The German football business model has become a focus of attention since the very successful World Cup of 2006. The image of Germans welcoming the world and having fun in modern stadiums and well organized fanzones has left a lasting impression. It has also helped German football to recover from the troubles of the early 2000s. and the German clubs have cashed in on the recovery. Although ticket prices are relatively low in Germany, they rose rapidly after the World Cup- between 2005 and 2008 matchday income per fan rose by 44%.

In fact, in the 1990s most German clubs were worried that they were falling behind. At the club level Germany has been somewhat slow to develop. The Bundesliga only became professional in 1963 (although shamateurism was commonplace), the second division was only added in 1974 and the third in 2008. While the national team of West Germany was a spectacular success, with three World Cup and two European Championships in 36 years, in the last 23 years only one European championship is considered a poor show in Germany (eat your heart out England fans). German performance in club competition was even more disappointing- Dortmund’s Champions League win in 1997 was the first time a German team had reached the final in more than a decade.

At the end of the 1990s many German clubs looked to England, and the commercial success of the Premier League, and argued that if German clubs were to be successful they needed to raise more capital through stock market flotation. Hamburg and Werder Bremen tried to do this in the early 90s but were blocked by the German FA. It wasn’t until 1998 that the corporate investment was allowed, and Borussia Dortmund, whose president had been at the forefront on the campaign for more access to finance, floated on the stock exchange in 2000. Fearing that all of the clubs would fall into corporate hands, the FA passed the 50+1 rule requiring club members to retain a controlling interest in the club (with longstanding company owned teams Bayer Leverkusen and Wolfsburg being granted an exemption).

The early 2000s were clouded by the failure of the pay TV broadcaster Kirch, which went bankrupt owing money to the League, and while a new contract was organized broadcast income was flat at a time when it was rising elsewhere. Broadcast rights are still relatively cheap in Germany, with the most recent deal generating just over €600 million a season for domestic and almost nothing for overseas rights, compared to the Premier League’s £1 billion a year from domestic rights, and almost as much again from overseas rights- in total around four times as much as the Bundesliga.

As I pointed out in part I of this blog the performance of German clubs has not been so spectacular over the last decade, so why all the hype? In part it’s just the “availability heuristic” – whoever is successful now is thought to have a monopoly on the right approach – who is talking about La Masia now? But it also reflects political views about the right way to run football clubs. Many people dislike commercialism in sport in general and in football in particular. This reflects

(a) Dislike of the excesses of the capitalist football model- high rates of insolvency, frequent changes of ownership, some dubious owners, commercial (=high) ticket prices

(b) A desire for a more fan-oriented model- fan representation, more consultation, fewer nasty surprises, lower ticket prices

This is fair enough. But it’s also a good idea to balance the good with the bad, and to take a realistic look at how things work. Here are some issues:

1. Ticket prices.

As I explained in a previous blog, these are not as low as the headline figures suggest, although official prices probably are about 50% lower than in England, and much lower than at Barcelona or Real Madrid. However, they have been rising rapidly in recent years and there is also a vibrant secondary market. Unless you have privileged access, you will find it hard to get the cheap tickets, which “fans” can resell at a profit.

2. Higher attendance.

Many people like to point out that attendance per game is the highest in Europe, but that’s because they play fewer games. Total attendance is a better measure of popularity (a point I have also made before- to see why ask yourself who is more popular: a baker who sells 100 loaves of bread per day but is closed on Saturday and Sunday or a baker that sells 80 loaves per day but is open seven days a week? Surely the latter). Total attendance is about the same in the two leagues (around 13 million), and has been for a few years now.

3. Competitive balance.

One problem in Germany is the utter domination of one club. Spain has two giants, Italy three and England four or more, depending on the era, but Hollywood FC have no close rivals with 22 Championships in 50 years. A few years ago it looked like this issue was going away, and I remember a German friend boasting to me that 5 different clubs had won the title 8 years. However, now that Bayern have won 5 of the last 9 that claim is looking a little more shaky. And generally it has only been Bayern that has achieved sustained success in Europe – they have 4 of the six German Champions’ League victories (and another this year?). If anything their dominance seems more complete than ever. Now, for the record, I have long argued that the issue of competitive balance is not such a big deal, but those who espouse the German model tend to think that it is. In that sense, the Bundesliga is not a good model.

4. Insolvency and financial problems.

Judging from some press reports you might imagine no German clubs ever faced financial problems and that insolvency is unknown. But according to a recent article in Der Spiegl 32 German sports clubs filed for bankruptcy last year – and most of them would have had a football team. Currently Alemannia Aachen is facing closure, VfB Lubeck is looking for a bail-out from the league and Kickers Offenbach is looking for a bail-out from the local government (which might be illegal under EU rules). Just as in England, where all the insolvencies other than Portsmouth have been in the lower divisions, the smaller clubs struggle financially. And even the big German clubs have struggled. Mighty Dortmund had to be bailed out, in part by a loan from Bayern (imagine that Chelsea had only been able to play in the final last year because Manchester United had given them a soft loan ten years ago- all hell would have broken loose). Schalke 04 overspent and borrowed against future ticket income ten years ago and were only saved by a very generous sponsorship deal with the Russian sugar daddy energy company Gazprom.

5. Hooliganism.

Arrests at German games are running far higher than in England, and there is a widely acknowledged problem with flares (fireworks, not jeans). When a senior police officer voiced concern last year he was dismissed as a crank who was misrepresenting the situation. Hooliganism is always caused by a small minority but they have a big effect. Signs of denial are not encouraging.

6. Club licensing and management

“There are strong indicators that clubs systematically rely on creative accounting to inflate assets and hide liabilities. Prosecutors are currently investigating whether the representatives of Schalke 04 committed fraud by deliberately misstating the club’s financial situation and failing to enter insolvency proceedings.”

“However, the real situation seems to be even worse than reflected by the official data because the data gathered by the DFL are data ‘‘after’’ systematic financial window dressing. The true financial situation of German football clubs only surfaces when clubs signal that they cannot pay their bills any more.”

“The (partly hidden) financial crisis in German football is caused by substantial governance failures. The peculiar German club governance structure may be well suited to prevent integrity problems resulting from multiple club ownership or from ownership by ‘‘undesired’’ persons or entities. However, this effect comes at a price. It results in a governance vacuum that opens wide discretionary freedoms.”

These comments were written in 2007 by two German economists, Helmut Dietl and Egon Franck and published in the Journal of Sports Economics. In case you are tempted to dismiss these as the comments of irrelevant academics, Egon Franck sits on the UEFA Club financial Control Panel which will vet financial information relating to Financial Fair Play. Neither author is an advocate of the English system, but they are not blind to the failings of the German ownership system.

7. Safe Standing

This is one area where I think the German system genuinely is better, since many fans would prefer to stand and it can be done safely. But this just shows how regulation can create as many problems as it solves. Clubs allowed standing until Lord Taylor recommended that the government ban it. This was duly done, and now regardless of how many reasonable arguments the fan groups advance, none of the regulators that have the power to change things are willing to consider. Not, I think, out of pure cussedness, but because if by some freak chance an accident were to happen the regulator that changed the rules would likely lose their job.

What I conclude from all this is that the German ownership model is not in itself much better at meeting the needs of the fans than the models used in other countries. There are some advantages, but there are drawbacks too. In fact, competition between rival leagues operating under different structures have helped to maintain European football and make it the globally dominant force it remains today. Whenever people start to think that things can be done in one way and one way only, that way madness lies.

However, German football is a waking giant. It already has the largest sponsorship income of any league, thanks to the backing of the large German industrial corporations. If it became internationally popular it could generate a lot more broadcast income, and it has a wealthy population that is experiencing rapidly increasing ticket prices that may rise to levels we see in the EPL in the not too distant future. With large stadiums recently built or refurbished for a World Cup, they have the greatest revenue potential, and as we at Soccernomics can always be relied upon to tell you, in the end it is money that buys success. Financial Fair Play might accelerate that process if it creates a meltdown in the Spanish and Italian leagues, but that might be a sideshow. The interesting part comes when the giant is fully awake.