Football Governance - Culture, Media and Sport Committee Contents

Written evidence submitted by Professor Stefan Szymanski



—  This statement has been prepared by Professor Stefan Szymanski of Cass Business School, City University London. It represents my own personal views. I have been writing about the business and economics of sport in general and football in particular for more than 20 years. I have published over 70 academic articles and book chapters as well as eight books and two edited volumes on sports related issues. I have been a consultant on sports issue to the DCMS, the OFT, OFCOM, the OECD, and in 2010 I was a member of the Committee of Independent Experts advising the European Commission on sports policy. I have also worked for governing bodies such as UEFA, the FIA and ICC. I was an expert witness on football for the OFT in the Premier League broadcasting case. I appear regularly in the media on sport and business issues and have written for various newspapers and including the Financial Times, The Times, the Washington Post, the New Statesman and the London Evening Standard.

—  This submission deals principally with the state of football in England—little will be said about the state of the game in Scotland, Wales or Northern Ireland.

—  Contrary to popular views, English football is not currently in crisis, but is in fact in rude good health. Not only has attendance grown significantly over the last 25 years despite rapid price increases, there has been £2.8 billion of investment in football stadia largely from the private sector. English football now dominates its European rivals thanks to the large commercial income that it generates from ticket sales, broadcasting rights and merchandising.

—  This represents a major a turnaround after the long term post-war decline that bottomed out around 1985. While there were many factors which helped the recovery, the main driver was a change in attitudes, away from the amateurism which had characterised management up to that date, toward a more commercial outlook.

—  English professional league football is also remarkably stable, as measured by the survival of football clubs over more than a century. This stability stems from the community base that football clubs rely on. Short term instability associated with debt crises and administration represent only a temporary setback. Moreover, the movement of clubs up and down the league is an important part of the competitive structure of the leagues.

—  Club finances in England are remarkably transparent, much more so than club finances in other countries, even those with admired regulatory systems such as France and Germany. This transparency reveals how the competitive process works. Money buys success, and support follows successful teams. This also means that clubs make little profit, but all income is instead ploughed back into football.

—  Against this background I have set out some answers to the questions posed by the Committee. Broadly speaking I see little basis for government intervention in professional football and argue that the competitive system provides the greatest possible benefit for the fans. This is manifested in the enormous popularity today of English football at all levels. There is no obvious market failure or social injustice which regulation is required to correct, and in that context the government would do better to keep well clear.

Failure or Success?

1.  There is a common perception that English football is in crisis. In reality English football is healthier than it has ever been. Equally, there is a view that English football experienced a golden age, possibly to be located in the 1950s and 60s, maybe even as recently as the 1970s. In fact the reverse is true. As the chart below shows, attendance at league football in England (the top four divisions) is now at the highest levels seen for five decades. Indeed, attendance at league football in England was in almost continuous decline from 1950 until 1985. The scale of the recovery since 1985 matches the scale of the decline, so that today attendance levels are where they were in 1960.

Source: Sky Sports Yearbook

2.  The Premier League has the highest annual attendance of any football league in the world, a total of 13 million in 2009-10, compared to 12.8 million for the Bundesliga1, 10.5 million for La Liga and 9.4 million for the Serie A. Much has been made of the Bundelsliga's increasing attendance in recent years, but this is only true in the top tier. If we compare second tiers, the Championship attendance reached 9.9 million last season (higher than Serie A), far ahead of the 4.6 million following Bundlesliga2, the 4.2 million attending Spain's Liga Adelante or the 2.5 million attending Serie B. Indeed, England's third tier attracted over 5 million spectators last season, making it more popular than any other second tier league in the world.

3.  Attendance is one of the best measures we have of the state of the game, since it represents active choices made by people about how they want to spend their time. Football clubs, like any other providers of a commercial service, have to ensure that what they offer is attractive to the buyer on the buyer's own terms. It is a commonly held myth that football fans are somehow a captive audience monopolized by whichever club they happen to support. However, the chart illustrates that if fans do not like what they are offered then they will desert football en masse as they did until the mid 1980s.

4.  The evident renaissance in English football might seem puzzling in the light of the dramatic price increases we have witnessed over the last quarter century. Back in 1985, when attendances were still falling, a ticket for a top division game cost £2.80 and a season ticket for Manchester United cost only £70.[5] When ticket prices were low, attendance fell. Since then prices have risen at an average annual rate of over 10% to a level of about £35 for a typical Premier League ticket and between £513 and £930 for a Manchester United season ticket.[6] For the sake of comparison, had ticket prices increased only with the rate of inflation (RPI) an average ticket would cost £6.60 today and a Manchester United season ticket £166.

5.  Economic studies[7] have suggested that demand for attendance at professional sports is inelastic (relatively insensitive to price) - with figures ranging from close to unit elasticity (so that a 10% increase in price leads to a 10% fall in attendance) to as little as -0.1 (so that a 10% increase in price leads to a 1% fall in attendance). All else equal, the size of the price increases we have seen would have provoked a decline in attendance of over 50% in the Premier League even if we assume very inelastic demand. In reality attendance has increased by 66% since 1989. Moreover, most Premier League teams have been playing at near capacity for the last decade. In the Championship, where ticket price increases have been less steep and clubs still have spare capacity for many games, attendance in 2009-10 was 180% higher than the post war low of 1985-86. It is sometimes remarked that attendance in the Bundesliga are equal to those of the Premier League while ticket prices are one third the level. The implication is that if the Bundesliga charged similar prices to the Premier League then their stadiums would be half empty, while the Premier League would need to double the size of its stadiums to meet demand if prices were cut to Bundesliga levels.

6.  The current strength of English football can be measured in other ways. TV broadcasting income has increasingly became a major source of earnings for successful sports leagues, and the Premier League is the most successful football league from this point of view. For the period 2010-13 domestic rights were sold for £1.8 billion and for international rights £1.4 billion overseas. This amounts to just over £1 billion per season, significantly more the top leagues in Spain, Germany and Italy generate. The Premier league is also probably the largest generator of commercial and sponsorship income overall. In the most recent review by Deloitte,[8] the average income generated in 2008-09 by Premier league clubs was £99 million, £75 million by Bundesliga1 clubs and £65 million by LA Liga and Serie A clubs. Seven out of the 20 clubs in the Deloitte Football Money League (ranking by income) were from the Premier League. This is to a significant extent driven by the growing enthusiasm for English football abroad. Its international reputation has never been higher, with significant following in the Far East, Scandinavia, the Gulf states, the USA and elsewhere. Thus English football is healthy at all levels- it has the lion's share of the world's richest clubs, while also enjoying the greatest support in depth of any football nation in the world.

Why has there been a renaissance in English football?

7.  It is not difficult to find explanations for the fall and rise of English football. Immediately after the Second World War attendance peaked as football was one of the few entertainments on offer in austerity Britain. However, from the 1950s onward increasing affluence and new forms of entertainment (TV, motor cars, leisure centres and so on) increasingly exposed the poor quality of facilities and lack of investment in the game. Hooliganism came to symbolise the English game both at home and abroad. The quality of English football compared unfavourably with most of Europe and Italy was seen to have the strongest league, with strong competition from Spain, Germany and Holland.[9]

8.  Since the mid 1980s the hooliganism issue has been dealt with and largely brought under control; massive investment in facilities—amounting to £2.8 billion across the 92 League clubs since 1992[10]—has made attending football matches a more pleasurable experience; the quality of football has improved with the introduction of some of the biggest stars from around the world; English football became fashionable again in the 1990s, with blanket media coverage and increased appreciation of its cultural significance, both at home and abroad.

9.  To a significant extent the pressure for change came from outside the game itself. The Taylor Report, which mandated all-seater stadiums following the 1989 Hillsborough tragedy in which 96 Liverpool fans needlessly perished, was a significant catalyst for change. Likewise, government pressure to deal with hooliganism problem brought measures to ensure that anyone causing a disturbance could be identified, ejected and if needs be prosecuted. The deregulation of broadcasting in Europe in the 1980s helped to create satellite broadcasters willing to compete aggressively for television rights and so bid up their value.

10.  However, change also came from within. The turning point for attendance came around 1986, before Taylor, before Sky and before hooliganism was brought under control. In 1982 the Football League Management Committee commissioned an enquiry into the structure of the League as many clubs were struggling with falling gates and revenues during the severe recession of that period. This produced the second Chester Report (Sir Norman Chester having written an earlier report as chair of the Committee on Football commissioned by the Department of Education and Science in 1968). The Report published in 1983 stated in its findings "clubs will have to be more sales minded in future if they are to maintain, let alone increase, their gates" (p vii). Until 1981 League clubs were prohibited from paying Directors- the Committee recommended that all restrictions should be withdrawn; the FA still limited the dividends payable by clubs and the Committee recommended abolishing these limits. In order to ensure "managerial efficiency" the report recommended abolishing gate sharing for League matches, and that clubs shown most frequently on TV should get a greater share of the revenues. The report also commented "League clubs are commercial enterprises: their financial success depends on meeting the needs of their customers. Yet until very recently neither the League nor individual clubs have shown any interest in the two management tools which consumer industries normally find indispensable- market research and advertising." (p10) It recommended increased market research, measures to attract more women to follow the game and consideration of moving games away from the Saturday 3.00 pm kick-off.

11.  There can be little doubt that the League and the clubs took this call for a more commercial approach to heart. Restrictions on paying directors and dividends were removed. As well as the investment in facilities already mentioned, clubs have significantly extended their commercial activities and are continuing to do so. By the late 1980s clubs were going on fact finding missions to the USA to discover how commercial sports marketing operated over there, and no doubt many practices have been copied. It was this new commercialism which helped to generate the rapid growth of income.

So why all this talk of crisis?

12.  Despite the continued success of the last 25 years, many people have felt that the English football boom was/is unsustainable, and that the "football bubble" will soon burst. This feeling arises out of a confusion of three things- the short term instability of individual clubs, the long term survival of individual clubs and the stability of the league system as a whole.

13.  There is clearly a great deal of short term instability at individual football clubs. This is largely a consequence of the promotion and relegation system, which drives teams to spend all they can afford, and often more than they can afford, to avoid the drop. Equally, ambitious teams are tempted to stretch themselves financially to their very limits, and frequently beyond them, in order to reach a higher level of competition. Many imagine this is purely sporting ambition, but there is also a commercial context to this as well. As the chart below shows (using a decade of data for clubs from the top two divisions), teams with lower league positions (the horizontal axis) generate lower incomes (the vertical axis). The chart demonstrates that there is a high level of predictability in the relationship between wages and league position- the "R2" tells us that over time 89% of the variation in club revenues can be attributed to league position alone.


Source: own calculations based on football club accounts

14.  One reason that revenue declines so significantly with performance is that many fans are not always as loyal as they are sometimes portrayed; failing teams lose support. To take an example of a club with notably loyal fans, Leeds United attracted a league crowd of over 39,000 in 2000 when the club was near the top of the Premier League, a figure which fell to only 29,000 when the club was relegated to the Championship and then fell below 25,000 when the club sank into League One. No doubt there is always a core of supporters who will follow a club through thick and thin, but equally there may be many "floating voters" who are mostly interested in success.

15.  An equally important cause of short term instability is the link between league position and wage spending, as shown in the next chart. This says that about 89% of the variation in league position (the vertical axis) can be explained by wage expenditure relative to other teams in the league (the horizontal axis). This relationship reflects the operation of the market for players. In economic terms this is a fairly "efficient" market, which in football terms means that you get what you pay for. Of course, individual players may get injured and sometimes a superstar emerges unexpectedly, but because there are many buyers and sellers in the market, and because there is plentiful information about player abilities, generally the market prices talent accurately.

Source: own calculations based on football club accounts

16.  Combining these two diagrams, it can be shown that revenues and wages at each league position more or less cancel each other out, which explains why most football clubs fail to generate significant profits. If a team makes profits, then it must be underpaying its players, in which case a team below them in the league can compete to hire those players at a higher wage and take their position. The short term instability of clubs arises when there is a mismatch between expectations and reality. This may be misjudgement or bad luck, but in either case if short term performance or fan support falls below expectations then the club will fall in to a deficit, which may lead to insolvency. This has become very common in English football; Deloitte identified 53 cases between 1992 and 2010.[11] In order to deter clubs from reaching this stage a variety of regulations have been introduced by the football authorities, including docking of points for going into administration, a system of expenditure limits adopted by League Two clubs and most recently the Financial Fairplay regulations of UEFA which will limit annual club spending on players to identifiable football income. Of course, even without these constraints, failure often imposes a sporting penalty in the form of relegation.

17.  Despite this short-term instability, football clubs are remarkably stable organisations over the long term. Of the cases identified by Deloitte, all of the clubs re-emerged as going concerns after a period of administration. Indeed, in 1923 there were 88 teams in the Football League: in 2007-08 85 of these teams still existed and the three that had disappeared did so before the war. 75 of the teams were still in the top four divisions and in fact 48 were still in the same division they belonged to in 1923. One reason for this stability is that clubs are at root community organisations. Clubs can adjust their expenditure to any level of competition, and likewise the fanbase for a club adjusts to the level of success, so even if a club falls on hard times, there is a level of operation (both financial and sporting) to which it can (and does) adjust.

18.  The leagues have also shown themselves to be remarkably stable. The greatest threat to a league is that a club might fail financially and be unable to complete its league fixtures. Whilst this in theory means that there is a systemic risk associated with the financial instability of clubs, in reality this risk is almost never crystallised. Leagues have also protected themselves by imposing rules on settlement of debts, such as the notorious football creditor rule. While some rules may be better than others, there is little doubt that league administrators have the capacity and the incentive to make rules which ensure the long term stability of the league.

Should football clubs in the UK be treated differently from other commercial organisations?

19.  Football clubs established themselves as limited companies in the 19th century, although as explained above the FA and the League imposed rules which limited their capacity to operate commercially until the 1980s.[12] Given the significant sums of money involved, it makes sense for clubs to be run as limited companies, but there is nothing to stop the ultimate owners of the clubs to adopting different organisational forms such as Supporter Trusts. It is worth noting that in the early 1990s the Spanish government obliged football clubs to move to limited company status because the membership organisations ("clubs") had unsustainable debts. In the event Real Madrid and Barcelona (as well as two other clubs) were exempted from the change. In Germany clubs (Vereine) have traditionally been registered with and subsidised by the state. However, this is a very different tradition of organisation compared to the UK.

Are football governance rules in England and Wales, and the governing bodies which set and apply them, fit for purpose?

20.  Like Parliament and the Bank of England, the governance institutions of football have evolved, and were not originally designed for the purposes they are now required to fulfil. However, institutions adapt, largely through competition among those interested in the consequences of governance. Most notably in recent years, the representatives of the professional game have exerted increasing control over the FA. Abolition or reform of the current institutions would not remove the fundamental conflicts over control of the game which exist, although they might give more power to some interest groups or less to others. This is a much more important issue than the organisational structure itself.

Is there too much debt in the professional game?

21.   According to the UEFA 2008 Club Licensing report, English clubs had just under €4 billion of net debt, and just under €4.5 billion of long term assets. While these debts were far higher than any other in Europe, so were the assets. Deloitte estimated the net debt of Premier League clubs at £3.3 billion in 2008-09, against income of £2 billion. By the standards of most businesses this level of debt is not excessive. Of course, individual clubs may have too much debt, but without full access to the management accounts of a business it is not easy to be sure about what constitutes "too much". I do not believe that current level of debt in English football endangers its long term future. Furthermore, restricting the capacity of teams to borrow may damage the competitiveness of the leagues.

What are the pros and cons of the Supporter Trust share-holding model?

22.  There is no reason that fans should not to acquire shares in football clubs and manage them through a trust. The limitation of the model is that few fans have the capacity to invest significantly in their club, and when they do these individuals often want their voice to reflect their investment. In reality Supporter Trusts have played a useful role in some lower division clubs, but the model makes little sense at the top end of the game. Moreover, even with lesser clubs the involvement of Supporter Trusts is no guarantee of good decision making, as the case of Notts County illustrated.

Is Government intervention justified and, if so, what form should it take?

23.  In principle I believe that the Treasury Green Book tests should be applied when considering the pros and cons of government intervention. According to this the "underlying rationale is usually founded either in market failure or where there are clear government distributional objectives that need to be met" (p 11). The annexes to the Green book describe the following classification of market failure (p 51):

(a)  "Public goods"—this has a very specific meaning in economic jargon, amounting to the fact that it is not feasible for private businesses to charge for services they provide, which is far from the case with football clubs.

(b)  Externalities—social costs and benefits exceed private costs and benefits leading to under or over-provision of the service in question. There is no obvious reason to think we have too little of too much football at present.

(c)  Imperfect information—in particular asymmetric information, so that, for example, buyers cannot be sure of what they are buying before handing over the cash. This is not an obvious problem in football.

(d)  Market power—some claim that clubs have market power over their fans, but the evidence given above shows that in reality large numbers of fans are ready to find substitutes if the quality of the product falls.

In my view there is no compelling social equity rationale for public intervention in commercial football, any more than there is a rationale to make luxury cars available at subsidised prices to people on low incomes.

24.  It is also important to draw attention to another aspect of the rationale for public intervention mentioned in the Green Book (p 11), namely "is it reasonable to assume that intervention will be cost-effective: ie that the benefits of intervention will exceed the costs?" These costs could include any damage done to the standing of English football in general. Given the absence of any compelling rationale on the ground of market failure or social equity, are purported benefits sufficient to outweigh the potential costs?

25.  There is a long tradition of state involvement in sport and physical education in Europe. In the 19th century this concerned mainly the preparation of young men for military service. In the 20th century this evolved into a concern both for providing a healthy environment and the pursuit of national prestige through success in sporting competition. In Britain sport evolved as an autonomous activity[13] and as recently as 1960 there was almost no state involvement in sport. In the last half century the state has become more closely involved in the provision of facilities and the development of healthy lifestyles, especially for young people. Through lottery funding for sport the state has also become involved with the development of elite sports.

26.  My own view is that public funding which supports mass participation in sport is desirable, but that the state has no useful role to play in the provision of sport as entertainment. Government would be no better at managing professional sports leagues than it would be at managing movie studios or any other form of mass entertainment. As this paper has shown, football is a highly competitive business and hence there is no need for a regulator of the kind required when there is natural monopoly (eg water supply) or where information hard to acquire and consumers need protection. I have not discussed the issue of the national team in this paper, suffice to say that any government that allows itself to take on even the slightest responsibility for the performance of the national team will create a rod for its own back.[14]

Are there lessons to be learned from football governance models across the UK and abroad, and from governance models in other sports?

27.  Yes, I believe there are always lessons to be learned from different models abroad, and much of my own research has been based on a comparative analysis of institutions.[15] Indeed, I believe that many of the views expressed on the "crisis" in English football stem from a poor appreciation of actual practice abroad. In a nutshell, it is my view that the major American sports leagues are both highly collaborative and highly profitable organisations thanks largely to the absence of a promotion and relegation system.[16] On the other hand, the regulatory mechanisms adopted in other European football nations are more reflective of the lack of transparency in the management of football clubs and poor levels of commercial performance. It is worth noting that the financial analysis in this paper, which is based on the publicly available audited accounts of football clubs cannot be conducted on any football league outside the UK, including Germany, because such accounts are not publicly available.[17] We should certainly beware of copying systems from other countries whose governance systems are not completely transparent.

January 2011

5   Annual Digest of Football Statistics 1986. Back

6 Back

7   See eg Fort (2004) "Inelastic Sports Pricing" Managerial and Decision Economics, 25: 87-94. Back

8   Deloitte (2010) Annual Review of Football Finance. Back

9   See for example Simon Inglis (1988) League Football and the men who made it. Willow Books. Back

10   Deloitte, ibid p 48. Back

11   Appendix to 2010 Deloitte Review, p 13. Back

12   For history of this commercial evolution see Szymanski and Kuypers (1999) Winners and Losers: the business strategy of football. Viking. Back

13   For a comparison of the European and British systems see Szymanski (2008) "A theory of the evolution of modern sport" Journal of Sport History, 35, 1, 1-64. Back

14   On the issue of the national team see Kuper and Szymanski (2009) Why England Lose. HarperCollins. Back

15   See e.g. Szymanski (2010) The Comparative Economics of Sport. London: Palgrave Macmillan. Back

16   On this see Hoehn and Szymanski (1999). "The Americanization of European Football" Economic Policy, No. 28, 205-33. Back

17   For a sceptical view of German regulation written by Germans see Dietl and Franck (2007) "Governance Failure and Financial Crisis in German Football", Journal of Sports Economics, 8, 6, 662-669 and a sceptical view of French regulation written by a Frenchman see Andreff (2007) "French Football: A Financial Crisis Rooted in Weak Governance" Journal of Sports Economics, 8, 6, 652-661. Back

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© Parliamentary copyright 2011
Prepared 29 July 2011