In brief: Unequal shares: the economics of elite football clubs

Eran Yashiv

English

Research Papers in Economics

CentrePiece Winter 2010/11
27
Unequal shares: the economics
of elite football clubs
The top clubs in the major football leagues of Europe
invariably come from big cities. In England’s Premier
League, for example, the top nine clubs last season came
from four big cities: London, Birmingham, Manchester
and Liverpool. Why do we see this empirical 
regularity and what does it imply for players, managers,
fans and owners?
The logic is as follows: big cities allow for a big fan base
and a big stadium – and cities are typically old enough
to have clubs with a rich history. The combination of the
fan base, the stadium and the history makes for high
revenues. High revenues allow for the purchase of the
star players who are crucial for both commercial and
football success. The stars attract more TV coverage and
enhance merchandise sales, thereby augmenting
revenues. And with football games often decided by a
one or two goal margin, the stars’ skills prove crucial.
Positive feedback follows: with commercial and football
success, the fan base rises, star players are more easily
attracted, revenues increase and the process is repeated.
While it is true that not every club in a big city joins the
elite and not every big city has an elite club, the elite
clubs do come from the big cities.
This positive feedback mechanism leads to a very skewed
distribution of clubs, with a handful dominating in terms
of both football and revenues. The numerous other clubs
are left with relatively low revenues and few trophies. 
In terms of players, the distribution is also skewed, with
the stars concentrating in the big clubs.
Take the following striking example: in the 18 seasons of
England’s Premier League, it has been won by
Manchester United 11 times. The other seven times were
won by just three clubs: Arsenal and Chelsea (three
times each) and Blackburn (once).
In the other major European leagues the situation is
similar if not more extreme. There are two big Spanish
clubs – Real Madrid and Barcelona – which are placed
much higher than the rest in terms of both revenues and
football. Together they have won 51 out of 79 league
titles. Similarly, there are four Italian clubs topping the
revenue list and the league – Juventus, Inter Milan, AC
Milan and Roma. The situation is similar in Germany,
Italy, Portugal and other European countries. 
Will global mass communications change this? Probably
not, as TV viewers and web users are attracted to the
successful, rich clubs with the stars, thereby yet again
augmenting their revenues and profits.
Can a club break into this elite group? Given the
circularity of big city size, big fan base, big revenues and
big football success, it is hard. The implication is that
only a club that is able to buy stars and to build a big
fan base with a big stadium can enter the elite group.
Manchester City is probably an experiment in progress in
this direction, but the outcome is still uncertain.
In any case, it looks like very few clubs will be able even
to try. This means it makes sense for investors to buy
clubs like Manchester United, Chelsea or Liverpool.
Buying a club like Portsmouth or even Newcastle is much
less interesting.
Another issue is the difference between the very top
teams (such as Manchester United) and the second tier
of the elite group (such as Arsenal). The very top teams
have a squad with more stars. It therefore pays to invest
in these players to move up within the elite group.
This explains why the wages paid to footballers and their
transfer fees have risen so much. There are few elite
clubs and they compete for a small number of stars. 
The high wages and high prices of the stars pull up the
wages and prices of the rest. The ‘small elite’ set-up
generates a ‘race to the top’ as each star can make a 
big difference.
A few elite clubs dominate the football leagues of Europe. Eran Yashiv
examines what drives the success of these clubs both on and off the field,
how it has generated the big increase in footballers’ pay and transfer fees –
and prospects for the clubs and their owners.
in brief...
Being at the top means
high wages for footballers
and satisfaction for fans –
but not handsome profits
for the shareholdersCentrePiece Winter 2010/11
28
This is a bad outcome for club owners and managers. 
No wonder that the latter keep complaining about the
high cost of players. And in recent years, we have seen
only small profits or even losses at the big clubs. This is
due to the high expense of footballers as well as the
need to keep investing in stadiums and merchandising to
maintain elite club status. So being at the top may mean
high wages for players and satisfaction for fans but not
necessarily handsome profits for the shareholders. 
This structure of the industry evidently has important
implications for potential buyers and sellers of clubs, as
well as investors. There are two ways in which it may
eventually change: one is when profits in the elite clubs
are so low or negative (due to high wages and high
costs of buying players) that a new regime emerges, one
of lower costs and a more even distribution. This may
happen through the piling up of debt, which will require
the clubs to scale back.
Change may also occur if governments intervene 
and impose salary caps: this would also lead to a 
more equal distribution. But until such things happen,
football will remain a very unequal sport and a very
unequal business.
Eran Yashiv is a professor of economics at Tel Aviv University
and a CEP research associate.
Football is likely 
to remain a very
unequal sport 
and a very 
unequal business

http://cep.lse.ac.uk/pubs/download/cp337.pdf

In brief: Unequal shares: the economics of elite football clubs

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