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Arsenal - The Song Remains The Same

The Swiss Rambler

It has be e n a mixe d start to the se ason for Arse nal, as promising away pe rformance s at champions Manche ste r City and a re juve nate d Live rpool have be e n balance d against a disappointing home de fe at to Che lse a. Howe ve r, the re is an air of quie t optimism among the fans that Ars ne We nge rs ne wlook side will be able to mount a challe nge once the ne w playe rs have fully ge lle d. It ce rtainly fe e ls be tte r than last ye ar whe n the Gunne rs we re on the wrong e nd of an 8-2 thrashing by Manche ste r Unite d. In fact, Arse nal re cove re d we ll afte r that disastrous start to finish in a cre ditable third position, se curing qualification for the Champions Le ague for a huge ly impre ssive 15 se asons in a row. Eve n We nge r was move d to de scribe this fe at as a miracle , citing the thrilling 5-2 victory ove r Spurs in the North London de rby as the turning point. Ne ve rthe le ss, it was a close run thing, as Arse nal only made sure of qualifying with a last day victory at We st Brom. T he te ams inconsiste nt pe rformance s can be partly attribute d to the significant amount of turnove r in the playing squad, e xace rbate d by losing some of the clubs be st pe rforme rs e ach summe r. Last ye ar Ce sc Fbre gas re turne d to his spiritual home at Barce lona, while Samir Nasri move d north to join Manche ste r Citys proje ct. In the re ce nt transfe r window, it was the turn of le ading score r Robin Van Pe rsie to he ad towards Manche ste r, though he opte d for Old Trafford, while Ale x Song joine d the long list of Arse nal playe rs transfe rre d to Barce lona.
" Me rte s a cke r - th e p o we r o f P e r-s u a s io n "

Good argume nts can be put forward that e ach of the se sale s may have made se nse individually, e .g. RVP was in the last ye ar of his contract, while the offe r for Song was too good to re fuse give n his tactical indiscipline , but take n toge the r the y do give the impre ssion that Arse nal have be come a se lling club, not ove rly bothe re d if the ir be st playe rs le ave . At le ast Arse nal appe are d to have more of a plan this summe r, re cruiting inte rnational re place me nts be fore the de parture s, including the highly tale nte d cre ative midfie lde r Santi Caz orla from Malaga, the e xpe rie nce d Ge rman forward Lukas Podolski from FC Kln and last se asons top score r in Ligue 1 Olivie r Giroud from Montpe llie r. Furthe rmore , the re turn of Jack Wilshe re and Abou Diaby afte r le ngthy abse nce s through injury e nable d the club to whe e l out the trie d-and-te ste d like a ne w signing line .

Howe ve r, many fans re main baffle d that a club of Arse nals imme nse financial re source s did not aim highe r in the transfe r marke t, such as buying a strike r of the calibre of Napolis Edinson Cavani or Atl tico Madrids Radame l Falcao. Of course , e ithe r of the se would have broke n Arse nals transfe r re cord by some distance , but the mone y is cle arly available to fund a purchase of this magnitude .
" Ca z o rla - S p a n is h e ye s "

To the outside world, it appe ars that Arse nal have paid rathe r more atte ntion to stre ngthe ning the ir balance she e t, as oppose d to the squad, an impre ssion that was re inforce d by last we e ks announce me nt of a he fty profit for the 2011/12 se ason, de scribe d by Pe te r Hill-Wood as anothe r he althy se t of full ye ar re sults. As is the chairmans style , that was a be autifully unde rstate d de scription of a thumping gre at profit be fore tax of 36.6 million, which was up from 14.8 million the pre vious ye ar. T his was split be twe e n 34.1 million from the football busine ss (up from 2.2 million in 2010/11) and 2.5 million from prope rty de ve lopme nt (down from 12.6 million).

T he massive 32 million incre ase in football profit was mainly due to profit on playe r sale s rising 59 million to an e normous 65 million, large ly from Fbre gas and Nasri, though re curring re ve nue also rose 10 million to 235 million with more than half of the growth coming from comme rcial ope rations. Howe ve r, this was offse t by substantial incre ase s in staff costs of 40 million: wage s climbe d 15% (19 million) from 124 million to 143 million; playe r amortisation surge d 70% (15 million) to 37 million afte r last summe rs acquisitions; and a 6 million impairme nt charge was booke d to re duce the value of playe rs de e me d to be e xclude d from the Arse nal squad. Ne t inte re st charge s continue d to fall, down to 13.5 million from 14.2 million (18.2 million in 2009/10). As anticipate d, the re was a furthe r slow-down in the prope rty busine ss with turnove r falling from 30.3 million to 7.7 million, as the Highbury Square de ve lopme nt is now almost e ntire ly sold.

Chie f e xe cutive Ivan Gaz idis was at pains to e mphasise the clubs se lf-sustaining mode l, claiming that the club can and will forge its own path to succe ss, though he must be conce rne d about the continuing de cline in ope rating profits, which have falle n from a 31 million pe ak in 2008/09 for the football busine ss. In fact, e xcluding prope rty de ve lopme nt, the club actually re porte d an ope rating loss of 18 million last se ason, compare d to the pre vious ye ars 9 million ope rating profit. T his 28 million turnaround was due to ope rating e xpe nse s (38 million) rising much faste r than re ve nue (10 million).

Ne ve rthe le ss, the bottom line is that Arse nal once again made anothe r siz e able profit, e ve n if it was large ly on the back of playe r sale s. T he re is no doubt that the clubs re cord off the pitch has be e n supe rb, e spe cially in the unforgiving world of football, whe re large losse s are fre que ntly the orde r of the day. In fact, the last time that Arse nal re porte d a loss was a de cade ago in 2002, amply de monstrating its se lf-financing e thos. T he last five ye ars have be e n particularly impre ssive , at le ast financially, with Arse nal accumulating stagge ring profits of 190 million, an ave rage of 38 million a ye ar. Arse nal have consiste ntly be e n one of the most profitable clubs in the world, though the y are not quite the only le ading club to make mone y. Both the Spanish giants have re ce ntly re porte d large profits for 2011/12: Barce lona 41 million ( 49 million) and Re al Madrid 27 million ( 32 million). In addition, Baye rn Munich have be e n profitable for 19 conse cutive ye ars. Manche ste r Unite d slippe d to a 5 million loss (be fore tax) last se ason, dragge d down by 50 million of inte re st charge s, though the y made a 30 million profit the pre vious ye ar.

At the othe r e nd of the spe ctrum, clubs ope rating with a be ne factor mode l re porte d e normous losse s. Manche ste r Citys 197 million loss in 2010/11 was the large st e ve r re corde d in England, while Juve ntus, Inte r, Che lse a and Milan all re giste re d losse s of around 70 million. As Gaz idis put it, we se e clubs struggling to ke e p pace with the financial de mands of the mode rn game . T hat said, the arrival of UEFAs Financial Fair Play (FFP) re gulations, not to me ntion the e conomic difficultie s of many of the clubs owne rs, has produce d a cle ar change in be haviour. Milan and Inte r have be e n se lling the ir e xpe rie nce d, more e xpe nsive playe rs, while City we re re lative ly re straine d in the transfe r marke t (by the ir own e xalte d standards) this summe r. Eve n Che lse as spe nding has be e n on younge r playe rs with a future re sale value .

So far, so good, but Arse nals profits have be e n ve ry re liant on playe r sale s and (to a le sse r e xte nt) prope rty de ve lopme nt. In 2011/12, if we e xclude the 2.5 million profit from prope rty de ve lopme nt and the 65.5 million profit from playe r sale s, the football club would actually have made a siz e able loss of 31.3 million. No othe r le ading club has be e n so de pe nde nt on playe r sale s as part of its busine ss mode l. In fact, ove r the last six ye ars, se lling the clubs stars has be e n re sponsible for 178 million (or ove r 90% ) of the 195 million total profit. T hats gre at busine ss, but it make s it ve ry difficult to build a winning te am, as Arse nal se e m to be pe rpe tually two pie ce s short of the comple te jigsaw. T he re s little sign of this slowing down e ithe r, as the sale s of Van Pe rsie and Song we re made afte r the 31 May accounting close , so will be include d in ne xt ye ars accounts, contributing anothe r 37 million of profit.

T he se once -off sale s are all we ll and good, but the y have be e n disguising Arse nals incre asing ope rational ine fficie ncy. T his can be se e n by the de cline in cash profits, known as EBIT DA (Earnings Be fore Inte re st, Taxation, De pre ciation and Amortisation), which has virtually halve d from a pe ak of 66 million in 2008/09 to 35 million last se ason. T hats still pre tty good for a football club, but, to place it into conte xt, it is le ss than 40% of the 92 million ge ne rate d by Manche ste r Unite d, who also fore cast growth to 107-110 million this se ason. T his may be a tire some accounting te rm, but it is important, as it re pre se nts the cash available for a club to spe nd unle ss it se lls playe rs or incre ase s de bt. Assuming no change in ove rall strate gy, this me ans that Arse nal will continue to se ll playe rs unle ss/until the y grow re ve nue or cut the ir wage bill. As Gaz idis e xplaine d, T he re ason we talk about the financial re sults at all is that it provide s the platform for us to be succe ssful on the fie ld. Give n this truism, le ts look at some of the challe nge s facing Arse nal. 1. How will the club grow re ve nue ?

Looking at the clubs re ve nue of 235 million, which is the fifth highe st in Europe , it is difficult to imagine that this could be an issue , e spe cially as it is only surpasse d by Manche ste r Unite d in England (331 million in 2010/11, 320

million in 2011/12), while it is way ahe ad of clubs like Live rpool 184 million, Totte nham 164 million and Manche ste r City 153 million. Howe ve r, the re are thre e proble ms he re : (a) the gap to the top four clubs is vast; (b) Arse nals re ve nue has hardly grown at all in the last fe w ye ars; (c) othe r clubs have continue d to grow the ir re ve nue . Re al Madrid and Barce lona ge ne rate around 200 million more re ve nue than Arse nal. Eve n though this shortfall would come down if the curre nt e xchange rate of 1.25 Euros to the Pound we re use d inste ad of the 1.11 pre vailing whe n De loitte produce d the ir surve y, the disparity would still be around 150 million, which make s it difficult to compe te .

Although re ve nue rose 10 million last se ason to 235 million, this is e ffe ctive ly the only re ve nue growth since 2009, whe n re ve nue was 225 million. T he large st incre ase in this thre e -ye ar pe riod came from broadcasting, which rose 11 million from 73 million to 85 million in 2012, as a re sult of ce ntrally

ne gotiate d de als for the Pre mie r Le ague and UEFA (for the Champions Le ague ), so Arse nals board cannot take a gre at de al of cre dit for that. Much was made of comme rcial re ve nue rising 5.6 million to 52.5 million, but this is only 4.4 million highe r than the 48.1 million re ce ive d in 2009. In othe r words, this crucial re ve nue stre am has only grown by a mise rable 9% in thre e ye ars. Eve n though Gaz idis state d in an inte rvie w with the club we bsite that comme rcial partne rships we re we ll ahe ad of our five -ye ar plan, I would sugge st that to date the re has is not e xactly be e n a scintillating re turn on inve stme nt in the e xpe nsive ne w comme rcial te am.
" G iro u d - h a n d s o m e d e vil"

T he most important re ve nue stre am for Arse nal, match day income , has actually falle n from 100 million to 95 million, de spite ticke t price s be ing raise d last se ason. It is impe rative that Arse nal manage to find ways to profitably grow the ir re ve nue , as Gaz idis acknowle dge d during the re sults pre se ntation, Our activitie s to incre ase re ve nue are important. Incre ase d re ve nue s allow us to be more compe titive and to ke e p pace with the e ve r pre se nt cost pre ssure s in the game . T he clubs Chie f Comme rcial Office r, Tom Fox, re -ite rate d this, whe n he de scribe d his role as to build and grow the multiple re ve nue stre ams at the club in orde r to maximise the mone y available for the board and the manage r to spe nd on the squad.

Arse nals re al re ve nue proble m is that while the y have struggle d to incre ase the ir re ve nue , othe r le ading clubs have continue d to grow the ir busine ss. In the thre e ye ars since 2009, Re al Madrid and Barce lona both gre w re ve nue by around 90 million. Madrid have just announce d re cord-bre aking 411 million ( 514 million) re ve nue for 2011/12, while Barce lona are not far be hind with 381 million ( 476 million). For English clubs, Unite ds re ve nue fe ll back to 320 million in 2011/12 afte r the ir e arlie r Champions Le ague e xit, but still re pre se nte d growth of 42 million since 2009, while the 2012/13 re ve nue outlook the y provide d to analysts was a mighty 350-360 million. T he only le ading club whose growth was anywhe re ne ar as low as Arse nals was Che lse a, but the ir 2011/12 figure s will be much highe r, due to the Champions Le ague victory and ne w comme rcial de als.

Arse nals Achille s he e l from a re ve nue pe rspe ctive has be e n comme rcial income , which is e xtre me ly low for a club of Arse nals stature . Eve n afte r the 13% incre ase to 53 million in 2011/12, this still pale s into insignificance compare d to the like s of Baye rn Munich 161 million, Re al Madrid 156 million and Barce lona 141 million.

T he story is no be tte r in England, as Arse nals 53 million is le ss than half of Manche ste r Unite ds 118 million. While Arse nal have bare ly re giste re d any comme rcial growth since 2009 (just 4 million), othe rs have ste ame d ahe ad, including Manche ste r City (41 million growth) and Live rpool (17 million growth). T he discre pancy will be e ve n worse whe n those two clubs publish the ir late st accounts, as the 2010/11 figure s do not include the incre ase s for ne w sponsorship de als with Etihad and Warrior re spe ctive ly. Arse nals proble ms in this are a can be highlighte d by a comparison with Manche ste r Unite d, who admitte dly are the comme rcial be nchmark for English clubs. Back in 2007, Arse nals comme rcial income of 42 million was just 14 million lowe r than Unite ds 56 million, but since the n Arse nals re ve nue has only rise n 26% to 53 million, while Unite ds has rocke te d 110% to 118 million, le ading to an annual diffe re nce of 65 million. Mind the gap, inde e d.

Arse nals we akne ss in this are a arise s from the fact the y had to tie the mse lve s into long-te rm de als to provide se curity for the stadium financing, which arguably made se nse at the time , but re ce nt de als by othe r clubs have highlighte d how much mone y Arse nal le ave on the table e ve ry se ason. T he Emirate s de al was worth 90 million, cove ring 15 ye ars of stadium naming rights (42 million) running until 2020/21 and 8 ye ars of shirt sponsorship (48 million) until 2013/14. Following ste p-ups the shirt sponsorship de al is worth 5.5 million a se ason, which compare s ve ry unfavourably to the amounts e arne d by the othe r le ading clubs, who have all improve d the ir de als in re ce nt se asons, so Live rpool, Manche ste r Unite d and (re porte dly) Manche ste r City e arn 20 million from Standard Charte re d, Aon and Etihad re spe ctive ly.

In fact, no fe we r than e ight Pre mie r Le ague clubs now have a more lucrative shirt sponsorship than Arse nal. As we ll as the usual suspe cts, Arse nals de al is be hind Sunde rlands bare ly cre dible 20 million de al with Inve st in Africa, Totte nham 12.5 million (Aurasma 10 million plus Inve ste c 2.5 million), Ne wcastle 10 million (Virgin Mone y) and Aston Villa 8 million de al (Ge nting). T he ne ws is no be tte r with Arse nals kit supplie r, whe re the club signe d a 7-ye ar de al with Nike until 2011, which was the n e xte nde d by thre e ye ars until 2013/14. T his now de live rs 8 million a se ason, compare d to the 25 million de al re ce ntly announce d by Live rpool with Warrior Sports and the 25.4 million paid to Manche ste r Unite d by Nike .

Gaz idis talks a good match, we continue to be succe ssful in attracting top brands to sign on as comme rcial partne rs, but the re ality is that Arse nal have be e n outpace d in this are a. Ye s, the y have inde e d signe d some ne w sponsors, such as Carlsbe rg, Inde sit, Be tsson, Bharti Airte l and Malta Guinne ss, while othe r like Citroe n and T homas Cook re ne we d for a highe r sum, but the re has be e n little tangible re ve nue improve me nt. Furthe rmore , Manche ste r Unite d continue to attract more se condary sponsors than Arse nal, including se ve n since 1 July 2012 alone . Inde e d, much of the comme rcial re ve nue growth was down to the ove rse as tour to Malaysia and China, which is some thing of a double -e dge d sword, as it may we ll have had a de trime ntal e ffe ct on the playe rs pre -se ason pre paration.
" Je n kin s o n - co rp o ra l p u n is h m e n t"

More positive ly, Arse nal will have a fantastic opportunity for what Gaz idis calls a significant uplift in re ve nue whe n the main sponsorship de als are up for re ne wal at the e nd of the 2013/14 se ason. If the y could match the 45 million curre ntly re ce ive d by Unite d and Live rpool for main shirt sponsor and kit supplie r, that would imply a 32 million incre ase in re ve nue . Gre at stuff, but the trouble is that the bar is be ing continually raise d in sponsorship de als, so Unite d have re ce ntly announce d a truly spe ctacular de al with Che vrole t. Not only will this rise to an astonishing 45 million ($70 million) in 2014/15, but the sponsor will e ve n pay the m 11 million in e ach of the pre vious two se asons while Aon are still the sponsors. Not only that, but Unite d have also pe rsuade d DHL to pay 10 million a se ason to sponsor the ir training kit. In othe r words, the re is no guarante e that Arse nals ne w sponsorship de als will ride ove r the hill like

the se ve nth cavalry to save the m, e spe cially if the brand is damage d by a failure to qualify for the Champions Le ague (though that has not pre ve nte d Live rpool from se curing supe rb de als). Gaz idis has said that in te rms of the financial impact, it will be as significant a ste p forward as the stadium was in 2005, but his comme rcial te am will have to significantly up its game or Tom Fox will be conside re d about as e ffe ctive in the box as Franny Je ffe rs.

Match day income of 95 million is the fourth highe st in Europe , only be hind Re al Madrid, Manche ste r Unite d and Barce lona, but that make s the club ve ry re liant on the re ve nue ge ne rate d in the stadium more so than any othe r club, as Gaz idis state d. We nge r confirme d its importance , We are ve ry lucky be cause we have good support and the income of our gate s is ve ry high. Inde e d, the 3.3 million that Arse nal ge ne rate pe r match is more than twice the amounts e arne d by Totte nham and Live rpool. Howe ve r, this re ve nue stre am se e ms to have re ache d saturation point, as Arse nal continue to re giste r capacity crowds of 60,000 and the ir ticke t price s are among the highe st in the world. In fact, match day income was actually highe r in 2008/09 at 100 million, large ly due to the high numbe r of home game s playe d (or old-fashione d succe ss on the pitch). Furthe rmore , re ve nue pe r match has also falle n from the pe ak of 3.5 million in 2009/10.

Inde e d, afte r the de e ply unpopular 6.5% ticke t price rise in 2011/12, most price s we re froz e n for this se ason, though 7,000 Club Le ve l me mbe rs we re aske d to pay an additional 2% . T he me dia made gre at play of the che ape st ticke ts for the match against Che lse a (an A cate gory game ) be ing an obsce ne 62, though the y have be e n le ss voluble about the 28% re duction in price s for C cate gory game s from 35 to 25.50. In addition, Arse nal have introduce d a numbe r of pricing initiative s, e .g. discounting lowe r-tie r ticke ts to 10 for the Capital One Cup game against Cove ntry City. T he othe r issue he re is what would happe n if Arse nal faile d to qualify for the Champions Le ague , e ve n if the infe rior Europa Le ague was on offe r, as the se ason ticke t include s the first se ve n cup game s from Europe an compe tition and the FA Cup. T he club would sure ly have to issue cre dits, pote ntially le ading to a 10-20% re duction in re ve nue .

T he majority of Arse nals te le vision re ve nue come s from the Pre mie r Le ague ce ntral distribution with the club re ce iving 56 million in 2011/12, unchange d from the pre vious se ason. Each club ge ts an e qual share of 50% of the dome stic rights (13.8 million) and 100% of the ove rse as rights (18.8 million) with the only diffe re nce s down to me rit payme nts (25% of dome stic rights) and facility fe e s (25% of dome stic rights), base d on how many time s e ach club is broadcast live . T his me thodology is ve ry e quitable with Arse nal only re ce iving 4.4 million le ss than champions Manche ste r City.

Howe ve r, the signing of the 3 billion Pre mie r Le ague de al for dome stic rights for the 2014-16 thre e -ye ar cycle , re pre se nting an incre ase of 64% , will provide clubs with a significant boost to the ir re ve nue pe r Gaz idis. If we assume (conse rvative ly) that ove rse as rights rise by 40% , that would incre ase Arse nals share by around 30 million (using the same allocation syste m). Of course , othe r English clubs re ve nue would also rise , though lowe r place d clubs would not re ce ive as much in absolute te rms, but this would ce rtainly he lp Arse nals ability to compe te with ove rse as clubs, e spe cially Madrid and Barce lona, who be ne fit from massive individual de als. T he othe r major e le me nt include d in T V re ve nue is the distribution from the Champions Le ague , which was worth around 24 million ( 28 million) to Arse nal in 2011/12. T he amount e arne d de pe nds on a numbe r of factors: (a) pe rformance a club re ce ive s more priz e mone y the furthe r it progre sse s; (b) the T V (marke t) pool allocation half de pe nds on the progre ss in the compe tition, half de pe nds on the finishing position in the pre vious se asons Pre mie r Le ague ; (c) e xchange rate s the 2011/12 figure was adve rse ly affe cte d by the Euros we akne ss.

In this way, Che lse a e arne d more than twice as much last se ason as Arse nal with 60 million afte r the ir triumph in Munich. Inte re stingly, Manche ste r Unite d ( 35 million) also e arne d more than Arse nal, de spite be ing e liminate d at the group stage , as the ir share of the marke t pool was highe r afte r winning the pre vious se asons Pre mie r Le ague , while Arse nal finishe d fourth. Pote ntially, Arse nal could incre ase the ir re ve nue by 30 million if the y manage d to e mulate Che lse as succe ss, but, by the same toke n, the y could lose 30 million if the y misse d out on qualification to Europe s flagship tourname nt. Howe ve r large the diffe re nce s are be twe e n the English clubs that qualify for the Champions Le ague , it is still much be tte r than the Europa Le ague , whe re the highe st amount e arne d by an English re pre se ntative was the 3.5 million that we nt to Stoke City. Financially, the Champions le ague is the only game in town, e spe cially now that the priz e mone y for the 2012 to 2015 thre e -ye ar cycle has incre ase d by 22% . 2. Are e xpe nse s out of control?

Last se ason saw the first ope rating loss in many ye ars afte r e xpe nse s rose at a much faste r rate than re ve nue . In particular, the wage bill shot up 15% from 124 million to 143 million, de spite the sale of Fbre gas and Nasri, two of the highe st e arne rs. Part of the incre ase was pre sumably due to rushing in the like s of Pe r Me rte sacke r, Andr Santos and Park-Chu Y oung last summe r without e nough time for me aningful salary ne gotiations. In addition, a once -off charge of 2.2 million was include d to top-up the pe nsion provision, while Arse nals lack of trophie s and comme rcial growth did not pre ve nt Gaz idis package rising 24% to 2.15 million (salary 1.366 million, bonus 675,000, pe nsion 100,000). T he e xplosive wage growth is nothing ne w. In fact, since 2009 wage s have gone up 39 million (38% ), while re ve nue has only grown by 10 million (5% ), le ading to a significant worse ning in the wage s to turnove r ratio from 46% to 61% . T his is by no me ans te rrible (most Pre mie r Le ague te ams have a ratio above 70% , while Manche ste r City notche d up 114% in 2010/11), but is of conce rn, e spe cially as Manche ste r Unite d have manage d to maintain the ir ratio around 50% . T hough not the only re ason, this he lps to e xplain why so little has be e n spe nt in the transfe r marke t.

T he proble m is that wage s in football re se mble a sporting arms race , as othe r clubs continue to se t the age nda, notably Manche ste r City, who have incre ase d the ir wage bill from 36 million to 174 million in just four ye ars. Arse nals wage bill of 143 million is now the fourth highe st in England, be hind City, Che lse a 168 million (2011) and Manche ste r Unite d 162 million (2012). Arse nals pe rformance in re gularly finishing third or fourth in the Pre mie r Le ague me ans the y have slightly outpe rforme d e xpe ctations base d on the wage bill, though Totte nham fans would note that the y ran the m ve ry close last se ason with 30 million le ss wage s.
" We n g e r - tra in o f th o u g h t"

One issue at Arse nal is the e quitable wage structure , which me ans that the top salarie s are not e nough to attract the worlds be st, while fringe playe rs like S bastie n Squillaci and Marouane Chamakh are handsome ly re warde d for sitting in the stands. Arse nals wage bill is sufficie nt to sign world-class playe rs, but that would me an re ducing the salarie s of le sse r lights. T his has be e n tacitly admitte d by Gaz idis: Can we compe te at top salary le ve ls? Ye s we can, but we have an e thos at the club - the way Ars ne e xpre sse s it is that it is not about individual playe rs, it is what happe ns be twe e n the m. T he difficulty is in ge tting the unwante d playe rs off the payroll at the ir high wage s, he nce loans for Nicklas Be ndtne r, De nilson and Park whe n the club would have pre fe rre d to se ll the m. Howe ve r, the re are signs that the club is now acting on this with nume rous de parture s this summe r and the hard line ove r contract discussions with T he o Walcott. T his is a tricky balancing act for the board: if the y e xte nd

contracts too e arly, the y risk paying ove r the odds in wage s; if the y wait until the last minute , the y risk losing the playe r for nothing on a Bosman.

T he othe r e xpe nse impacte d by inve stme nt in the squad, playe r amortisation, has also rise n significantly from 22 million to 37 million. For those unfamiliar with this conce pt, amortisation is simply the annual cost of writing-down a playe rs purchase price , e .g. Mike l Arte ta was signe d for 10 million on a 4-ye ar contract with the transfe r re fle cte d in the accounts via amortisation, which is booke d e ve nly ove r the life of his contract, so 2.5 million a ye ar. Many of the playe rs that have be e n sold we re fully amortise d, so amortisation was re duce d much by the de parture s, but it has incre ase d following inve stme nt in ne w playe rs. To give this some pe rspe ctive , its still a lot le ss than Manche ste r City (84 million), but significantly more than pre vious ye ars. 3. Whe re has all the mone y gone ?

Afte r so many ye ars of large profits, it is difficult for most supporte rs to unde rstand whe re all the mone y has gone . Gaz idis is adamant that it has be e n spe nt on football, We ge ne rate re ve nue and we re inve st all of that re ve nue in football. We don't pay divide nds, the mone y doe sn't come out of the club. All of the mone y we make is made available to our manage r and he has done an unbe lie vable job in managing that spe nd. T hats sort of true , but the re ality is that ve ry little has be e n spe nt on bringing in ne w playe rs with ne t playe r re gistrations of just 4 million in the last six ye ars. Inste ad, the vast majority has be e n gone on the ne w stadium, prope rty and othe r infrastructure (e .g. e nhance me nts to Club Le ve l, Arse nalisation proje cts, ne w me dical ce ntre ) with more planne d for de ve lopme nt at the Hale End youth acade my.

Since 2007 Arse nal have ge ne rate d a ve ry he althy 376 million ope rating cash flow, but have spe nt 71 million on capital e xpe nditure , 110 million on loan inte re st and 64 million on ne t de bt re payme nts, while the cash balance s have rise n by 118 million. Astonishingly, only 1% (one pe r ce nt) of the available cash flow has be e n spe nt in the transfe r marke t.

Although Arse nal have laid out a fair bit of cash on buying playe rs in the last two se asons (ne arly 90 million), this has be e n more than compe nsate d by big mone y sale s, so the ir ne t spe nd has still be e n ne gative . In fact, since the y move d to the Emirate s stadium, the y have made 49 million in the transfe r marke t, whe re the y are the only le ading English club to be a ne t se lle r.

Of course , Manche ste r City and Che lse a have be e n the big spe nde rs in re ce nt ye ars, splashing out 444 million and 235 million re spe ctive ly since 2006/07. Little wonde r that Pe te r Hill-Wood complaine d, At a ce rtain le ve l, we cant compe te . T hat said, in the same pe riod, Live rpool, Manche ste r Unite d and Totte nham have also all spe nt conside rably more than Arse nal. Following the e limination of the prope rty de bt, the club has manage d to re duce its gross de bt to 253 million (down 5 million from last ye ar), le aving just the long-te rm bonds that re pre se nt the mortgage on the Emirate s Stadium (225 million) and the de be nture s he ld by supporte rs (27 million). Once cash balance s of 154 million are de ducte d, ne t de bt is now only 99 million, which is a significant re duction from the 318 million pe ak in 2008.

De spite the high inte re st charge s, it is unlike ly that Arse nal will pay off the outstanding de bt e arly. T he bonds mature be twe e n 2029 and 2031, but if the club we re to re pay the m e arly, the n the y would have to pay off the pre se nt value of all the future cash flows, which is gre ate r than the outstanding de bt. In any case , the 2010 accounts cle arly state d, Furthe r significant falls in de bt are unlike ly in the fore se e able future . T he stadium finance bonds have a fixe d re payme nt profile ove r the ne xt 21 ye ars and we curre ntly e xpe ct to make re payme nts of de bt in accordance with that profile . 4. How much is available to spe nd?

T his que stion is provoke d by Arse nals incre dibly high cash balance s of 154 million, which are significantly highe r than any of the ir compe titors with Manche ste r Unite d the close st with 71 million (down from 151 million in 2011). Of course , not all of this is available to spe nd for a couple of re asons: (a) the se asonal nature of cash flows during the ye ar, e .g. the May balance will always be high following the influx of mone y from se ason ticke t re ne wals, but this mone y is use d to pay annual e xpe nse s, including wage s; (b) as part of the bond agre e me nts, Arse nal have to maintain a de bt se rvicing re se rve , which was 34 million in 2012. Ne ve rthe le ss, the re is cle arly still a large amount of cash available to spe nd, e spe cially as the cash balance doe s not include 26 million to come from the Que e nsland Road prope rty de ve lopme nt (though this is only payable in instalme nts ove r the ne xt two ye ars) and more (10 million?) from the two re maining smalle r proje cts on Hornse y Road and Holloway Road. It also e xclude s any mone y from this summe rs transfe r activity with the accounts giving a positive ne t impact of 11 million. Although this is probably the figure most fans want to know, it is actually almost impossible to calculate what could be spe nt in the transfe r marke t for many re asons. For e xample , most transfe rs are funde d by stage payme nts, so all the mone y is not ne e de d upfront. In addition, Arse nal could e asily take on some additional de bt, give n the stre ngth of the balance she e t. Ne ve rthe le ss, I e stimate that Arse nal could safe ly spe nd 50-60 million from cash re source s.
" D ia b y - kin g o f p a in "

T he othe r point that pe ople ofte n raise whe n discussing the transfe r fund is that it would also have to fund a ne w signings wage s, so if the club bought a playe r for 25 million on a five -ye ar contract at 100,000 a we e k, that would re pre se nt a commitme nt of 50 million. T hat is undoubte dly true , but it is a little disinge nuous, as it ignore s the fact that this would be at le ast partially offse t by the de parture of an e xisting playe r, not le ast be cause of the limitations impose d by the 25-man

squad rule , as highlighte d by We nge r himse lf. 5. Will FFP come to Arse nals re scue ? It is no se cre t that Arse nal hope that UEFAs FFP re gulations will re ward the ir prude nt approach, as the se aim to force clubs to live within the ir me ans, thus re stricting the ability of be ne factor-funde d clubs to spe nd big on playe rs. Inde e d, Gaz idis state d that the adve nt of FFP me ant that football is moving powe rfully in our dire ction, while the re sults pre ss re le ase was actually e ntitle d, Re sults confirm Arse nal strongly place d to me e t UEFAs ne w financial rule s. On top of that, the re are discussions at the Pre mie r Le ague to introduce similar rule s dome stically. Howe ve r, although the re are some signs of clubs modifying the ir be haviour, Arse nals faith in the ne w syste m may not work out as planne d.

First, the re is much le e way in the FFP rule s, e .g. clubs are allowe d to absorb aggre gate losse s of 45 million (around 36 million), initially ove r two ye ars for the first monitoring pe riod in 2013/14 and the n ove r thre e ye ars, as long as the y are willing to cove r the de ficit by making e quity contributions. In addition, ce rtain costs such as de pre ciation on fixe d asse ts, stadium inve stme nt and youth de ve lopme nt can be e xclude d from the bre ak-e ve n calculation. Furthe rmore , the re is a sliding scale of sanctions for offe nde rs, so it is far from ce rtain that clubs will be e xclude d from UEFA compe titions. T his is without conside ring the thre at of a le gal challe nge from a le ading club. Se cond, it is e vide nt that FFP will be ne fit those clubs that have the highe st re ve nue , as the y will be able to spe nd more on the ir squad, but, as we have se e n, othe r clubs continue to powe r ahe ad, so Arse nal are like ly to always have a shortfall against some clubs.
" I a m Vito Ma n n o n e !"

With the ne w comme rcial de als in 2014 plus more mone y from be tte r ce ntral T V de als for the Pre mie r Le ague and Champions Le ague , Arse nal should surpass 300 million re ve nue in two ye ars, but Re al Madrid and Barce lona are alre ady around 400 million, while Manche ste r Unite d are proje cting 350-360 million ne xt ye ar. T hat said, Arse nals re ve nue will place the m in the re ve nue e lite (the top five clubs in the world with se paration from the re st, said Gaz idis), so the y will be ve ry handily place d to be ne fit from FFP, though it is unlike ly to act as some kind of magic potion to solve all of the ir financial issue s. In many ways, Arse nals se lf-sustaining approach has be e n admirable , though it has ofte n fe lt like the club has be e n ove rly cautious. Gaz idis spe aks of avoiding the many e xample s of clubs across Europe struggling for the ir ve ry survival afte r chasing the dre am and spe nding be yond the ir me ans, but Arse nal are a long way from such an awful pre dicame nt. As we have se e n, Arse nal do face issue s around lack of re ve nue growth and an e ve r incre asing wage bill, but the y still have much more room to

manoe uvre than most.

" Ve rm a e le n - To m m y, ca n yo u h e a r m e ?"

T he price of Arse nals se lf-sustaining mode l has be e n to re gularly se ll the clubs be st playe rs, while charging the highe st ticke t price s in the country, so this is not quite the financial Utopia that has ofte n be e n portraye d in the me dia. For the fans, it must be particularly galling that the clubs two majority share holde rs, Stan Kroe nke and Alishe r Usmanov, are both billionaire s, but the re is little sign of e ithe r making any inve stme nt into the squad. Arse nals financial re sults are undoubte dly impre ssive and the y have done we ll to consiste ntly finish in the top four, but whe the r the curre nt strate gy is e nough to bridge the gap to the le ade rs and actually win an important trophy is de batable . T he board waste s no opportunity in te lling supporte rs how ambitious the club is, e .g. last month Pe te r Hill-Wood argue d, We have a pre tty good chance of challe nging for the Pre mie rship. I dont se e why we cannot win it this ye ar, but whe the r the fans be lie ve that this is cre dible is anothe r matte r, e spe cially whe n the club doe s not use all the re source s at its disposal.