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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 As I see it, it’s either clubs desperately trying to climb the greasy pole (points if you get the historical reference) to get into the Premier League, or simply stay there.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.
Do you know how the off side law came to be? The full story is on the Arsenal History site
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