It is a widely held belief among the general public, as well as among scholars studying sports, that tension about the outcome of a sports competition is a crucial ingredient to get people interested. Sports economists have labeled this idea the “uncertainty of outcome hypothesis” and refer to tension in a competition as “competitive balance”. Following this hypothesis, it seems obvious that leagues should try to protect the uncertainty of outcome in their competition, as growing imbalance might deteriorate the quality of their product. And indeed, sports leagues around the world have used a wide range of policies aimed at protecting competitive balance.
The underlying reasoning for these policies is that rich teams with large home markets might outspend their poorer counterparts and consequently dominate the on-field competition. The league therefore either tries to transfer resources from the rich to the poor or directly limits spending by the rich. Classic examples from North American sports include salary caps, where the league sets an upper (and lower) bound to the teams’ wage bills, and gate revenue sharing, which means the league forces teams to split their match-day receipts. In European football leagues, these policies have largely been absent. One exception however is the sale of media rights.
Media Rights in European football
Over the last two decades the value of broadcast rights has risen immensely for European football leagues. In the 2011-2012 season, for example, the Premier League paid out more than £1.1bn in revenues from media rights sales to its clubs, a huge amount given that broadcast income was virtually non-existent until the mid-1990s. Other leagues have seen the same trend, although the value of the deals depends heavily on the size of the country. The Belgian Jupiler Pro League, for instance, gets only €55.2m per season from its current broadcast deal.
Two rivaling systems have emerged to organize the sale of media rights, an individual and a collective one. Under the individual system, each club sells the rights to its own home games. Under the collective system, the league pools the rights to all games and sells them (usually in packages) to broadcasters. Thereafter the league and teams decide on a way to distribute the proceeds. The individual system is mostly used in southern Europe, most notably in Spain, Portugal and Greece, and until recently in Italy, which switched to collective sales in 2011. The majority of leagues have adopted the collective system.
However, collective sales are somewhat controversial among economists. Opponents of the system point out that it creates a monopoly in the national market for media rights of football competitions, as each country only has one league. This monopoly is perfectly avoidable, and might harm consumers if media companies charge higher prices to TV viewers to recuperate the cost of bidding for the rights packages. Proponents of collective sales on the other hand claim that it is a convenient way to redistribute revenues from the rich to the poor clubs in the league. This should help to increase the competitive balance in the league. The European commission, which is responsible for competition policy in Europe, has accepted collective sales under certain conditions, specifically recognizing it might be “important for the redistribution of income and can thus be a tool for achieving greater solidarity within sports.” (Commission of the European Communities, 2007) A crucial question in this debate is therefore whether collective sales help to raise competitive balance in European football leagues. In a recent paper (Peeters, 2011) I try to answer this question.
Empirical evidence
A first thing to note is that competitive balance plays at different levels. Match level competitive balance is high when a game is undecided until the dying seconds. Seasonal competitive balance usually refers to the closeness of the championship race. In European football leagues however, the struggle for survival at the bottom of the table and for qualification to European competitions, also contribute to the tension during the season. Finally, inter-seasonal competitive balance looks at domination of the league over time. When the same teams end on top each year, inter-seasonal balance is low. It appears that collective sales have most chance of increasing seasonal and inter-seasonal balance, rather than game level competitive balance, so that is what the paper looks at.
A second issue to consider is that factors other than broadcast rights sales may have an influence on competitive balance. For example, in the 2011 season UEFA distributed €754m in prize money among the 32 teams that participated in the Champions League group phase and beyond. Clearly, this gives qualifying teams a financial advantage in national leagues. Consequently, leagues whose teams earn more in the Champions League might have a lower competitive balance, irrespective of the sales system they use. If you do not control for these factors, you run the risk of over- or underestimating the effect of the sales system on competitive balance. Other factors to control for are the size of the national market, the distribution of the home market sizes among teams in the league (also known as drawing power) and whether or not the league has a play-off system to determine the champion.
In the paper I collect data on the seasonal and inter-seasonal balance in 34 first-tier European football leagues over the 2000-2010 seasons. When controlling for the influence of other factors, collective sales do not appear to lead to a higher seasonal or inter-seasonal balance than individual sales.
Why isn’t competitive balance increasing?
This puts serious question marks behind the main argument in support of collective sales. This result also raises the question why collective sales have failed to increase competitive balance. Part of the answer may lie in the distribution schemes leagues use to split up the proceeds of their media rights deals. If increasing competitive balance were the primary objective of having collective sales, one would expect that leagues distribute the money equally or favor teams in smaller home markets. Instead, most leagues opt for distribution schemes that are partly based on performance in the previous season or the number of appearances in live broadcasts, which both favor the large market teams. In the Premier League for example, Manchester United and Manchester City netted the largest amounts in the 2011 season, with around £60m each, whereas small market teams such as Wolverhampton and Bolton only received around £40m. To understand why leagues grant more revenues to large market teams, we need to take the internal decision making in the league into account. Large market teams are more powerful in negotiating on a distribution scheme. As such, they succeed in obtaining a larger part of the pie than their small market counterparts. In another paper (Peeters, 2012), I build a formal model to show this point.
A second result from the analysis confirms the findings of Pawlowski et al. (2010), who have shown that the Champions League prize money distribution decreases competitive balance in national leagues. Again, it seems at odds with the desire to protect competitive balance to hand out huge sums to each country’s top teams.