Month: May 2014

One to Watch – SONY

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SONY announced plans this week to enter into a Joint Venture with Shanghai Oriental Pearl, a Chinese State owned media company to facilitate the manufacturing and selling of the PS4 to a fraction of 1.3bn potential new consumers. I know some of you are wondering why this is such a big deal. Well, for the past 14 years in Mainland China there has been a ban on foreign made games consoles being sold to the citizens of the country. This was ended in January and now it seems like SONY want to tap into the Chinese gaming market – a market which saw revenues grow 38% year on year to $13.75bn, the largest growth rate since 2009 according to the China Games Industry Annual Conference.

Firstly lets look at how those revenues are broken down:

•65% is derived from client-based PC games
•15% is down to online browser-based games
•Mobile gaming accounts for 13.5% (with Apple’s iPhone and iPad take a quarter of Chinese      
mobile games revenues) and finally
•6.5% are as a result of the sales of Game consoles 

Is this a good move for SONY? No doubt about it – 100% yes in my opinion. There is a huge multibillion that can be tapped into legitimately (Playstations and Xbox Consoles have been available on the black market in the country for a very long time at over inflated prices) and could lead to long term strategic growth for the company. Microsoft are one step ahead of SONY after they announced their Joint Venture with BesTV New Media and have plans to launch the Xbox1 in September. The advantage SONY have on their American competitors is their price to value. They have been able to offer a console roughly £100 cheaper without compromising on the main specifications of the console. The value for money obtained if translated into sales could prove very profitable for the company in the long run. There is a huge market of multiplayer online role-playing gamers in the country for console producers to tap into – 129 million to be precise which accounts for 73% of all Chinese gamers. Games such as Final Fantasy proving to be best selling RPG’s on previous consoles, so if SONY can repeat their success with upcoming games the future looks bright for the company. How has the markets reacted to the news? As you can see on the below chart the share price went up by 3% when the news was announced so it was definitely viewed as a positive signal.

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It will be interesting to see how this developes over the next year or so – will SONY be able to break into the Chinese gaming market? Only time will tell.

@Capitalmoments

A Beautiful Game

LEKANOMICS

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After enjoying a weekend watching my favourite team win the FA Cup, my mind quickly turned towards next season and the possible transfer targets. Furthermore upon reading a Mourinho interview where he outlined some of his potential summer buys I was interested to understand how managers plan transfer market strategies. Therefore I’ve decided to post a blog incorporating another football analogy with an enlightening economic lesson. Some of you may be aware of two things:

1. The impending World Cup and transfer market dealings that come afterwards.

2. Game theory, a behavioural economic theory based on strategic decision making amongst rational agents. A theory told superbly by the Russell Crowe film – A Beautiful Mind on economist John Nash’s life.

Now to our transfer market problem. Let’s assume we have two teams, Arsenal and Chelsea who have a similar problem – to buy a striker(s). Both teams have a budget…

View original post 547 more words

The most lucrative game in football

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Before you read on ask yourself the following two questions. Would you rather be an unused substitute in the Champions League Final or score the winner in the Championship Playoff final? then ask yourself this which club would you rather own – the runner up in the Champions League Final or the Championship Playoff final winners?

This Saturday 2 football finals will be played, both having monumental levels of importance for different reasons. Firstly and in the eyes of the majority more importantly, the Champions League Final will be played between the two Madrid rivals – Real and Athletico. Who will be crowned the best team in Europe? Secondly we have the Championship playoff final between Derby and QPR to see who will be the third promoted club to the Premier League alongside Burnley and Leicster. Congratulations to all 4 clubs and the best of luck in their respective games…

But lets get into this post. You must think I’m crazy for even mentioning the latter two clubs in the same sentence as the madrid heavyweights, but this saturday in my eyes they will be just as if not more important for financial reasons. The Championship play-off final is the most lucrative one-off fixture in football and sport more broadly, and this year its more expensive than its ever been. It is an astounding 90 million more than second place – Floyd Mayweather’s earnings of £48m which he obtained fighting Canelo Alvarez last year, and 13 times the £10m you obtain for winning the Champions League! This figure could even get better as this accounts for the worst case scenario of relegation straight after promotion. There is a lot at stake literally and the pressure will be on both teams to secure their place with the big boys next season.

Let me break down this figure to see how it all adds up.

•£62m of Premier League prize money even if finishing bottom of the Premier League next season

•£72m over four years which is expected to be made up of parachute payments of roughly £26m in 2015-16, £22m the following year, and £12m in each of the two years after that. This almost certainly will rise if the club doesn’t get relegated due to the continual evolution of the Premier League brand as it looks to rubber stamp its position as the best league in the world which will translate into increased earnings via TV income, Sponsorship contracts and match ticket prices

it is true that the step up requires heavy investment into the squad through transfer fees and wages (but in Derby/QPR case FFP regulations will prevent them from going overboard: see here and here) however that is not always the case for all promoted clubs. Let me use Southampton to make my point….

Key financial highlights for Southampton:
•Total revenue increased 213% to £71.8m (2012: £22.9m) with average league attendances up from 26,427 to 30,807
•Broadcasting income grew from £5.6m in 2011/12 to £46.9m in 2012/13
•Matchday income of £11.8m in 2011/12 has risen to £16.9m in 2012/13
•Commercial income increased from £4.8m in 2011/12 to £6.7m in 2012/13
•The loss before interest and tax has reduced to £6.6m (2012: £11.9m loss)
•Total group wages, including player wages, increased to £47.1m in 2013 from £28.7m in 2012
•Expenditure on the total training ground project now anticipated to exceed £30m. The first phase of the build is expected to open this summer

From the highlights above we can see how much of a positive impact being in the premier league has has on finances, but also on the long term strategy to the club by actively investing in improving the training facilities – something they probably wouldn’t have been in the position to do a few years back when they were in the 3rd tier of English football.

However you look at it, winning the play-off brings a massive windfall, a windfall that next season will be £134m…. Now ask yourself the same two questions I wrote at the beginning of the article and see whether your answer changes. Mine did!

@CapitalMoments

AstraZeneca – Pfizer, cutting costs or leading the way in British Science? by Harry Archer @harryarch_

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The proposed merger of US drug giant, Pfizer and UK/Swedish pharmaceutical company AstraZeneca is one that has been met with a plethora of reactions. Some have argued that it will improve the way that drug companies deliver value for their shareholders. Other, more speculative views, have suggested that Pfizer is only interested in the merger to cut costs and to use the UK as a tax base to increase its profits.
Firstly, lets take a more optimistic view of the effect that this proposed mega-merger will have on the economy. The primary factor to consider is the jobs that will be created in the UK science and research sectors. This will provide employment opportunities for UK residents in highly skilled and well paid roles, which will reduce unemployment and possibly increase the long term productive potential of the economy. Increased investment in research and development can only be a positive for the economy as advances in pharmaceuticals will attract greater investment from other economies helping the UK to grow both quicker and more sustainably. This benefit is unfortunately overshadowed by the notion that the merger of the companies would result in cutting costs and ultimately a reduction of top class UK research and development jobs. This is reflected in the merger that Pfizer made with US pharmaceutical company Wyeth in 2009, where the total combined workforce was reduced from 129,226 to 77,700 – a major loss in US pharmaceutical jobs. Unfortunately this was not a unique case as with many of Pfizer’s recent mergers, most noticeably Warner-Lambert in 2000 and Pharmacia in 2003 both resulted in sharp jobs cuts and great reduction in research and development budgets.
Another issue surrounding the merger of AstraZeneca and Pfizer is the suspicion that Pfizer will use the merger to change their tax base to the UK. Currently corporation tax rate in the United States stands at 40%, whereas the UK corporation tax rate is almost half that amount at 21%. This will provide a major advantage for Pfizer, as they will be able to source their profit to the UK and get taxed 19% less than they would in the US. This comes as a result from proceedings in Washington where senator Carl Levin is acting to prevent US companies from moving their tax domicile abroad. Senator Levin aims to enact legislation that allows US companies to use a loophole, known as ‘inversion’ allowing them to evade the United States 40% corporation tax. If he is successful in this, it would remove a large motivator for Pfizer which could be highly damaging to the merger if it is passed before the deal is done.
A key factor to consider is the efficiency of AstraZeneca itself. Casting our minds back to 1993 when the UK division of AstraZeneca, formerly Zeneca group was forced to demerge from parent company Imperial Chemical Industry (ICI) due to increasing complexity in the business. As ICI grew the complexity of running both medical science sectors alongside paints and speciality products caused the company to experience diseconomies of scale, a situation where increasing the output of the company led to decreasing returns. So how does this relate to the merger of Pfizer and AstraZeneca? Well, shortly after the demerger of ICI and Zeneca, swedish firm Astra ZB merger with Zeneca to form a larger, yet more manageable company AstraZeneca. The merging of Pfizer and AstraZeneca would result in the largest pharmaceutical company in the world. This may lead them to suffer the same issues of ICI in 1993.
One interesting point to note is the effect that this has had on the British Science community. Many big names in the industry have emerged in order to express their concern over the merger. Many have referred to Pfizer’s track record with it’s previous mergers and suggest that the proposed takeover could have a harrowing effect on drug research, especially the UK science base. Pfizer’s boss, Ian Read has been reported to have compared both Pfizer’s and AstraZeneca’s Cambridge research centre’s as having “Great Similarities” and that he has praised the science research that is being done in the UK. However critics have warned that Pfizer has moved further from research and development, highlighting concerns that their main motivation lies within profit generation rather than the future of UK science.
The combined merger of these two firms would create the largest Pharmaceutical company in the world which may lead the way in drug research and development. The merger has generated a wealth of opinions both for and against the argument and is a serious opportunity for UK science. The main factor that must be considered is the intentions of Ian Read and Pfizer.

Mortgages: if it wasn’t hard enough already…

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Following the 2008 financial crisis, the Financial Conduct Authority (FCA) took a detailed look at the mortgage market with a view to address what has been seen in the past as irresponsible lending practices. As a result, on the 26th May individuals in the UK get a mortgage changed and new rules introduced by the FCA have now come into effect.

Going forward, lenders of residential mortgages will have to demonstrate that they have taken appropriate steps to ensure the borrower can afford the mortgage not just at the time of application but also if interest rates were to go up in the future. There will also be much more focus on the individuals expenditure as well as income and more supporting evidence will now be required. As a result, mortgage applications are going to take longer and any potential interest rate rises would be negatively correlated with the amount of money. It would be interesting to see if the amount of mortgage applications spike up this month to avoid the impending regulations – I would assume so. What surprises me is why wasn’t this introduced earlier? A major contributor of the crisis back in 08 was the greed of mortgage brokers who were arranging sub-prime mortgages for any Tom or Jerry who could barely afford their mortgages at the time and became screwed when rates rose. This change in my opinion comes a few years later than it should. It will also be interesting to monitor the next quarter how the number of mortgage applications is affected, and whether there is a spike in the amount of joint mortgages obtained in the UK (whether that figure is available is another issue). I would expect to definitely see an increase due to additional checks which will be implemented making it even harder to obtain a mortgage. As if it wasn’t hard enough already!

What effect may this have on property prices you may wonder? I believe it won’t. There will be many individuals who may now become priced out of buying in a very over saturated market, but prices will continue to rise as overseas investment in UK properties continues to pick up. How does that affect you and I? Well the stringency in the long term would be beneficial to us as the unfortunate scenario of property repossession is taken into account, however in the short term it is a pain. Future income (fixed and/or variable) is hard to predict; so over cautious mortgage lenders may affect the chances of an individual stepping on the property ladder.

Watch this space.

@capitalmoments

What’s PSG to a City like me

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There’s a new term which is taking the football world by storm – no it’s not Crystanbul it’s FFP, otherwise known as Financial Fair Play. This week Manchester City rejected the punishment equating to 49 million and a 21 man squad size restriction proposed by football’s European governing body UEFA for breaking the FFP rules. Before I start I’d like to congratulate Manchester City on winning another Premier League title this season – a fantastic show of mental and technical ability over the course of the 38 game marathon.

I’m not going to go in to too much detail Lekz has already done so here but I will focus on the FFP’s definition of the ‘valuation’ of a footballer.

“Financial Fair Play is intended to improve the overall health of European club football” – FIFA

Ok the above definition doesn’t really give much away. But let’s not talk Barcelona let’s talk business. I would define a healthy business as a business that has a solid current/acid test ratio. Simply speaking that means that their Assets can, in a worst case scenario pay off all the liabilities. Now let’s transfer that to football. Financial health is defined in a nutshell by spending within your means – so clubs can’t spend ‘much’ more than what they make. The rules have been drawn up to primarily avoid another Portsmouth/Leeds situation and secondly try to even out the playing field and increase competition. This is not a knee jerk reaction by the top dogs; it had been on the pipeline for years and it’s importance should not be dismissed. Something needed to be done to ensure that the astronomical fees and wages received do not become over-inflated.

Clubs with poor financial management aren’t expected to work miracles overnight also – the rules will be phased in over the following years to come. By 2018, it is expected that clubs would only be allowed to make losses amounting to 25million. But that being said, projects relating to youth development and infrastructure amongst other things are exempt from the rules. Also the value of a player (Asset) who is bought is amortised over the life of his first contract. Let me explain…..

Arsenal sign Josh Bright from Capital Moments FC in the summer of 2014 for 100 million on a ten year contract. Arsenal agree with Josh to pay him 5 million a year. That means that every year for the next 10 years he will cost

100million(value of transfer)/10years= 10m + 5million = 15 million each year. The longer an asset is held the more it depreciates (loses value). The FFP’s definition of the ‘value’ of the player in 2014 is 15m, even though he was bought for 100m.

If however 6 years through Real Madrid decide to put in a 72.5m offer for Josh, Arsenal now have to pay up the remaining amount due to Capital Moments FC and account for any unpaid wages that need to be reported. If he left in the January window I.e half way through the season, Arsenal would make a profit of
72.5m – 40m (remaining amount due) – 2.5m (half of Josh’s wages for the season) = 30m

Simply put the way that annoying uncle that always comes over to watch football at your house because he removed his sky subscription explains players values is very likely to be different to the FFP definition. The length of a contract and the wage bill of clubs are just as important as the agreed transfer figure.

It will be interesting to see how the FFP develops. From the outset it looks like a great idea to ensure the long term stability of football clubs – the FA have implemented the FFP all the way down to League 2. An issue I see straight away is that many clubs, especially the privately owned ones may continually attempt to game the system. There will be a lot of investment by some of your bigger clubs into finding loopholes in rules implemented. Both Manchester City and PSG are believed to have broken the FFP rules with sponsorship deals related to each clubs’ owners.

Abu Dhabi-owned City have a £40m-a-year deal with Etihad Airways, while Qatar-owned PSG have a backdated deal with the Qatar Tourist Authority worth up to (£165m) a year, which UEFA valued at about £100m. To be honest putting a valuation on these deals will be very difficult, however UEFA feel that these clubs are using affiliate sponsorships to get around the FFP, creating a sense of an indirect financial doping issue.

Another question I do have is whether the fixed depreciation on the value of a player each year is the best method. Players peak at different ages depending on the position they play, and the value they may contribute to the club in year 2 may be very different to the value in year 5. But then judging the “market value” of a player is like beating me of FIFA on the PS4 – Impossible!

I will be going on @Thetopcorner to talk about finance in football so watch out for that soon! Capital Moments website coming soon also…

@capitalmoments

Donald Sterling : Business or Personal?

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A leaked conversation between the owner of LA clippers basketball team Donald Sterling and girlfriend/side chick/mistress V Stivano has sent shock waves across the sport and around the world. Mr Sterling who bought the club in 1981 for $12 million was alleged to have expressed very strong racist views to Ms Stivano, insisting that she does not bring any black people to the clippers’ games. He also forced her to remove all pictures she had on her Instagram with black people – particularly expressing his anger any a picture she posted which featured legend Magic Johnson. His views have not sat well with influential figures from all sectors but most importantly within basketball. NBA commissioner Adam Silver announced that they will be banning Mr Sterling from being involved in the NBA for life. He won’t be able to attend any professional basketball games or be involved in any of the Clippers’ operations. He was also fined $2.5 million – the maximum fine that could be imposed.

The outline above leads to the following question

“When does business become personal?”

I start by discussing LA and the clippers in general. The Clippers were founded in 1970’s and play in the western conference of the NBA. 85 percent of their 2013-2014 roster is black. Interesting especially when you out into context there is a 70 percent average across the league. As mentioned above, Mr sterling bought the club over 30 years ago for $12m and now according to Forbes the Clippers is now worth no less than $575 million. Now how much of that amount is intangible? Goodwill plays and important part in the strategic decisions made by the guys in charge and are impacted by all different operations of the business. From your Corporate Social Responsibilty (which the club could have to take into account the 10% of LA residents that are African American) to the organisations you strategically associate your company with.

Goldman Sachs Business Principle number 2 states:

our Assets are our people, capital and reputation

The Clippers ‘reputation’ has taken a battering. Their on field achievements including their reaching of the playoffs have been overshadowed by recent events. Mercedes Benz, Virgin America, CarMax have ended their sponsorship agreements with them. Other sponsors have suspended ties until the situation has been resolved. Even President Obama had something to say on the matter.

“When Ignorant folks want to advertise their ignorance you just let them talk”

These companies who have been quick to end/suspend ties realise how much of a ‘survival of the fittest’ culture business is. It may be the personal values and ethics implemented by an organisation that determines decisions made but the underlying reasons behind those decisions remains the same – business. There are many consumers who do not want to be associated with troubled brands either directly or indirectly. Yes some don’t care, but in such competitive landscapes the finest details make the difference between a sale and a fail.

The NBA have had to act quick also in their best interests and they did. Slapping Mr Sterling with not only the maximum fine possible but with a lifetime ban from the sport was welcomed by the majority of owners and players. I also welcomed the swift action taken. No independent review or waffling straight action. Direct punishment hitting the man where it hurts. UEFA should use this as a blueprint for racism in football. Ban racist players for a year or even indefinitely depending on the severity. Hit clubs with fines that hurt (for example playing behind closed doors for half a season) not paltry slaps to the wrist. That’s how you eradicate it from grounds where young children are brainwashed into believing the idiotic ways of some is the correct way to follow. But let me not get sidetracked – Back to Donald.

These marketing sponsorships would have been bringing in a few hundred thousand dollars at least so this can prove to be very costly to the Clippers business model in the long run.

It’s an interesting topic to see how the personal can affect the business or the position of authority held by an individual. Let’s look at two cases across different sectors.

Gurbakash Chatal, a very successful founder of 2 companies was fired after activists called for his sacking due to the fine he received due to a domestic violence incident with his wife. Ex Co-op Bank chairman Paul Flowers was filmed buying 300 pounds worth of cocaine last year. This leads me to the million dollar question

“Can an individuals professional ability/potential be assessed on their private life? Or is that too personal?”

What next for Mr sterling anyway? Well he apparently doesn’t want to sell even though his return on initial investment would be 4792% – that’s craaaaazy! 22 if the 29 other owners have to support the forced sale imposed by the NBA and the commissioner is confident that would be the case. If he does have to sell the new owners would be taking over a healthy organisation. In the most recent financial year they brought in annual revenue of $128 million and. $15 million profits. This is good figures considering they do not being in the attendance figures some of the other clubs in the NBA do.

There has been a lot of interest in purchasing the club, with some reporters that it’s between a consortium spearheaded by Floyd Mayweather and Oprah, although I may have something to say about that Lol!

In conclusion, this incident has shown that a fine line has to be kept between business and an individuals private life as it can have devastating effects on not just the person but their business or professional ambitions. Business can get personal.

@capitalmoments