Written evidence submitted by David Cockayne, Kieran Maguire and Professor Sue Bridgewater

Select Committee Response

Centre for Sports Business
University of Liverpool Management School

David Cockayne, Kieran Maguire, Professor Sue Bridgewater[1]
 

1. Introduction
   
   The authors of this report are specialists in a range of sports business areas relevant to the topic area, specifically sports markets and marketing, sports governance and sports finance.
   
   Given limitations on word count, our analysis focuses primarily on the example of football in England, to highlight the way in which current governance structures work, the impacts of COVID-19 and offer our evaluation of the extent to which additional financial support of lower leagues and grassroots football might reasonably trickle down the pyramid of football.

2. Are current sports governance models fit for purpose? At what level of sport should the government consider spending public money?  
    

This section considers two interlinked perspectives:

              i) The football governance structure – “the pyramid” - which includes that way in which
              decisions are made, formal rules, informal conventions, resources and historical context and,

              ii) The football ecosystem – which refers to the stakeholders and networks that make up football
              as a game and industry.
 

2.1 The Football Pyramid[2] 

Football clubs do not operate in an “open market.”[3] In open markets, competition is permitted with the aim of enabling the strongest firms to survive and unsustainable enterprises to fail.

The governance structure of football means that clubs; who at a club-level exist to outperform their competition on and off the pitch, are members of leagues; which act on behalf of the collective interests of their member clubs.

Broadcast rights for leagues are sold collectively in the UK and revenues are distributed by agreed formulae between clubs. There is debate over the role of “competitive balance” and “uncertainty of outcome” in fostering match attendance and viewership of football,[4] but reducing competitive balance, thus increasing uncertainty of outcome are generally accepted principles which are defended by sports leagues.
 

This dynamic creates potential tensions within leagues, between clubs and the league, and perhaps also between leagues, given that level 1 the English Premier League (EPL), levels 2 - 4, the English Football League (EFL) and level 5, the National League are separate entities:

1. At the EPL level of the pyramid, the league exists primarily to regulate and govern the domestic competition but simultaneously faces global competition for inputs (talent ie: players, broadcast and sponsorship revenue) based on the attractiveness of the league compared with other elite football leagues eg: La Liga, Spain; Bundesliga, Germany; Serie A, Italy; Ligue 1, France).

2. The top six EPL clubs win the right to compete regionally in the UEFA Champions League and even globally (in the FIFA Club World Cup). Clubs in levels 2 - 5 comprising EFL and National league, benefit from promotion and lose by relegation, both in terms of sporting achievement and in financial terms. Accordingly, across the levels of the pyramid, clubs have the incentive to act in their own best interests, rather than for the collective good.
    

This combination of open market competition and more “socialised” collective forces creates fractures within levels of the pyramid structure, and simultaneously erodes and widen gaps between the levels. Figure 1 (below) identifies key issues arising from the countervailing supply and demand-side forces upon the football pyramid. Points A – E summarise these points. A fuller explanation is included in Appendix 2.

A: Demand Side: In pursuit of sporting and business goals, clubs have an incentive to maximise revenue. This creates a tension within, as well as between, levels of the pyramid. Larger clubs feel that they might individually achieve better broadcast and commercial deals and argue for performance-related rather than equitable distribution of monies. In the EPL, the top 6 clubs compete regionally in UEFA competitions, gaining additional revenue. Sporting performance correlates with player wages in the EPL, so clubs qualifying for UEFA competitions progressively widen the gap between themselves and lower ranked clubs in the same league.

B: Supply Side: Clubs over-spend on player transfers and wages in pursuit of sporting aims. This particularly affects the Championship where clubs overspend targeting promotion and the higher revenues / sporting achievements of the EPL. Average wages in the Championship were 107% of revenue in 2018-19. Wage caps seem inevitable if clubs cannot control costs despite the threat of sporting sanctions under the Profit and Sustainability cost control rules[5]. EPPP (See Appendix 3) has had the unintended consequence of reducing the ability of lower league clubs to develop and sell good young players to higher league clubs as a source of revenue.
 

C: Lower levels of the pyramid: On the demand side, lower in the pyramid there is less ability to generate revenue from broadcast and commercial and greater reliance on matchday revenue. Hence EFL, National League and levels 6 and 7 clubs are more greatly impacted by COVID-19 than EPL.

D: “Trickle down” funding: COVID-19 has accentuated the losses and overspending that have characterised EFL clubs. Many clubs would be unsustainable without inputs from club owners.[6] Both:

              collective: governing body and league regulations, eg: a reconsideration of parachute payments, salary caps, EPP, solidarity payments and

individual: club-level changes, eg: rigorous “fit and proper persons” tests, better cost control within clubs are needed to make even the elite levels of football financially sustainable.

E: Gaps between levels are not equal in size and some are more difficult to overcome than others in moving up or down the pyramid. A number of funding sources stop at National League levels. Even at lower levels of the EFL, the percentages of solidarity payments which trickle down are much lower than for the Championship. The EPL did, however, allocate 20% of its most recent domestic broadcast deal’s revenue to support grassroots and participation initiatives and in solidarity payments for lower leagues[7].


 

2.2 The Football Ecosystem

The preceding analysis of football’s governance structure, highlights the different interests, influences and levels of resources of the stakeholders within football.
 

An ecosystem approach looks at the totality of football and the way in which the governance structures work or could be improved. The considerable knowledge within football is often “vested” in stakeholders with particular interests or perspectives. As a result change is hard to achieve and innovation is often stifled.

COVID-19 represents a ‘burning platform’ which in some respects has brought football together to resolve a common problem which impacts on football as a whole, though debate exists between stakeholders with respect to strategies used.

The current governance structures mean that any changes rely on EPL clubs voting for the collective good of football on proposals which may not be in their individual best interests.

There is, however, an opportunity to revisit and re-evaluate some of the structures and systems of football to consider ways in which changes to football’s structures, rules and processes might create a more sustainable model.

This evaluation should avoid blindspots by incorporating perspectives from the wider set of stakeholders and experts eg: sponsors, broadcast, fan, community sports and independent expert groups.

Potential actions and recommendations built on the analysis of the football pyramid and our conceptualization of the football ecosystem can be found in appendix 2.

3. What are the biggest risks to the long-term viability of grassroots sport?
    

Andreff et al (2009)[1] identifies a continuum of funding models for grassroots sport in Europe. UK grassroots sport has hybrid funding towards the privately-funding end of the scale. Household disposable income, private gyms and subscription-clubs, national lottery funding via home country agencies such as Sport England are supplemented by government funding via UK Sport and local government[2]

UK sits at around the mid-point of the spectrum, but rather towards the private / individually
funded end of the scale, with household disposable income and private providers such as gyms and subscription-clubs playing an important role in maintaining the nation’s grassroots sport provision[8].

The biggest risks for the long-term viability of grassroots sport come from:
 

●        COVID-19 lockdowns which have had an overall impact on sports funding and have impacted both private and public providers.
 

●        COVID-related impacts on disposable household income via job losses and recession. These disproportionately impact lower income groups.
 

●        Viability of private providers and funding providers after lockdowns.
 

●        An overall reduction in the finances of elite sport and private sports facility providers and clubs trickles down to grassroots.
 

●        COVID-19 has compounded the impacts of austerity on local authorities which provide sports facilities and boost participation among hard to reach demographic groups eg: lower income groups (Widdop et al 2015), then COVID-19 will disproportionately impact on these groups[9]. Government support will be needed, particularly as lockdown has brought a decrease in sports participation overall and reduced fitness among children. Funding of after-school sport might go some way to reinvigorating youth sports participation, but it is expected that grassroots sport will need government support. 

4. To what extent should elite professional sports support the lower leagues and grassroots? How should the Government make this happen?

Given COVID-19 related decreases in revenue, it is unlikely that elite sports will have significant ability to support grassroots sports. It is nonetheless worth discussing ways in which “trickle down” funding or structural changes could improve the funding of lower league and grassroots levels.

The following section analyses the impact of COVID-19 on football finances and the implications for lower leagues and grassroots levels.

              4.1 COVID-19 - Financial Impact on Men’s Professional Football in England

              The most recent accounts (2018-19 data, See Appendix 5) do not, as yet, capture the magnitude
              of the impacts on COVID-19.
 

The Premier League generated £680m in 2018/19 from matchday revenue which will be reduced for the proportion of the 2019-20 season that was lost and that of the 2020-21 which will be lost if matches do not return before paying fans. In addition, there is an estimated £360m refund due on the broadcasting revenue for last season. Since then the PPTV deal in China has also been cancelled, which is worth about £175m a year and replaced with one worth no more than £30m. The total loss of revenue over a 12-month period is therefore likely to be in the region of £1 billion compared with last March.

In terms of EFL revenue, some clubs (Sheffield Wednesday and Derby County) have chosen to break UK company law and decline to publish accounts for 2018/19. If, however, we substitute in figures for the previous season, there is a total matchday revenue total of £155m, although this includes Leeds and Aston Villa, both of whom are now in the Premier League. In respect of Leagues One and Two, sadly many of them take advantage of abbreviated accounts rules and so do not disclose revenue details. Using the median figures for the clubs which have reported revenue data, however, gives matchday totals of £55m and £38m respectively.

In sum, the likely impact of COVID-19 on EPL and EFL revenue makes it clear that the finances of EPL and EFL will be severely impacted.
 

At present the amount of money paid to the EFL and National League from the Premier League (EPL) in the form of solidarity payments is an agreed percentage of the broadcast deal ie: if broadcast deals reduce in the next round, so will solidarity payments. As can be seen in Appendix 4, matchday income, whilst impacted, is a relatively small proportion of revenue in EPL and Championship, although far more significant at levels below these two.

The EFL clubs committed themselves to the current solidarity payments when they also signed up to the EPPP (Elite Player Performance Plan). Whilst advancing solidarity payments in ahead of the usual twice-yearly dates had helped EFL and National League clubs to survive in the short-term, in the absence of matchday revenue, this will not resolve the longer-term issues. The payments are an advance, not an increase in the amount payment.

Essentially, as a collection house for its member clubs, the EPL brings in the monies from broadcasting and commercial deals. It then pays out overheads and distributes almost all of the balance to the clubs themselves meaning that it broadly breaks even. The Premier League would have to have a vote of EPL clubs for any changes to be agreed with the EFL or National League to trickle more money down the football pyramid. “Project Big Picture[10]” is working on these issues.

Funding is passed from the EPL to grassroots football eg: via the Football Foundation, and through a range of mechanisms including Premier League Kicks, sports participation and schools’ programmes.

Grassroots football also receives funding via the Football Association. Appendix 6 shows £165.6m of FA spend on “investment in the game.” It should be noted that UEFA makes solidarity payments from the UEFA Champions League (via HatTrick funding) and FIFA from the World Cup revenues (through FIFA Forward 2.0) for infrastructure and grassroots participation initiatives[11].


4.2 Impacts of COVID-19 on Women’s Football
 

The women’s game of football suffered greater cancellations than the equivalent men’s leagues. Whilst men’s elite football resumed football in the top two leagues to complete the 2019-20 season, the top two women’s leagues, the Women’s Super League (WSL) and the Women’s Championship (WCh) ended their season. The level below, the third tier leagues: the National League North and the National League South had the end of last season cancelled and have again stopped fixtures during Lockdown 2 as has the women’s FA Cup. It is assumed that these last will be caught up post lockdown.

Financially, although WSL has been a professional league since 2018-19, its initial lower revenues and differences in the governance structure compound any loss of revenue. Appendix 7 shows the revenues and costs of women’s football across Europe. A heavy reliance on grants from UEFA / FIFA and National Associations can be seen but the largest single source of revenue is from a founder or parent club (Valenti 2019). In his 2019 UEFA report, Valenti finds among his sample of European women’s football clubs[12] that 69.6 of these are integrated and, at least to some extent, dependent on a related men’s team for financial support and shared resources.

3 of the 12 WBS clubs are linked with EFL Championship men’s clubs and the remaining 9 with EPL men’s clubs; moreover, in the Women’s Championship, 4 women’s clubs are independent, 3 affiliated with EPL clubs and the remaining integrated with EFL clubs. A clear concern is that financial hardship of the men’s clubs will impact on the ability to support the related women’s team. As has been seen in the cases of Sunderland Ladies and Notts County Women’s club, there is a knock-on effect of financial hardship for the ability to support a women’s team. 

It should be noted that the EPL has already made contributions to help to support the WSL and WCh women’s football leagues[13] to support the costs of COVID-19 testing which helped these leagues to be able to return in the 2020-21 season, although in governance terms, these leagues are run by the Football Association. Without subsidies, women’s football, even at the top level, would not have been able to return to playing in the current season.

In its most recent survey of the impacts of COVID-19 on women’s football, football players’ union, FIFPro provides stark data on the impacts:[14] “47 percent of the countries surveyed women footballers had wages cut or suspended. In 40 percent of countries, players received no mental or physical health support. In 69 percent of countries, communication with players was regarded as poor or very poor.”

In addition, whilst sponsorships, such as that by Barclays of the WSL, have become a growing and important part of the revenues of women’s football, 47% of respondents said that they had received indications that sponsorship revenue might be in jeopardy.

During Lockdown 2, there has been a lack of “felt fairness” in women’s football. Whilst it is clear that medical judgements and health concerns lie behind the decision to suspend girls Regional Training Centres (RTCs) whilst boys academy teams were allowed to continue training, this has been seen as an apparent contradiction of the Football Association’s stated 2017 “Game for Growth” aim to double the number of girls and women taking part in football by 2020[15].

5. Conclusions
    

●        Elite football - via the EPL and its clubs, and the Football Association - already play an important role in sustaining lower league clubs and grassroots football. The current support should not be under-estimated, and consideration of ways to further enhance this should not devalue the contribution which this makes to football.
 

●        At the same time, the governance structure of football is complex. The interests of diverse stakeholders results in slow decision-making and difficulties in taking collective action. Some issues eg: cost control, appear to be intractable and others such as parachute payments and EPP, have perhaps had unintended consequences. The current pandemic is a moment for reflection by everyone involved in football on ways in which the overall football ecosystem could be improved in the interests of its long-term sustainability and inclusivity.
 

●        The important social role of football clubs and football governing bodies in their communities is highlighted by the many excellent initiatives which they have instigated during lockdown eg: among many initiatives which might be highlighted: food deliveries to vulnerable fans, reaching out to those shielding, supporting “Operation Moonshot” testing program.
 

●        Whilst this report analyses English Football, given the limitations on word count, UK comprises four home nations with different governance structures, decision-making and resource challenges. Each of these merit further detailed analysis to identify similarities in differences between Scottish, Welsh, Northern Irish and English football structures and processes.
 

●        Moreover, analysis and representation in discussion of COVID’s impacts and the importance of grassroots inclines to focus men’s rather than women’s football and to elite rather than non-league and grassroots levels. In large part, this is a result of the greater commercial development of the men’s game, longer established leagues and governing bodies and also of the larger amount of data and understanding of best practice.  Again, fuller consideration of the specifics of girls and women’s football is recommended.
 

●        It would be helpful to expand upon analysis and involvement of both football, private and public partners, perhaps by creating a fuller range of knowledge sharing platforms and initiatives to showcase best practice. There are, for example, some very successful community partnerships at grassroots level which involve these hybrid models. Knowledge partnerships, knowledge platforms, seedcorn- and match-funding for initiatives after evaluation of their merit might be good ways of developing and supporting grassroots participation.

Appendix 1 – The Football Pyramid and the Governance of Football

“The pyramid” is the term used to describe the structure of English football. The emergence of this structure is historically and culturally rooted and signifies the socially embedded nature of football in local communities across England. The pyramid system also embodies an essential attribute of sport – ambition – and through the mechanisms of promotion and relegation it is feasible for a club in the 11th (local amateur) tier to rise over time and reach the first tier - the English Premier League (EPL).

It should be noted that England’s Football Pyramid sits within the broader context of European and Global Football.

The diagram below shows accountability and reporting lines.



It should be noted from this, that the pyramid includes the series of leagues in which football clubs play. Leagues are essentially Member Associations, in which clubs participate. Decision-making in league are governed by protocols eg: how many member clubs need to vote in favour of a motion for it to succeed. This would be, for example, 14 of 20 clubs (70%) in the English Premier League; 17 of 24 clubs (75%) in the Championship. There is a common misconception that leagues make decisions, whereas leagues actually represent the interests of member clubs who make decisions, according to the rules and regulations of the respective league.

The pyramid, however, sits within a broader governance structure. Clubs register players and report in other ways to National Associations eg: the English FA. National Associations are themselves members of Confederations, in the English case UEFA.

The UK has 4 home National Associations: The Scottish FA (SFA) , the English FA (the FA), the Welsh FA (FAW) and the Northern Irish FA (IFA).

League bodies are member associations operating at levels of the pyramid. In men’s football in England this is 1. English Premier League (EPL), 2-4 English Football League (EFL), 5. National League. League entities control competition within their own levels and promotion and relegation between these follows agreed rules. Competitions such as the FA Cup are attractive, especially for lower level clubs as an opportunity to realise “ambition” to win, and also as a means of generating additional revenue in “prize” and attendance revenue.
 

‘Seasons’ are used to frame periods of competition, and the connectedness between formal divisions of competition through promotion and relegation renews competition that exist in cycles and exists alongside yet interdependent with business performance.

It should be noted that the governance structure of women’s football differs from that of men’s football. In the case of the Women’s Super League and Women’s Championship leagues, the leagues are run by the National Association, rather than being separate entities.

Appendix 2: The Football Pyramid and Broader Eco-System Analysis, David Cockayne

1. On the demand side of the industry the top six clubs are able to access global markets as a result of their sporting performance. They compete for players, spectators and commercial partners, as well as sustained challenges for domestic and international sporting success. As a result of historic approaches to governance and distribution of TV rights monies, the “top six” exists today as a hardened cluster of teams that occupy a dipropionate amount of wealth and influence. This fractures the premier tier of the pyramid, meaning that the ‘other 14’ clubs who, while ambition to achieve more exists, are unable to compete financially with the other group (See Appendix 3). The other 14 clubs have global presence through broadcasting and sponsorship deals but their focus is mainly domestic. As you move down the pyramid, the opportunity to access global markets and revenue from domestic broadcast and sponsorship decreases, perhaps other than through cup competitions, such as the FA Cup.
    
2. On the supply-side of the market you have a wages market and a transfer market. The wages market is linked by the same links that sustain the ‘ambition’ of the league – acquisition of ‘best’ talent for greater chance at sporting success. The desire for clubs to realize inherent ambition prompts clubs into a ‘hand-to-mouth’ existence as clubs gamble long-term financial stability on short-term sporting success. As the ‘other 14’ clubs in the EPL and rest of the pyramid act locally and have little access to global markets, the ‘top 6’ clubs are able to trade players and numerate players on a scale that is not possible for other clubs. This creates a ‘wage vortex’ on the supply-side that increases the value of players and expected wages while at the same time starving lower-league clubs of the ability to compete in the transfer and wages market. Quota systems, such as the home-grown player rules, have been implemented with mixed success to favour development of national players. Solidarity payments to clubs were linked to EFL clubs acceptance of the EPPP system. Intended to improve the development of home-grown talent, critics see it as unfair that higher Category (there are categories 1 – 4, most EPL clubs are Category 1) academies attract higher funding and can watch and sign talent for relatively low fees.
    
3. Simultaneously on the demand side, TV rights income might be eroded. The distribution model remains equitable but moving forward that is likely to change for a number of reasons. Larger clubs are pushing for a greater proportion of collective income. An example of this can be seen in the 2018 EPL agreement (implemented from 2019-20) that international broadcast rights revenue would no longer be distributed equally but in accordance with league position. This will allocate higher income to the top clubs https://www.premierleague.com/news/707720

Moreover, digital technologies via OTT[16] platforms (eg: club’s own platforms, Amazon Prime or perhaps platforms set up by large satellite rights holders (eg: Sky, BT Sport) are more controllable from a conceptual and actual perspective than television rights for clubs. If the distribution of media rights in its current form becomes distrusted as clubs conceptualize more direct revenue creation potential through emerging technologies it will push down the value of media rights and increase structural inequality.  As such any proposal to “redistribute” broadcasting money now from the top of the pyramid as support is only a short-term support mechanism given the less static nature of the value of broadcasting rights relative to emerging technologies.

4. Parachute payments provide financial support for clubs who have been relegated from the premier league. These payments indirectly offer an incentive for clubs when competing in the EFL to take greater financial risk. The payments when received by relegated clubs widen financial inequality further between the relegated club and those already in the league. There is debate about re-purposing of monies currently provided via parachute payments to relegated clubs. These were introduced in response to gaps between the wages paid in different leagues which resulted in financial failure of relegated clubs who were contracted to continue paying higher wages that they could not afford. An unintended consequence is that only relegated teams receive these which advantages these clubs over other clubs[17]. Proposals to address this imbalance are: a more equitable distribution, abolition of parachute payments, a handicap points system.
   
   A related point is that clubs are separate governance structures which may be well, or badly run. Some relegated clubs have suffered from poor management. Clubs with declining fortunes are often also targets for takeovers. The “fit and proper” persons tests used in football are inadequate. Potential owners are not prevented from buying a football club if they have bankrupted other companies, or even football clubs. Parachute payments might well be lost in this financial mismanagement. If parachute payments continue, they might take a form that can only be used for specific purposes and / or as a form of bond which does not pass into the possession of the club[18].
    

5. Gaps between leagues are not of equal sizes. For example, there is a limited promotion mechanism between the national league and league two (there are fewer places plus National League clubs have to meet facilities standards which mean that some are prevented from promotion on resource grounds).  There are large financial gains from promotion to the EPL, which result in Championship clubs, in particular, overspending on player wages in pursuit of this.
   
   This means that league two clubs have comparatively lower risk than leagues above them in terms of relegation but at the same time face an increasingly harder task at winning promotion and sustaining a position in the 3rd tier. Solidarity payments currently trickle through the leagues to the lower levels. Greater and more equitable investment at the 3rd and 4th tier would both aid financial sustainability of clubs and ensure greater competitive balance.

Appendix 3 – EPPP

Elite Player Performance Programme (EPPP)

Introduced in 2011, the EPL EPPP system is a system designed to support the development of home-grown players in English football. The implementation of the system however raises a problem that has contributed to the financial instability of lower league clubs, albeit that acceptance of EPPP was accepted by EFL clubs for an increase in solidarity payments.

Specifically, the introduction of EPPP has made the operating of youth academies unattractive for many 2nd, 3rd and 4th tier clubs given the low levels of compensation if those players are signed by EPL clubs before a certain age.

The ability to develop and sell talented players developed through a youth academy was a major source of revenue for numerous lower league clubs. The introduction of the EPPP system has lessened the appeal of this and adversely affected this viability of the “player trading” business model for clubs.
 

While EPPP offers several benefits at a broader level for home-grown talent development, the system seems to be linked to a number of decisions by EFL clubs to downgrade or discontinue their Youth Academies which does not appear to be aiding its initial purpose and may have removed an important potential source of revenue from EFL clubs.

Appendix 4 - Financial Analysis of Football: Kieran Maguire



 

Championship Matchday Revenue

 

Appendix 5: EPL Revenue and Profits

Premier League Figures from 1992/3 onwards

Despite the large revenues above, the majority of the surplus is distributed to the member clubs, with the Premier League (EPL) acting as a collecting house for its member clubs. The remaining profit in the EPL is relatively modest. Changes to the solidarity payments require a vote of member clubs. Clubs voted unanimously in favour of advancing solidarity payments to EFL and National League clubs in order to help these clubs to survive the lack of matchday revenue.

Appendix 6 – Football Association Financial Results

Football Association                             2018                            2019

Revenue                                           £'m                            £'m

Broadcasting                                           145.9                            262.6

Sponsorship                                           79.1                            63.4

Club Wembley                                           33.4                            36.0

Events                                                         68.8                            11.6

Other                                                         48.4                            93.6

Total                                                         375.5                            467.2

Costs   

Wages                                                         62.9                            70.5

Other costs                                           185.1                            231.1

Investments in game                             127.5                            165.6

Profit                                                         (1.8)                            62.8

As in the previous appendices, the Football Association shows a profit, but even pre-COVID-19, this was relatively modest and investments in the game already account for 35.4% of Football Association revenue.

Appendix 7: Revenues and Costs of women’s football across Europe (Source Valenti 2019).

Based on 2017-18 financial data and a sample of 69 clubs.