UK: Division Of The TV Spoils: Why Clubs Should Be Left To Their Own Devices

Last Updated: 2 July 2013
Article by Stephen Hornsby

In a sporting competition where a degree of balance between the teams helps to make the overall product attractive, some equalisation of revenues (or at least some restriction on the major established teams taking the lion's share) makes some superficial sense.  This is always assuming that financial strength is a necessary condition for sporting success even if it is not always sufficient. 

Indeed, the need for competitive balance in a league has inspired a number of well known attempts in American sport to bring about a degree of equalisation – such as the "draft" and salary caps.  Measures such as the "draft" have never really taken off in the EU which sticks to a more free market approach.

In football, the recent introduction of Financial Fair Play Regulations (FFPR) is now generally accepted as assisting the major established clubs.  In essence, FFPR limits "speculation for accumulation".  Such measures devalue the clubs outside the "magic circle" and reinforces their advantages to the detriment of new entrants and their investors.  Despite the support of the European Commission (who seem to have forgotten that they once supported the arrangements torn up by the Bosman judgment) these rules are probably anti-competitive and sanctions for breach will therefore be unenforceable.

On the face of it, bearing in mind the impact of FFPR, there therefore seems to be some merit in the Italian Anti-Trust Authority's proposal to attack the division of spoils agreed by the Serie A Clubs and seek to have it decided by an independent third party.  The current division of spoils basically gives a larger section of the spoils to those clubs who have had sporting success since 1945.  "Johnny-come-latelys" fare comparatively badly in this system.  According to the Italian Anti-Trust Authority, a third party must be involved in decisions of this nature with a view to imposing a division of the spoils which more reflects recent performances by smaller clubs and therefore gives less reward to the great names of the Italian league such as Juventus. 

However scrape beneath the surface and the proposal has a number of fundamental problems.  As we shall see, the fact that leagues have always enjoyed autonomy in this matter throughout the world is natural and should not be interfered with.

To understand why this is the case, it is important to consider the dynamics of revenue distribution from the perspective of the participants.  In discussions amongst clubs about distribution of league revenues, small clubs' greatest concern is not to overplay their hand although they are generally speaking in the majority.  Such clubs will have three major concerns.  Firstly they will be concerned that the major established clubs should not exercise the freedom to set up their own competitions and exit the league thus devaluing the league completely.  Freedom of association is guaranteed by human rights legislation and although breakaways are less easy in countries where the state has a large role in sport and where grounds are state owned, this is a possibility that would have been borne in mind by all Serie A clubs who are outside the "magic circle" and seeking a larger share of the spoils.

The second factor that small clubs will bear in mind is that they may be relegated and will therefore want insurance in the form of parachute payments.  They therefore need the support of the larger clubs who are not so vulnerable to relegation and therefore have no particular interest in large parachute payments being granted as it reduces their revenues.    Thirdly, small clubs will be concerned that the "magic circle" might try and push through a reduction in league size – this can often be as potent as the threat of breakaway in bringing the smaller clubs to heel on revenue issues.

On the other hand, major established clubs are subject to different sorts of pressure.  On the one hand there is the desire to make as much money as they can; on the other there is the feeling that there needs to be somebody at the back of the grid and there is an awareness that breakaway is difficult and attracts bad publicity.  As a result, major established clubs also tend not to overplay their hand in negotiation about the division of TV spoils.  In the recent debates in England about parachute payments and FFPR, the interplay of those factors can explain the outcome, with the large clubs being able to get small clubs to vote in favour of FFPR by offering (whether explicitly articulated or not) to increase the parachute payments which are now enormous.

As a result of these factors, a delicate equilibrium is reached when the spoils are divided.  Reinforcing this outcome is the belief (not unique to the "magic circle" by any means) that there are actually positive reasons why the "Johnny-come-latelys" should not receive the same revenues as the well-established names.  In a new professional league for example, those in it at the beginning may have invested millions in building the competition up and, just like early investors in a mining operation, will consider that the ones who come along and benefit from their success after many years of losses are free-riding. 

This argument is raging within rugby union at the moment where one of the "Johnny-come-latelys", (London Welsh), argues that it should receive exactly the same amount of money as other clubs who (unlike London Welsh) have invested millions getting to the point where  they actually receive some compensation from the RFU for releasing its employees to international duty which is so disruptive to club competitors.  It follows that there is actually a rationale for favouring founders in the distribution of receipts as they built the competition from which the new entrants benefit. 

So what would the introduction of a third party decision maker achieve?  Inevitably the introduction of a third party into the process with a view to tilting the playing field in favour of clubs outside the "magic circle" could have a number of highly disruptive consequences to the league which would make such intervention counter-productive.  The "magic circle" could threaten exit, try to force through reductions in league size, and reduce parachute payments since they are not subject to the risk of relegation.  All these outcomes would not be favoured and would in fact be positively opposed by the small clubs for whose benefit the third party intervention was so piously designed.  The delicate equilibrium that only the participants can achieve in deciding the division of spoils would be destroyed. 

The application of competition law sport does not have a particularly good record.  It has interfered with the principle that the winner takes all by requiring Pay TV companies to licence their rights to competitors who they have beaten and it has done this when terrestrial companies have certain sports rights reserved to them by EU listed events regulations thus impoverishing those sports.  The consequences for consumers of these interventions have also been negative in that to watch the whole league they have often had to buy two subscriptions.  The well intentioned meddling of the Italian Anti-Trust Authorities in the division of the TV spoils could be another disastrous intervention; it is one that all the clubs in Italy are likely to fight and should fight successfully.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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