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Volume 1, Chapter 2The profitability of sports teams:international perspectives

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Profits in north America vs Europe

Teams in North America do NOT want to appear too profitable Antitrust suits

Teams in Europe fortunate if they make any profit

In English Premier League 1993-2004, correlation coefficients Team salary and team revenues: 0.927 Team revenues and team operating profits: 0.347 Increase in team revenues go to team salary

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Profits in north America vs Europe Difference in club objectives

NA: toward profits Europe: not-for-profit organizations

Different incentives NA: closed league structure Europe: promotion/relegation

Regulation of player labor markets NA: close regulation Europe: lack of control

Support from local authorities NA: subsidize sports stadia Europe: subsidize team’s wage bill, e.g. Real Madrid and

Barcelona in Spain

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Official numbers less than estimated by Forbes:

1. Cross-subsidizing other parts of their groups

2. Transferring costs from parent companies to teams

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Financial crisis in English soccer Premier League: 20 teams

72 in other 3 divisions (English Football League) Widening disparities of revenue growth by division Tendency for revenue growth Growth of wage bill Lack of profitability in lower divisions

Very few clubs folded due to financial deficits (last in 1962)

Teams in debt were sold to new owners at low prices but agree to take on the debt

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Financial crisis in European Football

Football began economic boom in 1990s 4-year TV contract to BskyB L647M in 1997, L1.6B to

BskyB in 2002 by Premier League Only very few teams benefit Many teams in financial crisis

ITV Digital TV signed L315M with English Football League (bottom 3 divisions, 72 teams) in 2000 Pay-per-view in Great Britain ITV bankrupt in 2002, court ruled ITV not responsible

for remaining ~L200M TV ratings remarkably low (few thousands viewers)

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Financial crisis in English soccer Largest debts for teams in Championship League

The tier just below Premier League, average attendance ~17000 in 2010-11

Clubs already spent the money on debts, buying new players, ground improvement

Compete for players of moderate quality Teams aim for PL

Higher revenue from TV, gates, sponsorship, merchandise,…

Parachute payments: demoted teams receive a share of PL broadcast income for 2 seasons following relegation

Market size fundamental determinant of league standings Despite promotion/relegation

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Lessons learned

Player contracts shorter in length, more performance based Automatically lower salary after relegation

Points deduction to deter clubs from entering administration (bankrupt)

16Revenue in Top Division of European Soccer Teams 2011/12

Deloitte Annual Review of Football Finance, 2013

17Total Wages and Ratio to Revenue in Top Division

Deloitte Annual Review of Football Finance, 2013

18Average Match Attendance in Top Division

Deloitte Annual Review of Football Finance, 2013

19Attendance and Sources of Revenue in Premier League

Deloitte Annual Review of Football Finance, 2013

Spanish Liga football club Barcelona has announced record revenues of €530m ($720.8m) for the 2013-14 season, with net profits hitting €41m – a mark only surpassed once in the Catalan giant’s history.

http://www.sportbusiness.com/sport-news/barcelona-claims-revenue-landmark

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TV Revenue Sharing in European Soccer

Premier League only shared within the league Italy’s Serie A teams do not share broadcast

revenue with each other Juventus, AC Milan revenue 10X of other teams

Many teams keep financially afloat by developing talented young players and then selling their rights to wealthier teams

Financial Danger of Open System

2007/08- 2011/12 only the Bundesliga (€190m) and Premier League (€121m) were the only ‘big five’ leagues to generate an operating profit before player trading and finance costs

Large Differences in Revenue and Market Values in European Soccer Manchester United, Real Madrid, AC Milan

have operating income and market values similar to Washington Redskins and NY Yankees 900-1300 M in market value Sales of brand-name soccer merchandise > 3 B NFL 2.5B, MLB 2.3B, NASCAR 1.2B, NBA

1B, NHL 900M, in 2001 Value of FC Porto of Portugal, 25th valuable

soccer team in world: market value 106 M Similar to least valuable NHL teams

25Market for broadcast rightsNorth America vs Europe

NA: networks + cable + satellite + internet… Europe: a single company by sealed-bid auction

BSkyB (Sky Sports) in England Now BSkyB + ESPN

BSkyB: use sports broadcasting to increase customer subscription package

Several European broadcasters merged or bankrupt greater concentration of sports provision among fewer remaining companies Italian Serie A and Serie B to create league channel in

2013, more competition for broadcaster

26Market for broadcast rightsNorth America vs Europe

TV revenues not equally shared in Europe In PL: equally fixed share, fee for each live broadcast,

prize money based on standings Big clubs (MU, Chelsea…) receive much greater

broadcast revenues than smaller clubs Individual vs collective selling of broadcasting

rights, arguments: Individual would raise profits for individual clubs

because more games should be shown Collective would raise total league profits and effective

distribution 20% increase in broadcasting fees in 2010-11 in Italian Serie A

after collective selling

27Market for playersNorth America vs Europe

NA: player unions, but more regulated Entry draft, restrictions on FA

Europe: player unions may only influence pension plans and insurance for injury No entry draft, FA for all players after contract Trade players for cash, rather than for players/draft picks

Incentives to overpay players in promotion/relegation system Playoff systems that give mid-table teams chance of

promotion 4th place in PL qualify for UEFA Champion’s League

28Market for playersNorth America vs Europe

Teams spend their surpluses from ordinary players on superstars who extract all available rents Big clubs, the only ones who can afford

superstars, make less profits by high payments to superstarts

Hidden monopsony rent, suited for Barcelona, Real Madrid, Inter Milan…

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Conclusions Team profits

NA: team revenues convert into team profitability Europe: this connection not exist

Revenue opportunities, especially concessions, merchandise, sponsorship Not maximized in Europe Greater commercial expertise gradually being introduced

into Europe Costs

High growth of player salaries in Europe Leagues should reinforce their attempts to construct

offsetting incentives Penalties for overspending? Salary cap?