A simple but fair redistribution of football revenues

From time to time I like to dip into the words (and thoughts) of the legendary investor Warren Buffett. One of his favourite thought processes is about keeping things simple. In a world full of people, usually highly paid consultants, who want to create complex solutions for failing businesses and industries, it is often the case that there is a simple underlying problem which has yet to be addressed. In the words of Warren Buffett, ““The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.” 

And so it is with football, particularly the English Football League and its current unworkable business model. Incidentally, this was unworkable even before Covid-19 accelerated the inevitable consequences of businesses continually spending more than they earn. Simply, in its current form there is not enough revenue to meet the costs of running most of the 72 English Football League clubs.

Therefore, in the interests of maintaining simplicity, what needs to be done? The simple answer is to increase revenue whilst putting a cap on those clubs that spend too much. How can that be achieved? Let me offer one simple idea.

The Premier League, whilst facing challenges of its own in the near term, generates sufficient cash to meet the need of its 20 members and provide funding, which if distributed sensibly, would create the strongest league structure or pyramid in world football.

Why would it (the Premier league) want to do that?

Simply, by distributing revenue more fairly it would provide funds to develop and improve the standards across the three leagues below. It would provide funding to invest in academies (not give the option of closing them down as suggested in the Big Picture proposal). As a result, over time it would provide a pool of talent in which the Premier League clubs might wish to recruit from (in doing so providing further resources to the lower league clubs).

Additionally, it would create a market for many of the players in the current Premier League academies and U-23 teams who perhaps are never going to make the grade in Premier League football but who nevertheless are sufficiently talented to remain in the professional game. Not only would the lower leagues produce better players, but again over time, provide a greater pool of management and coaching talent who might one day manage and coach in the Premier League.

Raising standards of competition in the lower leagues in the long term, is a wise investment by the Premier League clubs.  It is not, as is so often portrayed giving a hand up to competition, it is a wise investment in their own industry. Reducing the gap by providing sustainable revenue, thereby improving standards in the lower leagues, makes huge strategic sense.

How can this be achieved?

I don’t want this article to be a lengthy financial presentation but clearly we have to examine the existing arrangements before offering a solution. I should also express a caveat that to the best of my knowledge the figures below are accurate having been drawn from public sources. I am happy to correct them if the sources are inaccurate. The underlying principles however, stand regardless.

Currently the Premier League “supports” the EFL in two ways – parachute payments for those clubs relegated from the Premier League and “solidarity” payments across all divisions to clubs not in receipt of parachute payments.

In addition to the above the English Football League clubs receive revenues from the broadcasting deal with Sky, matchday receipts plus sponsorship, commercial (including ifollow) and merchandising.

Parachute & solidarity payments

Clubs relegated from the Premier League receive a percentage of the broadcasting funds equally distributed among the Premier League clubs. In year 1 it is 55%, Year 2, 45% and Year 3, 20% – if the relegated club has only been in the Premier League one year they receive the parachute payments for just two years.

Unfortunately these arrangements dramatically skew revenues towards those clubs coming back down from the Premier League. In 2017/18, 8 clubs received £242 million, 2018/19 £265 million (8 clubs) and estimated 2019/20 £248 million (7 clubs).

The remaining Championship clubs receive solidarity payments equal to 30% of the 3rd year parachute payment. Keeping it simple that is approximately £4.5 million each.

League 1 clubs receive 4.5% of the 30% of year 3 parachute payments, and League 2 clubs 3%. That amounts to £675,000 for League 1 and £450,000 for League 2. There are parachute payments in the lower leagues but I am leaving them to one side in this article.

£ milllions Current revenue from PL
Championship 324.5
League 1 16.1
League 2 11.2
Total 351.8

EFL Broadcasting deal

The EFL currently have a 5 year deal which runs until May 2024 worth £195 million a year which is split as follows, Championship £91.2 million, League 1 £16 million, League 2 £11.3 million. All clubs in each division receive £3.8 million, £667,000 and £472,000 respectively.

A better way?

I estimate that Premier League clubs will have received £2,641 million in broadcasting payment (minus any Covid-19 related payment) for season 2019/20.

I’d propose the following:

  • The merging of the Premier League and the EFL organisations
  • The abolition of parachute and solidarity payments in their current form
  • The Premier League to take control of the current and future EFL Sky broadcast agreement
  • The existing Premier League payments (parachute and solidarity) plus the EFL Sky broadcast agreement be made available to the three divisions below, plus
  • In addition the Premier League would make annual payments of £200 million (£10 million per Premier League club) from their own broadcasting agreements/commercial revenue

The result of such a redistribution is quite startling:

The 3 divisions of the former EFL would receive £670 million per annum (based on existing figures).

If the funds were distributed to each division on a 66:22:11 ratio, the Championship would receive £442 million, League 1 £147.4 million and League 2 £73.7 million. The key difference though is that each club in each division including the Championship receives equal amounts.

As a result Championship clubs receive £18.4 million each, League 1, £6.1 million and League 2, £3.1 million per season. Compare that to the grossly unequal distribution in the Championship, £1.3 million League 1 clubs receive and £902,000 received by League 2 clubs (based on calculations above).

Governance

Clearly conditions would have to be attached to the new financial structure to ensure (i) clubs do not spend more than their new income on playing staff (ii) automatic relegation clauses in player contracts across all divisions and (iii) that the interests of the three divisions would be represented in future negotiations or structural changes to the Leagues.

In terms of ensuring clubs do not overspend on players, a simple rule of spending a maximum percentage of total revenue with an additional fixed monetary cap (in the case of one or two clubs having substantially higher revenues than usual) seems most sensible. As mentioned above, mandatory relegation clauses in player contracts would also be required.

In terms of ensuring future fair representation, this is perhaps where an independent panel comes into play (possibly as per the Beautiful Game proposal). Such a panel would determine in the wider interests of the game whether future proposals were fair or appropriate.

Many will readily find reasons as to why the above proposals would not work. Usually those objections are driven by vested interests.

The proposals above would need refinement of course, but the principle of equal payments across clubs within the same division, Premier League clubs investing in the future of the league pyramid out of revenue annually and strict cost controls on the back of increases in revenue for almost all non Premier League clubs is in my opinion fundamentally sound, and as Warren Buffett prefers – simple.

Thoughts and comments very welcome.

 



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