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Untold’s submission to the Commons Enquiry into Football: let’s sort out the EPL/Championship divide

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Victory Through Harmony

By Phil Gregory,

Righto, here we are with the final part of my musings on the general state of football finances for the Commons Inquiry. Since starting this report, I’ve decided to do my dissertation along similar lines, so if you have enjoyed these articles, there’ll be more to come next academic year. Anyway enough of that, onwards with TV deals.

I said in an early section of my report that “I believe excessive debt is a symptom of other problems rather than a problem in itself, and the underlying reasons for the excessive debts must be dealt with”. What I mean by that is if you didn’t want clubs to be in debt, you could put a rule in outlawing it and voila, no debt. The problem is however that clubs are in debt for a reason.

OK, for United and Liverpool it is (was) as a result of foolishly loose legislation that meant someone could buy them without using much of their own cash. For smaller sides however, why are they actually in debt? As I see it, it’s either clubs desperately trying to climb the greasy pole (points if you get the historical reference) to get into the Premier League, or simply stay there. It’s all about the TV deal, and the financial gulf between the Premier League and the Championship, in other words.

With its vast TV and sponsorship deals in comparison to that of the Championship, the current season’s bottom-placed side in the Premier League will get approximately £42m. Contrast that with the £2.3m (plus sponsorship) that the winner of the Championship will receive and it becomes clear very quickly why most of the Championship fancy a shot at promotion, whether they can afford it or not.

The prevailing “wisdom” amongst Football league chairmen seems to be that excessive levels of spending can be sustained for a few years, within which promotion will definitely be achieved (cos, erm, they’re spending so much on wages obviously ) and then Premier League money will be used to pay off the debts built up.

The problem is, nothing ever goes exactly to plan, especially when your plan is total rubbish. For one, a club may not get promoted in the short term and it may get landed with a winding up order after HMRC decides that its tax bill shouldn’t be used as an overdraft, after all. Secondly if a club does eventually manage to get in the Premier League, it spends even more in order to stay there, as well as incurring high bonus payments and basic salary increases reflecting the new Premier League status of the playing squad. So instead of consolidating the club’s position by clearing debts with the taxman and other clubs, they overspend again and again as they cannot afford to be relegated, either.

Of course, such a high-risk approach more often than not doesn’t pay off, but other clubs can’t generally take a moral stance and wait for the rest of the league to go bust, as there are always more clubs eager to replace them. You have your best shot at getting promoted by overspending and if you do get promoted, you have at least a shot of paying the bills off.

So promotion, by rewarding overspending actually rewards bad practice, something that should be setting warning lights off all over the place if you have even a basic understanding of economics. Our very own Arsène Wenger put it best when he stated: “Something that is more irrational in football is that sometimes non-rationality can be rewarded. But nine times out of ten it doesn’t work so nine times you are in a bad situation”.

Unless the cause of this irrationality, the financial gulf between the leagues, is dealt with football clubs can’t be expected to show restraint while their competitors have a competitive advantage due to excessive spending. Financial sanity can only be restored by eliminating the perverse incentives rewarding bad practice.

So our problem lies in the financial gulf between the leagues, a result simply of there being too much TV money in the Premier League when compared to the Championship. Let’s be fair though, the Premier League’s wealth is no bad thing; it creates a spectacle seen all around the world with many of the best players plying their trade in our country, all of whom are paying vast amounts in tax to HMRC.

All we really need to do is sort out the difference between the Premier League and the Championship, rather than damning the Premier League as a whole as the worst thing since the common cold. To be fair to it, the Premier League is making more solidarity payments to the Football Foundation than ever: beforehand, 5% of the broadcasting and sponsorship revenues went to the Football Foundation. Now after Richard Scudamore needed a favour from the government (who had the good sense to get something in return), 6% of the first £1.1bn, 7.5% of the next £300m and 10% of any money raised in excess of £1.4bn goes to the Football Foundation. Domestic rights, highlights, international rights as well as sponsorship money come to nearly £3.5billion, so do the maths and that is cracking contribution to the grassroots of the game.

Bit of a tangent there, but it is only fair to give them their dues. What I was saying is that the Premier League gets a stack of money, but the Football League’s television and sponsorship rights are substantially lower, resulting in vastly smaller payments to Football League sides (have a nosy at my lovely graph:

What that means is that the Premier League TV money absolutely dwarfs what’s available in the Championship, it’s not even close. While TV money received by a League Two side is over 75% the amount of a League One side, the same comparison for a Championship club to a Premier League club gives a figure of only 5%. Considering the Premier League’s distribution of its own money to Premier League clubs is highly equitable it is bizarre that they have allowed the Football League to fall so far behind in the broadcasting money stakes, given three out of 20 of Premier League were Football League sides the season before.

Richard Scudamore himself said “The Premier League clubs felt a stronger Championship would be greatly beneficial to both competitions”, so why would you let the Football League drop so far behind, financially? He can’t have known Ian Holloway would do such a smashing job with next to no money, so how can he have expected anything other than a Championship racking up debt in an effort to be competitive upon promotion? Oh, he’s the Premier League chairman is he? Maybe then he doesn’t really care about the Football League, despite what he says… (Or maybe he’s just a little daft).

How’d I fix this? Basically the government need to get involved and ensure that more money goes to the Championship and other leagues, to not only close the gap between the Premier League and the Championship but to ensure that the Football Leagues all stay within a certain proportion of each other. It would be very daft to pump money into the Championship to fix one problem and then have exactly the same problems between the Championship and League One. It’d just be Premier League Two in all but name.

Our other big problem is parachute payments. These uniquely stupid creations are given to relegated clubs out of the Premier League’s broadcasting and sponsorship revenues, designed to soften the financial blow of dropping to the Championship for recently relegated sides. The fact that such a thing even exists is testament to the gulf between the Premier League and the Championship. You don’t need a parachute to drop between the leagues of the Football League for example.

In practice, the payments aren’t used to reduce losses, going instead towards maintaining a Premier League-sized wage bill despite Championship-level revenues. This drives other promotion hopefuls to spend yet more money they don’t have to try and keep up, exacerbating an already unsustainable situation. Despite opposition from Football League chairmen, the Premier League decided it would be a wise idea to increase the amount of money in parachute payments to £48m over four years from £32m over two years.

Now, I’m generally sceptical of something being called an act of charity when the recipient doesn’t want it, but this takes the biscuit. The Premier League dressed up these increased parachute payments as a solidarity payment, but as shown here it’s actually greatly detrimental to the Championship. Premier League clubs simply voted for it  to create a more closed shop and dressing it up as an act of charity. Now, think back to the excellent Mr Scudamore’s earlier quote. What he was referring to was the unveiling of the new parachute payments… worrying stuff. He may do well at securing money for the Premier League, but he clearly has absolutely no idea about economics.

Now, not only do parachute payments cause other Championship clubs to spend money they don’t have, to attempt to remain competitive in the promotion battle, they also cause newly-promoted Premier League sides to spend even more money in an attempt to stay up, knowing that in the event of failure they will be getting substantial funds to help their bottom line anyway. We come back to the idea of reward for bad practice (overspending).

It’s a bit like, oh I don’t know, banks racking up billions of dollar losses and requiring unprecedented support in the form of bailouts and cheap money from central banks but still paying out performance (ha!) related bonuses. Of course nothing silly like that would ever happen, it is parachute payments that are unique in being appallingly poorly thought through…

So if parachute payments are a reward for failure and an impediment to good practice then why doesn’t someone simply remove them? Now, clubs will have budgeted for the payments (well, not many of them seem to budget at all, but we’ll give them the benefit of the doubt here) so that prevents their immediate removal, I suppose. I’d still support getting shot of them as early a date as possible and redistributing the money to the Football League to dish out fairly.  I’ll illustrate the impact this would have in the following paragraph:

While parachute payments can total a maximum of £48m, they stop if a team is promoted back to the Premier League so the amount received may “only” be £16m if a side is goes back up immediately after relegation. From analysing sides relegated from the Premier League between the Millennium and the 05-06 season I can tell you that on average take three years to get promoted. (aside: this is a bit of a statistical lie., As the results tend towards the extremes (the two most common situations are you either get promoted straight away or take longer than four years, with the odd two year slowcoach) however the analysis still works, as the non-promoted sides drew the full hypothetical four years).

Taking three years then as our magic number, that would see them receive £40m each, plus £6.9m for their Championship TV money for the same period. With relegated sides receiving £46.9m against a mere £6.9m for their competitors during the same period (in addition to the bare minimum of £42m they received from their last season in the Premier League) this has quite clearly gives recently relegated sides a huge, unfair financial advantage in the promotion fight.

Complete removal of parachute payments would save on average £120m of cash that the Premier League could redistribute equitably amongst the Football League sides. Doing this would raise the amount received by every club in the league by £1.66m, to £3.96m, which would be great. It’d nearly double the size of the Football League TV deal in relation to the Premier League TV deal (the percentage improves to 9.36% from 5). If such action was combined with further payments from the Premier to the Football League as a whole, both the gulf between the two leagues and the perverse incentives of parachute payments would be eliminated to the great benefit of English football as a whole.

Premier League clubs would naturally protest such a change, as it gives lower league sides an opportunity to break their hold on the top flight. In addition, they could attempt to point to the large difference between Premier League and the Championship revenues as evidence that they need parachute payments. While these reforms would reduce that financial gulf, admittedly there would still be a gap and relegated clubs would have to cut their costs substantially in order to remain financial secure.

This isn’t the end of the world: instead of a messy yearly fire sale of players from relegated sides without parachute payments, all that is needed is contract clauses whereby player wages are greatly cut in the event of relegation. These clauses already exist (unless you play for Newcastle where they’re too big to be concerned by the prospect of ever getting relegated, so don’t bother with them).

The problem is that there are more Newcastles than we’d like, as these clauses may be an obstacle to a obtaining a player’s signature in the first place. If this proves to be the case then removing parachute payments will have to be combined with legislation that all player contracts must include such a clause, so that clubs don’t gain a competitive advantage by not using them. Such a change is perfectly in line with the real world, as any business that experiences an enormous fall in revenues is forced to cut costs drastically. Indeed if the playing squad gets paid more for an exceptionally good league position, does it not make sense that relegation results in wage reductions?

My only concern with this plan is inflation. If you look at Premier League wage bills, they tend to go up when the TV deal does. If the money in the Championship for example suddenly doubled, would they just go and blow it and more on players? It’s a concern, but I’m hoping that by removing parachute payments, relegated clubs will have a lower wage bill. This will have a knock-on effect on their competitors, who in turn won’t need to spend quite so much, so perhaps by giving them more money but equally, we’d see an end to the “arms race” we have in the Championship.

More research needed on that last bit, I suspect. A special prize for whoever can find out who came up with the idea of parachute payments, too.

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14 comments to Untold’s submission to the Commons Enquiry into Football: let’s sort out the EPL/Championship divide

  • walter

    I don’t know the name of the inventor but “Self Interest” could be his middle names. 😉

    I must say it is shocking to see how like you said ‘bad management being rewarded’ that much.

    I think the solutions you propose are very sensible but then again will the FA and the teams regulate it themselves? I doubt it as Mr. Self Interest will be looking over the shoulder. Any club that has gone down(and/or up) in the last 10 years will think of themselves and will be happy to take the extra money from the parachute payment.

  • Phil

    It can’t be left up to the Premier League, as I showed their self-interest culminated in huge parachute payments. When you consdier that any side bare really the top six has the potential to get relegated in any season (as Aston Villa’s recent troubles prove), thats 14 of 20 who would vote for more parachute payments, while the remaining six have no real interst in the matetr, and could vote either way.

    Which is why I put it as a issue for the government to get involved and sort out – the last time they did they secured a small fortune for the Football Foundation, which is fantastic.

  • Rhys Jaggar

    Another excellent, thought-provoking article, Phil.

    I like the way you think, not being restrained by current mores.

    One thing I do think is worth thinking about is actually how many clubs can sustain a truly professional set-up paying players a wage that makes such a short-lived career worthwhile. I calculated once that it’s around 50 – 60, although you need to have some mechanism to reward aspiration of smaller clubs. Scunthorpe is one which currently clearly comes to mind, as did Crewe a few years ago. Right now, League 1 has Southampton, Charlton, Brighton, Huddersfield, MK Dons, Sheffield Wednesday, Tranmere, all of which could happily reside in higher divisions. Bradford City in League Two are clearly another, then there is Luton Town in the Conference.

    If you want to avoid bankruptcies, you do need some kind of basement below which not too many folks will drop and my kind of take on that is 3 leagues. Whether you have an EPL and two regional leagues below or a traditional pyramid is irrelevant. The clubs could decide that. But you could clearly say that there would be a crowd/capacity threshold of, say, 10,000, which was necessary for membership of the new league. That wouldn’t stop, say, Luton Town re-emerging and no doubt Newport County might manage that in time too. If this change were flagged up 5 years in advance, communities would have time to decide whether they really wanted their club to be part of a new League. Because if they did, enough of them would support their team to justify it……..

    Agree with you entirely about parachute payments being replaced by a uniform payment to all Championship and, to a lesser degree, League 1 sides. Agree with you about break clauses in all contracts concerning relegation etc.

    I’d go further and say that all professional clubs must retain an appropriate level of reserves at the day before season tickets for the following season go on sale, which is usually the day where reserves are at their minimum. If it were said that all clubs started the renewal on June 1st, it would be easy to validate the reserve levels on May 31st for all clubs. If the punishment was relegation or a points deduction in the lower league, clubs would comply. Setting an appropriate level would be a key decision, which should be subject to oversight from independent bodies.

    Another thing you could do is to incentivise slightly the development of home-grown youth through paying a slightly higher performance bonus to clubs if their teams contained more than a threshold number of performances > 30 mins by U21 English players, whilst also rewarding League position. Managers wouldn’t play useless English players to finish lower, but they would be rewarded for developing good ones. It’d only work if the incentives were framed correctly, but that’s a matter of working through details and stress-testing them with managers and coaches alike.

    Keep writing articles, like this Phil. It’s well worth the effort and I hope good comes from it.

  • Phil

    Nice idea on compulsory levels of reserves, I’ll certainly consider some way to work those in. A fall-back base of capital is enver a bad thing, though it would have to be relative to say a club’s wage bill – otherwise a flat level would be regressive and punish smaller sides.
    Good thinking also on youth incentives – my proposals on increasing the money in the football league would probably work better if there was a performance element, so the top clubs earned (slightly) more, and a youth scheme could work as part of that.

    Incidentally, I miscalculated and understated the impact that removing and redistribtuing parachute payments would have. Here’s the updated section (changes are largely in the 2nd paragraph), the results are incredible:

    While parachute payments can total a maximum of £48m, they stop if a team is promoted back to the Premier League so the amount received may only be £16m if a side is goes back up immediately after relegation. From analysing sides relegated from the Premier League between the Millennium and the 2005-06 season9, it can be seen that a relegated side on average take three years to get promoted10.

    “Hypothetically, complete removal of parachute payments for next season would save £120m over three years that could be redistributed equitably amongst the Football League sides. Doing this would raise the amount received by every club in the league by £1.66m in 2011-12 season, to £3.96m, nearly doubling the size of the Football League TV deal in relation to the Premier League TV deal in the first year of redistribution (the percentage improves to 9.36%)11.

    The amount would increase by an additional £1.66m for season 2012-13 and again for 2013-14, reflecting the additional money coming in from subsequent years of parachute payment funds being saved and added to the Football League’s funds. By the 2013-14 season, the Football League TV deal would plateau at £7.3m, which would be more than 17% the size of the money received by 20th placed side in the Premier League. Solely by removing parachute payments and redistributing the money fairly, with no additional payments required from the Premier League, the size of the Football League’s broadcasting revenue has more than tripled in relation to the Premier League, reducing hugely the financial gulf between the two leagues. When that is considered alongside the benefits in terms of competition resulting from the removal of the unfair parachute payments, the financial health of the Championship going forward would be greatly improved by the adoption of these measures.”

    Now just to re-proof read and submit!

  • shakabulagooner

    Phil:
    Thanks for the great piece. However, except you still have more coming, I don’t think the solution goes deep enough thus I’m afraid that it may not work.
    The way you positioned the solution is some kind of tax on Premier League to support the rest of the League structure because the Premiership owes its success to the League sub-structure. While this may be true the solution still smacks of supporting a fundamentally unsound infrastructure. An extreme reaction to this idea may be a few clubs bolting away from the Premiership to form a Europe-wide Super-League with their peers in other European countries.
    At another level too, the clubs that are stable in Premiership (apart from ManU and Liverpool) that you mentioned are not (e.g. Everton) epitomes of financial stability. So, something deeper is wrong with the models that drive even stable Premier League clubs to be financially unstable.
    In addition to the support you’ve advocated from the Premier league (which must be at some level that can be freely agreed to by the management of the league in active consultation with the big name clubs in the league) I believe a deeper look at
    1. How to make the respective leagues able to generate more income;
    2. How to make local governments/cities support their city clubs financially
    3. How to get tax incentives into sports management
    4. Salary caps and laws as the EUEFA has proposed that makes it crucial for clubs to operate within their means are needed.

    Having just read a piece about a budding hockey player for England at the forthcoming Olympics who credited the mentoring he received at Arsenal grounds as reason that he is where he is today rather than being dead or in the prison, I believe cities’ support and tax breaks are justified – not to talk of the Cities’ pride when their team win something…

  • Phil

    Shakabulagooner: paarchute payments already exist, so even if the Premier League didn’t give any more money adn we simply redistributed the parachute money equally, we would triple the siwe of the FL TV deal in relation to that of the PL’s, greatly reducing the gulf. Hence the net effect of these reforms on EPL bottom lines is nil, unless you get relegated of course!

    Sport is funadmentally unstable – as it is based on a level of sporting performance that is subject to intense competition. stability can mean stagnation which reduces innovation. Club’s struggling and getting releagted via everyone improving isn’t a problem, economics is all survival of the fittest. However if they do a Hull, we need to see why that happened and remedy it.

    taw breaks is an interesting idea that I will think about – I’d certainly support a national removal of taxes on profits, for one. Why should Arsenal get a tax bill cos it runs its business well, yet other sides who run at a loss don’t? Crazy.

    Salary caps – no. As long as wages aren’t excessive (ie clubs pay so much they bankrupt themselves) I have no problem wit high salaries, after all it is the players with the talent thatc reates the “product”. Capping salaries would simply lead to higher profits realised by owners, and you’d get more glazer types looking for a profit.

    Interesting comment, and plenty to think about there however!

  • walter

    I think it would be a good idea to install the European Financial Fair Play rules in the EPL.
    This would mean that all clubs in the EPL will have to work withing their means and you would have no more Chelsea and City scenarios with their rich owners and mass debt.

  • Phil

    Problem is though that you’d set for example the top four in stone. Nobody else could get into those places and get the revenue streams without spending a lot of money and running up a loss. It’s a tricky one…

  • only1

    hey Phil,

    I thought that you could change a little and make this into champions league article. I believe its the exect same situation for clubs in PL and elsewhere fighting for european football. In order to compete, many clubs took the risk and borrow as much as they could to build the team needed, and other clubs have no choice but to follow suit (to borrow more money) in order to compete.

  • Ole Gunner

    I disagree strenuously with giving money to Championship sides. The Premier League makes its money fair and square and owes NOTHING to the championship

  • Phil

    Only1 – you are right on CL money. I’d point out however that the difference between the Top4’s TV revenue and the rest of the Premier League is a lot smaller than the gap between the Premier League and the Championship, so the latter situation is much more important.

    The top 4 being set in stone has a much to do with other revenue streams as TV money itself. United and Arsenal have vast matchday money, Liverpool make up a lot on commercial etc. If you look in terms of turnover, the big four simply earn the most money, and this is only partly to do with TV.

    Ole Gunner: You’ve missed much of the point. If you look at my comment above, I actually mentioned that the removal of parachute payments and equally sharing them would fix much of the gulf, and that wouldn’t actually require any additional funding from the Premier League.

    The Premier League is also made up of 3 former Football League sides, so yes it does owe something to the championship.

  • Paul C.

    Firstly I dont think it is the Governments place to force the Leagues to do anything. Why do we want the Government involved in this? As an Economist from the Austrian school I would have thought the idea of the government meddling in the affairs of industry is not something to be encouraged.

    Also, I think the idea of spreading the wealth around the Championship clubs more would simply dilute the competition even more. The parachute payments were designed so that teams relegated would not need to cut their playing staff drastically straight away, so adding a double punishment to relegated teams. If the parachute payments were removed then just about any club getting relegated would have to cut wages and playing staff drastically and immediately. A lot of those players would come back up to the PL rather than staying in the Championship, so diluting the talent pool in that League even further. You say that clubs could put in contracts that wages could be reduced in the event of relegation but if I was an agent for a player, then I would insist that if such a clause was inserted it would also represent breach of contract and my player could effectively become a “free agent” and try to obtain a deal elsewhere. I dont see that any respectable court would rule against an agent in such a case. A contract is a contract. If you dont want to pay me my money then allow me to go. Period. The parachute payments at least give clubs the opportunity to retain a core of players and promote continuity.

    Ultimately no one forces clubs to overspend. There are plenty of examples of clubs staying within their means in the search for PL football and even after they have been promoted. Clubs that do not spend wisely tend to get punished for it, unless they have a brand large enough to cope with that excess (Liverpool and Utd obviously), which is exactly what you would hope would occur.

    There are plenty of businesses taking on excessive debt to succeed. Sometimes it works and sometimes it doesnt. Government shouldnt meddle in the ambitions of private companies unless it is to remove externalities or enforce the law. You castigate the banking industry rightly for getting a bail-out and then recommend the government to legislate within football. I think there are lots of ways that Football could do a better job of legislating internally, but asking the government to come in and try to do better is not the way.

  • Ian B

    I have heard from an Everton fan that the reason they sold Piennar was due to needing the cash and removing his salary from the wage bill. Further to this apparently Yakubu and Phil Neville either need to be sold or pushed out on loan to remove their wages. Rumour is that Neville will be sold in this transfer window.

    On top of this they are actively seeking investment that will enable them to continue this season without entering into administration. Seems the Blue half of that City have enjoyed laughing at the Red half for some time now without realising what a mess their own club is in.

    Not sure how accurate this info is but there seems to be a real concern from the supporter that i know

  • Dan M

    Have to agree with the others – Nice post.

    Ultimately, however, I have to admit that, even if the EPL were to adopt your sensible suggestion re parachute payments, the lack of business nous amongst the managers would simply mess things up in a different way. Until the clubs across the board realise they also have to operate as a business then player Agents are going to tie the clubs finances up in knots.

    On a positive note, it is a good thing that the EPL has made ‘some’ positive steps to share the wealth amongst a greater proportion of club. Can you imagine what the EPL would look like if we were more like la Liga? You don’t see RM or Barca sharing the wealth do you?