Why Saudi Arabia Is Spending Millions on Soccer Stars

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1:22Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, I think we need to figure out something extremely important before we even begin this discussion. I know what you're going to say. And I was wondering if we should have figured this out before the episode started or now. No, no, no. Let's force our work process on everyone listening to this. No, are we going to call this soccer or football? I knew this was – you can call it whatever you want. It's fine. Okay. I say soccer, but I also don't really pay attention to the sport. And I know you do, so maybe you should get to choose.

1:58I don't as much as I used to, but for all thoughts listeners, I lived in the UK for more than 10 years. And in the UK, soccer is kind of inflicted on you, whether you like it or not. So let me just say, if we do start saying football in this conversation, unless otherwise specified, we mean soccer. Unless we say American football. What do they call it in Japan? I don't know. That's a good question. What do they call it in Austria? Foosball. Foosball, right, of course. What do they call it in Hong Kong? Soccer, I think. No, it must be football because that's British. I have no idea. Okay. Okay, look, soccer and football are going to be interchangeable on this discussion, but I think we've given away what we are going to be talking about.

2:42Yes. Yeah, and we brought it up very briefly in an episode with Brad Setzer because at the time I asked him, I was like, what's the deal of Saudi Arabia offering like half a billion dollars to Lionel Messi? then like two days later that deal never actually happened and he went to Miami there was a but it all but he of course it was being Brad he had this great like macro answer about the Saudis current account surplus and all that stuff and so there is a lot there with like the econ the macro right of soccer right it is no secret that Saudi Arabia has been on something of a soccer star spending spree recently I think it all kicked off when they bought Ronaldo earlier in the year and since then they've bought some prominent people like Benzema, I think.

3:27I'm probably mispronouncing all of these names. We're recording this on June 21st and I saw that they just picked up Conte, who's like a very well-known Chelsea midfielder and they had a very strange video to go along with it, which maybe we can get into. But anyway, why is Saudi Arabia doing this is, I guess, the big question. And what does it mean for both European football and American soccer? Yeah, I have no idea about any of these things. I only found out recently that like, I mean, I knew like the major league soccer in the U.S. was kind of like big, but I didn't realize it was quite as big.

4:05It was like booming. You didn't know? Not really. You know, my husband was briefly a youth coach for the New York Cosmos. I had no idea. That's crazy. Yeah. All right. Well, we have a lot to talk about, and I am very pleased to say that we truly have the perfect guest. We are going to be speaking with the co-hosts of the Double Pivot Pod, which describes itself as the world's most agreeable soccer analytics podcast. I love that tagline. We have Michael Cayley, in addition to being the co-host of Double Pivot Pod. He is also the forthcoming author of a book with the very interesting title of The First Apocalypse of James, Martyrdom and Sexual Difference.

4:48So not necessarily what you would expect from a soccer commentator. And we also have Mike Goodman. He is the senior editor for soccer at CBSSports.com. So really the perfect people to thread the needle between the soccer world and also Saudi Arabia's current account surplus. Welcome to the show, Michael and Mike. Thrilled to be here. We're both big fans, so it's great that we have the chance to do this. Yeah, we're so excited. I feel like we were probably the only soccer podcast to base an episode around Brad Setzer's research on the Saudi current account balance. Oh, amazing. Amazing. Love it.

5:23Okay, so first, one more bit of housekeeping. I'm just going to, you know, Mike and Mike is a little confusing. So I'm going to refer to Michael Kaylee as Kaylee and Mike Goodman as Mike or Michael, if that makes sense. I think that's what you do on your podcast anyway. So hopefully that works for everyone. But I guess the big question for me is, you know, watching all this activity, it kind of started in January when we saw Cristiano Ronaldo moved from Manchester United over to a Saudi Arabian team called Al Nasser. And that was for some insane amount of money, like 200 million euros for a two and a half year deal.

6:03And I think when that first happened, there was a lot of discussion that maybe this was just an opportunistic move by Saudi Arabia. You know, he was out of contract and maybe they just saw an opportunity there and seized on it. But since then, we've just seen them making more and more approaches to football stars and snapping some of them up. So what's happening here? Is this the first salvo of a long-planned development in Saudi football, or did the transfer open the Saudi government's eyes to what was possible? So, honestly, I think I'd start by taking a step back and doing something that maybe we do a lot on our podcast, which is sort of questioning the premise here a little bit.

6:53I would honestly say that Saudi Arabia's involvement directly in soccer predated Ronaldo. They bought Newcastle United, the PIF, bought Newcastle United last summer, basically. And this had been a long going, actually more than like 18 months ago. This had been sort of a long going negotiation where Saudi Arabia PIF had wanted to purchase it. And the UK had stood in the way and the Premier League had stood in the way saying we, despite the fact that another club, Manchester City, is owned by United Arab Emirates. We won't allow a sovereign nation to buy this club. There were ongoing negotiations.

7:35Eventually, Saudi Arabia satisfied the UK and said, we are not a sovereign nation. We are PIF. We are independent. And UK accepted this, Premier League accepted this, and they bought Newcastle. I would say this was going on at the same time that PIF founded LIV Golf to be now merged with the PGA Tour. And what you've seen, I think a better way to understand it, is really looking at the soccer spending, first on Newcastle, then on these players, in addition to some other ways that they are putting money into the game, as in concert with what they were doing in golf as a concerted effort to spend their capital on sports for various reasons.

8:15Yeah, I think the other thing to add here is in terms of what is the Saudi Arabian timeline, and obviously these things can change, but their vision 2030, this big economic modernization plan, 2030 is also the next World Cup that is up for bidding. And Saudi Arabia is one of the probably the leading bidder at this point. You know how the bids for FIFA things work. And so they are very transparent and very on the up and up. Yeah, everything's good. Everything's kosher. Exactly. There's no advantages to being a sovereign nation that can just dispense money in various random ways. And so they are like, is as they're looking to build for soccer, I think the timeline is probably best understood as a 2030 timeline, both in terms of the vision project and in terms of the World Cup.

9:08God, I already have so many questions. You know, one thing that Brad brought up when we mentioned, and I think this was an issue with the last, where was the last World Cup? Cutter? Was that? Cutter, yeah. The most recent one. What's the deal? Too much controversy, obviously. Too much controversy. Absolutely. Like, how difficult is it and costly to build sort of climate-controlled stadiums in that climate? Like, how did that even go, like, with the heat and everything? So I don't know the specifics of the cost. Certainly, it's a massive money-losing effort. They were more or less successful at getting stadiums where players could play soccer that was recognizable as soccer.

9:51In the heat, they did have to move. The initial bid from Qatar did say they were going to play on the normal World Cup schedule. It was going to be played in June. And they were not able to produce the climate-controlled stadiums that would make it possible play in June in Qatar. That was why the World Cup moved to November and December, because that was the only time that they could pull it off. And it's worth pointing out that that decision was incredibly contentious. There were contracts that had to be renegotiated. There were amends that had to be made. Media companies bid lots of dollars to broadcast the World Cup.

10:32And an American broadcaster broadcasting something in the summer versus an American broadcaster broadcasting something when the biggest game for American audiences is the day after Thanksgiving is a massive difference in terms of what you are paying for and why. So let me ask the big picture question that, you know, you were kind of hinting at in your first answer. But it is well known at this point that there is a lot of Middle Eastern money floating around the world of football in various ways, either through the World Cup in Qatar or through ownership of teams, primarily in Europe. I know when I was in Abu Dhabi, if you wanted to have a nice conversation with Khaldun al-Mubarak, you would bring up Manchester City and he would talk a lot about it, provided that they were actually having a good season.

11:24But what is it about soccer slash sports that makes these attractive assets for a country like Saudi Arabia or even the United Arab Emirates? Yeah, so I would say the starting point here is that foreign money flowing into soccer is not new. The soccer economy is set up to not really be a healthy economy. So there is a long history of soccer clubs testing around for money to either sell to a new owner to sell their their most saleable assets which are player contracts to you know people outside of Europe who maybe have lots of money to spend on it what is new and different right now is that it's only since 2008 when Abu Dhabi in particular bought Manchester City that we come to understand these teams as being owned by sovereign nations as opposed to rich individuals from these sovereign nations.

12:24Manchester City was not the first club to be bought by somebody with the title of Sheik. It wasn't. But before that, you would understand them to be a rich individual who was doing this instead of buying a super yacht, basically. Sports teams have for a long time been luxury goods. And then that changed. And that changed first with Abu Dhabi, then with Qatar and Paris Saint Germain in 2011, then with Saudi Arabia and Newcastle. And now what we're seeing is the sort of secondary extension of that, which is the players going the opposite direction with Saudi Arabia now attracting a number of big names and seeming to have no end in sight to what they want to do.

13:03Why they want to do that is, I think, an interesting question. It's a question of politics. It's a question of, you know, influencing the Western world in a lot of ways. But I think the place to start is this is a vulnerability that the sport has had for a long time. This need for capital, because until very recently, these clubs have not been at all profitable. And being even a little bit profitable is an extremely new development. And you've seen then American owners come in because of this. You've seen lots of different changes in ownership as it's become big business. But the fundamental sort of bedrock premise here is that soccer as an entity, especially European soccer, but all soccer as an entity, needs to find influxes of capital pretty regularly.

13:50And I think it's worth here making a contrast to the way that most American league sports work. This is very, very different from MLB baseball, from NBA basketball, from NFL football, all of those are effectively run as ownership cartels. You cannot just get a team and have it join the NBA. It has to be approved by the NBA owners. There's all sorts of rules. The NFL rules not only explicitly do not allow for a sovereign wealth fund team, they don't even allow for a private equity to own a team. And so all of these are done in order to ensure profits for all of the ownership groups. And then there is a collective bargaining agreement with the players that sets the terms of this and continues to guarantee those profits.

14:38And there are two really crucial ways that European soccer is different from that. One is promotion and relegation. So top teams in the second league get to join the top league. So there's a ton of teams and there is just more competition. This has historically made it very, very difficult for any individual league to put in place any kind of cost controls in the way that you expect in American sports. Because if your league puts in place cross controls, someone else is going to sign your players. And then on top of that, of course, European soccer is multinational. So instead of having one league, which is, you know, based in America, has a Canadian team or two, you know, there is an English league, there is a Dutch league, There is a Spanish league.

15:25There is an Italian league. And so all of these individual leagues are competing with each other at the same time as the clubs are competing. And it creates a situation where it is just a far, far more cutthroat capitalist kind of world. And it means that, and what it has effectively meant is it's very, very hard for any team to retain any kind of profitability. There is a need for external money. And then as people have found this opportunity, then it is an opportunity for them to use soccer to advance national interests in a way that, again, just really kind of isn't happening in American sports.

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17:44It's built to grow with your business, whether you are just starting out or already scaling up. Plus, it's easy to use, customizable, and designed to streamline every process so you can focus on what really matters, running your business. Thousands of businesses have made the switch, so why not you? Try Odoo for free at odoo.com. That's O-D-O-O dot com. Let me ask a totally innocent and completely unloaded question. But in Europe, don't we have financial fair play rules that are supposed to limit some of this influx of capital? It is a great question, and we do sort of. Financial fair play comes about, honestly, specifically because of Abu Dhabi and Qatar buying Manchester City and Paris Saint-Germain and spending tons of money in the attempt to improve their teams.

18:38And what financial fair play rules are, they're structured fairly differently from an American sports salary cap, right? An American sports salary cap just says, here's the negotiated amount of money that each team can spend. They can't spend more than it. Here's the floor. They have to spend more than the floor. This is the range of acceptable money to spend on contracts, more or less. FFP, Financial Fair Play, says you cannot spend more than the revenue you are bringing in. We average it out over a number of years. There are exceptions here and there. But the bottom line is the intent of Financial Fair Play is to structure your finances such that you are not going into increasing amounts of debt.

19:17Now, because those are different, you will hear not unfair critiques of financial fair play from the likes of Manchester City who will say this is not actually about responsible spending. This is about protecting the old rich clubs from the rise of the new rich clubs because we have tons of money that we can responsibly spend. We're owned by a nation state. But you are instituting rules to prevent us from spending that money in order to sort of reify your place at the top. And then you have the additional complication of the fact that FFP may not be legal under European law, that it may be anti-competitive.

19:55It may not be. But if it was legally challenged, nobody is super confident it would survive. So there is a lot of effort to use financial fair play to enforce some things without ever using it emphatically enough to get it challenged where it might get struck down. What is the difference between financial fair play? Because you described the situation in which an environment of relegation and promotion, sort of lack of barriers of entry into competitive soccer, competition between different nations, soccer leagues, so the Premier League versus the Spanish League versus the Dutch League versus the Bundesliga, the German one.

20:40So what is the mechanism via which financial fair play is supposed to constrain how much any given team spends on salaries? So financial fair play is, as it currently is, there are individual leagues that have their own rules. Barcelona is presently being heavily constrained in their spending by La Liga's own internal rules. But the main financial fair play that was put in place was put in place Europe-wide through UEFA. which so UEFA is both the entity that runs the Euros, the European international soccer competition, as well as the inter-club competitions like the Champions League. And so the financial fair play that we're mostly talking about is one that only applies to teams that are competing in a European competition, such as the Champions League or the Europa League.

21:31And then the penalty mechanism is one of both fines, but also if you are in violation, we can prevent you from playing in this competition, even if you were qualified for it, which is itself both an expensive penalty, but also sort of, you know, the prestige of it. Like the idea is you're trying to qualify for the Champions League and then win the Champions League. So, I mean, it's a significant penalty should it be implemented. And when these were put in place, it was pretty clear that Qatar and Abu Dhabi were violating these rules. They both got very, very large sponsorship contracts from the airlines of their respective countries right at the time that financial fair play was put in place.

22:13But UEFA did bring, tried to bring charges against them and then settled for extremely minor levels of punishment. So this has been, you know, continued to be a thing that they push up against even as they are no longer allowed to run the kind of humongous book profits that they did before financial book losses before financial fair play. So, you know, we talked a little bit about the World Cup in Qatar most recently. And I guess when I see so I understand your point about football consuming a lot of capital and Saudi Arabia at this point has spent hundreds of millions, maybe even some billions at this point on its soccer ambitions.

22:58Are there any suggestions that it wants to, I guess, succeed consistently in the world of football? Or is this basically a one-time cash splurge to try to get the World Cup? So I don't think there's a lot of suggestion that they want their national team, the Saudi Arabian national team, to be competitively successful. You're not seeing from them, at least not yet, the kinds of things that you have to do as a nation. And these things all take extremely long time horizons. I mean, talk to any US men's national team fan who loses their mind every three years. These things are like decades long processes.

23:37We're not seeing any indications of that. What we are seeing possibly is the beginning of an economic plan that would basically could, in the years to come, make Saudi Arabia more of the central hub of soccer in the world, club soccer. So, you know, that if you want to see the best teams, the best players, the best competitions, you would be associating them. They would be owned in some manner or other by Saudi Arabia. I think that's where you could see this going, including the World Cup. But I think that's the direction you could see this going, much more so than, say, the Saudi Arabian national team becoming a powerhouse.

24:18How the details of that would eventually work are, I think, really cloudy, and maybe it doesn't happen. We've seen instances before where, if not nation states, at least actors closely associated with nation states, have spent a lot of money to bring soccer talent into the country and then seen it fizzle out after a few years. So I don't think anybody wants to get too ahead of themselves. But if you're thinking about what is Saudi Arabia possibly doing, I think the answer is spending a lot of money so that Saudi Arabia conceivably could be the sort of kingmaker of club soccer. One thing I think is an interesting sort of piece of context here and contrast, because I think that what is going on in Saudi Arabia is notably different from what went on in China between about 2014 and 2020.

25:05Yeah, I was going to ask you about Saudi versus China, but go ahead. Yeah, so the Chinese Super League, in 2014, Xi makes some remarks about how he wants China to be more of a global soccer power. And he specifically says that he wants China to have a national team that is competitive in men's and women's soccer and to host and eventually compete for World Cups. And that was part of it. But he also said that he wanted to build a league that would be successful. And I think also suggested wanted to see major Chinese interests buy into European leagues as well. And so between 2014 and 2017 especially, you see a ton of this investment in the Chinese Super League.

25:54And also owners going abroad and buying parts of teams as well. But the biggest thing is, I think the 2015, 2016 summers, Chinese clubs spent over 800 million in transfer fees to purchase contracts of players, mostly, almost entirely from Europe. And those teams also ran up massive increases in their wage bills. Multiple teams in the league running wage bills, tens, many tens, up to$100 million effectively. And this happened very, very quickly. And obviously you can imagine what Chinese money is going into this. The team that wins the Chinese Super League five out of six seasons is Guangzhou Evergrande.

26:43I have an Evergrande jersey. Do you really? There's a great, actually, I think we did this when I was in Hong Kong with Bloomberg. There's a great schematic of all the random businesses that China Evergrande was into. And yes, one of it was a professional football club. I'm just saying I'm enjoying this conversation a lot. I want to say, Michael and Michael, you guys, I might become a soccer person after this. I'm really there's so much now I'm like fascinated by all of this. But here's a question that I have. So you sort of hinted at it, which is that for a long time, soccer clubs weren't profitable, which I guess implies that more and more they are.

27:22What is the business model of a successful soccer club? Is it selling jerseys? Is it the streaming rights with various networks around the world? Like, what does a successful soccer business look like? Okay, so I suppose before we get too deep into the conversation, I do work for CBS, we do own the rights for the UEFA Champions League and a number of other rights. So I should probably just say that not that it has anything to do with my job specifically. But what has changed, what had changed, I suppose, in a large way is that because these teams were in an open environment of promotion and relegation, because it was very hard for you to say in five years from now, our situation, our revenues will be constant from where they were now, because competition on the field could really randomly kind of blow a hole in your operation if you got relegated.

28:14It was very hard to invest capital in a team that was not a club. It was hard to build a new stadium. It was hard to do hospitality. It was hard to have a professional marketing team because you had to be flexible enough to not blow up if you got relegated. Now, that meant that all of these in Europe, specifically clubs, were kind of ripe to have their values increased by some sort of basic business management, by somebody with a lot of money coming in, running the club well, building up the marketing department, building up the training facilities to make them sort of more attractive, doing all the things that a normal business will do to increase revenue.

28:59And even if they weren't increasing profitability, right, we understand how this works. You increase the value of a club. Stadiums are a massive one. The ability to come in and either renovate an existing stadium or build a new stadium. And you had that coincide with the TV boom. The Premier League itself forming in the early 90s, increases TV revenues massively. Now we have international markets with streaming. It's another massive revenue stream. So especially kind of in the zero interest environment of, you know, borrow, buy, die, You had a lot of people that could look at these clubs as like fun and fairly easy ways to invest in a property that would increase in value fairly quickly by doing like lots of low hanging fruit stuff.