The North American vs the European Sports System
Whether sports fans actually realise it or not, there are fundamental differences between the North American (and I primarily mean USA and Canada by this) sports system and the European sports system, with the rest of the world generally having a sports system somewhere in between. Despite what some people believe, it is not as simple as North American sports clubs being franchises that are ‘all about the money’ and that will sell out their fans and move cities, nor that European clubs have a tribal following, although to be fair, this is the most visible to the everyday fan. Some of the differences that I’ll discuss today are:
- Open (Promotion/Relegation) vs Closed Leagues
- Competitive Balance Rules:
- Salary Cap
- Team valuations
- Owner Objectives
To give credit where it is due, Professor John Genzale, the Director of Academics of the Columbia University Graduate Sports Management Program, presented much of what is discussed below during a series of lectures at the FIFA Master.
Open vs Closed Leagues
Many Europeans are not even aware that promotion/relegation systems do not exist in the major North American sports leagues (NFL, MLB, NBA, NHL and MLS) and so we call them ‘closed leagues’. On the other hand, due to the lack of this system across mainstream US sports, many North Americans find it difficult to understand why the Europeans would even have this ‘open’ league system.
‘Open’ leagues have a promotion/relegation system. The worst teams in a league at the end of a season are ‘relegated’ to a lower division and the top teams in that lower division at the end of the season are ‘promoted’ to replace the aforementioned teams in the higher division. The majority of European team sports have open leagues, whereas the North American leagues generally have closed leagues.
Open leagues provide all teams, in any geographical area of a country, a theoretical opportunity to reach the top division and play with the best teams. In the past, the downside was perhaps less apparent; however, since sports have become a business, the differences in expenditure between clubs in different divisions mean that newly promoted or relegated clubs are often at risk of financial ruin as they chase sporting results. ‘Parachute payments‘ are a tactic to combat this. The Football Association provides parachute payments to clubs relegated from the EPL (English top division) down to the Championship (English second division) to help them survive the corresponding drop in revenues. Relegated clubs continue to receive a share of the top division revenues for a few years after their relegation.
Closed leagues, by providing the clubs and investors with the certainty that they will always be part of the league (provided they meet certain criteria – think the NY Knicks), also ensure that clubs are more stable as it is far easier for them to estimate revenue and expenses with a degree of certainty. The downside is that the league had limited places, so it is not possible for a club outside the league to enter the league based on sporting merit. Another potential effect is the alienation of some fans as they will have no team to support or they will have to choose a team that is not in their geographical location.
Competitive Balance Rules
Due to a number of rules that North American sports leagues place on their clubs, they generally have a better competitive balance in that many different teams have a realistic opportunity to win the league. Compare this to many European leagues where a handful of teams have won all the championships, particularly in the last 20 or so years, as they have become too financially powerful for other teams to compete. The two most prominent rules in relation to this are:
- The Salary Cap
- This limits the amount of money clubs can spend on wages, thus ensuring a level playing field in the ability to hire the best talent.
- The Draft
- In its basic form, the lowest ranked team in a preceding season will get the first choice of the new youth players that are eligible to play in the league the following season, and so ensuring that they have the opportunity to get the best future talent.
I believe that many fans of European leagues would welcome the addition of greater competitive balance (and presumably these rules) to their competitions as it would arguably make them more interesting (imagine teams like Leicester City FC winning more often). So why not implement them? What many people don’t know is that US sports leagues have built up a number of legal exemptions, particularly related to Anti-Trust laws, that enable them to maintain these rules and closed leagues. EU Law on the other hand prohibits much of this behaviour, which is why it has been so difficult for the likes of UEFA to implement the Financial Fair Play regulations. I could write a series of articles on this topic alone, so I’ll best leave this for another time!
In the European leagues, traditionally the clubs were just members of the league that they are a part of and had no ownership rights over the league. This situation is changing and the EPL is a notable exception. In the EPL, the 20 teams involved at any point in time, own the league, but the result is that the ownership structure changes every single year.
In the North American sports system, the owners of the clubs/franchises are also the owners of the league and it has a purely private ownership structure. The owners have the exclusive right to decide who is involved and to appoint a ‘commissioner’ that has the full power to make decisions regarding the league (essentially a CEO). Also, since the leagues are privately owned, they do not need to publish any financial statements. Therefore, owners have a lot of power to protect their investment.
Another factor is that European clubs are in many cases still ‘clubs’ or ‘associations’ and so they are publicly owned community institutions (although this is becoming less prominent). Consider the 50+1 rule in the German Bundesliga, which means that if a club chooses to become a private or public limited company, in order to remain a member of the Bundesliga, the parent club must maintain 50% + 1 share of the football company in order to ensure that the club’s members still hold a majority of voting rights.
Compare this to the North American sports system again where the teams are privately owned ‘franchises’ rather than clubs and owners can move them to a new city if it is likely to generate more revenue. Private ownership also means that the clubs don’t publish their financial statements. Again there is an exception, the Green Bay community in Wisconsin own the Green Bay Packers NFL team. The NFL banned this ownership structure, but gave the Green Bay Packers an exemption as they had this structure in place before the ban. Such a system is currently unthinkable in Europe, although the big clubs in various leagues have been flirting with the idea for a while (think Euroleague basketball and the G14 super league in football).
Due to the law of supply and demand, when considering the value of an investment, you will mostly consider two things, the risk and the potential reward. The higher the risk of an investment, the lower its value will be, as there will be fewer people willing to accept that risk (i.e. less demand). Consider this in relation to a sports team in North America and one in Europe.
An investor looking at a North American club has less risk of the club collapsing financially because:
- The club is unlikely to be relegated so sporting results will have less impact on your finances.
- The salary cap ensures unexpected wage cost inflation will be minimal.
- As an owner you are a shareholder in the league so you have a great deal of power to protect your market from new entrants.
Therefore the risk of investing is low and the value of the franchise will be high.
Now the investor looks at the European club:
- The club has a risk of relegation or not qualifying for a continental competition so there is a lot of uncertainty about future revenues.
- Without a salary cap, there is the risk of wage expense inflation if a rich owner at another club starts spending more money on players and others follow suite to remain competitive.
- The investor will not be an owner of the league so they cannot easily protect their investment. Imagine if three other clubs from this city exist in the top two divisions – the potential market size is significantly reduced due to the added competition.
Therefore the risk of investing is high and the value of the franchise is likely to be lower.
The result of all this (along with the fragmentation of the leagues) is that seven out of the ten most valuable sports clubs in the world are from North America despite association football (soccer) having a far more global appeal and taking in far more revenues globally than any of the North American sports.
With the above in mind, consider where this leads. In North America, you don’t have a strong chance of winning the league in any given season because the competitive balance is strong, so many teams are in with a shot. Not that they won’t try to achieve sporting results, but this means that the owner’s are more free to focus on building the value of their investment – and hence North American leagues are more likely to attract owners who see sport as a business investment. As their main stakeholders are the owners, their chief concern will be personal interests and are more likely to want to win at the bank by generating value/equity by driving the top line i.e. revenue.
In Europe, you will have a fair idea of where your team will finish on a ladder and you are less likely to make money due to the risk involved in failing or spending too much. However, European clubs have the fans and the community as the main stakeholders and so their goal will be to win on sporting results. Therefore, new owners focus more on attracting the best players while controlling wage expenses and place less emphasis on top line sales. As a result, European clubs are more likely to attract investors who have a personal motivation to achieve sporting success rather than financial success, and as sporting results are a zero sum game, it becomes increasingly risky for everyone as there is a need to outspend your opponents to win (think of the Roman Abramovich and Chelsea effect on footballer wages).
Sports System Conclusion
There is no perfect system as there are advantages and disadvantages to both systems. Europeans will argue they are more attached to their clubs, but North Americans will vehemently disagree . I personally have the A-League example of football in Australia of a more North American sports system and the Croatian football league (Prva HNL) which has the European sports system in place. I love the concept of promotion/relegation and sporting merit, but I can tell you that despite the quality of the top clubs in the Croatian league being significantly superior, the competitive balance of the A-League makes it far better to watch, and from a financial viability perspective it is much stronger. Nevertheless, I am torn between the two systems. I think a good middle ground exits which incorporates the best of each sports system. With this in mind, keep an eye on UEFA’s Financial Fair Play and its similarities with the North American sports system. FFP is positively impacting football club finances across Europe and it will be interesting to see how far UEFA can push this.
I’d love to hear your thoughts on whether you prefer the North American or European Sports system and why – please comment below!
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