Economics serving society

Luc Arrondel: “The world (of football) afterwards”

Luc Arrondel is associate professor at PSE and research director at CNRS. He wrote, with Bastien Drut and Richard Duhautois “L’Économie du sport en fiches” (Sports economics in fact sheets) published in January 2020 by Éditions Ellipses. In 29 fact sheets, this work offers students who are not specialising in economics a comprehensive and accessible approach to the most important theories and processes in sports economics. A specialist in the economics of football in particular (1), Luc Arrondel agreed to an interview with PSE about this book and to share his thoughts on the future of professional football in France after the COVID-19 crisis.

In the midst of the health crisis provoked by the COVID-19, the future of professional sport in France, and especially football, is uncertain. How do you see the situation? Does French football have to review its economic model?

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Saying that we must change the economic model of sport, particularly for football in France, is often translated simply as a question of “beliefs” about how there is “too much money in football” or that “football players are paid too much”. Transfers sums are the subject of ongoing criticism and some columnists do not understand that we accept the “big salaries” of footballers but not those of big bosses. All this needs to be seen in perspective.

“Post-modern” football is a fast-growing economy that has succeeded in drawing the interest, for a variety of reasons, of the media, sponsors, billionaires and even some states. The great European clubs (also North American ones) have never been so highly valued: the latest dealings of Manchester City valued the club at 5 billion euros and PSG [Paris Saint Germain] at almost one billion. Since 2011, European football has reduced its deficits considerably (and its debts) and for the first time in ten years, it is now overall in surplus. Regarding player salaries, there are not many who earn millions (the median salary in the premier league is 35,000 euros per month) and careers are short (from 4 to 6 seasons). Also, wage inequalities are not unique to football: the arts, for example, function on the same model.

The point is not that nothing needs to change in football today. But rather than think about miraculous changes, let’s look at what works well (which is actually the case for football economics in general) and think more modestly about how to improve certain things, such as the management of the risk of club bankruptcy, the number of player loans, relations with supporters. It would be better to predict the effects of success than to think about the apocalypse.

Repercussions of the economic crisis seem, however, inevitable, and clubs have taken strong punishment, especially by the shutdown of the premier league. A number of clubs risk financial collapse; what solutions are being proposed to avoid that?

Today, it is hard to predict precisely the revenue losses provoked by the health crisis, but KPMG estimates the following figures for Ligue 1 in France: between 50 and 60 million euros in ticket sales, around 210 million in TV rights and between 100 and 140 million in commercial income. If this means a total loss of around 350 million euros, then income will be down about 18.5% compared with the 2018-2019 season. Putting together 2018-2019 expenses and the reduced budgets for 2019-2020, we estimate that gross income losses will be more than double those of the previous season (around 650 million euros in place of 300 million) (2). At the balance sheet level, some transfer receivables might also not be paid in the following financial year and certain intangible assets (the players) may depreciate. Some French clubs are likely also to see the income source that assures their financial equilibrium diminish, that is, player trading (3).

Although bankruptcies in football are relatively rare, French football nevertheless risks experiencing a wave of difficulties after this health crisis. But not all clubs are in the same boat because the management of the crisis will also depend on what Wladimir Andreff calls “soft” budgetary constraints (4), which might make it easier to overcome the obstacles. Remember, too, that the General Assembly of the professional footballers’ league (Ligue de Football Professionnel) is going to take out a loan guaranteed by the state of 224.5 million euros that will be divided among the French clubs. As well, the growth in TV rights will earn all premier league clubs around 20 million euros extra from the 2020-2021 season.

In your book, you present a list of the different sources of funds in professional football; can you tell us what they are?

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In the 1970s, French professional football club income came almost exclusively from ticket sales (between 60 and 80 %) and local subsidies (15 to 30 %). Nevertheless, advertising income increased regularly in the next decade, reaching nearly 15 % at the beginning of the 1980s. It was not until the mid-1980s that TV rights began to finance professional football (7 % in the 1984-1985 season), and then kept on growing (up to 21 % by 1990-1991) until the 2000s (when it reached 50 to 60 %). After 2010, the share of TV rights income diminished because of the growth of other sources, in particular sponsorship and other products (including merchandising). This income structure is not unique to France. The share of TV right is greater than half in Italy (62.1 %), England (53.0 %) and Spain (50.6 %), but lower in Germany (34.4 %). European football is thus highly dependent on television transmission rights.

The share of ticket sales (which depends on ticket prices, stadium capacity and their occupancy rate) continues to decrease, reducing from around 25 % in the mid-1990s to around 11 % today, even though, in constant value terms, the stadiums bring in twice as much. On match days, this income share is around 20 % in the Premier League, the Bundesliga and the Liga, but is the poor parent (around 11 %) of income in the A Series, whose receipts amount to only ca. 200 million euros in France, which is three times less than in Germany and Spain, and five times less than in England!

Income structures also vary a lot depending on the financial weight of the clubs. The biggest European clubs succeed in negotiating the juiciest commercial contracts and generate substantial matchday revenues (5), which means that they can further diversify their incomes. Finally, many professional French clubs now engage in player trading to balance their books: for a dozen or so years, the result of these transfer operations has been mostly positive. The problem lies in the fact that this income is more random.

Sporting competitions also play a major role in the economics of football. You explain that the degree of competitive balance and the uncertainty of the result are key factors in the demand.

The uncertainty of outcome hypothesis has been central to sports economics since the 1950s in explaining spectator “consumption”. The idea is that unequal competitions have a negative effect on “demand”. This “competitive balance” can refer to the result of a match or to the overall winner of the season. The notion of competitive equilibrium is used specially to justify decisions by the professional leagues to change the rules of the competition or the distribution of television rights.

Most empirical studies of professional football find no link between result uncertainty and supporter demand, except perhaps for matches broadcast on TV. So, for example, we see that stadiums are full in England and Germany, but relatively empty in France and Italy, without finding a link with the competitive balance of the championships: uncertainty was the greatest in France until Qatar bought out PSG. Result uncertainty is far from being the only explanatory factor in demand for football: in addition to socio-economic variables, the ambiance in the stadium, the performance and victories of their teams, and the presence of star players are just as influential in that demand.

Your book raises an interesting paradox: we have a strong tendency to compare income generated by football clubs to those of other businesses. And we see that the economic importance of football is much less in reality than we imagine; how do you explain that?

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Despite strong growth since the 1990s, football remains quite a small business compared with other sectors of economic activity: the turnover of the five biggest European championships (the Big Five) is slightly lower than that of La Française des Jeux [the French national lottery and betting agency] and the overall budget of the French premier league is lower than the turnover of its future sponsor, Uber Eats. What is the percentage of GDP of the turnover of football in France? It barely reaches 0.2 %.

Simon Kuper and Stefan Szymanski (6) note this contradiction between a sport that we talk about every day and the weak business that it generates. Football is the most popular sport on the planet; the 2018 world cup final (France vs Croatia) was watched on television by more than a billion people (26 million in France). These two authors highlight a problem pointed out by economists in the cases of innovation, that of the “appropriability” of the football “good” (the fact of not being able to appropriate the totality of the income associated with the activity): “football clubs can appropriate only a tiny part of the public’s love for football and make money from it.” Football is mostly followed and commented upon by amateurs, but also by “experts” on TV platforms, in radio broadcasts, newspapers (specialist or not), on blogs and on social networks. But in the end, all these activities make little for the clubs! Without doubt, it is the world of media that now profits most from these externalities. Football produces income well below the passions that it arouses.

You also talk about a highly segmented labour market: how do you explain the salary and career inequalities among professional sportspeople?

The career of a professional footballer in the first division (the best remunerated) lasts no longer than an average of four to six years in the European championships. What is true for football is equally true for a number of team sports. Very few professional players manage to stay very long at the highest level, particularly because of frequent injury, competition from younger players and these days, from foreign players. As well, European footballers are exposed every season to the risk that their team will be demoted to a lower division, which entails salary reductions. To use the terms of segmentation theorists, the labour market for professional footballers is categorised by an “upper primary” segment offering very high salaries and great careers for a small minority of players (who are in high demand from a number of clubs and thus in a monopoly situation, able to negotiate their salary), and a vast secondary segment in which salaries are much more modest and careers shorter. Another segment is the “superstar” market.

Since the work of Sherwin Rosen (7), economists have studied the “superstar effect”. This effect cannot be explained by the standard theory that stipulates that salaries are paid at their marginal productivity, that is, depending on their contribution to production. In order to understand the “superstar effect”, we must keep in mind that there are discontinuities in the remuneration of employees at the top of the distribution curve, which allows for higher remuneration for just a slight increase in productivity, but also that exceptional talent is highly rewarded by employers because the consumers do not like to see them move on: once Neymar is playing for Paris, what supporter wants to see him leave for Madrid?

The salaries of the superstars also depend on the size of the market (the rent). The greater it is, the more they are paid: the best footballers earn more than the best rugby players; a footballer in the 1970s earned much less than a footballer earns today. Finally, labour markets with superstars have three characteristics: the wages-for-talent curve is sharply convex, meaning that wages increase exponentially with talent; a large portion of the employees gain less than the average salary, and consequently, the few superstars capture a great share of the rent: “The winner takes all !” The explanation lies in the monopoly power of the superstars.

(1) See Luc Arrondel and Richard Duhautois, L’Argent du Football, Cepremap, 2018

(2) It should be noted that these are accounting simulations that do not take into account possible government measures for lowering costs, particularly wages (such as partial unemployment benefit and negotiations to reduce or defer players’ wages) and the deferral of social contribution payments.

(3) Trading is the buying and selling of players according to their market value.

(4) Andreff Wladimir, “Équilibre compétitif et contrainte budgétaire dans une ligue de sport professionnel”, Revue économique, vol. vol. 60, no. 3, 2009, pp. 591-633.

(5) Matchday income is what spectators spend at football matches, including ticket sales.

(6) Simon Kuper and Stefan Szymanski, Soccernomics: Why England Loses, Why Germany and Brazil Win, and Why the U.S., Japan, Australia, Turkey - and Even Iraq - Are Destined to Become the Kings of the World’s Most Popular Sport, New York: Nation Books, 2009

(7) Sherwin Rosen, “The Economics of Superstars”, American Economic Review, 71 (5), 1981, pp. 845-858.

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