The Soccer Industry in Europe - Assignment Example

WAGE CAPPING IN EUROPEAN SOCCER I) Introduction International football has blossomed into a multi-billion dollar industry. Its tag ‘the world’s most popular sport’ is suitably vindicated by the huge number of people who play and view the game. In 2002, Economist Stefan Szymanki at Imperial College, London, put the value of worldwide soccer industry at £150 billion ($ 216 billion). Football’s simplicity is its strength that allows anyone to play the game, and leaves open the challenge of winning to any club or country. Europe, one among the 3 truly football crazy continents, easily leads Latin America and Africa as the best in the sport (http://www.economist.com/surveys/displayStory.cfm?story_id=1142861). II. Definition of Wage Caps and its Current Usage A wage cap is defined as the maximum sum of money a soccer team can spend on wages to players. It can take two forms; representing a limit on the wages per player, or it can be the total limit on wages paid to all players in the team. Wage caps are a regular feature in North American sport. The wage cap was $ 46 million per team during the 2005 National Basketball Association (NBA) season; in the current 2006-7 season, it is $ 102 million per team in the National Football League (NFL), AUD 6.47 million per team in the Australian Football League, C. $ 3.8 million per team in the Canadian Football League, and $ 44 million per team in National Hockey League (NHL) {http://en.wikipedia.org/wiki/Salary_cap}. Wage caps are actively being considered in European soccer. In 2002, a BBC report claimed that, beginning from 2005/06, the G14 group (AC Milan, Real Madrid Club de Futbol, AFC Ajax, Borussia Dortmund, FC Barcelona, FC Bayern Munchen, Juventus FC, Liverpool FC, Futebol Clube de Porto, FC Internationale Milano, FC Manchester United, Olympique de Marseille, Paris Saint-Germain and PSV Eindhoven) among 18 top European soccer teams (the other 4 being Arsenal FC, Bayer 04 Leverkusen, Olympique Lyonnais and Valencia Club de Futbol) have agreed to limit total team wages to 70% of the team’s income (http://en.wikipedia.org/wiki/Salary_cap). III. Beneficial effects of Wage Caps to the European soccer industry 1) Competitive balance, League stability Fixing wage caps will ensure that rich teams cannot perennially dominate the competition by just buying all the best players in the sport. This effect is undoubtedly the single major sought-after change in the present European soccer scene (http://en. wikipedia.org/wiki/Salary_cap). In soccer, as with other spectator sports, competitive balance is vital because, other things being equal, doubtful results on the pitch creates interest among watching fans, besides increasing demand for viewing matches both at stadium level and television audiences (subscription and pay-per-view). This can be seen in Figure 2.1(http://www.football-research.org/papers/competitivebalance-paper.htm) below: an increase in competitive balance results in increasing demand (the demand curve shifts up and to the right) for viewing matches. Figure 2.1 The Impact of Competitive Balance on Spectator Demand (Ceteris Paribus) Competitive balance in European soccer can be analyzed by evaluating H-index and C5 ratios in the industry. In economics, the Herfindahl Index (also called Herfindahl-Hirschman Index or simply H-index) refers to a measure of the size of firms in relationship to the industry, and is a device showing the amount of competition among them (http://en.wikipedia.org/wiki/Herfindahl_index). In soccer it is a measure of the teams in relation to their league. The C5 ratio refers to the five company concentration ratio that calculates the level to which an industry is dominated by the five biggest companies. In football terminology, it is the five club concentration ratio that measures the extent the league is dominated by the top 5 clubs. C5 ratio = Total points won by the top five clubs ---------------------------------------------------------------- Total number of points won by all clubs in the league (http://www.football-research.org/papers/competitivebalance-paper.htm). The analysis of Tables 2.2 and 2.3 (http://en.wikipedia.org/wiki/Herfindahl_index) provided below points to an increase in C5 ratio of 21 percent between 1947 and 1990, although this change includes a change in the index due to reduction in number of clubs from 22 to 20; a deeper analysis reveals that the C5 ratio remained constant between 1947 and 1987 while it registered a 6.4% increase between 1989 and 2004. The analysis of Figures 2.6 and 2.7 (http://www.football-research.org/papers/ competitivebalance-paper2.htm) related to H-index figures of the English Premiership League shows that there has been a relatively small increase of 13% (due to the decreasing of the league teams from 22 to 20) in competitive balance between 1947 and 2004; a deeper study shows that nearly all the increase in competitive balance has taken place between 1989 and 2004, whereas the H-index was nearly constant between 1947 and 1987. Data on the C5 and H-indexes of competitive balance for top-flight leagues in Italy, Germany, France and Spain (Figures 2.9 to 2.12 {http://www.football-research.org/ papers/competitivebalance-paper2.htm} provided below) reveals that Italy had the highest degree of imbalance among the top 5 leagues of Europe; Germany recorded a decline in competitive balance over the last decade; France witnessed highest levels of C5 and H-index over the past 6 years (nevertheless there seems to be no distinctive trend in competitive balance); and Spain recorded a moderate improvement in competitive balance between 1956 and 1976 but the competitive balance moderately declined after that period. The irrefutable conclusion drawn from the analysis of the top flight European leagues’ competitive balance, underlines the fact that the European soccer industry is governed by the vicious and virtuous circles of sporting and economic performance. The virtuous circle involves good performances by top clubs that lures sponsors and fans (supporters, spectators in stadiums and on television), thus boosting revenue which enables the club to spend more on players with the aim of courting more success in future {http://www. football-research.org/papers/competitivebalance-paper2.htm} (English businessman Alan Sugar calls it the ‘prune-juice effect’ – one can pour a lot in, but it all emerges at the other end {http://www.economist.com/surveys/displayStory.cfm?story_id=1142861). The best example is Chelsea: Russian billionaire Roman Abramovich acquired it, immediately adding $ 200 million to club funds solely for buying as may top players as possible (http://www.time.com/time/arts/article/0,8599,671302,00.html). The vicious circle involves clubs lagging at the bottom of the league; poor performances by them lead to loss of income as disillusioned sponsors, supporters and fans turn away; such poor clubs cannot afford to invest much in players which in turn leads to a further deterioration in performance (http://www.football-research.org/papers/competitivebalance-paper2. htm). Viewers are not interested in lower division soccer matches, as England’s ITV Digital found at the cost of a huge loss in 2002 (http://www.economist.com/surveys/ displayStory.cfm?story_id=1142861). Competitive balance, ensured by the wage cap, will significantly reduce the performance gap between the top and bottom of the league clubs; the resultant league stability will greatly reduce risks of bankruptcy of clubs, loss of spectators and the danger of the league breaking up due to moves from new or rival leagues (http://www.football-research.org/papers/competitivebalance-paper2.htm). 2) Improved club image, improved fan following European soccer fans and the general European public consider it unfair that the burden of astronomical wages paid to soccer players is passed on to them by soccer clubs in the form of rising ticket prices. Millionaire soccer stars (like Zinadine Zidane who earns around $ 150,000 a week at Real Madrid, that too, post-tax {http://www.economist.com/ surveys/displayStory.cfm?story_id=1142861}) are increasingly being viewed by stars as greedy players with little or no concern for the team’s financial position or competitive standing, who are using their success and fan adulation as bargaining tools to get as high a wage as possible. With the wage cap in place, the expenditure of clubs on player wages will greatly reduce, enabling them to reduce ticket rates, thus contributing to an increase in fan attendance, a boost fan following, and most important, increased fan satisfaction with clubs as people will begin to respect clubs for providing a sport featuring ordinary football players and not just highly paid stars (http://en.wikipedia.org/wiki/Salary_cap). 3) Better club financial structure Player wages is the single highest expenditure by clubs. For example, between 1994 and 2003, English Premiership expenditure on player wages increased by 550%; by 2004 the top 5 clubs were each paying over £40 million (http://www.football-research.org/ papers/competitivebalance-paper2.htm). Figure 2.4 (http://www.economist.com/surveys/displayStory.cfm?story_id=1142861) provided below shows the huge amount clubs shell out in terms of player wages. In the 2000-2001 season, the wages of players averaged the highest in Italy (125% of club revenues), followed by England, Spain and France (75 to 100% of club revenues) while Germany spent the lowest (60% of club revenues). Figure 2.4 Total cost of players as % of turnover 2000-2001 season Wages to highly paid soccer players are consuming most of the club revenues. The wage cap will suppress the compulsive need of clubs to pay high wages to lure the best players, resulting in a significant reduction of their expenditure which in turn will contribute to healthier financial structures (http://en.wikipedia.org/wiki/Salary_cap). 4) Exposing not-so-super superstars The wage cap will succeed in rooting out poorly disguised, supposedly ‘superstars’ from the game. There have been many instances of a team signing on a supposed superstar on highly paid and guaranteed long term contractual basis, only to be faced with a continuing series of underperformances by him (http://en.wikipedia.org/wiki/Salary _cap). Examples of this are Ronaldo’s ejection from Inter Milan, Louis Figo’s forced departure from Real Madrid and David Beckham’s present unsatisfactory situation with the same club. IV. Detrimental effects of Wage Caps to the European soccer industry 1) The multiple currency factor All the nations in the UEFA use the euro as their national currency except England. England, which has the richest league in Europe, steadfastly retains the pound sterling as its currency. If the UEFA wage cap is set in euros, fluctuating exchange rates will not make it easy for the wage cap to be fairly applied to English clubs, who collect their revenues in pounds sterling and pay player wages in that same currency. As top level soccer is closely intertwined with politics and national pride, the English dissatisfaction has a strong likelihood of exacerbating to include political opposition as well. The NHL has averted this problem by making it mandatory for Canadian sports teams to pay their players in U.S Dollars and not Canadian Dollars (http://en.wikipedia.org/ wiki/Salary_cap). 2) Differing national tax systems and tax rates In Europe the tax system and tax rates differ greatly from country to country. As result, clubs and players would be dissatisfied with a wage cap that wrongly equates the aggregate ‘take home’ amount that every club experiences. For example, Monaco is a territory ruled by a Prince, and it does not require its inhabitants to pay income tax at all; as a result of this benefit, the soccer club AS Monaco has huge tax savings – a boon that is not enjoyed by other European clubs. Teams in countries with high taxation would be at great disadvantage in attracting top soccer players. The NHL has circumvented this problem because the tax systems and tax rates differ very marginally between the U.S and Canada ( http://en.wikipedia.org/wiki/Salary_cap). 3) The problematic promotion and relegation systems European soccer league are based on the promotion and relegation system whereby a certain number of teams who end the season at the bottom of their division drop to the lower division; they are replaced by an equal number of teams who end the season at the top of that lower division. A wage cap, logically, would be positioned at different limits in different divisions, with the top division having the highest figure. The problem arises if a club having a payroll figure nearly equal to the top division’s cap is relegated to the second division; it will find itself at a definite advantage over the second division cap. Similarly, a promoted club (say from the second to first division) will have to search for players whom it can pay under the higher cap limit of the first division. This problem is avoided by North American Leagues who do not have promotion and relegation systems (http://en.wikipedia.org/wiki/Salary_cap). 4) Different governing bodies Unlike all major North American sports, each of which has only a single league which supervises and directs a single premier competition, European soccer is governed by different bodies. UEFA is in charge of European football in general, and the high profile Champions League and UEFA Cup in particular. UEFA has no authority over operations involving domestic leagues of its member countries. Therefore, if a UEFA wage cap is set up, it would first of all be relevant only to UEFA club competition, and secondly it would relate only to the part of each team’s payroll involving payment to players registered with the UEFA. By this definition, the wage cap would leave a convenient loophole for rich Champions League teams to procure players to play solely in domestic competitions (http://en.wikipedia.org/wiki/Salary_cap). 5) The star adulation factor Soccer is undoubtedly the most followed sport across the globe. European country soccer competitions, the Champions League and the UEFA Cup are second only to the World Cup in the eyes of soccer-crazy fans. A large part of club fans base their loyalty on the famous superstars that the club employs. Notable examples over the years have been the Dutch component of AC Milan’s mid-1990s ‘Dream Team’ – Marco Van Basten, Frank Rijkaard and Ruud Gullit; Bobby Charlton of Manchester United, Eric Cantona of Olympique Marseille, Gheorghe Hagi of Real Madrid, Kevin Keegan and Ian Rush of Liverpool, Franz Beckenbauer of Bayern Munich and Johan Cruyff of Barcelona). Imposition of wage caps will cause such players to abandon clubs offering low wages and rush to those who can afford higher wage caps. This displacement of top players will result in a huge disappointment to fans, leading to a significant withdrawal or shifting of fan support that will have a detrimental effect on the club’s revenues (http:// en.wikipedia.org/wiki/Salary_cap). V. Effect of wage caps on the soccer transfer market Success in European soccer competitions like the prestigious Champions League and the lesser UEFA Cup, is looked upon as the ultimate goal of clubs, players and fans. This is due to two reasons. The first reason involves fierce national pride – a winning team stokes nationalistic fervor like almost no other factor. Secondly, each nation gets a limited number of entrants into such high-profile competitions (depending on its teams’ performances); the clubs who ultimately qualify relish the prospect of gaining huge financial income that would increase if and when they successfully move closer to the final stages of the competition. The prospect of winning and gaining huge financial success makes European clubs vie with each other to sign the top soccer players of the world (http://en.wikipedia.org/wiki/Salary_cap). 1) Player dissatisfaction This competition between European soccer leagues is exacerbated by the rule that soccer leagues in European Union countries are allowed to sign EU players from another nation; there is even no limit to the number of players they can sign in this context. Given this scenario, a wage cap would see a huge rise in transfers fuelled by player dissatisfaction: if one league sets a wage cap on its teams, the top players in that league may feel they are grossly underpaid and choose to be transferred to rival leagues that do not impose wage caps; the soccer transfer market would thus experience disconcerting upheavals. North American major sports have foreseen and forestalled such a problem; its system of a single league supervising a single premier competition ensures that teams with wage caps in place need not negotiate with teams in rival leagues that have the financial means to have payrolls that are even close to the wage cap levels (http://en.wikipedia.org/wiki/ Salary_cap). 2) Loss of old and new talent of clubs Imposition of the wage cap will see many clubs struggling to comply with it. Veteran players who have been with the club for a long time, and who dearly like to end their careers with that same club will find themselves ejected on to the transfer market by such struggling clubs {http://en.wikipedia.org/wiki/Salary_cap} (Imagine West Ham doing this to Trevor Brooking, or Alan Shearer getting such treatment from Newcastle United). Similarly the ongoing, commendable practice of many clubs to recruit and nurture young talent will be largely discontinued by lower division clubs who need to tighten their budgets under the wage cap rule, thus not being able to indulge in courting young talent; they will most likely also be compelled to shift budding talent on to the transfer market at very low prices. One can imagine the club’s consternation if their former protégés blossom into a Wayne Rooney or a Michael Owen type stature. 3) The end of soccer superstars Some critics (like talk radio host Rush Limbaugh) object to the wage cap on libertarian grounds, arguing that there should be no artificial limitation on what truly talented players can earn. There is no doubt that certain soccer players are match winners who play pivotal roles in most of their team’s games. Notable current examples are Ronaldinho of Barcelona, Steven Gerrard of Liverpool, Zinadine Zidane of Real Madrid, Wayne Rooney of Manchester United and Frank Lampard of Chelsea. Such players justifiably earn much higher wages than other team-mates. If a wage cap is imposed (by which their high wage will be trimmed down to a general player’s level), they will be extremely disillusioned and actively seek transfers to other clubs whose wage caps are higher (http://en.wikipedia.org/wiki/Salary_cap); in all likelihood, they will not perform as well as they did with their former club, thus causing the football fraternity to lose a charismatic, match-winning superstar forever. A prime example could be (although it did not involve wage caps) Michael Owen’s move from Liverpool to Real Madrid. 4) Less transfers of non-European players Globalization of soccer began in earnest in the 1990s. As a result, many players of non-European origin get a chance to expose their talent. In 2004 it was estimated that there were 5,000 Brazilian and 1,000 African professional soccer players in Europe. Significantly, all the African players and most of the Brazilian players were bought by clubs on the transfer market from other European clubs, and not directly from Africa or Brazil. Non-European foreigners are currently quite dominant in European soccer (such as AC Milan’s Dida, Cafu, Ricardo Olivera {Brazil}, Arsenal’s Kolo Toure {Ivory Coast}, Olympique Marseille’s Renato Civelli {Argentina}, Liverpool’s Harry Kewell {Australia}, Barcelona’s Samuel Eto’o {Cameroon}, Bayern Munich’s Julio Dos Santos {Paraguay} and Manchester United’s Park Ji-Sung {Korea}). Arsenal is probably the best exponent of non-European club domination: it won the 1989 Premiership title with just one foreigner (a Swede) on its team; today, the team managed by Frenchman Arsene Wenger has no English players in its current playing squad (there are 5 Englishmen – Justin Hoyte, Matthew Connolly, Mark Randall, Jay Simpson and Theo Walcott {who earned a World Cup team call up, but does not apparently enjoy similar support from his manager} who are part of the reserves). The wage cap will involve clubs adjusting their finances to retain their existing (mostly European) players as well as those fortunate non-European players who are already on club payrolls before the cap is in place. Clubs will find it financially hard to venture into the transfer market seeking talent from Brazil, Africa or other non-European nations. As a result, talent from such non-European countries will find it very difficult to get into European soccer (http://www.time.com/time/arts/article/0,8599,671302,00.html). 5) Disarray in the soccer transfer market A wage cap based on a percentage of a team’s income, subject to the vagaries of different tax rates and different governing bodies, would throw the transfer market into pandemonium; it would be absolutely deluged with transfer transactions from frantic soccer players. Such players, used to lavish lifestyles prompted by high salaries, will suddenly find their paychecks virtually unrecognizable; fears of being unable to retain their current lifestyles will make them rush to seek clubs who can offer higher wage caps. This may well be the start of a chain-reaction: seeking transfers from one club to another always in search of a higher wage cap. VI. Conclusion Given the glaring deficiencies in current European soccer, the wage cap is undoubtedly the best solution. UEFA should find ways to circumvent the various factors that pose hindrances to this project. A close study of North American sports would be extremely beneficial. Perhaps an attachment clause to wage caps could be the ‘luxury tax’ system in which a team whose payroll exceeds a certain amount (the figure should be revised each year), must pay the excess amount into a luxury tax fund, which will then be used to assist teams not financially well-off to pay higher wages to their players. This system is used by Major League Baseball in the U.S with a reasonable degree of success (http:// en.wikipedia.org/wiki/Salary_cap). References used: Anon. “Herfindahl Index.” Wikipedia. 6 Aug. 2006. Anon. “Passion, Pride & Profit.” Economist.com. 3 May 2002. Anon. “Salary Cap”. Wikipedia. 2 Nov. 2006. Karon, Tony. “What Soccer Means to the World.” Time.com. 21 July 2004. Michie, Jonathan & Oughton, Christine. “Competitive Balance in Football: Trends and Effects.” Football Governance Research Centre. 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