
• The reality is that interstate clubs are generally in much stronger shape then the Victorian clubs, and the wealth competitive opportunity gap will grow.
• The reality is that while more revenue comes in, more money gets spent in an "arms race" pursuit of advantage.
• The reality is that the economic advantages interstate, and in WA in particular, will accelerate over the next 20 years, no matter what action is undertaken where the draft and the salary cap are concerned.
• The AFL made it clear during the successful broadcast deal negotiations that it was committed to 16 clubs, although it was not specific about the physical location of those 16 clubs and the long-term economics.
Now it is openly reviewing the competitiveness of Victorian clubs, which comprises more than half of the competition.
It will be fascinating to see what it all adds up to.
Footnote: Data sourced through AFL and Club records and reports, Australian Bureau of Statistics. I also gratefully acknowledge additional calculations provided by Don Field, Queensland University of Technology; Dr Bernard Salt, KPMG Property Advisory Services; Simon Avenell, economics consultant
