DO AMERICAN OWNERS UNDERSTAND THE EPL LANDSCAPE?

Do American Owners Understand the EPL Landscape?
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by Ken Pendleton

Jacksonville Jaguars’ owner Shad Khan recently became the 6th American to purchase a controlling interest in an English Premier League (EPL) soccer club by acquiring Fulham in a deal thought to be worth between $250 and $300 million. NFL owners have acquired a controlling interest in fabled clubs (Arsenal, Manchester United, and Liverpool), a middling-size one (Aston Villa), and now an even smaller one. Fulham have never won a major trophy since being established in 1879. The sixth club, Sunderland, is owned by Ellis Short, who emassed a reported two billion working in private equity. NFL owners are not the only billionaires who have invested in the EPL. 12 of the 20 teams are owned by foreigners. Most notably, a Russian oligarch (Roman Abramovich) and an Arab sheik (Sheikh Mansur) have poured hundreds of millions of dollars into Chelsea and Manchester City, transforming the two clubs into European powers. But the huge losses both have wracked up suggest that their motives have more to do with the dizzy glory of winning trophies than good business. Owning soccer clubs has rarely proved to be profitable. Before he died a decade ago, former FIAT and Juventus Turin president Gianni Agnelli put matters even more bluntly: “If it’s a business, then it’s a losing business.” Agnelli and his wealthy fraternity assumed a controlling interest in clubs out of vanity or civic pride or as a hobby or just because it was a lot more fun than making widgets. Big soccer clubs were always run differently than teams in the major American sports: the point of generating revenue was to buy the players to win more trophies rather than to buy players and win titles to make bigger profits. A lot has changed since Agnelli’s death. Clubs are now run like sophisticated corporations and the major international soccer leagues generate huge TV rights, both domestically and abroad. The EPL’s most recent domestic contract, which takes effect next month, is worth more than $4.6M, a 75% increase on the prior one. And the increasing value of foreign rights is highlighted by NBC’s recent $250M acquisition of rights for the next three seasons, which is more than triple what Fox previously paid. In sum, sales of rights have inflated total TV revenues to an estimated $8.31B over the next three years. Throw in the huge money that comes with participating the Champions League, other domestic competitions, such as the FA Cup, and the global marketing and merchandising possibilities and you can understand how the EPL has lured so many American owners. They realize that EPL has vast global growth potential—far more than any other domestic soccer league and eventually maybe even more than the NFL—despite the fact that commercials are not shown during matches. But these huge investments do not come without risks. The most obvious of these is relegation. Manchester United, Arsenal, and Liverpool are almost certainly safe (though United were demoted for one season in 1974). Aston Villa and Sunderland flirted with the ‘drop’ last season. And, although Fulham has enjoyed being in the top flight the past 13 seasons, most of their history has been spent toiling in the lower divisions. One assumes that Kahn and his brethren at Villa and Sunderland have planned for this contingency, but Leicester City, Bradford City, Crystal Palace, Wimbledon, and most notably Leeds, which used to be a very big club, suffered insolvency (bankruptcy) after being demoted. Some conspiracy theorists have suggested that relegation (and consequently promotion) might be abolished. But the political fallout makes this more or less inconceivable. The reaction of fans, especially in England but also around the world, would be hostile to the point where they would take collective political action or even resort to violence. The next huge problem club owners face is the fact that they must compete in a global market. In fact, the amount of increases in player salaries has more or less kept up with the increases in revenue generated. EPL owners have recently taken steps to control their own spending and the governing body of European soccer, UEFA, has adopted a policy called Financial Fair Play, which is supposed to compel clubs to ‘live within their means’. But, so far at least, there is little evidence that these policies are slowing spending. There is never going to be a salary cap to strictly control costs, like there is in the NFL, and players figure to continue to enjoy relatively unrestricted freedom of movement (what Americans call free agency). American owners have never demonstrated an ability to live within their means when faced with the reality of free agency. That’s why they clung to the ‘reserve clause’, which allowed them to continue to retain rights to a player unless the team released him; tried to restrict free agency once the courts abolished the reserve clause in the 70s; and instituted salary caps and luxury taxes, of varying degrees of strictness. Finally, at some point in their history all of the major American sports leagues have merged or entered into strict non-compete agreements with other leagues in order to curb labor costs. American owners are fond of touting the virtues of the free market, but the success of their businesses would not be possible without strict regulation and revenue sharing. As former Cleveland Browns’ owner Art Modell once admitted, “We’re 28 Republicans who vote socialist.” And this gets to the heart of the challenge NFL owners face in the EPL: they will have to compete a largely unfettered marketplace and negotiate with stakeholders they are used to ignoring. The biggest cubs in England will always have to compete for players in a free market with each other as well as with the biggest clubs in Spain, Italy, and Germany. And the middling and smaller clubs will have to compete in an even more saturated, global market. The fact that the average club in the EPL is appreciably bigger than the average club in la Primera Liga, Serie A, or the Bundesliga, let alone the average clubs in smaller leagues, will not help hold down player costs. A club like Sunderland will not be competing for players with the average team in those leagues; they will be competing with the comparably sized teams in them. The other problem with competing in a free market is that the demand for talented players is always greater than the supply, and thus—given the lack of restrictions on player movement—there will always be bidding wars for the players on the right side of the bell curve. These realties explain why one EPL club, Portsmouth, actually had to file for insolvency even though, or precisely because, they were enjoying unprecedented success. Until the 1970s the owners of major American franchises did not have to negotiate seriously with other stakeholders unless there was a rival league. They did not have to work with governing bodies, like the English Football Association (FA), whose primary charge is to promote the best interest of English soccer at all levels. No equivalent body exists in the United States. They did not have to bargain with players over pay because of the reserve clause. Fans in the United States and Canada have never organized collectively. And they have never faced concerted political opposition at home or abroad. EPL club owners could face strong opposition from all of these groups. The FA may very well attempt to direct a larger share of the EPL’s revenues to the lower tiers and the youth system. The players’ agents and union, the Professional Footballers’ Association, will likely resist any attempt to impose cost controls. Supporters Groups are already organizing with the goal of lowering ticket prices. And the other major domestic leagues, as well as UEFA, and perhaps even FIFA, will not likely just stand by if the EPL becomes too big. They might, for example, pass regulations to distribute Champions League TV revenues more equitably. The NFL has been the most profitable league in sports history because owners, like Modell, were creative and open minded. So it would be foolish to dismiss their EPL investments as folly. And it is easy to see how they could come to the conclusion that the EPL could be a global NFL. But the structural challenges they now face could not be more different. They will never enjoy market exclusivity, be able to run their business with player cost certainty, or be largely free from having to negotiate with fans or other governing bodies. Their success will depend on their ability to adapt to an entirely different sporting culture.

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