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Thursday 30 May 2019

business of football • extra time

Pulling up the ladder

  • Promotion and relegation have been central to football since the game was first organised in the 19th century
  • Now leading European clubs want to turn the Champions League into a closed shop, on American lines
  • Their aim is to close the financial gap with the English Premier League

By Tim Wigmore

In 1892 England’s Football League feared a rival league, the Football Alliance, was encroaching on its turf. So a deal was hatched: the two leagues would merge, with the stronger Football League clubs staying in the top division, and a new lower tier forming the Second Division.

Out of this compromise arose an idea that became a footballing norm: promotion and relegation. Every season there would be promotion from the Second Division and relegation from the First Division. This has been central to English football ever since, and a cornerstone of how domestic football is organised throughout the world. It has been mimicked in other sports.

Promotion and relegation are meritocratic, rewarding successful teams and punishing failing teams for their losses. Relegation also ensures that there remains interest in the bottom of the league until the end of the season, rather than all attention being focused on the top.

But there is another model: the major US professional leagues have neither promotion nor relegation. Leagues are closed: the same teams are assured of taking part year after year, regardless of what happens on the pitch. They are effectively monopolies.

These two models have long co-existed, each viewing the other with a certain curiosity. Now the two are in conflict. Owners of European teams – who have studied US sports and, in the case of many owners of leading European football clubs, long controlled teams in US sports leagues – are trying to bring a touch of America across the Atlantic.

Most radically, the European Club Association, a group of the richest and most powerful European football teams, is pushing for fundamental changes to how the Champions League competition is organised. The ECA wants the best clubs to be virtually assured of entry season after season, rather than qualification being tied to how sides perform in their domestic leagues, as has been the norm.

Real Madrid celebrate winning the Champions League final in Kiev in 2018

In one proposal, reported by The New York Times, the top 24 teams, out of 32, in each season’s Champions League would qualify automatically for the following season. The certainty of appearing in the Champions League would render Europe’s biggest football clubs a little more like a US sports franchise – a largely closed league, inoculated from on-field defeat causing financial turmoil.

“Closed leagues are much better for the incumbent owners than open ones,” explains sports economist Victor Matheson. “Team owners in the US get to be permanent members of the club. They never have to worry that their major league team will suffer through a bad season and then become a minor league one.”

In closed leagues “it’s easier to raise finance – because you can secure borrowing against income as there is no relegation,” says Rob Wilson, a sports finance expert from Sheffield Hallam University. Owners “can generate better and more stable revenue” than in leagues with the volatility that promotion and relegation brings.

There are other financial benefits to the closed system. Consider how revenue distribution works in the three major US leagues: Major League Baseball, the National Basketball Association and the National Football League. All national TV money is distributed equally among teams, while a significant amount of ticket and merchandise revenue is also shared.

Giancarlo Stanton of the New York Yankees. Cash from sales of NYY caps is shared by all clubs

Anyone buying a New York Yankees cap, one of the most ubiquitous pieces of sports merchandise in the world, contributes equally to all Major League Baseball teams: the licensing revenue is split equally between all 30 clubs. Overall, about 60 per cent of the total revenue of NFL teams is shared – a system inconceivable in open leagues.

The upshot is that in closed leagues the fundamental link – between performance and profit – is eroded so much that it barely exists. A paper in 2015 found that a 10 per cent increase in regular season wins for an average team lead to only a modest 2.7 per cent increase in revenue for teams in the National Basketball Association, and Major League Baseball leagues. In the NFL, which redistributes revenue most aggressively, a 10 per cent increase in wins led to only a minuscule 0.14 per cent rise in revenue. For many years both the Florida Marlins baseball team and Oakland Raiders NFL team have systematically under-invested in their squads – but maintained profitability.

The Oakland Raiders have systematically underinvested in their squad because of financial rules

This is the antithesis of open leagues. In the Premier League, no money from ticket and merchandise revenue at all is shared between clubs. And, while the NFL distributes broadcasting revenue equitably, leagues like the Premier League give the most cash to the most successful teams. Other clubs doing better means less chance of winning trophies and greater risk of financially-crippling relegation.

The paradox of closed leagues is that being competitive matters far less for individual teams than in open leagues. But that means teams are happier to support structures which maintain competitive balance on the field.

Although dynasties can still be created in US sports leagues – the New England Patriots in the NFL and Golden State Warriors in the NBA have both enjoyed extraordinary sustained success in recent years – they are less commonplace than in European leagues because of the greater revenue sharing and communitarian spirit that reign in the US.

Stephen Curry, of the Golden State Warriors who have enjoyed sustained success in recent years

Without relegation to fear, clubs recognise that their strength – and their revenue – is intertwined with every other team. For instance, if teams are poor, their rivals will sell fewer tickets for home matches against them, while the overall value of broadcasting rights could be damaged if there are too many unattractive teams.

As well as the redistribution of revenue, teams have both minimum and maximum amounts they are allowed to spend on salaries each year. In the drafts for new players entering the league, the lowest performing teams get the first picks. The weakest teams can get their choice of the best young players.

By contrast, European football has a hegemony problem. In French football, Paris Saint-Germain have won Ligue 1 six seasons out of seven. Bayern Munich have won seven consecutive Bundesliga titles. Juventus have won eight straight Serie A crowns. In Spain, the league is a duopoly: only once in the past 15 seasons have Barcelona or Real Madrid failed to win La Liga. Both clubs finished in the top three in all 15 years.

Camp Nou, home of Barcelona, one of the two dominant clubs in Spanish football

Such relentless success invites a simple question: why should the biggest European teams be agitating for change? There are two explanations.

The first rationale is that reforms to the Champions League – making the tournament bigger, and ensuring more games between the biggest European sides, regardless of the countries where they are based – are a response to the paucity of competitive balance in European domestic football.

Yet this is very generous: after all, if the biggest clubs desired to mimic the lessons of US sports leagues, they could make their revenue distribution structures more equitable. Paris Saint-Germain can opt to take a smaller slice of the cake.

Instead the moves to restructure the Champions League are motivated by earning the world’s wealthiest clubs even more cash. Many of the biggest teams in European football fear the extraordinary financial clout of the Premier League. The bottom club each year receives about £95 million from the league, more than the winners in the Bundesliga, Ligue 1 or Serie A. These concerns have been crystallised by all four teams in European finals this year being from England.

Owners such as Juventus chairman Andrea Agnelli are determined to push forward changes that help them earn more from the Champions League. Under some proposals, each team would be guaranteed 14, rather than six, Champions League matches each season. This would allow them more financial certainty and close the financial gap with the Premier League’s leading teams.

Juventus chairman Andrea Agnelli, left, with new signing Cristiano Ronaldo

There has, quietly, already been one move that has moved European football in an American direction. “Financial Fair Play” rules, gradually implemented from 2009, are effectively borrowing caps. Clubs can spend only what they bring in through commercial revenue. This means that smaller clubs have lower limits on what they are allowed to spend than bigger clubs – because their revenues are lower. And no generous billionaire can step in to move them up a tier. FFP thereby helps to entrench the elite.

It also had another effect. The FFP rules have reduced wage pressure from players, which allows owners to take a higher share of the team’s revenue for themselves. According to Deloitte, 70 per cent of English Premier League revenues flowed to the players. This is now down to 59 per cent – still a high ratio compared with US sports. In the NBA, NFL and MLB, players earn half of overall revenue. FFP has been a boon to owners.

In Europe the uncertainty of a team’s fixtures – no team is assured of a Champions League berth – has been the last great obstacle to sport clubs becoming “normal” businesses. The erosion of meritocratic principles, ensuring that the elite can remain there regardless of their results, would be the final shift needed to make a club’s bank balance impervious to what actually happens on the pitch.

“Owners in Europe will love a move away from relegation – and fans are going to learn to hate this,” says the sports economist David Berri. He views the proposed “anti-competitive” reforms to the Champions League as “the rich teams in Europe embracing North American monopoly practices”.

The biggest clubs in Europe may already be able to glimpse this future – a decisive break with the historic volatility of the game on and off the field.

Further reading

For the romance of what promotion can mean, the story of the Spanish club Eibar’s is hard to beat. Leicester’s, of course, does beat it.

The New York Times has reported on the proposals to reform the Champions League in a way that would reduce teams’ chances of breaking through.

The paper by David Berri et al showing the link between team income and on-field success in American leagues is paywalled here. Berri has also written about the topic here. The idea of American sport as being unusually “socialist” is a well worn trope.

Arsenal’s chief executive explains how the Premier League is the club’s most important meal ticket not Europe, in a good statement of Tim Wigmore’s point about the financial value of the superstar English league.