Tuesday, February 9, 2010

Stupid Questions Part 3: An NFL v. Premier League Case Study

Some housecleaning: this series has killed my numbers this week, so to remedy the situation, I've stopped looking at my numbers.  Also, the following subject matter has been covered elsewhere already countless times, but I needed to do this for myself, so if you comment on or link to it, please don't write "this is nothing new."  Thank you.

I watched the Super Bowl on Sunday evening and for all the ads, the ads, the constant graphics, the ads, the Close Encounters of the Third Kind-inspired half-time show featuring some band from olden times, it was a pretty good game.  Yet it probably only just "a good game" for me and my soccer-following cronies who immediately switched to GolTV after the final whistle.  For everyone else, particularly the NFL channel which apparently felt it necessary to broadcast an eleven-hour pregame show, this was the sporting spectacle of the year (and for some sports journalists and one emotional quarterback, redemption for Hurricane Katrina).  And any time there is a sporting spectacle in America, there is a hell of a lot of money not too far away.

Even on Canadian TV, there are constant reminders the NFL is a league drenched in revenue—this is the one game where the ads are often more popular than the main event.  It's no secret the NFL makes oodles and oodles of money.  In fact, it's four spots ahead of the Premier League in overall profitability.

It's certainly arguable the Premier League has a greater global reach, but the NFL dominates a cash-heavy North American viewing base.  That's part of the story, but there's a lot more to it.  In fact, the NFL provides a good point of comparison to parse out some of the problems with the Premier League model.

It's interesting to note the two separate wikipedia entries for the Premier League and the NFL.  The Premier League article features two sub-headings, one labeled "Finance" and the other "Corporate Structure."  By comparison, he only substantial space dedicated to money issues on the NFL entry is under "Player contracts and compensation," and you get the sense it's only there because the NFL are just so damn proud of the 59.5% of total projected league revenue wage hard salary cap.     

Which oddly brings to mind Chuang Tzu's dictum:

So, when the shoe fits
The foot is forgotten,
When the belt fits
The belly is forgotten,
When the heart is right
“For” and “against” are forgotten.

And when you have a functional financial model, money issues are "forgotten" too.  Hence you don't have a gang of American David Conns raving about irresponsible ownership and the threat of enormous debt in the National Football League, or lots of space on the NFL wikipedia page—or the internet for that matter—dedicated to discussing NFL finance.  

So why is the highly-profitable NFL doing so well while the highly-profitable Premier League (and often not-so-profitable English football in general) remains financially unstable?  Simon Kuper once wrote that it's amazing English football teams persist as long as they do considering how many businesses have failed since the late 19th century, but that argument misses the point.  These are English football clubs, not grocery stores.  They are administered by the publicly governed Football Association, which often intervenes (for better or for worse) whenever clubs are threatened by financial mismanagement.  European football clubs often operate as quasi-private businesses that double as important 'public' institutions, and for this reason it's a lot harder for football clubs to fail.  Consider how many Simon Jordans in England would willingly lose ten years and £30 million preserving a long-running but money-losing cracker factory.

Anyway, the reason why the NFL is in such good health despite a hard economic downturn is simple: stability.  This stability isn't necessarily engineered; in the NFL's case it often comes down to culture and geography.  

First of all, NFL teams are franchises. The franchise system doesn't carry the stigma in North America that it does in Europe simply because many sports clubs here haven't been around since kingdom-come.  For example, there are only two original 1922 charter teams still in the NFL, and both have since moved to different cities.  A franchise system offers economic flexibility; if your team can't generate enough money in one geographical area, it can simply be moved somewhere else.  When this was most recently tried in England, with FC Wimbledon getting moved to Milton Keynes, it caused a public furor as Wimbledon was perceived to be "more than a private business," it was a club with supporters and a rich history.  But the flexibility of the franchise system isn't just a perk in North America—it is integral for owners interested in building a viable business.

That brings us to relegation/promotion.  Sports teams the world round tend to make their money the same way—stadium tickets, television broadcast rights fees, sponsorships and merchandise.   It's much easier to earn money in all of these areas, even if you're the worst team year-in, year-out in the league, if you don't have to worry about relegation to say, the CFL.  Consider that the St. Louis Rams with their persistent loser-status were last valued by Forbes magazine at $929 million dollars.   

Hull on the other hand have no choice but to spend as much on players as they can get away with—which means dallying in long-term debt for short-term survival—before worrying about maximizing gates via stadium upgrades, because just staying in the Premier League is so financially important.  And the sheer number of teams going up and coming back down in England is such that those sorts of upgrades are already an extremely risky venture regardless if your team stays up.  There are 92 league teams in England.  There aren't enough fans from every last geographical quarter of England to fill every ground anticipating a long stay in the Premier League, and therefore gate receipts, sponsorship and merchandise are a much more difficult prospect than in the NFL with its limited, and static, number of teams.    

None of that would be as big an issue though if player wages and transfer fees weren't so inflated.  Which brings us to the third point, the business of the 59.5% of projected league revenue hard salary cap.  Now before MLS salary cap advocates get all uppity, it should be noted that the talent pool for the NFL is almost entirely (North "Go Doug Flutie!") American.  The NFL has no real global competition to worry about either.  It's not like Peyton Manning can go to some Mongolian league to earn three times as much money.  

The Premier League on the other hand is competing with four or five European leagues.  If it independently decides to enact a salary cap, even one based on turnover, the league's smaller clubs won't be able to compete while the Big Four crushes competitors at home while suffering in the Champions League, losing millions of dollars of revenue.  All the best players will simply go to the continent.  It might work if UEFA mandated a cap across Europe, but we've yet to see any concrete action on that front.

You get the idea.  A sport where the business side and sporting side are so integrally linked, where "merit," that is, league standing, is bought and sold at prices far exceeding any long-term investment an owner might choose to make for the benefit of the club; where teams are unable to project revenues beyond their standing in the league table (or whether they'll be in the league at all), where they are unable to move to a more profitable market, and are forced to pay market rate for players with no centrally-enforced salary cap, will put owners in debt.  Lots of debt.  The Glazers, for all their bad behaviour—borrowing against the club, selling players to shore up their own debt—wouldn't be nearly as hated if qualifying for the Champions League meant the difference between a bright future or "doing a Leeds."  Nor would Liverpool be in such dire straights if keeping Fernando Torres on the squad wasn't integral for the club keeping their "Big Four" status.  To me, this is a structural problem, and a deeply complicated one that won't be solved by fiat or by fan. 

The Premier League (perhaps arguably all of English football), based on the history, geography, and culture of its place of origin, has made financial wizards of every fan of the league, because performance in the league has such direct consequences for a club's financial health.  And as we saw the other day, the league in some part wants it this way.  The way out will involve hard choices, from everyone, fans, owners, football administrators and politicians alike.  We can all keep reacting to the news as if money-makers are bad, or we can decide what a football club is exactly, whether it is worthy of public protection or not.  I will continue to look for answers...   



ghostfeed said...

Richard, this is a fine piece of analysis. Exhaustive.

Sean Ingle should jettison some deadwood over at Guardian Sport and give you a wage for your columns.

Anonymous said...

Soccernomics did a study showing clubs with some debt do better than clubs with no debt.

However, loading teams with crippling debt to acquire them, like Man U and Liverpool and West Ham, hurts them. There is good debt and bad debt. This bad debt, of the kind of junk bond financed leveraged buy-out from Barbarians at the Gate, is the kind that the FA and FIFA should crack down on.

Rod said...

Great article, I will say that I think the financial situations in England make it more interesting to watch really. Yes, clubs have to watch how they spend and take risks to improve the squad, stadium, and staff that could result in a slow colapse of the club. but usually it is a string of decisions and poor performance that sees the demise of clubs. I feel like the NFL has lost a bit of the competitive edge past week 10; some teams give up and others keep pushing forward. In the premier league, its always a fight to stay afloat and i think thats what makes it more enjoyable.

Anonymous said...

Another aspect to consider is the apparent willingness of American cities to make massive concessions to teams and owners in terms of tax breaks and stadium financing. Hull would have a much easier time paying for stadium expansion if they weren't the ones paying for it. This is tied to the whole portability argument, cities pay to keep NFL teams from leaving town, but in a sense you could argue that a place like Hull paying for stadium upgrades would be a means to keep Premier League football in their town as it enables the club to spend more on the squad.

BTW, although I'd love to claim Doug Flutie as well, he's not Canadian.

Elliott said...


this has been down before, but never as good. Sorry the Google bandwagon is disinterested, but that's a sign you are doing something right.

The NFL,though, has its own problems.

First, the retired players all suffer from concussions, serious medical problems, and an indifferent union and ownership.

I'm not so sure if I see smiling and happy owners as the barometer of success - I'd rather see Stephen Ireland get a nice car for a WAG, actually.

Second, the NFL has gotten fat on national television. But that gravy train is going to totally dismantle itself in ten years, probably twenty years. Until they move to an online Google revenue model, things will get ugly.

Anonymous said...

One key issue that you have failed to touch on is the revenue sharing aspect of the NFL; this includes ticket sales, merchandising and licensing, and TV revenue. Owners do not need to worry how well their team performs because they will be able to generate revenue. The FA at least challenges clubs to be creative in their strategic planning in order to deal with their lack of resources, while the NFL allows perennial losers and uncreative planners to continue to profit from the league's fortunes.

It should be noted that Man U has not always been a well resourced club. It could be argued that others clubs throughout Europe have bigger markets to profit from compared to Manchester's 394k population. But the creative planning that they have built for themselves has put them into their favorable position. These clubs that are failing are relying on the same methods of planning rather than creating something new. Relying on paying big salaries may not be the key to winning.

leviramsey said...

The franchise system also has another benefit relative to the [English] football model: each franchise is the exclusive right to play league games in a given geographic area, much like how the franchise agreement for a fast-food restaurant prevents McDonalds from opening up a competing location across the street.

The only exceptions are in New York and the San Francisco Bay Area, but those arose because of the NFL/AFL merger: the Oakland Raiders and New York Jets were required, under the terms of the merger, to compensate the San Francisco 49ers and New York Giants for infringing on their franchise territory.

In a sense, the franchise model was designed to prevent clubs from moving around by giving clubs exclusive rights for the cities where the most money was available. The model worked as long as there were no cities without franchises that were more viable than the least viable city with a franchise: the inability to add franchises to keep up with population shifts led to moves and then to owners realizing they could play cities off against each other.