Posted by John Vrooman on Tuesday, May 27, 2014 in UEFA Football.

Interview with Fortune Magazine.

1) What in the economic set-up in European football makes it so much more top-heavy with the big teams in terms of success? (this obviously is a big question and much of it can be dug out of your paper and others, but if I could get a few pithy sentences that would be great).

Sports league outcomes usually derive from ownership objectives and fan preferences. Club owners usually have 2 basic motives that form 3 possible combinations or league types. The traditional assumption is that owners of the first type are profit-maximizers who can compete with one another on the pitch between the lines but who also compete at the bottom line in the market for talent. The second type of owner realizes that it makes economic sense to conspire with other owners to form a cartel that maximizes their market (monopsony) power over the players. The third type of owner is a sportsman who is mainly concerned with maximizing wins and he is constrained by zero profit rather than maximum profit. The sportsman owner is in it to win it.

The most balanced leagues are comprised of owners of the first type and the most unbalanced leagues are comprised of owners of the third type. Cartel owners of the second type are usually considered welfare optimal because they maximize total revenues and fan welfare. Leagues comprised of profit-max owners of the first type are too competitively balanced and owners of the third type are too unbalanced for customary fan preferences. Customary fan preferences are to win but to win by a close margin in a fair match.

In this simple analysis it is pretty easy to see that the deterministic imbalance in European football leagues implies that the owners are sportsmen who are in it to win it maximizing payrolls and pushing profit margins to zero, whereas the Cowboy capitalism of the NFL is in to maximize profits rather than wins and minimize overall payrolls through cartel power rather than maximize them. Moreover the fact that both European and North American leagues are very successful revenue generators implies that European fans are more ultra-fans than moderate and that NFL fans are more “infra-fans” than moderate.

Ultra-fans care more about winning than balance and infra-fans are the opposite. This all implies that the leagues are different because the owners have different motives and they are successful at the gate (not necessarily the bottom line) because their objectives are in synch with their respective fan preferences.

2) How is the inequality between top and lesser player salaries in European football different than in U.S. sports? (salary caps presumably, but more)

The first ostensible reason is that North American players are unionized whereas European players are not. But in spite of this the ownership structures discussed above North American players capture less than one-half of the revenues in the NFL and MLB while the players share in the EPL and the other Big 5 leagues (with the exception of Bundesliga) all exceed 70 percent. The hard salary cap in the NFL (and NHL) are responsible for this but the imposition of a hard salary cap serves as more evidence that NA leagues are legalized cartels while the cost squeeze in Europe derives directly from the win-max sportsman owner.
There is also evidence that stock owned clubs are more aggressive than solely owned clubs because they are playing with other peoples’ money but also they are in synch with the fans’ preference to win rather than maxing out profit.. The NFL has rules against corporate ownership (Green Bay Packers are fan owned but grandfathered under the NFL ByLaws) whereas European football does not.
It is also important to note that NA sports unions are craft unions or guilds in that the masters or veterans have significant power over the apprentices or rookies. All NA leagues have strict controls over rookie salaries and contracts whereas the select few veteran free-agents have market power over the owners. As a result of this labor market twist the younger players in the lower tiers of the labor market are grossly exploited while the veteran players are often overpaid.

As a result of the veteran/rookie twist overall payrolls can be minimized while veteran salaries explode. In MLB players in their first 6 seasons are underpaid by an average of two thirds, while the free- agent third of players with over 6 years of experience are probably overpaid by a third. In the meanwhile payrolls in MLB have dropped from two-third of revenues 10 seasons ago to less than 45 percent of MLB revenue today.

Once again this simply points to the difference in ownership objectives between NA sports cartels and European sportsman leagues.

3) Competing in this system has obviously led some teams to bankrupt themselves in Europe (Leeds, obviously, but others in Spain more recently). How does this happen in such a profitable and popular sport? And is it inevitable?

Small market and large market clubs have been forced into administration because the competition in a sportsman league drives out any semblance of profitability at the limit. The competition is particularly fierce when the sportsman is even trumped by the sugar-daddy owner who operates in negative profit by bankrolling payroll. The sportsman is the steady state and the recent invasion of foreign capital and sugar-daddy ownership compounds the pressure at the bottom line.

For example before Leeds United went belly up they were financially equivalent to Chelsea hanging out in the middle of the EPL Table. After Roman Abramovich bought Chelsea in 2003 they could take risks and lose on long shots that Leeds could not afford. As a result Leeds was soon relegated to the third tier and Chelsea was determined to end up EPL Champion and winners of UEFA Champions League with negative profit. UEFA is imposing Financial Fair Play rules that restrict bottom line losses (similar to Germany’s Bundesliga) but the restrictions serve ultimately to handicap mid-table clubs, leave the giants alone and polarize the leagues even further.

4) Is there any non-sports analogy to compare the labor set up of U.S. sports and European football? (I.e. one’s like the finance industry, the other like silicon valley, or something like that)

The best financial analogy would be like comparing the NFL as a well-diversified S&P index portfolio with an all or nothing NASDAQ roulette wheel. Sports league are zero-sum games where if one team wins the other team must lose. The NFL is the perfect portfolio where teams share two-thirds of their revenue with clubs who by definition have exactly the opposite fortunes.

In financial terms this is risk-free pure money for all teams. European football particularly in La Liga and Serie A is make-it-or-break-it unless of course you are one of the top 3 or four clubs for whom it is pure money. The TV contracts for Barca and Real Madrid ($225 million each) make MLB NY Yankees implicit $150 million deal with YES Network look like chump change. NFL football is a natural sure thing; whereas European football is risky business.

5) Can revenue disparities in European football be fixed, or should they?

Yes the Big 5 leagues are ultimately headed to a revenue sharing scheme similar to EPL and Bundesliga where TV money is split 50% solidarity equal share 25% based on final standings and 25% based on number of appearances.

A problem with revenue sharing is that there is some evidence that it reduces the financial incentive to win and leads to exploitation of talent, and ironically it increases imbalance on the pitch. It is important that all leagues have a similar sharing formula because talent will migrate to the league where revenues are based on merit such as Serie A and La Liga. Serie A and La Liga are headed toward 40/30/30 and Barca and Real are considering a splitting a third of league TV revenue compared to the approximate half that they now garner.

An example of the talent drain occurred in 2001 when French Ligue1 was ranked last of the European Big 5 leagues while FIFA had the French national team ranked first in the world. Before 2005, French Ligue 1 TV revenue sharing allocated 83 percent for solidarity, ten percent merit and seven percent appearances.

Increased merit sharing under Charte 2002 des clubs de football was justified on the premise that Ligue 1 clubs were at a disadvantage in international competition (UEFA Champions League) because of solidarity sharing. Ligue 1 changed the formula to 50 percent solidarity, 30 percent league finish and 20 percent appearances.

But those adverse effects occur only in profit-max leagues and not in sportsman leagues. In sportsman leagues modest revenue sharing could be used to nudge the sportsman back toward optimal fan preference, which seems to be shifting toward domestic imbalance and excellence in Europe.

6) Why do fans like unbalanced competition, if they do?

Fans appreciate quality and continuity a yet they realize that any league is only as strong as its weakest team. That is the mix that determines the fans’ preference for dominance or randomness. European football has a dual 2-tier fan system where a fan can pull for a local domestic favorite but not to the point where it damages the domestic champion’s chances in UEFA Champions League and other European competition.

European fans are loyal to country and league in European competition as much as they are their local club. There is no well-defined local inter-national duality in the US because all of the NA professional leagues are peculiar to this continent.

7) How is it good for social welfare?

Social welfare depends on the preference of the fans and the beauty of the game is in the eye of the beholder. Social welfare is the sum of fan welfare owner profit and player salaries.

The European football market has doubled over the last decade to about $25 billion today and the Big 5 leagues’ share is about one-half of that. The bad news is that players share is pushing 70% everywhere but Bundesliga, the good news is that European fans love it, the sportsmen owners love it and the players are capturing a lion’s share.

8) Does it in any sense reflect Europe’s more class conscious society?

Yes probably to some degree. The leagues actually reflect the opposite of the political climates in the US and Europe. Former NFL owner Art Modell once said that “NFL owners are a bunch of fat cat Republicans that vote socialist on football.” Europeans joke that macho Cowboy capitalist Americans are not so tough, because they need pads for their hybrid brand of football and they share all the wealth.

Americans are then confused about how Europeans can tolerate such competitive imbalance and deterministic outcomes. There is also the feeling that the Spanish civil war is played out for every culture in every El Clasico match between Barca and Real Madrid. This is one reason why every single El Clasico draws more than the 110 million fans that watch the NFL Super Bowl worldwide. This also why only ten percent of Barca and Real fans actually live in Spain.

9) How would a pan-Europe superleague work (again, in your paper but maybe a sentence or two) and what would happen to the non-super teams? And why would that be good?

European football is caught in a polarized spiral based on the rapid evolution of a dual domestic-international market. Each league has only a handful of perennially powerful clubs that pound the lesser teams in their leagues. These Davids have no shot against these Goliaths.

Champions’ league has naturally evolved as a meta-platform where the Goliaths can play each other but the times that Barca or Real Madrid have recently met Manchester United can be counted on one hand. Since the modern origins of UEFA Champions league in the early 1990’s the top clubs have threatened to break away and establish a European super league. The breakaways are usually driven by the TV money available for such mega-matches. Each rebellion has been quelled by UEFA adding more teams from the power conferences (Champions League was originally just that with one champion from each league).

The economic laws that flow from the economic unification of Europe are pulling the domestic leagues apart. Players are moving across national lines to play for economically defined leagues that are breaking away from their domestic leagues. The super-league could be modeled after the NFL which is also rapidly becoming a media league. The dominant teams have fans throughout Europe and the matches would even quality clubs.

The Super-league would be closed otherwise no one would pay to join and the membership fee would be the difference in the present value of the club from the average other clubs in the league. The existing promotion relegation system would still be intact for the lower domestic divisions. I finished the proposal by saying that “this was not ugly Americanization rather it is the unification of European football…” along the same economic lines as the rest of the European Union.

V