Competition law and sport: we need more, not less ‘financial fair play’ in Europe
This time I do not have particularly good excuses for squatting the blog, but I do so nonetheless. This said, thanks to Alfonso and Nicolas!
Basketball fans like myself are probably following the NBA playoffs. Those basketball fans that are also interested in competition law and in statistics (no doubt a substantially smaller fraction) will have realised that the teams reaching the conference finals this year are based in relatively small metropolitan areas. Only Miami is in the US top ten (9th). Indianapolis (29th), San Antonio (31st) and Memphis (45th) are far behind. Just because there is always a good excuse to point out how incredibly good Kevin Durant is, I will also mention that Oklahoma City is right behind Memphis in the ranking. It is safe to say that the fans of any NBA franchise can realistically hope to see their team win the championship one day.
There was a time where a team based in a comparable European city could aspire to win the UEFA Champions League — Nottingham Forest, which won the European Cup two years in a row (1979 and 1980) is the archetypal example in this sense. Not any longer. Or maybe it could, if a tycoon decided to pour billions of euro into the team overnight. Starting probably with Chelsea FC, we are now used to the stories of teams becoming instant winners. Monaco, just promoted to the top division in France, is the latest (and one of the most outrageous) examples. In parallel, the Spanish football championship has become unbearably boring. Only Barcelona and Real Madrid can aspire to win. We have witnessed yet another freak show record-beating championship this year.
And yet, the celebrity sports lawyer, Mr Dupont, complains about the modest attempt by the FIFA to introduce ‘financial fair play regulations’. I thought this is a good occasion to point out why more measures actively promoting competitive balance, not less, would be needed in Europe. It has been said thousands of times, but one cannot emphasise enough the fact that competition among sports teams is fundamentally different from competition among firms in most other markets. Teams are interdependent. Without teams against which to compete, clubs are worth nothing (even the Harlem Globetrotters need the Washington Generals!). This means that one big team’s success is only partly attributable to it. In this sense, I have no doubt that Real Madrid and Barcelona are taking a free ride on competing Spanish teams by capturing around 45% of the income coming from the sale of television rights. It also means (and this will look obvious to the readers, but competition authorities tend to ignore this fact when convenient) that fan interest lies in the championship taken as a whole, not the individual teams.
What are the implications of these features? They look obvious to me. There are very good reasons to set a stringent ‘salary cap’ to preserve the competitive balance among teams. Similarly, transfers of star players from relatively poor to relatively wealthy teams should be severely restricted (just as they are in the US). I prefer a championship in which Tottenham Hotspur (to clarify, West Ham is my London team!) can build a winning team around Gareth Bale instead of seeing this player leaving for Manchester City or Real Madrid as soon as he achieves superstar status. Finally, television rights should be more evenly distributed among teams. I believe we will progressively get there, and I hope that, when the moment comes, the Commission will take account of the objective features of sports competitions (which are measurable differences, not some sort of tailor-made exception) so that European sports become genuinely interesting and the outcomes of competition truly difficult to predict and vary from year to year just as they do in the US.
Chillin'Competition 
Partial dissent: Out of the last 10 UEFA Champions League winners’ home cities 9 do not rank among Europe’s 15 largest cities (all but Chelsea); of which 2 do not even rank among Europe’s 100 largest cities (Porto and Liverpool) and 1 ranks #92 (Manchester). This year’s finalist Dortmund ranks #70.
The current state of “competitive balance” seems to be “fundamentally different” between the national leagues, too: The top two German teams only get around 15 % of the income coming from the sale of Bundesliga television rights (without CL etc.).
AX
10 June 2013 at 10:34 am
Hi,
Thank you. I think this debate only makes sense if we talk about metropolitan areas. Referring to Dortmund as the 70th largest city in Europe is a misrepresentation. What is relevant is that it is part of the massive Ruhr area conurbation. And then of course the conclusions change. Would you really say that the Barcelona and the Milan metropolitan areas are not in Europe’s top 10?
And my point is precisely that it is becoming seriously unrealistic (unless a tycoon comes into play, which is the other crucial factor that I mention) to see teams like Liverpool or Porto win the UEFA Champions League (even Valencia reached the final twice in a row not so long ago, and this is a very unlikely prospect in the near future).
Pablo Ibanez
10 June 2013 at 11:23 am
Interesting points. However, the whole US sports system (NBA, NFL, NHL, MLB etc) is predicated on a rigid draft system whereby the weakest team from the previous year gets the highest pick in the draft, and therefore the biggest chance of snagging a future superstar. My baseball team – Washington Nationals – had the worst record in baseball two years running, got two first picks in the draft, (taking Harper and Strasburg) and in 2012 had the best record in baseball. This, in my view, is the biggest factor in the competitiveness of US sports. It is not applicable by analogy to European soccer as the college/high-school conveyor-belt doesn’t exist in Europe – the best players are signed by academies at a young age.
Colm
10 June 2013 at 12:03 pm
Pablo, I am sorry but you are completely wrong. We need less public interference on private agreements, not more. Real Madrid and Barcelona are not taking any free ride on other clubs’ right. It is always the Government the one to push for redistribution of club’s income. Why is spanish league more valuable (the most one, after the Premier League) than french, italian or german league? Why are Real Madrid and Barcelona two of the 3 richest clubs in the world? why can Spain have 2 clubs in the world league? Because we allow them to spend whatever they want to be the best clubs in the world. And they must be set free to cash whatever money anyone is willing to hand over to them.
http://derechomercantilespana.blogspot.com.es/2012/04/lo-que-maximizan-los-clubes-de-futbol.html
http://derechomercantilespana.blogspot.com.es/2012/02/por-que-la-venta-individual-de-los.html
jesus alfaro
10 June 2013 at 12:57 pm
Hola Jesus!
I may well be completely wrong (as you can imagine, I do not think I am) but I am certainly not in favour of increased government intervention. My point I make in the post is the opposite one. I am saying that the Commission (or any other competition authority) should consider the economics of sporting activities before jumping to the conclusion that privately-adopted rules enhancing competitive balance are anticompetitive.
You certainly agree with me in saying that uncertainty about the outcome of a competition is what makes it exciting and valuable and that the value lies in the championship taken as a whole, not in the individual games. If we do not have these two elements, we are left with a circus show such as the Harlem Globetrotters playing (and perpetually winning) against the Washington Generals. Which is precisely what the Spanish championship has become.
If you consider these two elements it becomes clear that Real Madrid and Barcelona are not like Google and Microsoft. They DO NEED their rivals to exist. What is more, their ‘wealth’ is shared wealth and I can only describe the current situation of Spanish football as one in which other teams effectively subsidise Real Madrid and Barcelona. It is a mystery to me why the other teams (most of them struggling financially) do not rebel more boldly against the situation. And I suspect government intervention goes both ways in the case of Spain (the idea that the collectivist ‘we’ that you use in your reply is a world leader is very attractive to politicians, who tend to enjoy watching games at Bernabeu and Camp Nou). And if I remember correctly the individual sale of television rights is the outcome of government intervention.
Pablo Ibanez
10 June 2013 at 1:45 pm
Interesting piece, Pablo. Just to point out that it is not clear whether the FFP would actually increase or decrease competitive balance. (See for example http://footballperspectives.org/financial-fair-play-alternative-instruments-and-competitive-balance). Certainly, FIFA has gone public with the claim that FFP is NOT meant to increase competitive balance. Of course, what FIFA says publicly is neither here nor there in terms of what the actual impact will be.
To take an example, however: would the FFP discipline future cases like Chelsea or Monaco? There is a sudden investment, all the money is spent on transfers and high wages, but the books are in order. Nobody is overspending and there is no FFP violation. On the other hand, I can think of several teams in the Croatian league that absolutely do not pose a threat to competitive balance (if anything, they are punching bags) that would be in instant violation of the FFP.
Mislav Mataija
10 June 2013 at 6:37 pm
Hi Mislav,
I have the impression that the FFP is a measure that will tend to protect wealthy incumbents with a pedigree such as Barcelona or Manchester United. It would not be the first example in history in which new regulation serves that purpose 😉
Pablo Ibanez
10 June 2013 at 8:45 pm
Btw: Have there been any new developments concerning the Commission’s everlasting preliminary investigation on possible State aid for Real Madrid et al.?
AX
10 June 2013 at 8:24 pm
Hi Pablo!
I find your post undoubtedly extremely interesting.
It reminds me a lot, especially in what concerns the possible NBA model benefits´ extrapolation (maximum spending limits per team, wage agreements, draft system) to an article I read a while ago written by well-known Javier Berasategi (http:// http://www.cincodias.com/articulo/opinion/futbol-mercado-competencia/20070113cdscdiopi_2/).
Obviously, the NBA model is beneficial, not only for small teams (anyone can win as you said), but also for the competition system in general. Indeed, in the NBA, whatever teams are playing, any match is a show and you´ll rarely see an empty stadium, thing that can not be said of spanish football stadiums when Madrid or Barça are not playing.
However, one aspect that neither of you mentioned, and that I believe is of extreme importance, is that the big teams, if case an NBA system threatening their oligopoly were to be implemented, will always have an escape route that would certainly be the end of small teams. Let me explain: if small teams started to demand higher TV rights´ returns, a draft system, a salary cap, etc., the big teams could “drop” of its domestic competitions and create a kind of continuous “Champions league” against the other european big teams throughout the year (I mean, not 6-9 matches like the actual Champions, but a 38-day competition), which certainly would bring them more incomes than the actual ones.
I think this is the biggest difference between the American model and the European model. I am convinced that if the Bulls, Lakers or whatever had this kind of sword of Damocles over the other teams, they would ensure respect for themselves and would get to keep their power year after year. However, unable to threaten to leave and play against the best teams from other countries in the region (basically because these latest don´t exist) they just have had to adapt to the rules of the game…
Therefore, although it is true as you say that big teams need small ones, it is nonetheless true that small teams need big ones as well nolens volens. Aware of this, in my opinion, this might be the reason why small teams do not go beyond as you say in their protests, and why the system as we know it still persists…
Carlos Bobillo Barbeito
11 June 2013 at 1:02 am
I couldn’t agree more with Pablo. Not only as a competition lawyer (rational side of my position), but also as supporter of a small club from northern Spain 8completely irrational one).
Well, maybe the solution for the Spanish league would be that Barcelona and Madrid play against each other 39 times, while the remaining 18 first division team play a real competition.
Miguel Troncoso Ferrer
13 June 2013 at 1:06 pm
Hola Miguel,
The solution to the current situation would in fact be very simple. It would be sufficient for the 18 teams that are not Real Madrid and Barcelona to decide not to compete against them. They could refuse to play, or simply pretend that they play. They would not lose much from that, given how clear it is that the two will end up first and second in the championship. Team interdependence would then become obvious.
This said, the idea of Real Madrid and Barcelona playing constantly against one another is an attractive one. I had thought of it, but had envisioned something more international, rock-star style. The ‘Real Madrid vs Barcelona International Tour’, with colourful shows in places like Las Vegas.
Pablo Ibanez
13 June 2013 at 2:16 pm
I agree with the objective of the FFP agenda, but not for the reason that Pablo has stated.
I do not care about the size of the municipality from which a team draws support. I care about two things – that the fan gets good value and that the league is competitive.
In terms of the fans, I support a points reduction in cases of illegal state aid. This is because the fan is paying twice in such situations, once at the turnstile and again through tax. Therefore I think state aid should be carefully policed.
The second is that football will be more competitive if FFP is established. You will have greater volitility within the league. Clubs will rise and fall more quickly because their competitors are operating on similar financial terms. Long term decisions will be made. I don’t think it is a perfect system, for example clubs like Real Madrid and Manchester United will still be outliers, able to offer more than smaller rivals. However overall you will move towards a closer league.
Framwelgate George
13 June 2013 at 4:32 pm
Hi Pablo,
there are three things that I do not get in your blog:
1. What has the size of the metropolitan area to do with competitive balance if it is the television money (allocated according to past and current success, i.e. tradition and performance) that matters most?
2. FFP may indeed end up protecting the incumbents against new competitors – as you admit in response to Mislav. How is this helping competition or competitive balance?
3. You argue that the economics of sport should be considered here. Agreed! But then look into the sports economcis literature that, incidentally, often sees more harm than good in regulations as FFP ((see Szymanski’s recent papers, for instance), caps, cartels in the sale of broadcasting rights, etc..
Oliver Budzinski
13 June 2013 at 5:36 pm
Hi Oliver,
Great comments! My thoughts:
– The size of the metropolitan area is used as a proxy. A look at any of the top football championships in Europe clearly shows that the most successful teams tend to be in the largest metropolitan areas. Similarly, it is not by chance that the only metropolitan areas in the US with more than an NBA franchise are precisely the two largest ones (LA and New York).
– The whole point of my post is that FFP as currently conceived is not enough (the title is after all ‘we need more financial fair play’). If implemented alone, it may indeed do more harm than good. Other FFP measures I mention are salary caps and the restriction of transfers.
– I am familiar with that literature! The role of a competition authority (or any other regulator) is not to micromanage the competition in the participants’ alleged best interest, but to decide whether the privately-designed arrangements are contrary to competition law. And (again, this is the point of my post) I do not think they are.
Pablo Ibanez
13 June 2013 at 8:47 pm
Pablo, you are in favour of more intervention by public authorities, only in a skewed way: push clubs to restrict competition in order to advance the competitive balance idea and then, make these agreements among clubs (salary caps, restrictions of transfers, collective sale of broadcasting rights) compulsory by the competition authority. This is regulation. And this is exactly what the spanish CNC has done when limiting the freedom of each individual club to sell its broadcasting rights as they see fit. How interesting would a spanish league be without Real Madrid & Barcelona? How interesting the french league is? If we look at what people do, not to what people say (willingness to pay) what we see is (i) spanish league is the most interesting one from the perspective of foreigners -after the Premier League – and (ii) european football is one of the best exporting “products” we have invented. How much do american leagues get from Asia or Africa or South America or Europe?
jesus alfaro
14 June 2013 at 8:41 pm
Jesus, I am emphatically against public interference in the arrangements adopted by sports associations to enhance competitive balance. And this includes competition authorities. There are, in my view, very valid reasons why these arrangements should be adopted. More importantly, I believe it would be a terrible mistake to conclude that they are anticompetitive.
One of the key assumptions you make is that the current system, which leads to growing imbalance among teams, is sustainable. Can a model in which two teams take up almost half of the revenue coming from the exploitation of television rights and in which many teams are struggling financially, last in time? This is the key question that should be addressed.
Is it relevant to point out that the French championship is not very interesting? The NBA is a very balanced competition and I am sure you do not dispute that it is a well-established and widely recognised global brand with players from all over the world. The Superbowl, even though it concerns a very North American sport, is an event that makes the headlines on a global scale.
In any event, I am not sure that the popularity of the Spanish championship is the relevant factor in this debate. What is exactly the deal for smaller teams taking part in the competition? Should they be grateful for, and accept, the fact that Real Madrid and Barcelona reap the overwhelming majority of the financial benefits deriving from the popularity of the championship? Two teams make the money and the others take pride in contributing to the financial success of their rivals? That is what I call subsidisation.
Pablo Ibanez
15 June 2013 at 10:40 am
Just in case no one had noticed: Pablo is a huge Atlético de Madrid fan… 🙂
Alfonso Lamadrid
15 June 2013 at 12:29 pm
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