When the English Premier League was founded in 1992, clubs agreed an egalitarian system for distributing Sky TV money. Skip forward 25 years, and that model is under threat after the 20 Premier League clubs met to discuss how to share future international TV rights.
Overseas broadcasters have discovered that Premier League football is a key vehicle to deliver subscriptions. The money paid to broadcast football has increased considerably. Glancing back to 1992 shows broadcast revenue of £192m. In the current cycle (2016-19), these payments total about £8.1 billion (£5.1 billion from the UK and £3 billion international). The cost of international rights is expected to rise further.
Six clubs now want a change in the formula for spreading this source of revenue. They want a bigger slice of the pie but, perhaps unsurprisingly, many other clubs are opposed to the proposals. No consensus has yet been reached, and a vote on the matter has been deferred until November.
The Big Six?
The dissent in the ranks is driven by the “Big Six” clubs – Arsenal, Chelsea, Liverpool, Manchester United, Manchester City and Tottenham Hotspur. They believe they are the key force behind the popularity of the Premier League in overseas territories, and are therefore entitled to greater financial reward.
In 2016, the Big Six received 70% of Premier League matchday income, 77% of commercial income, but “only” 43% of broadcast income. In their mind, they are effectively subsidising the other clubs. The argument put forward is that overseas TV fans will only tune in to watch the Big Six. They evidence this by the viewing figures for individual matches.
Premier League TV rights are initially divided into a number of “pots”. Domestic rights consist of three pots: 50% divided equally, 25% based on the number of TV appearances, and 25% on final league position. International rights are split evenly between all 20 clubs.
Overall, the ratio between the club generating the highest amount of Premier League TV income in 2016/17 (Chelsea) and that of the club bottom of the league (Sunderland) was 1.6:1. So for every £100 of Premier League TV income generated by Sunderland, Chelsea earned £160. This ratio in other European countries is at least 2:1.
The Big Six also believe that the present TV arrangement gives them a financial disadvantage in relation to other large European clubs, such as Real Madrid and Barcelona.
Premier League chairman, Richard Scudamore, has proposed a change for international rights whereby 65% would be shared evenly and 35% based on league position (“merit payment”). But this has caused a falling out between club owners. The Big Six want more, ideally identical to the domestic TV rights formula.
One side effect of these proposals is that money paid to relegated clubs under “parachute payment” rules is likely to decrease, as they would not be entitled to merit payments. This would result in about £40m of existing parachute payments moving from relegated clubs to those remaining in the Premier League.
The chart below shows how things would change if Scudamore’s proposal was approved.
Driving revenue
Professional team sports need to benefit from the concept of competitive balance. First pioneered in the 1950s and taking its origins from North American team sports, the theory suggests that to make a strong competition, you need a contest with equally matched opponents.
However, what tends to happen is that professional sport leagues produce games between teams with unequal market power. One team becomes dominant, reducing the spectacle of the competition and, therefore, its value to spectators, broadcasters and sponsors.
Professional team sports are intrinsically different from other businesses, in which a firm prospers if it can eliminate competition and establish a monopoly supplier position. In sport this doesn’t work. Competitive opponents are required at a level that produces excitement and jeopardy.
This is important in relation to the vote on Premier League TV rights. The league has even praised itself for keeping broadcast distribution relatively equal compared to other big European leagues. And as a result the games tend to be more competitively balanced too. Smaller teams can invest money to secure better playing talent and compete more effectively.
It is true that top teams in the league have a bigger appeal to fans in a global market. But it is also true that what makes the Premier League such an attractive product is that, on any given day, any team has a realistic chance of beating another. And in extremis, a team like Leicester might even win the league.
The thin end of the wedge?
If clubs agree to the Scudamore proposals, or accede to Big Six demands, then the outcomes will be challenging.
First, when most international rights are renegotiated from 2019 it is likely they will see an increase in value, by an estimated £1.2 billion over three years. This will increase the money gap. If distributed evenly, every club in the Premier League would receive an extra £20 million a year.
Let’s not forget, the Big Six clubs are also far more likely to qualify for UEFA competitions, such as the Champions League, where they have a £30-90m financial advantage from separate TV rights.
The proposals will make the Premier League less competitive, potentially reducing the value of the competition’s brand and making it less attractive to viewers. The Leicester miracle will look more and more like a one-off; more likely will be Crystal Palace’s season so far, which has seen the London club lose its opening seven games without scoring a goal.
When the clubs vote, any proposal will require a two-thirds majority to be approved. The Big Six must therefore convince another eight clubs that they have a sniff of tasting the increased riches on offer for league success. That will deliver another hit to the egalitarian spirit of 25 years ago. Turkeys don’t normally vote for Christmas but if these ones do, the future of the Premier League looks less competitive and ultimately, worth less too.