1. No category

This article was downloaded by: [Solberg, Harry Arne]
On: 12 February 2010
Access details: Access Details: [subscription number 919251819]
Publisher Routledge
Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 3741 Mortimer Street, London W1T 3JH, UK
Sport in Society
Publication details, including instructions for authors and subscription information:
http://www.informaworld.com/smpp/title~content=t713634841
European club football: why enormous revenues are not enough?
Harry Arne Solberg a; Kjetil K. Haugen b
a
Trondheim Business School, Trondheim, Norway b Department of Economics, Molde University
College, Molde, Norway
Online publication date: 12 February 2010
To cite this Article Solberg, Harry Arne and Haugen, Kjetil K.(2010) 'European club football: why enormous revenues are
not enough?', Sport in Society, 13: 2, 329 — 343
To link to this Article: DOI: 10.1080/17430430903523036
URL: http://dx.doi.org/10.1080/17430430903523036
PLEASE SCROLL DOWN FOR ARTICLE
Full terms and conditions of use: http://www.informaworld.com/terms-and-conditions-of-access.pdf
This article may be used for research, teaching and private study purposes. Any substantial or
systematic reproduction, re-distribution, re-selling, loan or sub-licensing, systematic supply or
distribution in any form to anyone is expressly forbidden.
The publisher does not give any warranty express or implied or make any representation that the contents
will be complete or accurate or up to date. The accuracy of any instructions, formulae and drug doses
should be independently verified with primary sources. The publisher shall not be liable for any loss,
actions, claims, proceedings, demand or costs or damages whatsoever or howsoever caused arising directly
or indirectly in connection with or arising out of the use of this material.
Sport in Society
Vol. 13, No. 2, March 2010, 329–343
European club football: why enormous revenues are not enough?
Harry Arne Solberga* and Kjetil K. Haugenb
Trondheim Business School, Trondheim, Norway; bDepartment of Economics, Molde University
College, Molde, Norway
Downloaded By: [Solberg, Harry Arne] At: 23:56 12 February 2010
a
This essay discusses why many European football clubs have experienced financial
problems, despite earning high revenues. The fact that European football clubs are win
maximizers make them more aggressive when competing for talented players than
professional teams on other continents. So-called eyes of a needle, such as promotion,
(avoiding) relegation and qualifying for international tournaments strengthen the
cost push effects. Due to the free movement of labour, any regulations have to be
implemented simultaneously across the whole of Europe. Achieving such unilateral
agreement in 52 national leagues is difficult. European football has a history of
powerful clubs that are not favourable to regulations that can reduce their advantages.
A game-theory approach illustrates the mechanisms that lead European clubs to spend
more resources than they can afford. Additionally, this part offers a new and hopefully
interesting explanation, besides objective function differences, when it comes to
understanding micro differences between US and European sports.
Introduction
It is well documented that European football clubs can generate enormous revenues.
During the 2005/06 season, Real Madrid, Barcelona and Juventus each earned more than
e250 million, while 16 clubs made more than e100 million.1 Table 1 documents high
revenues also among the average clubs in the ‘big-five’ European football leagues. Despite
this pattern, many football clubs have struggled with severe financial problems, as
illustrated in Table 2.
In the period from the 1997/98 to the 2003/04 season, the Italian Serie A clubs had an
aggregate operating loss of e955 million.2 Before the start of the 2002/03 season, 23 clubs
(2 in Serie A, 6 in Serie B, 15 in Serie C) were facing possible exclusion from their
respective leagues due to financial problems. In an attempt to reduce the financial
problems, several Italian clubs offloaded star players. In addition, many players accepted a
reduction in salaries during this period.3
The clubs in the French League 1 had an aggregate operating loss of e404 million
from the 1996/97 season to the 2004/05 season.4 However, due to regular export of
players, these deficits were not as devastating as for the Italian clubs. Since 1998, more
than 50% of the French internationals have played for foreign clubs.
With few exceptions, English Premier League clubs have avoided financial
difficulties. This, however, has not applied to the lower divisions. From 1999 to 2004,
22 out of 72 clubs in the Football League (the three leagues below the Premier League)
were put under administration.5 For the period from 1992/93 to 2005/06, the clubs in the
*Corresponding author. Email: harry.solberg@hist.no
ISSN 1743-0437 print/ISSN 1743-0445 online
q 2010 Taylor & Francis
DOI: 10.1080/17430430903523036
http://www.informaworld.com
330
H.A. Solberg and K.K. Haugen
Table 1. Average revenues in the ‘big-five’ European football leagues (e-million).6
Downloaded By: [Solberg, Harry Arne] At: 23:56 12 February 2010
English Premier League
Italian Serie A
German Bundesliga
Spanish Primera Liga
French Ligue 1
2001/02
2002/03
2003/04
2004/05
2005/06
84
63
58
39
32
98
65
61
42
35
98
64
59
47
33
99
67
69
52
35
100
70
66
58
46
division below the Premier League, (currently named the Championship) alone had a
cumulative operating loss of e760 million.7
The majority of the German Bundesliga teams have been quite ‘healthy’ in economic
terms. The exceptions have been Borussia Dortmund and Schalke 04, who have been hit
by severe problems. This is a paradox since both have attracted very high attendances –
even from a European perspective. During the 2003/04 season, Borussia Dortmund had an
average audience of 74,000 – a capacity utilization of 90%. Schalke attracted 56,000
spectators on average during the same season, a capacity utilization of 93%. Indeed,
Dortmund avoided bankruptcy by buying its stadium back from a consortium of investors
that were willing to renounce interest payments of several million Euros.8
Football clubs in smaller European football nations have also experienced financial
difficulties. In 2003, the combined debt of the 12 Scottish Premier League (SPL) clubs
amounted to £186 million. This was £32 million higher than the clubs’ combined annual
turnover. At one point during the 2003/04 season, a quarter of the SPL clubs were in
administration.9
Benfica, the Portuguese champion in 2001, registered net losses of more than
e37 million. This was more than 40% of the total for the entire first division. Its costs for
the season were double the club’s income.10
Norwegian elite clubs have also been hit by difficulties, despite a strong growth in
revenues from gate receipts and TV rights. From 1998 to 2007 gate attendances increased
by 100%, and the TV rights deal commencing in 2005 represented a growth of almost
400% from the previous deal. Nevertheless, in 2007, 10 of the 14 elite clubs had an
operating loss, which in total amounted to NOK80 million.11 Indeed, five years earlier
similar problems initiated a discussion on whether smaller nations, such as Norway, could
afford to have a professional football league.12
¨ rebro from
In 2004, the Swedish Elite Licence Board (ELB) decided to relegate O
Allsvenskan (the Swedish elite league) due to financial problems. At some point,
Helsingborg, the winner of Allsvenskan (the Swedish elite league) in 1999, risked the
same destiny, but was saved by extra funding from the city of Helsingborg. Winning
Table 2. Aggregate operating profit/loss (e-million).13
England: Premier League
England: Division 1
England: Division 1 – 3
Germany
France
Italy
2001/02
2002/03
2003/04
2004/05
2005/06
121
2 20
2 65
100
2 98
2404
180
2113
2160
138
261
2265
216
2 51
2 75
52
2 102
2 234
234
2 61
2 83
65
2 15
1
200
2 77
2 106
72
37
21
Downloaded By: [Solberg, Harry Arne] At: 23:56 12 February 2010
Sport in Society
331
Allsvenskan qualified them to UEFA’s Champions League, which dramatically increased
the revenues the following year. The direct CL-revenues amounted to SEK52 million, a
figure that was uncommon in Swedish football at that time. As an illustration, it accounted
for 12% of Allsvenskan’s total revenue during the whole season, while Helsingborg’s total
revenues accounted for 21% of Allsvenskan’s total revenues. Despite this, the club almost
broke its financial neck in the following years. The Champions League adventure
increased their ambitions, but also the cost. Star players were recruited, and the
organization enhanced. This, in turn, increased the salaries considerably. Unfortunately
for Helsingborg, they have never (up to 2008) qualified to the Champions League since the
2000 season. After the CL-adventure, the revenues dropped considerably, i.e. by 41%
from 2000 to 2001. This reduction, however, was not reflected in the costs as Table 3
illustrates.14
These examples have illustrated that even the highest revenue generators in European
club football can run into financial difficulties. There are few other industries – if any –
where firms of so few employees can generate such enormous revenues as the football
industry.
This paradox, namely that sports clubs with enormous revenues operate at the brink of
bankruptcy, has been a European phenomenon. Although teams in other continents also
have been affected by financial problems, these have neither occurred as often nor been of
the same extent as in Europe. The main purpose of this essay is to provide more insight
into the reasons for this and, of course, whether it is possible to solve the problems.
Economic theory will be applied to identify the mechanisms that put the clubs in to such
difficulties. We also discuss whether Europe successfully can adopt the regulations that
have helped North-American teams to avoid such problems, for example the Salary Cap.
Theoretical context: the objective and market behaviour of European football clubs
The objective of a football club will influence its policy of recruiting players and hence
also the revenues and costs. Literature in Sports Economics has distinguished between two
alternative objectives: profit maximizing and win maximizing. There has been some
consensus that North American clubs behave like profit maximizers, whereas in Europe,
Australia and other continents some kind of utility maximization seems to be the
objective.15 Sloane considers European soccer clubs as utility maximizers where the utility
function of club owners also includes sporting performance.16 According to Vrooman,
European club owners are willing to sacrifice some financial return in order to achieve
better sporting performance.17 It would probably be more correct, however, to regard these
two regimes as polar cases where the behaviour of North American teams is closer to profit
maximizing, while the behaviour of European teams is closer to win maximizing, but that
teams on both continents emphasize both objectives.18
Table 3. Helsingborg’s revenues and costs the years surrounding their participation in UEFA’s
Champions League.19
Revenues
Cost
Operating result
One year
before CL
participation
Year of CLparticipation
One year
after CLparticipation
Two years
after CLparticipation
Three years
after CLparticipation
60.4
58.8
2.0
109.0
88.6
19.5
64.3
81.320
2 7.9
59.5
77.4
218.5
63.3
64.0
26.0
Downloaded By: [Solberg, Harry Arne] At: 23:56 12 February 2010
332
H.A. Solberg and K.K. Haugen
Figures 1a and 1b use a framework known from production theory and show how
much talent a club operating in these two alternative regimes will hire. This presentation is
based on Ke´senne, which presents the revenues of a club as a function of the market size
(M) and talent (L).21 In this context, M is assumed to be constant. The equations are
presented in the Appendix.
We call this club X, which is explained in the footnotes. Figure 1a measures its total
revenues (Rx) and total costs (Cx) along the vertical axis, while Figure 1b measures the
marginal-revenues (MRx), average revenues (ARx) and the talent costs (Wx). The
horizontal axes measure talent (Lx) in both figures. Note that in this context, talent is not
identical with players. Talent is unequally distributed among the players. A player with
many talents is more productive in terms of point- and revenue-generating than one who is
less talented. Hence, the most talented players will have the highest salaries. The club will
improve its sporting performance by hiring more talent, and hence also increase its
revenues. However, the figures illustrate that the growth rate in revenues is diminishing.
A profit-maximizing club will hire talent until its marginal revenues equal the unit
cost, i.e. at Lx1. A win-maximizing club, however, will operate on ‘break-even’, which is
at point Lx0. Hence, it will hire more talent than a profit maximizing club. However, at this
Figure 1a and b. (a) Total revenues and costs from recruiting talent; (b) Marginal revenues, average
revenues and unit costs from hiring talent.
Downloaded By: [Solberg, Harry Arne] At: 23:56 12 February 2010
Sport in Society
333
Figure 2. Factor market equilibriums for clubs operating in profit-maximizing and
win-maximizing regimes.
point (Lx0), it has no safety margin. Hence, unexpected reductions in revenues or cost
increases will cause a deficit if it is impossible to offload talent (L).
In reality, some win-maximizing clubs sometimes hire more talent than Lx0. Funding
from wealthy supporters can enable them to operate at a level where the costs exceed the
revenues. Indirectly, the decisions of European football clubs are not only influenced by
the formal owners of the clubs, but also by the supporters, who often are regarded as
the ‘social owners’ of the clubs. Although the supporters have no formal power they
nevertheless can influence a club’s decisions by their numbers and by being well
organized.
In general, the supporters are not concerned about the club’s financial condition unless
it affects the ability to hire talent. When clubs are under-performing, they often demand
new players, irrespective of whether or not the club can afford it. If the supporters are
overlooked, the clubs will risk negative publicity. This, in turn, can reduce the attendances
and hence also the revenues from the media and sponsors. To avoid such problems, some
clubs might find themselves forced to recruit more talent than they actually can afford,
i.e. adopt a solution to the right of Lx0 in Figures 1a and 1b.
In recent years, many football clubs have been exposed to unforeseen reductions in
revenues. The bankruptcies of Premiere and ITV-Digital (the German and British pay TV
broadcasters) early in this century represent two such examples. Both incidents
caused severe difficulties, respectively for the German Bundesliga clubs and the English
Football-League clubs.22
In cases of revenue reductions, a club operating in a win-maximizing regime will have
to cut W or L (or a combination) to avoid deficit. In reality, however, it can be difficult to
effect either of the alternative strategies. After the Bosman ruling, long-term contracts
became common in European football. Many clubs regarded contracts over periods
of three to five years as a safety net that prevented players from disappearing too early.
On the other hand, long-term contracts can also become a financial burden if players
under-perform or negative shifts in demand occur. Players on long-term contracts are
unlikely to be willing to reduce their salaries. To persuade them to move to another club,
the selling club may have to offer compensations.
Downloaded By: [Solberg, Harry Arne] At: 23:56 12 February 2010
334
H.A. Solberg and K.K. Haugen
A multi-club perspective
In general, a professional football club will earn more revenues the more successful
it is. Studying the objectives of the clubs before the start of the season leaves the
impression that each and every club aim to perform better than the previous season.
This, however, is impossible due to the ‘zero-sum game nature’ of team sports
tournaments. If one club climbs on the ladder, then another club has to move down
along the same ladder. The most effective instrument to improve the sporting
performance is to requite more talent.
However, achieving success in football tournaments can be very costly due to the high
salaries of the players. Table 4 documents a very strong growth in salaries over a ten year
period in the elite leagues in the big five football nations and Sweden.23
In real life, clubs are operating in multi-club environments and not solely as
presented in Figure 1a and b. We now introduce a two-club regime, which of course
(still) is a simplification compared to the reality in European football leagues, where
the number of clubs usually is in the region of 12 to 20. Despite this, a two-club
model can illustrate the main reasons for the financial problems of European club
football.
Figure 2 illustrates the equilibrium solutions in the input markets in the two regimes.
The equilibria will be at the point where ARx ¼ ARy in a win-maximizing regime, and at
the point when MRx ¼ MRy in a profit-maximizing regime. We now see that the wage
rate will be higher in a win-maximizing regime than in a profit-maximizing regime.
Hence, European football clubs not only hire more talent than the professional teams in
North-America, they also pay more per unit of talent. From Figure 2 we can also read
that the aggregate profit of the two clubs will be higher when they operate in a profitmaximizing regime than in a win-maximizing regime. The logic behind this is easy
to understand. At Lwm, the marginal revenue in club Y is higher than in club X;
MRy . MRx. Hence, the aggregate revenues will increase if we transfer talent from club
X to club Y.
Summarizing the findings in Figures 1a, 1b and 2 has shown us three major differences
between the two regimes. If we stick to the assumptions that European football clubs are
win maximizers, while North American professional teams are profit maximizers, we can
conclude that:
1. European football clubs recruit more talent than the North American teams.
2. The wage rate in European football will be higher than North American team
sports, other things being equal.
3. The aggregate profit will be lower in European football than in North American
team sports, other things being equal.
Table 4. Salary costs European leagues (e-million).
England
Italy
Spain
Germany
France
Sweden
1995/96
2000/01
2005/06
Growth whole period
250
256
175
187
161
6.3
822
868
491
447
414
16
1,235
806
739
578
541
22.2
383%
222%
322%
209%
236%
200%
Downloaded By: [Solberg, Harry Arne] At: 23:56 12 February 2010
Sport in Society
335
A game-theoretic approach
In previous paragraphs, we have discussed various explanations for why football clubs
may suffer economic problems – even if revenues are enormous – through traditional
(general equilibrium-based) economic arguments. In this section, we will demonstrate that
a game-theoretic approach may strengthen such arguments, and even shed some added
light into the difference between win- and profit-maximization. Hence, we now focus on
the direct competition between clubs and the effects we can infer through simple game
models involving player transfers.
Consider that the two clubs, X and Y are facing the decision of buying a new player.
We assume that a buying decision is made, so the option of not buying is closed. The new
player may be expensive (EP) or cheap (CP)24 and the costs (cE and cC, cE . cC )25 for
buying the players, are exogenously given. The exogenously given costs (may) indicate
that the two teams buy players from different markets. The two teams compete against
each other, either for a given qualifying match, or for a series of matches (a league).
We furthermore assume that the teams are equally good and that a certain premium or
revenue R,26 is related to winning the match (or league) – a loss yields no revenue.
The assumption of a single match or a league indicates a win/lose situation. Hence, if
both teams are equally good, the probability of winning equals a half for each team.
Finally, we assume that buying an expensive player (EP) leads to an increase in the
winning probability of 1ð1 . 0Þ. We also assume (to simplify) that both the two expensive
players as well as the two cheap players are clones (that is – they are equally good).
Now, assuming that both teams maximize expected profits and must make the buying
decision simultaneously (or without information on the competing clubs choice), the
above situation may be summed up in the two-player simultaneous complete information
game of Figure 3.
The values in the double matrix of Figure 3 may need some further explanation.
As both teams initially are assumed equally good, a coordinated buying decision will not
alter this fact. Hence, in the (EP, EP) and (CP, CP) cases, both teams are still equally good
and the probability of each team beating the other is 12. Then, expected revenue is 12R and
Figure 3. A simple profit-maximizing buying game.
336
H.A. Solberg and K.K. Haugen
expected profits are
Downloaded By: [Solberg, Harry Arne] At: 23:56 12 February 2010
1
R 2 cE
2
or
1
R 2 cC
2
In the situation without coordination (EP, CE) or (CP, EP), the team buying the
expensive player (choosing EP) gets a probabilistic advantage equal to 12 þ 1. As a
consequence of the assumption of a win/loose situation, the probability of a win for the
other team (choosing CP) must be 1 2 (12 þ 1) ¼ 12 2 1. This explains the remaining parts
of Figure 3.
Given these assumptions, it is straightforward to study the win-maximization (game)
option – as indicated by Figure 4 containing winning probabilities for both teams. Recall
that, initially, both teams were assumed equally good leading to a winning probability of 12
for both. Adding either both expensive (Ep) or cheap (Cp) players made no difference –
hence an unchanged strength relationship between the teams. However, in the situation
where one of the teams buys expensive while the other buys cheap, the team buying the
expensive player gains the probabilistic advantage of 1.
It is easy to analyse these two games. Starting with the simplest in Figure 4, computing
best reply correspondences are done as indicated by circles and squares of Figure 4.27
As Figure 4 indicates, a unique pure Nash equilibrium exists where both teams buy the
expensive player (i.e. EP, EP). Hence, the win-maximization strategy guarantees that both
teams (through competition) choose the expensive player option.
The other game (Figure 3) is a little bit more involved, but still easily analysed. This
game contains two possible unique pure Nash equilibria – determined by the following
inequalities: either or 1R , cE 2 cC or 1R . cE 2 cC 28. In the first case, this Nash
equilibrium is (CP, CP) – both teams choose the cheap player. In the second case, the
opposite occurs; both teams choose the expensive player (EP, EP).
Immediately, we observe the difference between win- and profit-maximization. In the
first case, the expensive solution is always chosen. However, in the profit maximization
case, both possibilities are open. This may serve as a game theoretic way of explaining
why a profit maximizer may choose less expensive players. At the same time, we observe
Figure 4. A win-maximization game.
Downloaded By: [Solberg, Harry Arne] At: 23:56 12 February 2010
Sport in Society
337
that profit maximization does not guarantee a cheap solution. In addition, we observe the
Prisoner’s Dilemma character of this game (given 1R . cE 2 cC ), as the ‘cheap’ (CP, CP)
outcome is preferable (by both agents) compared to the game theoretic prediction of
(EP, EP).
Finally (and interestingly), we observe that it is perhaps not necessarily the difference
in objectives (profit or win maximization) that separates European football from US teams
sports, as the value of R plays the role it does. If (by example) RUS p REurope it is perfectly
possible that both these Nash equilibria may exist; one in US and the other in Europe –
leading to inexpensive choices in US and expensive choices in Europe. The differences in,
for instance, relegation/promotion between US/Europe may be serving as an example on
strong differences in the R’s. Promotion will usually increase the revenues significantly,
while relegation has the opposite effect. The huge revenues involved in playing and
advancing in tournaments like Champions League – likewise.
Hence, we have shown that the difference in objectives does make a difference.
However, equal objectives may still lead to different player-buy-strategies (as well as
salary strategies) if the revenues involved differ enough between the two continents.
Obviously, our choice of game models involves (extreme) simplification. Still, it is
relatively easy to relax some of these simplifying assumptions allowing for unequal teams
as well as unequal player characteristics.
The game-theoretic approach illustrates the dilemma many European football clubs
are facing. If all of them adopt an aggressive (going for the expensive and good players)
strategy, the result will be too high wages. If all of them adopt a moderate strategy, for
example because the clubs agree to collude, costs can be held under control. If one (or
some few) adopt a moderate strategy, while the others follow the aggressive strategy, the
former one(s) will have lower costs. Such a strategy, however, may have a long-term
negative effect. Firstly, they will risk being overtaken by the clubs that adopt aggressive
strategies. This in turn, can reduce their revenues on a medium and long-term basis, both
from gate receipts, sponsors and sale from TV rights. The worst scenario is relegation,
which can reduce next year’s revenues considerably. This explains why many clubs find it
difficult to both achieve sporting success and at the same time cover the costs. It is also
important to have in mind that the choice of strategy also will influence the costs of the
other clubs, as was illustrated in the ‘down-left’ and ‘up-right’ columns in the ‘gametheory’ figures. If some adopt a moderate strategy, as Team X does in the ‘down-row’ and
Team Y in the ‘right-column’, this will reduce the competition, and hence also the costs of
the other teams, compared to the situation where all teams adopted an aggressive strategy.
This illustrates how the teams can become captured to adopting an aggressive strategy.
The dynamics discussed in this section is illustrated in Table 5, which shows the
sporting and financial ranking in the Scottish Premier League for the 2000/01 season.
The better the clubs performed, the worse was the financial result. The aggregate loss
amounted to £48.2 million – of which 60% belonged to the top two clubs (Celtic and
Rangers). The only club with a positive profit, St Mirren, finished at the very bottom and
was relegated.
The relationship among football clubs is different from the relationship among other
companies that belong to the same industry. This partly has to do with the uncertainty of
outcom/competitive balance phenomena, issues that are well covered in the sport
economic literature.29 In his famous article, Rottenberg (1956) argued that the interest in
the sport, and hence the total attendance and revenue, will be greater the closer the
competition between the competitors is.30 According to Fort and Quirk, professional
sports leagues are classic examples of business cartels.31 However, sports leagues differ
338
H.A. Solberg and K.K. Haugen
Table 5. Sporting and financial ranking Scottish Premier League (2000/01 season).32
Downloaded By: [Solberg, Harry Arne] At: 23:56 12 February 2010
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Celtic
Rangers
Hibernian
Kilmarnock
Hearts
Dunfermline
Dundee
Aberdeen
Motherwell
St Johnstone
Dundee United
St Mirren
Ranking – operating profit
Operating profit (£-mill.)
11
12
5
3
10
8
7
9
4
2
6
1
2 11,190
2 17,531
2 1,990
2 0,853
2 3,776
2 3,026
2 2,505
2 3,220
2 1,462
2 0,339
2 2,370
þ0,054
from other cartels in one important and paradoxical respect, since they are in the business
of selling competition, leading to what Neale termed ‘the peculiar economics of
professional sports’.33 Unlike any conventional industry, clubs must combine together to
produce a product. Thus, they also have an interest in upholding the economic health of
their rivals. It is in all teams’ own interest to ensure that none of them become too
dominant. Therefore, leagues use a variety of mechanisms to protect the collective interest
in upholding uncertainty of outcome/competitive balance. This includes various forms of
cross-subsidization of the smaller clubs by the larger clubs. Such a philosophy does not
correspond with basic principles in other industries where companies at each level along
the value chain would prefer to be the sole supplier (monopolist) or buyer (monopsonist).
This would provide them with more market power than if they had to compete with
rivalling companies. The importance of upholding the competitive balance has allowed
sports clubs to establish cooperations that would be in violation to anti-trust policy in other
industries.
Another factor that makes European football different from other industries is the trade
of players and the consequences this can have. The drawing power of football clubs varies
enormously, which also reflects the distribution of revenues. This has initiated a pattern
where the rich clubs buy up the most talented players from the ‘less rich’ clubs. For the
latter group, the revenues from selling players have an important source. Indeed, many of
them base their activity on regular sale of talented players to wealthier clubs. Such trade,
however, can also make them vulnerable if the sale dries up. If those at the top of the ‘food
chain’ run in to financial problems, this can affect those further down the chain. Indeed,
one reason why many Norwegian clubs were affected by financial problems during the
first years of this century could be that foreign clubs lost interest in buying Norwegian
players.34
Can European club football regulate itself out of the problems?
The game theory section illustrated the mechanism behind the growth in wages, and hence
also the need to establish regimes that regulate the costs. Sports leagues outside Europe
have applied various forms of regulations to keep the teams in a healthy financial
condition. One such instrument is the Salary Cap. A hard cap is a maximum wage level,
while a soft cap allows clubs to exceed this level. The Salary Cap can be effectuated both
as a per-player limit as well as a total limit for the team (or both).35 The major objective is
Downloaded By: [Solberg, Harry Arne] At: 23:56 12 February 2010
Sport in Society
339
to keep the overall costs down, but it can also prevent the wealthiest teams from becoming
too dominant, as it reduces their ability to recruit all the top players. Over the years, a
number of teams have been fined for breaking the regulation, for example by a reduction in
points.
However, although Salary Cap has worked effectively on other continents, it will be
difficult to introduce in Europe. While North-American and Australian team sports (only)
operate in a one-league system within their respective sports, European football club
football has more than 50 leagues. These leagues compete fiercely with one another for the
(best) players. The free movement of labour within the European Union and the European
Economic Zone has added fuel to this competition. Hence, any major regulations of
European club football, for example the Salary Cap, require them to be introduced
simultaneously. Not surprisingly, it has proven difficult to achieve such universal
agreements across Europe.
It will take a powerful governing body to effectively introduce and keep the
regulations. UEFA does not have the power to enforce any regulations upon the national
football associations. Furthermore, regulations such as a Salary Caps are unlikely to be
embraced by the wealthiest clubs, since they reduce their market power relatively to the
other clubs, which particularly applies to any forms of hard cap. Another hindrance is that
wealthy supporters can help the clubs to evade the regulations by illegally remunerating
the players. It can be difficult to prove such irregularities. If some clubs suspect others of
breaking the rules, this can in itself reduce the incentives to comply with the regulations.
The promotion and relegation system in European football can further complicate the
implementation of a Salary Cap. A club with a payroll close to the top division’s cap might
be relegated and then find themselves significantly over the second division cap. Likewise,
a promoted club might have to face the challenge of quickly finding players who it could
then pay under a higher cap.
Many football associations have introduced control mechanisms aimed at keeping the
clubs in a healthy financial condition. This includes various forms of cost regulations
where those clubs that do not meet the requirements are punished, for example by
relegation, withdrawing or loosing the licence. Anecdotal evidence has indicated that
these efforts may have paid off in terms of adjusting the behaviour of the clubs. However,
due to free movement of labour within Europe, the effectiveness of such regulations relies
heavily on simultaneous implementation in all markets. If domestic regulations go further
than in rivalling leagues, the best clubs will find it difficult to compete internationally. This
has been illustrated in France, which has had stricter regulations than any of the other ‘bigfive’ football nations. In addition, footballers in France are also taxed more heavily than in
most of the other leagues. This policy has reduced their ability to compete internationally
with clubs from England, Spain and Italy.36 French club football has not been as successful
as the national team. The question for the future is whether France will keep its regulatory
systems intact.37
Financial support from wealthy supporters
Many European clubs have been supported financially by wealthy supporters, including
the local public sector. One such example occurred when the city of Helsingborg offered
their local football club a loan of SEK20 million, and later transferred it to a gift.38
Another example was in Spain, when Real Madrid, the Spanish giant, was able to cancel a
debt of nearly e300 million, after persuading Madrid City Council and the Autonomous
Community of Madrid to sell the Ciudad Deportiva ground for e480 million. Another
340
H.A. Solberg and K.K. Haugen
example on a smaller scale is Sporting de Gijon, which sold its Mareo Football School and
its brand name to the City Council for e12 million in 2001.39 These three examples relate
to situations of clubs that otherwise could have gone bankrupt. Receiving such support
does not represent a problem in it self. The problems can arise if the clubs get used to being
saved so that it reduces their cost discipline, for example so that they spend more on hiring
players than they can afford.
Downloaded By: [Solberg, Harry Arne] At: 23:56 12 February 2010
Bonus salaries
This essay has illustrated that European club football needs better cost control to prevent
the financial difficulties we have observed in recent years. However, it has also illustrated
the need to tie the costs and revenues. One solution is to replace fixed salaries with bonus
salaries. However, to effectively improve the financial results, it is absolutely necessary
that the salaries correlate with the revenues. It is not enough to tie the salaries to
performance. Indeed, if improved sporting performance is unable to trigger an increase in
revenues, then bonus salaries can even worsen the financial result.
The clubs may have a hard job persuading the players to accept bonus clauses instead
of fixed salaries. Risk aversive players are unlikely to embrace the proposal. Hence, the
chance of bonus salaries being accepted will be influenced by the distribution of market
power between the players and the clubs. The fiercer the competition for the players, the
better cards they have when negotiating with the clubs. The better cards the players have,
the more difficult it will be to persuade them to accept bonus salaries.
The problems of replacing bonus salaries with fixed salaries illustrate a conflict
between individual and collective rationality. The revenues of a club can vary significantly
over the years. For many clubs, TV rights fees have become the most important revenue.
Although the long term trend has been a growth, one also finds many exceptions – even on
the most popular products. In addition, other factors which influence the revenues of the
clubs can also fluctuate. European club football has many needle eyes which do not have
room for all that try to pass. Those that fail to pass, for example by missing out on
qualifying to international tournaments or by being relegated, can find it very difficult to
cover the costs. If so, the club might be unable to remunerate its players. Hence, in the end
the players may be forced to accept reductions in salaries against their will, even if their
contracts guarantee fixed salaries.
Conclusions
This essay has discussed why many European football clubs have experienced financial
problems, despite earning high revenues. These problems have not only been due to low
revenues or high costs – but also to lack of correlation between the revenues and the costs.
The fact that European football clubs are win maximizers make them more aggressive
when competing for talented players, than professional teams on other continents. This can
explain why professional leagues outside Europe to a greater extent have avoided such
financial problems. The game-theory approach has illustrated the mechanisms which put
European clubs into situations where they spend more resources than they can afford.
Additionally, this part offers a new and hopefully interesting explanation besides objective
function differences when it comes to understanding micro differences between US and
European sports.
Leagues on other continents have applied various regulations that have held the costs
under control. Such regulations, for example the Salary Cap, are difficult to introduce in
Sport in Society
341
Downloaded By: [Solberg, Harry Arne] At: 23:56 12 February 2010
Europe. Due to the free movement of labour, they have to be implemented simultaneously
across whole Europe. Achieving such unilateral agreement between more than 50 national
leagues has turned out to be difficult. In addition, European football has a history of
powerful and wealthy clubs, and these will not be favourable towards any regulations that
can reduce their advantages.
Another alternative is to replace fixed salaries with bonus salaries. This, however, will
transfer risk from the clubs to the players. Therefore, the clubs may have a tough job
convincing the players that the instrument is absolutely necessary. As for the other
regulations, their success will depend on whether they are introduced simultaneously
across Europe.
This shows that the problems are not (necessarily) due to too low revenues or too high
costs, but due to lack of correlation between the revenues and the costs. What is missing is
mechanisms that tie the costs to the revenues.
Notes
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
Deloitte, Annual Review of Football Finance.
Ibid.
http://news.bbc.co.uk/sport2/hi/football/europe/2164106.stm.
Deloitte, Annual Review of Football Finance.
Buraimo, Simmons and Szymanski, ‘English Football’.
Deloitte, Annual Review of Football Finance.
Ibid.
Frick and Prinz, ‘Crisis? What Crisis?’.
Morrow, ‘Scottish Football’.
Barros, ‘Portuguese Football’.
http://fotball.aftenposten.no/eliteserien/article117919.ece.
Source: http://e24.no/naeringsliv/article1995579.ece.
Deloitte, Annual Review of Football Finance.
See Carlson, ‘Insolvency’, for a thorough description of these two cases.
Fort, Sports Economics; Fort and Quirk, ‘Cross-subsidization’; Fort and Quirk, ‘Owner
Objectives’; Vrooman, ‘A Unified Theory’; Ke´senne, ‘League Management’; Ke´senne,
‘Competitive Balance’; Sloane, ‘The Economics of Professional Football’; Szymanski, ‘Income
Inequality’; Rottenberg, ‘The Baseball Players’ Labour Market’.
Sloane, ‘The Economics of Professional Football’;
Vrooman, ‘A Unified Theory’.
Gratton and Solberg, Economics of Sport Broadcasting.
Source: http://www.svenskfotball.se/t2svff.aspx?p=288436.
Of which SEK 15.7 million refer to Champions League participation in 2000.
Ke´senne, ‘League Management’.
Gratton and Solberg, Economics of Sport Broadcasting.
Source: Deloitte, Annual Review of Football Finance; Carlsson, ‘Insolvency’. SEK 100 ¼ e10.39
(September 2008).
That is, EP, CP are the possible decision variable values for any team.
cE and cC can be viewed as total team costs (both possible sign on fees as well as salaries) for a
relevant time horizon. The point is of course that team costs after adding an expensive player
should be larger than after adding a cheap player – cE . cC
As the above costs where defined as total costs, it is obviously reasonable to view the revenue R as
total revenue over the same relevant time horizon. Note that we have chosen not to let R be a function
of buying choice. In practice this could be relevant – after all David Beckham sells more shirts than
Mister Nobody. However, in order to keep analytic complexity down we have deliberately chosen
this simplification. Still, the modelling framework makes such a relaxation tractable.
Best reply correspondences are optimal choices for each player as a function of all possible
strategic choices for the opponent. They are shown as circles for team X and squares for team Y in
Figure 4. A Nash equilibrium can then be popularly defined as all «intersections» between best
reply correspondences – i.e. all subsquares with both a circle and a square in Figure 4.
342
28
29
30
31
32
33
34
35
36
37
38
39
H.A. Solberg and K.K. Haugen
The third option of 1R ¼ cE 2 cC involves an infinite number of Nash equilibriums
in pure and mixed strategies and is not discussed further here due to its extreme unlikeliness.
See Ke´senne, The Economic Theory, for a detailed overview.
Rottenberg, ‘The Baseball Players’ Labour Market’
Fort and Quirk, ‘Cross-subsidization’.
Pearson correlation: 2 0.643, significant at 0.024 level. Source: PricewaterhouseCoopers, The
PricewaterhouseCoopers Financial Review.
Neale, ‘The Peculiar Economics’.
http://www.aftenposten.no/nyheter/sport/article754427.ece.
See Ke´senne, The Economic Theory, for more details.
Bolotny, ‘Football in France’.
See Gouguet and Primault, ‘The French Exception’, for a thorough discussion on this matter.
Carlson, ‘Insolvency’.
Garcı`a and Rodrı`guez, ‘The Economics of Soccer’.
Downloaded By: [Solberg, Harry Arne] At: 23:56 12 February 2010
References
Barros, C.P. ‘Portuguese Football’. Journal of Sports Economics 7 (2006): 96 – 104.
Bolotny, F. ‘Football in France’. In Handbook of the Economics of Sport, edited by W. Andreff and
S. Szymanski. Cheltenham: Edward Elgar, 2007.
Buraimo, B., R. Simmons, and S. Szymanski. ‘English Football’. Journal of Sports Economics 7
(2006): 29 –46.
Carlsson, B. ‘Insolvency and the Domestic Juridification of Football in Sweden’. Soccer and Society.
Forthcoming.
Deloitte. Annual Review of Football Finance. Manchester: Deloitte & Touche LLP, 2007.
https://www.deloitte.co.uk/RegistrationForms/PDFs/DeloitteFootballMoneyLeague2007.pdf.
Fort, R. Sports Economics. Upper Saddle River, NJ: Prentice Hall, Pearson, 2003.
Fort, R., and J. Quirk. ‘Cross-subsidization, Incentives, and Outcomes in Professional Team Sports
Leagues’. Journal of Economic Literature 33 (1995): 1265– 99.
Fort, R., and J. Quirk. ‘Owner Objectives and Competitive Balance’. Journal of Sports Economics
5 (2004): 20 – 32.
Frick, B., and J. Prinz. ‘Crisis? What Crisis? Football in Germany’. Journal of Sports Economics 7
(2006): 60 –75.
Garcı`a, J., and P. Rodrı`guez. ‘The Economics of Soccer in Spain’. In Handbook of the Economics of
Sport, edited by W. Andreff and S. Szymanski. Cheltenham: Edward Elgar, 2007.
Gouguet, J.J., and D. Primault. ‘The French Exception’. Journal of Sports Economics 7 (2006): 47–59.
Gratton, C., and H.A. Solberg. The Economics of Sport Broadcasting. London: Routledge, 2007.
Ke´senne, S. ‘League Management in Professional Team Sport with Win Maximizing Clubs’.
European Journal for Sport Management 2 (1996): 14 – 22.
Ke´senne, S. ‘Competitive Balance and Revenue Sharing: When Rich Clubs Have Poor Teams’.
Journal of Sports Economics 5 (2004): 206– 12.
Ke´senne, S. The Economic Theory of Professional Team Sports – An Analytical Treatment.
Cheltenham: Edward Elgar, 2007.
Morrow, S. ‘Scottish Football – It’s a Funny Old Business’. Journal of Sports Economics 7 (2006):
90–5.
Neale, W.C. ‘The Peculiar Economics of Professional Sports’. Quarterly Journal of Economics 78
(1964): 1 –14.
PricewaterhouseCoopers. The PricewaterhouseCoopers Financial Review of Scottish Football
Season 2000/01. Glasgow: Pricewaterhouse Coopers, 2002.
Rottenberg, S. ‘The Baseball Players’ Labour Market’. Journal of Political Economy 64 (1956):
243– 58.
Sloane, P.J. ‘The Economics of Professional Football: The Football Club as a Utility Maximiser’.
Scottish Journal of Political Economy 17 (1971): 121– 45.
Szymanski, S. ‘Income Inequality, Competitive Valance and the Attractiveness of Team Sports.
Some Evidence and a Natural Experiment from English Soccer’. Economic Journal 111 (2001):
F69– 84.
Vrooman, J. ‘A Unified Theory of Capital and Labour Markets in Major League Baseball’. Southern
Economic Journal 63 (1997): 594– 619.
Sport in Society
343
Appendix
The equations 1 and 4 present the revenues of club X and Y as a function of L (talent) while the
equations 2, 3, 5 and 6 present the marginal and average revenues. Equations 7 and 8 show that the
costs increase proportionally with L. Equation 9 shows that all talent available is being distributed
between the two clubs.
1. Rx ¼ ax Lx 2 bx L2x
2. MRx ¼ ax 2 2bx Lx
3. ARx ¼ ax 2 bx Lx
4. Ry ¼ ay Ly 2 by L2y
5. MRy ¼ ay 2 2by Ly
6. ARy ¼ ay 2 by Ly
Downloaded By: [Solberg, Harry Arne] At: 23:56 12 February 2010
7. Cx ¼ W*x Lx
8. Cy ¼ W*y Ly
9. L ¼ Lx þ Ly
Setting MRx ¼ MRy gives us equation 10 which is the equilibrium equation for the clubs
operating in a profit maximum regime
10. ax 2 2bx Lx ¼ ay 2 2by Ly
while ARx ¼ ARy gives us equation 11, which is the equilibrium equation for clubs
operating in a win maximum regime.
11. ax 2 bx Lx ¼ ay 2 by Ly
Abbreviations:
M ¼ Market size
L ¼ Talent
W ¼ Costs per unit of talent
C ¼ Total costs
R ¼ Total revenues