Summer is a time for lighter fare, but even then, economists can find an economic message in an unexpected topic such as European football (or soccer). And what we see in top-level European football is an unlevel playing field that is both unfair for fans and a useful lesson for North American pro sports leagues.
In our recent book Power Play: The Business Economics of Pro Sports, my co-author Mario Lefebvre and I compared European football to the unconstrained capitalism of the 19th century – the era of the "robber barons." Like then, enormous market power and wealth has been accumulated by a few wealthy European football clubs and their owners, and everyone else is being left to fend for themselves. The supreme irony is that Europe is home to a highly developed social welfare system, yet its professional football leagues operate in a more capitalist fashion than leagues based in North America.
The most striking business elements of European club football are (1) the lack of significant revenue sharing among teams, and (2) the absence of a cap or limitation on player salaries. These operating conditions result in a fundamental and sustained competitive imbalance on the pitch that is hard to fathom for most North American sports fans.
The operating conditions for revenue sharing vary by country, but are seldom fair. The two biggest clubs in Spain – Barcelona and Real Madrid – currently take half of the annual €600-million ($876-million) in football TV revenue in Spain, leaving the balance to be split among the remaining 18 clubs in the Spanish top division. When combined with their huge stadiums and merchandising appeal, it's no surprise that Barcelona and Real Madrid invariably lead the way in pan-European and Spanish competitions, since they have the means to buy the very best players.
The revenue-sharing rules are a bit better in England. Teams in the top division, the Premier League, generate and share more than a £1-billion ($1.8-billion) of annual broadcast revenue – which is why clubs fight so hard to avoid relegation to a lower league. Premiership clubs do not, however, share the gate from matches, nor the revenues from advertising and merchandise. A big team like Manchester United generates many times more revenue from its own sources than a poorer Premiership club like Swansea.
The lack of salary cap allows top players to move easily between teams by having their contract sold to the highest bidder and then renegotiating their actual contract. This free-market system has led to tremendous wage inflation at the top end of the player scale, ensuring that only the richest clubs can buy the best players.
This summer's buying and selling of football talent has been particularly aggressive. Many of the biggest European clubs have spent huge sums (€80-million or more per player) acquiring the best talent. At the other end of the scale, some smaller clubs are rapidly selling their talent to the big clubs in order to capture the available financial gains. For example, Southampton had a surprisingly competitive young team in 2013-14, finishing 8th in the Premiership table, but it has held an "everything must go" sale this summer and may generate net revenues exceeding £100-million. Great for the owners, terrible for the fans, and the unlevel playing field in European football has gotten even more unlevel.
To try and limit the excesses, the UEFA (Union of European Football Associations) introduced Financial Fair Play (FFP) regulations stipulating that club revenues must cover their spending from their revenue base. But since there is no effort to introduce broader revenue sharing or to control player costs, FPP will have only a limited impact on the competitiveness on the pitch.
The richest clubs with the greatest revenue-generating capacity are almost always competitive, and their supporters can reasonably expect their team to win a championship trophy each year. Upsets do happen in any sporting event, but the major football tournaments and divisions are usually won by a rich team with skilled and expensive players.
What's the lesson for North American pro sports leagues? If leagues want to offer a competitive product for fans across the continent where every team has a reasonable chance of winning, it is critical to have both a cap (and floor) on player payrolls, and revenue sharing across the league. The NFL is the market leader on both fronts, and is the most successful league. Even the Buffalo Bills NFL franchise, in a small and struggling regional market, is expected to fetch at least $1.3-billion (U.S.) when sold this year. The NHL and NBA have taken important steps in recent negotiations with the players to level the playing field among their franchises on revenue sharing and player salaries, while Major League Baseball remains the least committed to financial and competitive balance.
It's an intriguing contrast. On the continent most committed to social welfare, the football rich continue to get richer while the poor get poorer. In the land of free enterprise, a higher degree of égalité and fraternité creates a more enriching experience for sports fans everywhere.
Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.