In 1971, Peter Sloane published an article titled The Economics of Professional Football:
The Football Club As A Utility Maximiser. It laid bare the ideological differences between
the North American and European sporting cultures. In the United States, there had always been
an assumption that sports teams should be ‘profit-maximisers’, and therefore be
organised as ‘closed’ leagues to protect the sports clubs against the economic penalty
of relegation. Conversely, in Europe, where leagues were ‘open’ and had promotion
and relegation, ‘utility maximisation’ - the desire to prioritise sporting success
- was the true objective. Profit, or underwriting losses, was only important insofar as it was
necessary for a club’s long-term stability and survival. This economic concept is the
bedrock behind the implementation of Financial Fair Play.
There have been various examples of owners in England that have tried to run football
clubs as profit maximisers. Alan Sugar, a notorious businessman, tried his arm at running
his beloved Tottenham Hotspurs as a profit maximiser, and looks back on the experience
as having wasted ten years trying to do something great for that football club“”. From 1991
to 2001, Sugar ran Spurs within their means. Most of their fans hated the period, with
the League Cup being a solitary trophy in a period of mid-table mediocracy. The club
only managed to make £2 million a year in profits over the first six years, which was
much less than their local rivals Arsenal who were competing at a much higher level.
Importantly, Sugar’s ownership illustrates a paradox in running a football club, as Stefan
Szymanski and Simon Kuper describe in their book Soccernomics: “When business people
try to run a football club as a business, then not only does the football suffer, but
so does the business.” In an open system of promotion and relegation,
utility maximisation is the only way to survive. That being said, without financial regulations,
football clubs are at risk of over-extending to the point of threatening their existence.
A classic example of this is Leeds United. In 2001, the club reached the semi-finals
of the Champions League and were one of the more consistently competitive teams in the
Premier League. Under the guidance of chairman Peter Ridsdale, the club had taken out a number
of loans against the prospect of achieving Champions League football, which they narrowly
missed out on in 00/01 and 01/02. Due to consecutive seasons without the Champions League revenue,
the club was unable to repay their loans and were forced to sell valuable assets, such
as Rio Ferdinand to Manchester United for £30 million. With Leeds leaking players due
to their debts, on pitch performances suffered and the club plummeted out of the top flight.
Leeds failed to stop the rot in the Championship and were forced to dismantle the squad further
and sell both their training ground and their stadium in 2004. The club finally entered
administration in 2007, were given a 10-point deduction for failing to control their finances
and were relegated to the third division for the first time in their history.
Leeds fans can feel comfort in the fact that they are far from alone. In fact, between
2000 and 2008, 42 Football League clubs entered administration, 17 clubs in 2002 and 2003
alone. In reaction to this plight of poorly managed
football clubs, an inquiry was held by the House of Commons Culture, Media and Sport
Committee into the governance of English football in 2011 and 2013. Two of the leading sport
economists present, Stefan Szymanski and Sean Hamil, had opposing views on the habitual
loss-making of football clubs. Szymanski argued that a lack of profitability didn’t actually
matter considering that there was always a new owner ready to step in and pick up the
bill. Hamil, however, stated that financial instability led to the cannibalisation of
the rest of the sporting pyramid to pay increased wages, citing the case of Glasgow Rangers
in the SPL. There was also the moral issue of tax-payers
effectively picking up the bill for mismanaged football clubs. When a club is put into administration,
the ‘football creditors rule’ ensures that all football-related debts (e.g. to players,
coaching staff and other clubs) are to be paid first and in full. This essentially means
that the taxman is one of the last creditors to be repaid their debts, and HMRC typically
only receives between 5 and 10% of what they are actually owed. Equally problematic is
the fact that, despite going into administration, football clubs very rarely go extinct. In
2002, Leicester City went into administration and paid HMRC £700,000 of the £7 million
it owed. Fourteen years later, Leicester won the Premier League. While the country revelled
in the underdog story of the century, it is worth contemplating how heroic the story really
is. The wider context of European football’s
finances is equally important to understanding why regulation was necessary. In the late
1990s, European football club revenues dramatically increased thanks to the rise of pay-per-view
TV. The Bosman Case, however, allowed players to have more bargaining power meaning that
the increased revenue largely translated to an increase in player wages. In an interview
with the BBC, Alan Sugar described this phenomenon as ‘the prune juice effect’ when discussing
the Premier League’s new TV deal: “If anyone knows the effect of prune juice, it
is very simple. It goes in one end and comes out the other, and that is exactly what is
going to happen with this money.” With larger sums of money in the game, the
risk of financial mismanagement was much higher. Professor Egon Franck summarised the situation:
“In the end, managerial moral hazard and rent-seeking tend to be infinitely repeated
games in a league where the expectation of being bailed out had become part of the collective
experience. The potential arms race mutates into a zombie race, where an entire league
operates on the verge of insolvency, chronically expending more than its earnings, but being
systematically rescued by external money injections year after year.”
The real threat from UEFA’s point of view, however, were the clubs themselves. After
the global economic crash of 2008, the European governing body came to two conclusions.
That: this chronic loss-making was not sustainable
And: the threat of a breakaway European super-league
(with no promotion or relegation) was increasing with the ‘big clubs’ growing tired of
chronic loss-making The answer? A form of financial regulation,
which is effectively a soft salary cap, to control club expenditure and turn clubs into
reasonably stable institutions. They called it Financial Fair Play.