More money, more problems

Tuesday, 28 February 2012

Yesterday the UCI put out a short press release on the apparent financial health of the pro peloton. Two statements stood out

  • the budget of the 40 top teams is €321 million, an increase of 36.5% over three years
  • the average annual salary is €264,000, up from €190,000 three years ago

It sounds great, money is pouring into the sport and riders wages are going up. Only the more I think about it, the more these trends are not healthy.

First, a caveat. We don’t have much detail. The UCI quotes a report by Ernst & Young, a business services firm tasked with auditing the top pro teams. With that in mind, let’s look at the budgets. We have a statement that :

In 2009, the total budget for the 39 professional men`s teams was 235 million euros. In 2012, there are 40 professional teams (18 UCI ProTeams and 22 UCI Professional Continental Teams) with a total budget of 321 million euros, according to the Ernst & Young report on the economic situation of the professional peloton. This represents an increase of 36.5%.

Note we’re reporting the growth in team budgets to the right of the decimal place but note many teams are budgeting in US dollars as well as other currencies like the British Pound or Aussie dollar and in the last three years the US dollar alone has fluctuated greatly against the Euro. In other words it’s hard to compare like-for-like given the moving exchange rates.

If we assume the data are suitable then a 36.5% increase worries me. First there’s not been a proportional increase in racing, TV scheduling or other returns that sponsors look for. See the TV rights deal for the Tour de France, the latest one was I believe signed at the same rate as the last one several years ago. Put simply the price of a ticket into the sport has risen but there’s no evidence of any extra return: this looks like cost inflation for the teams. Does this matter? Well imagine if Wall Street banks put out a press release saying they’d not done much more business in the last few years but wages were up by over a third… the protests would begin immediately. On a less contentious comparison, consider if the German auto sector announced car production was flat but workers’ wages had risen by a third. Whilst it’s great for the staff, rising costs could signal problems ahead.

Back in cycling if you were a sponsor looking to back a team you would be worried because any budget agreed today could see you build a decent team in the first year… only to find costs rise and in three years’ time your squad is decidedly below average unless you decide to commit to upping the budget by 10% a year. Similarly if you’re a team manager landing a new sponsorship deal you have to sign riders today but this inflation means you could have to set aside a disproportionate chunk of the funding to for later years to cover the apparent wage inflation.

Safer sponsorship?
The good news here is perhaps that with doping scandals becoming more infrequent the risk premium on investing in pro cycling is falling. Once upon a time many a team would get dragged from scandal to scandal and many sponsors were terrified of the sport. This is still true, large corporates are sitting out for now but I’m told some big names watching with a view to joining if things stay safe and clean. Because your sponsorship is less likely to blow up with headlines linking your valuable brand to cheating liars and even criminal conspiracy, the naming rights and “real estate” on team clothing is now trading at more normal price.

Breakaway wages
We also get news on rider wages, here is the statement:

the average annual salary of a rider with a UCI ProTeam has risen from 190,000 euros in 2009 to 264,000 euros in 2012.

Again the foreign exchange question comes into play but even if we assume this, the word “average” is a loaded term. As you might remember there are different averages like “mean”, “mode” and “median”. Sport is a winner-takes-all domain where a few take home vast rewards whilst the large majority earn more modest wages.

To illustrate this, imagine three riders in a breakaway and one earns €30,000, the next €40,000 and the third €50,000. Thus the mean average wage of the escapees is €40,000. Then Ag2r’s Jean-Christophe Péraud jumps across to the move and suddenly the average wage is €117,000 because the Olympic mountain bike medallist earns €350,000 a year. Next Andy Schleck, on €2 million a a year, joins the five man move which now has an average wage of about €500,000… only three of the five riders are earning one tenth of this average. Indeed a quick take on twitter sees several riders expressing surprise at the average wage and the pay inflation too.

As such talk of “average” is not so helpful because the distribution of earnings is skewed by a few champions at the top. At the bottom let us note that the UCI minimum wage of €30,000 (€24,000 for a neo-pro) has not risen in recent years.

Salary?
Finally, take the word “salary” with some caution too. Normally it means the gross annual income that is paid in regular monthly instalments. But cycling is not such regular work. There are image rights, there are performance bonuses, there’s prize money. Salary is not the same as a rider’s total income. And increasingly income is not the same as taxable pay because many teams are not paying their riders a salary, instead the rider is paid on a self-employed or “independent contractor” basis from which they rider has to deduct the payroll taxes so the income isn’t equal to salary. That said Ernst & Young reviews all the contracts so hopefully its calculations on rider wage levels adjust for this.

Comparison
Before you rush out the door for a new training ride to help you turn pro, note cycling isn’t so well paid. In a back of the envelop calculation, the entire wage bill for the all riders on the UCI World Tour is inferior to a single sports team in other competitions, for example lower than the wages paid by soccer’s Liverpool FC or Bayern Munich, in baseball it is lower than spend for the Philadelphia Phillies.

Conclusion
We don’t have the full report and without source data it is hard to analyse team budgets and rider wages in full. But the UCI’s self-congratulatory tone might read well for some riders earning bumper wages but the increase isn’t evident for many riders. There’s no mention of women’s cycling either.

If the cost inflation continues then it could pose a substantial problem for teams and in turn the sport with a few squads funded by billionaires whilst others struggle to find sponsors on a commercial basis. Here we enter the “prune juice” economics of the English Premier League soccer where any new money that flows into the sport… flows straight back out the bottom to a handful of superstars and dealmakers without necessarily reinforcing the sport itself.

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{ 23 comments }

Zinoviev Letter February 28, 2012 at 10:34 am

I’m not sure that the worker’s wages in manufacturing or finance metaphor is that useful. As the article goes on to correctly point out, what we are talking about is a rise in costs in general and in particular a rise in salaries only at the very top end.

This, in my view, is being driven by “prestige” as opposed to commercial sponsors. States and extremely rich individuals don’t have to make the same sort of cost-benefit analysis as an ordinary commercial sponsor when it comes to pouring money into a team. A few teams with budgets inflated by such backers then inflate the wages of the very top riders, which in turn changes the cost-benefit analysis for ordinary commercial sponsors in a detrimental way. There really aren’t that many genuine commercial lead sponsors left in the Pro Tour, and the ones there are tend to be concentrated around the bottom end of the budget league (Saxo, Garmin, Ag2r, etc).

Dennis Fernandez February 28, 2012 at 10:35 am

Do you know for sure that some riders are paid as independent contractors? In the US it is illegal to employ someone as a contractor to avoid employer responsibility or when that person cannot go work for someone else as well: We know pro cyclists can’t ride for any other team, since they can’t even wear a different jersey. I doubt if EU labor laws are less stringent, less protective of the worker’s rights than their US counterparts.

The Inner Ring February 28, 2012 at 10:40 am

Zinoviev Letter: fair point on the comparison, I was trying to draw the contrast of a governing body looking proud at rising wages… but without any corresponding changes.

Dennis Fernandez: the quick answer: yes. In longer form note the UCI rules even provide for this, specifying the premium paid in order to cover payroll takes. It’s illegal in France and a factor behind the relative weakness of French teams because they must have salaried riders and meet high payroll taxes… whilst direct competitors from other nations are not concerned.

sinai February 28, 2012 at 11:47 am

Perhaps the rising costs indicates that the sponsors are valuing their sponsorship more then before. If more sponsors would want to get into the sport then the price of sponsoring a team would inevitably rise, and maybe this is the cause for the rising costs and wages.

Larry T. February 28, 2012 at 11:55 am

Nice bit. I share your concerns. When I read the UCI spiel on this my first thoughts were – sure, things look great based on this agency’s report. How many of these things have we read, all glowingly positive about this or that, only to find out later the books were cooked and the agencies on the take? When it’s the UCI you really have to wonder. Then there’s the issue itself – Bicisport has touched on the issue of pro teams costing way too much and I (no surprise here) agree with them. Does it REALLY have to be so expensive? Beyond this, pro cycling faces the same challenges as football (soccer) where teams with unlimited budgets can buy up all the talent and create these “super teams” which skew the results in their favor too often. Have they chased all the small-money sponsors (other than the ones who’ll pay to have their name added to Gianni Savio’s team jersey, which people joke looks like a newspaper) out of the sport with the idea that unless you have millions to play with you’ll not get much return on your investment? I hope not.

Zinoviev Letter February 28, 2012 at 12:13 pm

Sinai: I don’t think the idea that sponsorship prices are going up because sponsors are fighting with each other for limited numbers of sponsorship slots holds any water. Particularly when you consider the difficulties teams are having in finding title sponsors at all (see under: HTC).

It’s not that there are more sponsors, but that some of the sponsors aren’t really bound by the same value for money criteria that ordinary commercial sponsors are, ie states and mega rich individuals. This drives up costs at the top end, and in turn makes sponsorship less appealing to ordinary commercial sponsors who have to pony up more cash to have their name attached to a truly competitive team. The existence of non-commercial sponsors with a lot money doesn’t make a sponsorship opportunity more valuable to a commercial sponsor, it just makes it more expensive.

Now, I don’t think that there some moral reason to prefer commercial sponsorship from gadget company X or bank Y over sponsorship from rich dude A or country B. In fact, I don’t like the fact that cycling is so utterly sponsor dependent in the first place. But I’d be concerned about the medium term viability of a model where the latter slowly price out the former.

StevhanTI February 28, 2012 at 12:21 pm

De “fake independent contractor” construction is very common in Belgium, albeit officially illegal in most cases. I wouldn’t be surprised if a lot of ( Belgian) riders have their own ‘Ltd.’ and get payed as contractors through that. Moving to a fiscally interesting place (eg Monaco (salut Tom, Phil, Thor, Gert,…) or Switzerland (Ciao Cadel) probably raises your monthly net pay substantially.

In cycling it’s probably just a tax dodging thing so we shouldn’t care too much imo (the IRS should though). This quasi-fraudulent constructions are often used to detriment of the workers too. I know for sure the daycare where my child goes uses this to underpay the nice young ladies working 12 hours a day caring for my son and 15 others. That’s a real problem.

gear_ratio February 28, 2012 at 1:51 pm

Wages are rising, big name sponsors are on the sidelines waiting for the moment the sport is viewed clean enough that they can become involved. More cash gets pumped into the sport. Wages will presumably rise again, with an even bigger gulf between an ‘average’ pro-peloton rider and even the slightly successful riders.

Human nature being what it is, someone will be tempted to take the gamble of not riding clean to earn enough to support the rest of their lives. They get caught. Sponsors leave the sport …. cash gets tight … and we start all over again

What the spiralling costs indicate is a need for a wage cap. Then extra sponsorship, and tv money, at least gets a chance (maybe) to flow down through the sport

daniel February 28, 2012 at 2:43 pm

The press release just seems to be the UCI throwing out some basic figures pretending that everything is going well.
The team budget figures are undoubtedly skewed by teams such as BMC, Sky, Astana, Katusha, GreenEdge, with only Astana around in the ProTour in 2009.
Meanwhile race organisers across Europe struggle to keep their events going, and the most successful team of recent times leaves the sport because of lack of sponsorship, and others have to fight for sponsors every year.

Don February 28, 2012 at 3:08 pm

What I saw yesterday and today was that the UCI released a press release which was reprinted by at least one information source as a “story”, http://www.cyclingnews.com. The information contained in the press release/story is too brief from which to base any objective conclusion. In my view, the purpose of the press release is to convey the message as stated in the press release that “… cycling is in a healthy position and resisting the effects of the current global economic downturn.” The data in the press release is a “throwaway” to bolster this message.

Whether professional cycling is in a healthier position today (and “bucks economic trends” as headlined by cyclingnews.com) is debatable. There is certainly anecdotal information that suggests otherwise.

cd February 28, 2012 at 3:08 pm

Cycling will always be behind other sports, but i’m not super worried. Undoubtedly it’s best when Europe is strong economically, but don’t overlook continued globalization. Maybe soon we will have Haier sponsor a team, or a Alibaba, or a Petrobras. Remember when Gatorade & Word Perfect first made investments in teams. And its not just cycling where rich oligarchs are coming in to own teams without care for profit. Prohkorov bought the NBA Nets and then there are the countless EPL examples.
All that said, cycling needs some new ideas – Vaughters continues to think about these issues and has a number of ideas that could help (one is a real transfer system that would happen post TDF each year).

Larry T. February 28, 2012 at 4:00 pm

cd – where are you getting the Vaughters details on how he would fix things? Most of the reforms mentioned seemed to consist of tweets and rumors (are those the same thing?) rather than a reasoned, fully-explained idea for a new pro cycling league. One would think a proposal made to big-money folks like the Rothschilds would have all the details – the transfer system, drafts of new pros into the league, salary cap, overall team budget limits, etc. I’m starting to warm to an idea I previously despised, not so much because I think it’s such a great idea, but more because the UCI seems ever more corrupt and clueless. Has this new league idea been spelled out anywhere in full detail where the average cycling fan can see it? Inrg – have you got any more details?

cd February 28, 2012 at 4:09 pm

@ Larry T – it was either a tweet or in the chat he did in the CN forum the other day. I don’t think he’s officially laid out a more all-encompassing proposal nor do I think he necessarily backs the idea of a breakaway league. I’m sure what he leaks via twitter is probably just a few of his thoughts on improving the sport.

Rider Council February 28, 2012 at 4:33 pm

To me it seems what is really growing is the is the hole in our pockets, as we the active cycling fans fork out (no pun intended) the dollars, the pounds and the euros, slappin them down, one hundred, two hundred, notes at a time to go that little bit faster and look that little bit more like we belong when we hit the Kemmelberg in our sleep. Maybe the general public is not watching like it used to but the ones that know you don’t wear underwear with cycling shorts are very much tuned in, more ways that one . Cycling just isn’t like other mainstream sports as much as they seem to be trying to make it so.
Also; was it not a couple of weeks ago that we had such a slew of doping scandals that it prompted Tomke to exclaim he was fed up with hearing about doping? I personally don’t see or feel any major change in the situation. Please, let’s not kid ourselves because we want it to go away so bad.

daniel February 28, 2012 at 7:03 pm

Here is what JV said about a salary cap..

http://forum.cyclingnews.com/showpost.php?p=798582&postcount=78

“Sponsors already pay top dollar for pro cycling, in comparison to other advertising avenues and sports. And they get great value from cycling. Cycling gets huge viewership world wide, so that is not our problem. we do quite well on that front.

The biggest threat to sponsors is a very subtle one: Teams like Katusha, Astana, or BMC that are not backed by a sponsor, but by a wealthy individual or governments. These teams tend to have “unlimited” budgets, which hurts other teams that rely on corporate sponsorship for funding. Why? Because they raise the cost of having a #1 type team to the point it becomes uneconomical to sponsor cycling for a publicly owned company that has to answer to shareholders. Then their ad dollars go elsewhere.

This is easy to fix, however! Simply put overall budget/payroll caps in place. I’m a big believer in raising the minimum wage in cycling, but having firm total budget cap for all teams. That way fairness is applied to the business of cycling, not just the anti-doping aspect.”

Steve February 28, 2012 at 8:25 pm

Like the topic, especially cd and gear_ratio’s take.
Private or Public money, rich dudes who want to ride with pro’s we don’t care.
Just don’t dilute the sport with drugs or sub quality organizations or riders.
Cycling will always be a B sport for the reasons that we all love.

Cycling is one of those sports were it all starts with a few dudes who bet they can make it from point A to point B before the other guy, on a vehicle that you buy in the toy department!

andrewp February 28, 2012 at 9:07 pm

Rider average salary pretty meaningless stat in 2009 and remains one in 2012. Although the 2009 press release on the last report did have a little more flesh on the bones, and a happy(ish) JV quote
http://www.uci.ch/Modules/ENews/ENewsDetails.asp?source=SiteSearch&id=NjQzOA&MenuId=MTI2Mjg&CharValList=630%3B&CharTextList=&CharFromList=&CharToList=&txtSiteSearch=average&SelChar214=630&LangId=1

CAT4Fodder February 28, 2012 at 9:34 pm

One wonders how much longer JV is going to put up with this nonsense.

68GT February 28, 2012 at 9:45 pm

Inring, kudos on another insightful post and you have every right to be skeptical of the financial picture that the UCI is attempting to paint.

I have worked as a motorsports marketer for the last 15 years and I can tell you that the situation is identical. Numbers about value, ROI, exposure, market share, etc are all grossly exaggerated or skewed by ignorant statistical analysis.

Professional cycling, as well as professional motorsports, and indeed any sport that relies on commercial dollars as its primary revenue driver needs to, or eventually be forced to, create a new revenue model that de-emphasizes the role of commercial revenue. The primary asset that cycling, and in fact all sports and entertainment properties own, is content, which will need to be monetized. That begs the question dear cycling fans– would you be willing to pay to watch your favorite sport?

David B February 28, 2012 at 10:33 pm

Great post Inner Ring.
Like many readres here, I too read the UCIs release with a massive pinch of salt. Mean salary is a pointless figure, given the small number of top-end earners, unless of course you’re just looking for headlines (median or mean minus 2 std devaitions would be more useful for more meaningful analysis).
Your average salary example however doesn’t really work, due to the absurd idea of Andy Schlek joining an early break without his brother.

Dennis Fernandez February 29, 2012 at 10:15 am

I am more than willing to pay to watch bike racing on TV or the internet. Actually, I DO pay two providers for the priviledge and am happy with the price and arrangement. What I don’t like is the tenativeness of the situation: The viewers never really know what the coverage is!

Bundle February 29, 2012 at 12:17 pm

Of course the sport is cost-inflated!
And not only team-sponsoring.. Race-organising has become ridiculously dear! Races keep disappearing every year all across Europe.. Why?

TheDude March 9, 2012 at 6:07 am

I’m sure this has been reported on in the past, but some discussion here on this post points to large buckets of euros going to a handful of riders. Probably not anything new, except for the increase in size. Guys like Boonen, Cavendish, Gilbert are pulling in what over $3 million/year, not including separate product endorsements. Then the domestics at $100k/year, maybe. Perhaps the caps would be useful to consider for sanity and longer term affordability. Having rich private backers cash in and out on a whim (ala BMC) seems like it could be more disruptive than the sponsor hunt that Saxo always seems to be challenged with (not to mention HTC High Road).. Maybe keep the races within a race car circuit and charge admission. Um, yawn, never mind.

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