Why the New York Jets are Overrated

Ah, the New York Jets...you gotta love 'em right? They have a fat,lovable boisterous coach who just took his team to the AFC Championship game overcoming all expectations. They also have a team loaded with free-agent stars, including running back LaDainian Tomlinson, defensive end Jason Taylor, wide receiver Santonio Holmes and cornerback Antonio Cromartie.

This all makes everyone forget the Jets miraculously snuck into the playoffs with a 9-7 record and won two games in a row on the road in the playoffs. As a result, people do stupid things like ranking them as the second best team in the entire NFL, ahead of the defending Super Bowl champions New Orleans Saints and behind the AFC champions Indianapolis Colts.

I have one example for all those people: the 2004-05 Miami Dolphins. They had just gotten quarterback Daunte Culpepper from the Minnesota Vikings and Sports Illustrated predicted they would face the Carolina Panthers in the Super Bowl. The end result was a much sadder and dissappointing one. Miami stumbled to a 3-7 start that season and finished 9-7 thanks to backup Gus Frerotte. The Super Bowl ended up being played between the Patriots and the Panthers.

The way I see it, Cromartie is the only free agent that will pay off for the Jets. Tomlinson and Taylor are getting older and less productive every year, and Holmes has emotional baggage with a four-game suspension to start this season.

I predict that opposing teams will stack the box against them and dare sophomore quarterback Mark Sanchez to throw the ball, which will result in a very humbling 8-8 season.
The New York Jets are victims of the offseason hype, and they will be taking plenty of "Hard Knocks" this year, and not just on the HBO documentary they wll be starring in during the summer. They are simply overrated.

How Big Is Arsenal's Transfer Budget?

Come with me, if you will, back to the beginning of this season, a time when most pundits graced us with their opinion that Arsenal were the club most likely to drop out of the top four positions in the Premier League, having spent very little and sold two of their established stars. With the team now virtually assured of third place, you would therefore think that this was cause for celebration, but most fans still feel a sense of disappointment. The humbling by Barcelona in the Champions League quarter-final was followed by defeat in the North London derby (the first time that Spurs had beaten Arsenal in the Premiership for over a decade) and the desperate collapse against a feeble Wigan side.

If it wasn’t evident before, it has become abundantly clear that Arsenal need to strengthen the side during this summer’s transfer window. We are not talking about a major rebuilding programme, but most supporters know where the priorities lie. First, no team is ever going to win the title with goalkeepers of the calibre of Manuel Almunia and Lukasz Fabianksi. There could also be significant changes to the central defence. The hapless Mikael Silvestre should be allowed to leave, while William Gallas’ contract is due to expire and at the age of 35 Sol Campbell cannot be a long-term solution, despite his sterling efforts since he returned. The squad would also benefit from another powerful defensive midfielder to cover for the much-improved Alex Song. After crashing out of the Champions League, even the loyal Arsene Wenger admitted that his side needed reinforcements, “We have to add something, for sure.”

"Good arguments for strengthening the squad"

The club has always maintained that it has the funds to compete in the transfer market and this was confirmed by chief executive Ivan Gazidis when commenting on the most recent accounts, “We have money available to invest in the transfer market when we can identify the right players to add into the mix that add something to the squad.” A couple of weeks ago, chairman Peter Hill-Wood gave an explicit green light for a spending spree this summer, “We have got more money than we’ve had for a long, long time and we would like to spend it. But we want to spend it sensibly. There is plenty of cash, although not in comparison to Manchester City.” His normally circumspect manager was just as bullish, “We can match Chelsea and Manchester United in any bid. They can’t buy all the top players.”

But exactly how big is the transfer budget? For obvious commercial reasons, the club has not divulged how much money it has, but you would expect a considerable surplus to be available from playing in a 60,000 sold-out stadium with some of the highest ticket prices in the world, especially when the club’s wages to turnover ratio is among the lowest around. The newspapers certainly appear to be completely confused. The Daily Telegraph announced this week that “Wenger gets £18m war chest”, though did not bother to explain how they arrived at this figure in the accompanying article. The Daily Star typically went big with “Arsene Wenger’s £60m spree”, while the Sunday Times was more oblique, “If Wenger wants to sign two £20m players on £80,000 per week this summer, he has the means to do so”. Even John Cross at the Mirror, normally so authoritative on all Arsenal matters, seems unsure, saying that “the club has £50m plus to spend” last October, only to reduce this to a “£30m plus budget” this month.

"Time to open the cheque book"

So, let’s take a look at the accounts to see if we can work it out, as the Beatles once said. The starting point is an impressive cash balance of £101m, but that includes £22m which must be maintained on deposit as security that future payments of interest and principal can be made to bond lenders, leaving £79m. Much of this will have come from season ticket money paid in advance, which will be needed to cover operating costs in the second half of the accounting year. As we do not know when expenses are incurred (or other income is received), we cannot say for sure how much cash is required for this. Your guess is as good as mine, so let’s just take the estimate of £35m from the esteemed Arsenal Supporters’ Trust, which would leave the club with net cash of £44m - still pretty good by most standards.

Half of this came from last summer’s profitable player trading. The annual report boasts “all proceeds from player sale transactions are made available to Arsene Wenger for re-investment back into the development of the team”. This is reinforced by the terms of the stadium financing deal, which states that 70% of all net sale proceeds must be used on buying players or placed into a ring-fenced Transfer Proceeds Account (TPA). This protects lenders by ensuring that the club continues to invest in its core asset, i.e. the playing squad. The sales of Emmanuel Adebayor (£25m) and Kolo Toure (£16m) to Manchester City less the purchase of Thomas Vermaelen (£10m) from Ajax produced a net surplus of £31m, so £22m went into the TPA.

"Pointing the way forward"

Importantly, this fund can also be used to improve players’ contracts and this has become key to Wenger’s approach to investing in the squad. Most fans probably do not appreciate that the manager controls a budget covering both transfers and wages, so just because money is available to him does not necessarily mean that he will use it to purchase new players. Instead, he can allocate cash to increase the wages of the existing squad, which is a route he has clearly followed. The interim accounts highlighted an £8.6m rise in player wages, despite the departure of Adebayor and Toure, who were on very high salaries. This reflected the re-signing of 17 first-team players on long-term contracts, which the chairman described as an “investment in a very talented group of players” and as the “best means of protecting the value of one of our most important assets”.

That may well be true, but it implies an annual wage bill of £120m, which is admittedly £30m less than Chelsea, but is now over 50% of turnover. Although that’s lower than most other clubs, you would not really want to push it any higher, even though there will be pressure to do so for a number of reasons. This month’s increase in the top income tax bracket from 40% to 50% has compounded the currency effect of Sterling’s weakness against the Euro, making England a less attractive proposition for foreign players, which can only be compensated by increasing gross salaries. At the very highest echelons, the market might also continue to be artificially inflated by the presence of extremely wealthy benefactors like Roman Abramovich and Sheikh Mansour, not to mention the Spanish giants Real Madrid and Barcelona.

"Money talks"

Hence, the so-called “golden handcuffs” deal to keep Cesc Fabregas away from the Catalans’ clutches, which not only increased his salary from £80,000 to £110,000 a week, but actually back-dated it for two years, resulting in a “signing-on” fee of £3m. It is strongly rumoured that Wenger’s first addition to the squad this summer will be Moroccan forward Marouane Chamakh from Bordeaux. This is presented as a free transfer, but he will reportedly be on a five-year deal worth £50,000 a week, which is a £12.5m commitment. See how important wages are to the overall cost of buying a player? A straightforward point, but one that Harry Redknapp did not seem to grasp at “pay up” Pompey.

What might be worth considering is whether the allocation of the wage bill is the right one, as much of it is currently given to younger players, who earn more at Arsenal than other clubs. In one sense, this is a shrewd policy, as it protects the players’ value in terms of future transfer fees, but it does mean that there is less money available to improve the first team squad. If the balance were fine-tuned, this could facilitate the purchase of the players who would make the difference between challenging for and winning trophies.

From a purely financial perspective, it is difficult to criticise Arsenal’s transfer strategy, as player trading has proved to be a very profitable activity in recent years. In the four seasons since the club moved to the Emirates, their net transfer spend has been a negative £35m. As a comparison, the net spend at their North London rivals Tottenham was £78m, even after the big money sales of Dimitar Berbatov and Robbie Keane, which is an incredible £113m more. Of course, any sales this summer would increase Wenger’s transfer pot and there has been media speculation about some departures, such as Eduardo to Lyon for £8m and Tomas Rosicky back to the Bundesliga for a similar sum. However, one potential barrier to clearing out some of the dead wood is the relatively high wages paid to the likes of Almunia, Eboue, Diaby and Denilson. Which other clubs would be willing to match their salaries?

"All in the past?"

On the other side of the coin, the club has provided £9m for “probable” additional transfer fees payable to other clubs after existing players make a certain number of appearances. It is not clear exactly when these payments will be made, but the prudent approach would be to deduct this from the available cash. On top of that, there are another £11m contingent liabilities for similar performance-related clauses, though these payments are considered less likely.

The really good news in the last set of accounts came from the property side. Although there had been considerable uncertainty arising from the market downturn, Peter Hill-Wood confidently announced, “It is clear that the next couple of years will see our property activities deliver excess cash”, while Ivan Gazidis confirmed, “We will soon be delivering a profit back into the football side of the Group”.

At the time the interims were published, 524 of the 655 private apartments at Highbury Square had been sold and recent reports indicate that there is only a limited number still available. We do not know how much money they sold for, but we can estimate the value of the 131 remaining apartments as between a conservative £33m (using the on-line starting price of £250k) and £54m (based on the average price of sales to date of £414k), which would produce net proceeds of £20m to £41m after clearing the outstanding debt of £13m (at the time the accounts were published). It’s a bit rough and ready, but if we take the mid-point for our calculations, that would produce £30m, though we do not know when the money will be given to Wenger. As Hill-Wood said, “This is very good news, although I would not want to speculate on the exact quantum or timing of this.”

"Welcome to Highbury"

Furthermore, the club’s other three property assets (Queensland Road market housing, Hornsey Road and Holloway Road) are now free of debt following the sale of Queensland Road social housing, so any future sales here represent pure profit. I have no idea what that could be worth, but let’s say £15-20m. The reason that I have guessed those figures is that it would result in total once-off property gains of £45-50m, which is in line with the £45m estimate from the Arsenal Supporters’ Trust and the £50m “surplus from sales” expected by the Times. Everyone seems to think that this money will be produced “over the next two years”, so it is far from certain that it will be on tap in the next transfer window. While we are being cavalier, let’s assume that half of the Highbury Square money is available now, leaving Queensland Road as future music, which would give Arsene another £15m now.

Given that Arsenal made a £5m profit from the core football business in the last six months, having stripped out player trading and amortisation, we could potentially add this to the transfer budget, but let’s be conservative and leave that untouched, so it can be used to cover other costs.

After all that, how big is Arsenal’s transfer budget? Well, we start with £44m cash, having allocated £22m to the security deposit for lenders and deducted £35m for second-half running costs, and then should reserve £9m for probable additional transfer fees, leaving us with £35m net cash. To that, we could add the estimated £15m from property development, giving us a grand total (drum roll) of a nice, round £50m.

"If we build it, they will come"

Even if that figure is not completely accurate, there is definitely a lot of cash available. It is equally clear that Wenger will have additional funds next year as well from a combination of solid football profits plus the remaining property development. However, if the club wishes to maintain a similar level of transfer funding beyond that, it will have to go down the old-fashioned route of increasing revenue (or cutting costs). Is that feasible?

The most obvious potential for revenue growth is in the commercial area, where Arsenal’s income lags way behind their peers, according to the Deloittes Football Money League 2010. Arsenal’s commercial revenue of £48m is much lower than the other teams in the so-called “Big Four” (Manchester United £70m, Liverpool £68m and Chelsea £53m). Understandably, Arsenal tied themselves into long-term deals with Emirates (stadium naming rights until 2021, shirt sponsorship until 2014) in order to provide security for the stadium financing, but recent deals by other clubs highlight the size of the opportunity, which is probably worth another £20m a year.

Gazidis is well aware of this and has recently restructured and strengthened his commercial team to explore new partners and overseas markets in order to “unlock value” (in his terms), though the thorny issue of more lucrative pre-season tours to America or Asia is on the back-burner until the club has a clear strategy for these regions. Arsenal’s transfer activities are also relevant to this area, as a new star would generate more shirt sales à la Ronaldo, Messi, Torres and Rooney.

"Gazidis unlocking value"

Other revenue streams are relatively fixed, though we know that broadcasting income will rise by £7.5m a year following the new Premier League deal for overseas rights. It is also difficult to see how match day revenue could be increased, given that Arsenal’s ticket prices are already among the highest in Europe, and there are some slightly worrying signs that demand at the higher end is not as strong as it has been. This is important, as the 9,000 premium seats generate approximately 35% of match day revenue. This may well have resulted in pressure on the manager from the board to buy some established stars, in order to improve the team’s chances of success, thus reducing the risk of a drop in crowds.

How about a spot of cost cutting? There certainly seems to be scope for some judicious efficiencies, as the annual costs of £55m for “other operating charges”, i.e. excluding salaries and amortisation, is actually higher than the total costs at seven Premier League clubs. Unfortunately, the club does not provide much detail for these costs, but they must include items like stadium operating costs, travel and training. What we can see is that these costs represent 25% of football turnover, which seems on the high side to me.

Hang on a minute, don’t Arsenal have a huge amount of debt to pay off? Yes and no. The astonishing advances on property sales have enabled the club to reduce net debt by circa £160m in the last twelve months to around £175m with the property developments now being essentially debt-free. This represents gross debt of £275m less £100m cash with the remaining debt being for the Emirates stadium, via a mixture of fixed rate and floating rate bonds that are due for final repayment in 2031. Total annual cost to service these loans is £20m (£15m interest and £5m principal reductions). It’s not clear whether it would be possible for Arsenal to pay off this debt early in order to reduce the interest charges, but my guess is that they are in no hurry to do that, as Gazidis has argued that not all debt is bad, “The debt that we’re left with is what I would call ‘healthy debt’ – it’s long term, low rates, very affordable for the club, and it’s effectively a mortgage on our stadium, which generates revenue.”

"Money spinner"

You might therefore conclude that all the funds will be invested in the team, but Peter Hill-Wood struck a slightly contrary note (not for the first time), “In addition to investing in the team, I think we will examine investment in club projects and infrastructure … into the next phase of growth.” Not sure what that might mean, but it inspires visions of adding a new tier to the Emirates like the San Siro before the 1990 World Cup – though somehow I doubt it.

Those fans that would prefer to see the club put money into the “Arsenalisation” of the team rather than the stadium, would be comforted by Gazidis’ comments after the results, “We have delivered a profit before tax of £35m for the first half of the year, but it’s important to note that this isn’t our primary objective. The reason we run a responsible, profitable and self-sustaining business is so that we can deliver success to the club and invest in the club and ultimately deliver success on the pitch.” While Arsene Wenger believes he “would not be doing his job well if the club lost money”, he is at pains to emphasise that “the sporting side is always the most important thing.”

There is no doubt that the move to a new stadium has limited Arsenal’s transfer budget over the past few years, which Wenger finally admitted this week, “The construction of the Emirates Stadium meant that for many years we could not spend a lot of money. Our financial situation has greatly improved. We are finally able to buy the players we think we need”. This is a much more transparent response than the previous obfuscation, but there is still a suspicion that Wenger would prefer to build rather than buy, so much of the low spending was out of choice.

"How much?"

Every summer, Wenger has repeated the mantra: “We are not short of money. I am not scared to spend money. We have a squad that is good enough to compete. I will spend for a player that we need.” Even though he clearly has money this year, Wenger seemed to be preparing supporters for another summer of low spending, when he told the club’s magazine, “I feel we have made huge steps forward this year compared to last year”, while also pointing out the dangerous consequences for the club’s wage policy of buying a top star on top dollar. Last summer, he also showed his hand when discussing Real Madrid’s galactico policy, “In my opinion, to recruit more than three new players in a transfer window, as Real plan, is taking a technical risk.” Wenger may feel vindicated after the lack of success for the Spaniards (and indeed Manchester City) this year, but critics would point to the improvement shown in the Champions League by Bayern Munich and Lyon, who were among the biggest spenders last summer.

There are two other factors that might influence Arsenal’s transfer targets. First, injuries have been a major dynamic this season with key players being lost at different stages (Robin Van Persie, Cesc Fabregas and Alex Song in particular) and the squad suffering a barely credible seven fractures. If they all return hale and hearty, that will be like making several “new signings”. Second, the Premier League has introduced a new home-grown player rule, which means that all clubs must register a squad with a limit of 25 players of which eight must be aged 21 or under and qualify as home-grown. The consensus seems to be that Arsenal are well placed to satisfy these quotas, but it might influence the club’s manoeuvres in the transfer market.

"Mind over matter"

Whatever signings Arsenal make, we can expect them reasonably soon, if you believe Wenger’s comments to the club magazine, “I have definite transfer targets and have been talking to people, but I will not tell you who. I believe the earlier you settle your teams the better it is and the less anxiety you have.” While some might cynically note that this announcement neatly coincides with season ticket renewals, there is a precedent for this approach, as he signed Rosicky before his goal scoring feats for the Czech Republic in Germany (and before his price was artificially inflated). It should also be noted that Wenger is going to South Africa to cover the World Cup for French television.

One final factor is that Arsene Wenger’s own contract expires next summer. The chairman has reiterated his support for the enigmatic Frenchman, “We want him to stay for as long as he wants, and we hope that will be for a considerable time yet”. Wenger’s sense of moral decency would not allow him to go on a spending spree if he felt that he was likely to leave, as a new manager will usually want to bring in his own players. From this perspective, the arrival of several new players would be doubly pleasing to the majority of Arsenal fans.

However, a few supporters are getting restless at the lack of trophies and reluctance to spend big in the transfer market, because Wenger’s reign has been like the proverbial “game of two halves”, winning three Premier League titles and four FA Cups in his first nine years, followed by nothing in the last five years. He is an outstanding manager, probably the best that Arsenal has ever had, but he might need to modify his transfer policy to ensure that he goes out with a bang.

Wild, Wild West

In my last NBA post, I said that upsets are very rare in the NBA Playoffs. The Eastern Conference has proved me right so far, with the top four seeds being ahead halfway through their first round series.
However, the Western Conference is upside down right now. The four lower seeds either have a decisive advantage or are ted four games into their series.
Right now, the San Antonio Spurs look like the best team in the NBA, the L.A Lakers are the most disappointing, and the Oklahoma City Thunder are, by far, the most surprising.
How did I come to those conclusions? Let's just take a look at how each series is shaping up and you will see why.

Western Conference: Where Everything is Upside Down .

(1)L.A Lakers 2-(8) Oklahoma City Thunder 2: Edge...OKC/LAL 50%.
Kevin Durant has made the leap from NBA boy to man. In just his third year in the league, Durant has lifted the Thunder from an 0-2 hole against the mighty Lakers with help from point guard Russell Westbrook, who is also having a breakout series. Do I think the Thunder can shock everyone and eliminate the defending champs? I don't think so...but taking the series to seven games would really be something too.

(2) Dallas Mavericks 1-(7) San Antonio Spurs 3: Edge...San Antonio 70%.
Ah...poor Dirk Nowitzki. No matter how hard he tries,it looks like he will never win a championship. The straw that broke the camel's back came on Sunday night, when the Mavs looked primed to even up the series with a 15-point lead earl in the third quarter and shutting down the Spurs' big three (Ginobili, Duncan, Parker). However, the Spurs made an electric run and won the third quarter 29-11 behind backup point guard George Hill's 29 points in the game and backup power forward DeJuan Blair's relentless hustle. That's right Dirk, a guy named DeJuan just beat you..think about that.

(3) Phoenix Suns 2-(6)Portland Trail Blazers 2: Edge...Portland 55%
Both teams split their games at home, and Blazers point guard Brandon Roy came back from an injury that was supposed to keep him out of the playoffs in Game 4 to tie up the series and put some life back on a team that had beer blown out in Game 3. I find absolutely no explanation for Portland hanging around, but Phoenix is going to pay a very high price if they don't put them away soon.

(4) Denver Nuggets 1-(5)Utah Jazz 3: Edge...Utah 85%.
Denver is stumbling, all Utah has to do is deliver its final punch at home to advance to the second round. As far as the Nuggets go, I am not going to judge a team that has its coach bed-ridden and battling throat cancer. George Karl was their compass, and they look lost without him.
I want to see Utah win it all, because Jerry Sloan has been coaching them for 20 years and hasn't been to the Finals since 1998, when he was denied by a certain player called Michael Jordan.

Eastern Conference: Superman vs LeBron..It's on.

(1) Cleveland Cavaliers 3- (8) Chicago Bulls 1: Edge...Cleveland 99%.
What does LeBron James, the best player in the NBA, do on Sunday afternoon on national TV in the game that would decide which way momentum would swing in the series? he just goes for a triple-double and lifts his team to a 121-98 victory that puts the series beyond any reasonable doubt. LeBron looks unstoppable...but there is one team that has the recipe to ruin his championship ambitions once again, just like they did last year...

(2) Orlando Magic 3- (7) Charlotte Bobcats 0: Edge...Orlando 99%.
And that team is the Orlando Magic. This series marked the difference between a team that only wants to be an NBA champion (Orlando) and one that s just giddy to be in its first playoff series in team history (Charlotte).
I think Cleveland has the best player, but Orlando has the best team to get to the NBA Finals and will sweep the Bobcats on Monday.

(3) Atlanta Hawks 2-Milwaukee Bucks 1: Edge...Hawks 55%.
Atlanta looked to be in complete control and primed to sweep the series after the first two games, but Milwaukee revived in Game 3 with a convincing blowout victory. Game 4 is an absolute must-win for the Bucks if they want to have a chance to advance to the second round, while Atlanta has a chance to prove it is a serious contender for the Eastern Conference Finals.

(4) Boston Celtics 3-(5) Miami Heat 1:
Edge...Celtics 95%
I'm leaving that five percent margin because I don't know what Dwayne Wade can do to follow up his amazing 46-point performance in Game 3, single-handedly pulling his team back from elimination by overcoming a six-point deficit in the fourth quarter by making three after three.
No team has ever come back from an 0-3 deficit in a series in the history of the NBA, and the Heat don't look like a team capable of doing so. Watch out if they win Tuesday in Boston though, because then they would become truly, really dangerous and steal momentum.

Is Tim Tebow first-round worthy?

I say no, but at the same time I think that he is the third-most promising quarterback in the draft. Don't get me wrong, I didn't say talented, I said promising. Sam Bradford, Jimmy Clausen and Colt McCoy are the three most talented QBs in tonight's draft, but I see a higher ceiling for Tebow than I do for Bradford.

I don't think Bradford has what it takes to be great, I see him being a Chad Pennington type quarterback. Solid in the regular season, very respected in the league, but can never muster enough to get his team to the Super Bowl.
Tebow will emerge after Bradford, but if he lands with the right team (Patriots, Colts, Saints) he could develop into a very good quarterback that maybe isn't great himself, but would make his teammates great and knows how to shine in the harshest spotlight.

For every superstar that effortlessly becomes great, there are players like Tebow that are willing to work tirelessly to transcend expectations and prove experts wrong. However, it takes the right coach and the right system to make all that hard work pay off. It remains to be seen whether Tebow will be lucky enough to land there.

When Will Chelsea Reach Their Target?

While Chelsea continue to battle Manchester United for the Premier League title that apparently nobody wants to win this season, the club's accounts for the twelve months to June 2009 were submitted to Companies House last week. Not a thrilling read, you might think, and you would be right, but two key points emerged in the detailed notes: first, Chelsea’s wage bill was the highest ever reported by a British football club; second, the players earning these salaries are, in fact, worth a lot less than the year before.

This once again called into question whether Chelsea would ever achieve their frequently stated target of breaking even on their financials. Fans with a good memory will remember that this was part of former chief executive Peter Kenyon’s five-year plan, but even his initial confidence appeared to weaken along the journey, “The 2010 break-even is ambitious. I don’t think it’s something we are postponing, but it’s always been ambitious. We are determined to meet it or get as close as we can.” Of course, this has not overly mattered at Chelsea, given the generosity of their wealthy owner, Roman Abramovich, but it could become a more pressing issue, as the Russian has supposedly started to clamp down on the club’s largesse.

"Man with a plan"

Current chief executive, Ron Gourlay, reiterated the target, though quietly dropped the previous deadline, “It is still our aim to be self-sufficient and we will achieve this by increasing our revenues as we continue to leverage off our brand. We are reducing our costs by controlling expenses, including salaries and wages.” Nothing much wrong with that (apart from the hideous marketing-speak about “leveraging the brand”) - except for a couple of minor caveats. First, it’s all well and good talking about increasing revenue, but it sounds a bit hollow after the club’s revenue has just declined. Also, it’s a bit rich to start talking about controlling salaries after they have reached £150m or, put another way, nearly 25% higher than the next highest wage bill in the Premier League (at Manchester United).

So exactly how close were Chelsea to reaching the promised land of zero profit? The £44.4m loss in the 2009 results was somehow presented as a triumph, purely because it was £21.3m smaller than the prior year. OK, the loss is lower, but it’s still a thumping great loss. Only Manchester City recorded worse figures in 2009 in their first year of (ironically) “doing a Chelsea”. The club’s press release described the revenue as “stable”, which actually meant that it fell £6.7m from £213.1m to 206.4m, reflecting the front-loaded nature of a sponsorship contract. This decrease is attributed to the “economic climate”, but should be a cause of concern when the other members of the Big Four all managed to improve their revenue, especially after a fairly successful season (Premier League runners-up, Champions League semi-finalists and FA Cup winners).

"The only way is up"

To be fair, operating expenses of £263.7m were also down £10.4m, but you could make a case that most of the £21.3m improvement in profits (a.k.a. reduction in losses) was due to non-core activities: profit on player sales was £6.4m higher; amortisation was £8.3m lower, reflecting a slow-down in player purchases; and termination payments to managers and coaches were £10.5m smaller. These severance expenses are described as “exceptional items” in the accounts, suggesting that the underlying loss is much lower, but it’s actually pretty much business as usual for Chelsea, when you see that they have made such payments in three of the last five years (£25.5m in 2005, £23.1m in 2008 and £12.6m in 2009), paying £61.2m to rid themselves of a succession of “failed” managers: Claudio Ranieri, Jose Mourinho, Avram Grant and Luiz Felipe Scolari. That’s a staggering amount, especially if you consider how successful Mourinho and Ranieri have been since leaving Stamford Bridge.

In the trading world, technical analysts are fond of the expression, “the trend is your friend”, and the club’s management are keen to point to losses reducing for four years in a row. Good stuff, but everything’s relative, and the starting point was the record deficit of £140m in 2005. Yes, the losses might be on a downward trend, but they are still enormous by almost anyone else’s standards. Back in 2005, Peter Kenyon talked tough, “Two years ago we were seen as streets paced with gold. That is over. Chelsea is now being run properly. The club is being run as a business.” Four years later, he repeated the message, “This is the fifth set of financial accounts since the takeover and Chelsea has made huge progress during that period as a football club and a business.”

Hmmm. I’m not sure that I would describe the progress as “huge”: in the period described by Kenyon, the losses did fall, but only from £87.9m in 2004 to £65.7m in 2008. Big deal. In fact, much of the improvement over the years has been due to a revised approach to buying and selling players. As Kenyon said, “We have consistently reduced our net transfer spend over the last five years and will continue this trend.” Following the record shortfall in 2005, losses have now reduced by £95.6m (from £140.0m to £44.4m), but almost all of this (£74m, nearly 80%) has come from the transfer market: profit on player sales is £40.4m higher, while amortisation on purchased players is £33.6m lower. Another £12.9m of the reduction is simply because of lower termination payments (£12.6m compared to £25.5m). In other words, only £8.7m of the improvement has come from the underlying business. In an era when television money has significantly increased, that’s an unconvincing performance. Another way of looking at this is to say the revenue growth of £57m has been as near as damn swallowed up by matching cost growth of £53m, leaving a net improvement of just £4m.

The club was also keen to emphasise the improvement in cash flow in the press release accompanying the 2009 accounts, “Disciplined management of capital expenditure has reduced the cash spend from £107.4m down to £16.9m”, largely due to the completion of major projects such as the training centre at Cobham. However, like the profit and loss account, the song remains the same: cash flow might be better, but it is still negative, as it has been for every year of the Abramovich reign. This is, of course, before “financing”, i.e. interest-free loans from the owner. Interestingly, the net cash outflow from operating activities of £13.1m 2009 is exactly the same as it was in 2004 – no progress at all.

"Shining example"

But it’s the wage bill that has hit the headlines for all the wrong reasons. As per Chelsea FC plc’s accounts, total payroll costs (excluding termination payments) increased by £4.5m from £148.5m to £153.0m and may be even higher this year following new deals for the likes of John Terry, Frank Lampard, Petr Cech and Michael Essien. Chelsea had seven players in the recent list of the top 50 highest football salaries by Portuguese agency Futebol Finance, which is more than Real Madrid and big-spending Manchester City and only behind Barcelona. Chelsea started as they meant to go on when the first wage bill of the Abramovich era in 2003-4 of £115.6m was more than twice as much as the year before £55.9m. At the time, Kenyon said that he would set some “aggressive” targets for reducing the payroll, but it’s actually increased since then by more than 30%.

This has resulted in a wages to turnover ratio of 74%, which is admittedly better than a lot of teams in the Premier League, but is worse than Chelsea’s stated target of 55% and is a long way behind Manchester United and Arsenal (excluding property development) with 44% and 46% respectively. So the players are well paid at Chelsea, but the directors don’t do too badly either or at least one director, whose remuneration was £2m in 2009. The accounts do not specify who this is, but it’s presumably Kenyon, given that the same amount was earned in 2008.

At least money can’t buy success. No, strike that, as the current Premier League table shows that actually it can. As we speak, the top three positions are filled by the three teams with the largest wage bills – in exactly the same order. Chelsea pay the most and lead the table, followed by Manchester United with the second largest payroll and then Arsenal whose salaries are third highest. In fact, the top seven places in the Premier League are occupied by the first six teams in the “wages league” plus Tottenham (who are 8th). It appears that there is an almost perfect correlation between wages and league success (at least, this season).

"Can Buy Me Love"

Arsene Wenger has described this as “half cheating”, explaining that, “Professional football is about winning and balancing the budget. I’ve always pleaded for financial fair play.” He continued, “What is not normal is not our wages bill, but their (Chelsea’s) wages bill. That should not be allowed.” It’s a fair point, though critics might argue that it’s a bit steep coming from Arsenal, whose annualised wage bill is now running at around £120m, which is not that far below Chelsea and a long way ahead of most other clubs. However, Wenger’s argument is valid from the perspective of the wages to turnover ratio, namely that clubs should not be permitted to subsidise inflated wage bills by injections from owners, but should cut their cloth according to their revenue.

To Chelsea’s credit, they have already embraced a more prudent approach. Abramovich’s arrival was characterised by a massive spending spree, the likes of which the English game had never seen, but he has been far more frugal in recent seasons. In his first three years at the club, he splashed out almost £400m on buying new players (£170m in the first year alone, when he essentially purchased an entire new team – plus substitutes), but has only spent about a quarter of that (£110m) in the last three years. The last big splurge came back in 2006, including the likes of Ashley Cole, Salomon Kalou and the ultimate vanity purchase Andriy Shevchenko. The only “big” names to arrive last summer were Yuri Zhirkov, Danny Sturridge and Ross Turnbull (on a free).

The new, more cautious strategy has also been witnessed on the other side of the trade: in the first three years, Chelsea made a £6m loss on player sales (partly due to writing-off Adrian Mutu’s contract after his drug test), but have made a £60m profit in the last three years, mainly thanks to the sale of Arjen Robben to Real Madrid and three players to Manchester City (Wayne Bridge, Shaun Wright-Phillips and Tal Ben Haim).

"Praying for money?"

Manager, Carlo Ancelotti, has said that significant funds are available to him if required, but I think that the gentleman “doth protest too much”. In the January transfer window, he said, “Together we take the decision to maintain this squad, because we think this is a good squad. It’s not a question of money. Absolutely not. If it’s necessary to buy players, then we can do it”. Only last week, he was still on message, as he did not see any need for a summer spending spree, “I don’t think it’s necessary for us to spend a lot of money”. He is beginning to sound a lot like Arsene Wenger (“there is money to spend, but at the moment I am very happy with the squad I have”) and Alex Ferguson (“the money’s there if I want to buy someone”).

If a special player like Sergio Aguero or Kaka became available, it is possible that Abramovich would stump up the cash to get him, but it has become evident that the owner is concerned about the size of the club’s wage bill, most obviously with the protracted contract negotiations with the aging Michael Ballack and injury-prone Joe Cole. They could well be allowed to leave the club on free transfers, unless they accept drastically reduced terms.

This revised strategy has been reflected in the players’ valuations. In the balance sheet, intangible assets (basically net book value of the players) have decreased by £65.8m from £143.6m to £77.8m in just twelve months. The accounting treatment might be highly theoretical, but even an “independent” assessment by officers of Chelsea FC has slashed the valuation by £40m from £287m to £247m, based on estimates of what could be realised in the transfer market.

"Ballack gets shirty"

This explains Abramovich’s concerns, as he has been hit by the double whammy of a squad diminishing in value while continuing to command the highest salaries in the country. In terms of cashing in on the players, most of them are well past their sell by date with six players in their thirties when next season starts: Ballack, Drogba, Carvalho, Lampard, Anelka and Malouda (Terry and Ashley Cole are just short at 29). Even though the team may well win the Premier League, this is a team that needs rejuvenation if they are to deliver the Champions League success that Abramovich craves. What is certain is that this will not be funded by player sales – just look at Shevchenko, bought from Milan for £30m in 2006, moved to Dynamo Kiev on a free in 2009. It is not easy for any club to replace many key players at the same time, as Arsenal fans well know, following the break-up of the “Invincibles”.

One route that the Gunners have followed is to develop youth players that can break into the first team, but this has proved difficult for Chelsea to emulate. Frank Arnesen’s academy has hardly been a glittering success and the Dane was strongly criticised by Mourinho for not producing a single player that regularly started for the first eleven since his arrival in 2005. This remark might have been down to politicking by the notorious “Portugeezer”, but there was a tacit admission of failure when over half of the club’s worldwide scouting network was sacked. And that’s without mentioning the “tapping up” accusations.

"Wake-up call"

As we have already seen, the squad rebuilding cannot be financed from profits, for the very good reason that there aren’t any, so it will once again come down to the willingness of the owner to open his wallet. As that man Wenger said, “The only difference is that Abramovich can go out tomorrow and change ten players, because he has the financial potential to do it. But if Chelsea were run like any other club, they couldn’t do it.” Leaving aside the fact that Manchester City can now also do the same, Wenger is right to stress the importance of Abramovich to Chelsea’s fortunes.

The question is whether the Russian is willing to inject even more cash into Chelsea. After all, his personal spending on the club since he took over in 2003 is now over £700m. In the first year, Kenyon said that Abramovich’s purchase was “a serious investment with a long-term business plan”, but the oligarch has had to put his hand in his pocket every year since. Accusations that Abramovich had “lost his interest and enthusiasm” first emerged in 2007 and Mourinho was just the person to rub salt into the wounds after his Inter team eliminated Chelsea in this season’s Champions League, “He is not the same person. Probably he thought it would be easy when he arrived in football.” Not unnaturally, Carlo Ancelotti refuted this, “Roman is very interested, for sure, in his team. He likes football, Chelsea, the players and he wants to know everything – about injuries, the balance of the team, tactics.”

"You don't know what you're doing"

The reality is that Abramovich is still there. Perhaps the best example of his support is that he has converted his loans into equity, effectively making the club free of debt. Last year he halved the club’s debt with a £370m conversion and followed that up with another Christmas present in 2009 by doing the same for the outstanding £340m. When asked whether Abramovich would ever ask for his loans to be repaid in 2007, Peter Kenyon had replied, “As chief executive, I want to pay him back, because that would show we are running this club as a real proper sustainable business.” Although the Russian’s grand gesture made a mockery of these comments, a grateful Chelsea chairman, Bruce Buck, said, “There should now be no doubt as to the owner’s commitment to the club.” This had already been amply demonstrated by the interest-free nature of his loans, meaning that Chelsea paid less than £1m interest last year, compared to the eye-watering £68m at Manchester United, £37m at Liverpool and £20m at Arsenal. That’s what I believe is called a competitive advantage.

Some have commented that the debt conversion would make it easier for Abramovich to sell the club, as an investor would no longer be acquiring a mountain of debt, but that obviously does not imply that the club is on the market. At first glance, the timing does seem rather strange, as it doesn’t really make the club any more secure, unless you believe that Abramovich was thinking of calling in the loans at some stage.

"Good brand values?"

Bruce Buck provided a more likely reason for reducing the club’s debt, which was “to comply with any regulations on debt levels which are being discussed by the football community”. This was his oblique reference to UEFA’s Financial Fair Play initiative, which will come into force for all clubs involved in European competitions from 2012-13. However, it is far from clear whether Abramovich’s actions will be sufficient, as UEFA want to ensure that all clubs break-even and be self-supporting. They have explained that their intention “is to stop clubs making losses consistently, and having a backer to pay them off. That way of funding clubs, from outside owners, inflates players' wages, and too often an owner finds he cannot fund the losses any more and the club is in crisis, (which) is not sustainable for football”.

Therefore, Chelsea do need to explore ways of hitting the elusive break-even target and one route is to increase revenue. The long-term objective was always to turn Chelsea into a global brand (like the franchise that is known as Manchester United). There has been some success in increasing sponsorship revenue, mainly as a result of switching shirt supplier from Umbro to Adidas, but Chelsea’s commercial revenue of £52.8m still lags behind United at £70.0m and £67.7m at Liverpool. Ron Gourlay has spoken about selling naming rights for Stamford Bridge, which might generate an additional £10m a year. There’s obviously room for growth here, but the off-pitch scandals involving “JT” and “Cashley” Cole don’t exactly promote the Chelsea brand.

"Bridge of Sighs"

The club’s capacity to make more match day revenue is constrained by, er, their capacity of 42,000 at Stamford Bridge, which is considerably lower than Old Trafford (76,000) and the Emirates (60,000). Nevertheless, they do get a lot of bang for their buck with revenue of £74.5m, which is much higher than Liverpool’s match day revenue of £42.5m, even though Anfield’s capacity is actually larger with 45,000. They have held prices steady for a couple of seasons, but apparently maximise the corporate revenue. However, their only realistic hope of matching the £100m+ earned by Manchester United and Arsenal would be to move to a larger stadium and that appears to be off the agenda for the moment, as no feasible alternative site has ever been realistically identified.

Broadcasting revenue is already pretty good at £79.1m, second only to Manchester United in England, but may be a bit lower this year after the earlier exit in the Champions League. In line with other teams in the Premier League, Chelsea will benefit from the new agreement on overseas rights, which will deliver an extra £7.5m per annum for the next three years. Apart from this revenue stream (and even this may be endangered in future years by Ofcom’s ruling that Sky should charge less for their sports packages), it is not easy to see how Chelsea can grow their revenue sufficiently to hit break-even. As Deloittes said in their annual review, “the club faces a significant challenge to regain a top five position in our Money League.”

"Still interested?"

Hence, the continued reliance on Roman Abramovich even now, despite Kenyon’s grand five-year plan to reduce dependency on the Russian. This cannot be a sound business model. Even chairman Bruce Buck had to admit, “No matter how much money the man has, and I don’t know how much, at some point he is not going to want to invest more money in the club.” Clearly, Chelsea’s benefactor is not short of a few bob. Last year, his fortune was reported to have declined by 40%, but he was still worth £7 billion according to the Sunday Times Rich List and he must have increased his net worth in 2010 following the stock market recovery. However, even the wealthiest businessman is not invulnerable and Abramovich is currently facing a £2 billion court claim from former business partner Boris Berezovsky. Although it is unlikely that Abramovich would ever abandon the club for financial motives, Chelsea would be in serious strife if he exited stage left – for whatever reason. At the very least they would have to find another source for their borrowing – and might even have to pay standard rates of interest.

So will Chelsea finally manage to break-even? I’m afraid that the answer has to be “yes” and “no”. If you look at the bottom-line loss of £44.4m in 2009, it looks improbable, but it is certainly possible if you consider the narrow profit definition used by Peter Kenyon, “We have set ourselves ambitious targets to be EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) neutral on June 30 2010.” On this basis, Chelsea’s 2009 loss was only £11.4m, so they are in with a fighting chance, though it does bring to mind the old saying about moving the goal posts.