Editor's Note: The Public Interest Section of the American Accounting Association is pleased to publish the following blog post by Dr Rob Wilson & Dr Daniel Plumley from Sheffield Business School, Sheffield Hallam University, Sheffield, UK. Please contact lawrence.chui@stthomas.edu with questions, comments, or suggestions about our blog, or to express interest in our organization. Disclaimer: When you read the comments of our columnists, please keep in mind that they only speak for themselves. They are not expressing the positions of the AAA or of any other party.
Covid-19
has unmasked the frailty of the English football financial model. A host of
professional clubs in the football pyramid on the brink of financial
collapse.
The UK government has persisted with its ban on allowing fans to attend live
events, which cuts off the lifeblood of the ticket revenue that ensures clubs can
meet their financial obligations. Yet, English club finances were bleak well
before Covid.
Since the
formation of the English Premier League (EPL) in 1992 and the lucrative
broadcasting revenues that have followed, the financial gap between the
‘bigger’ clubs and the rest has continued to grow. In this regard, the recent
discussion regarding Project
Big Picture (a motion tabled by the US owners of
Liverpool and Manchester United to revisit the governance structure of the EPL broadcast
revenue distribution), labelled a sugar
coated cyanide pill, has raised further eyebrows
surrounding its financial implications for a number of clubs. Ironically, it is
the power and dominance of clubs such as Liverpool and Manchester United that
is in part the issue.
Revenue
distribution (from the EPL TV deal) in the English football pyramid is a major
problem and leads to significant financial inequality between the EPL and the English
Football League (EFL). It has also contributed to a decline in competitive
balance in the pyramid. On the face of it, there are
some positives to Project Big Picture that can address these issues. A £250m
bailout to the EFL would not only be welcome but necessary for some lower
league clubs to survive. Similarly, the proposed distribution formula of 25% of
future EPL broadcasting revenue to the EFL is a positive step. Reducing the EPL
to 18 teams could, theoretically
lead to stronger competitive balance; good
news for future revenue generation if we accept that competitive balance, and
uncertainty of outcome, drives revenue. Perhaps most importantly, Project Big
Picture proposes
to scrap parachute
payments which are destructive to competition (especially in the
Championship) and help fuel inequality.
However, clubs
outside the wealthy elite should be troubled by changes to the voting rights proposal.
This is another land grab by the clubs that feed at the top table and
destabilises the foundations of the football pyramid. The ‘big 6’ clubs have
already taken more share of the international television money and reducing the number of
teams needed to pass a collective vote will only be to the detriment of the
smaller clubs in the league system.
The devil, as always, is in the
detail and all may not be what it seems linked to these proposals. Further
detail regarding the 25% of future broadcast revenues for the EFL revealed
cause for concern. It stated that clubs promoted from the
EFL will
have £25m deducted from their TV money for the first 2 seasons in the
EPL and this
is then returned when/if they are relegated. This system effectively retains a
parachute payment and, importantly, reduces the ability of promoted clubs to
compete in the EPL. Additionally, the total number of games sold to
broadcasters in the future will be smaller as the proposals will also allow
clubs to sell up to eight of their own games through their own broadcasting
channels. The 25% of the total pot to share between the other 72 clubs
continues to shrink as the finer details emerge.
Project Big Picture appears to be over before it has started, and talk has
quickly moved to a European Football League (an idea that has been on/off the
table for the last two decades). This time, it appears to have FIFA’s backing
and is reportedly being supported by Wall Street banking giant JP Morgan to the tune of $6bn. It would see a move to a US style
sports model for European football and, unsurprisingly, the American owners at
Liverpool and Manchester United have been mentioned as the driving force behind
the proposals. UEFA, European footballs governing body will reject the
proposals, seeing it as a direct threat to their flagship Champions League
competition.
Meanwhile, the lack of balance in
English footballs financial equation remains. Clubs continue to make poor
financial decisions, becoming emotionally involved in spending more than they
earn. A trait more commonly found in regular business sectors. Were clubs run
as a genuine going concern, there would be no need for a bailout in the first
place. But, perhaps this is a question better addressed to the auditors of the
clubs in distress? Some have argued that Project Big Picture provides financial
sustainability when, in fact, the opposite is probably true. It would simply
enable a continuation of the status quo, potentially fuelling a new wave of
reckless spending.
If Project Big Picture has underlined one thing it is that English football is crying out for a reboot. It needs more effective financial regulation, fairer distribution of revenue and salary caps to force owners into making better choices. Clubs need to work collectively to preserve their product, casting aside self-interest in the winner takes all scenario. It’s an alien concept for business leaders that chase profit maximisation and market domination and needs external intervention from finance professionals. Without competition in football, there is no product for fans to buy.