17.

English professional football

Paul Downward

17.1 INTRODUCTION
This chapter provides an economic analysis of English football, examining the develop-
ment of professional football since its foundation in 1888 and subsequent stability and
change. The drivers of these developments have been both ‘exogenous’ and ‘endog-
enous’. The former are associated with shifts in the emphasis of the economic regulation
of sport that followed from changes in the emphasis of economic regulation generally.
Consequences followed for football because sport, in general, was perceived increasingly
as an economic activity. The latter, endogenous, changes resulted from the responses of
the football industry to these exogenous changes, with a consequent growth in market-­
driven behaviour.
To explore these issues in some detail, section 17.2 provides a brief outline of the
historical development of English Football. Section 17.3 briefly provides an analytical
framework for understanding the key components of the economic system for football.
Section 17.4 examines each of these components in more detail to investigate how and
why change has taken place. The chapter concludes in section 17.5.

17.2 HISTORICAL EVOLUTION OF ENGLISH FOOTBALL

The exact origins of football internationally are unclear (Szymanski, 2006). In England,
Roman forms of the game (harpastum) as well as medieval forms (ffotebale) are docu-
mented (Moorhouse, 1995). The latter were not uniformly structured, had unique char-
acteristics, often involved sides of unequal and varying sizes, were typically violent, and
often banned by the authorities. By the seventeenth century, Strutt (1801) documents
football’s emerging codification, particularly through the involvement of the main public
schools of England. With the exception of Rugby School, which in 1862 developed a
code of rules that came to underpin Rugby Football (Moorhouse, 1995; Downward and
Jackson, 2003), a uniform code emerged with the formation of Association Football, and
its governing body the Football Association (FA) in 1863. The key proponents of this
development were Cambridge University students that were former pupils of the schools.
The development of the game was then carried forward as part of the Victorian empha-
sis on preparation for duty towards the empire and the desire for healthy exercise, and
through the culture of ‘associativity’ that had developed as part of the Enlightenment
in Britain (Downward and Jackson, 2003; Szymanski, 2006). A key development was
the formation of the FA Cup in 1871. This increased the scope and intensity of rivalry
between teams because the competition was national, and was a seedbed for the begin-
nings of commercial activity because of the spectator interest that it aroused, particu-
larly in the industrial towns of Lancashire. The FA Cup demonstrated the potential for

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278   Handbook on the economics of professional football

a paying demand for football, as crowds for these games were large. The additional
incentives to win also meant that payment was used to attract the best players to clubs
even as early as 1876, creating a need for funding (Vamplew, 1988). Following formal
accusations of the payment of players, Preston North End were expelled from the com-
petition in 1884. Preston North End and other successful Lancashire clubs subsequently
­threatened to form a break-­away association.
To prevent schism the payment of players was accepted in 1885 if they originated
within a 6 mile radius of the club.1 Full professionalism of football occurred with the
establishment of the English Football League (EFL) in 1888 for the top 12 teams. By
compromise, the EFL retained its links with the FA and the amateur game (Szymanski
and Zimbalist, 2005). Subsequently, the growth and development of both the profes-
sional and amateur games was symbiotic. Wall ([1935] 2005) records that in 1871
there were 50 clubs registered with the Football Association. By 1905 this number had
increased to 10 000 clubs. In turn, Dobson and Goddard (2011) note that the original 12
professional clubs was progressively increased to 16, before a further 12 clubs facilitated
the creation of a Second Division prior to the First World War. Movement between the
divisions and access to the EFL was based on merit. After the First World War further
expansion included a segmented Third Division, constituted on geographical lines, for
clubs from the north and south of England. The expansion was achieved by incorporat-
ing elements of the former Southern League, which included some clubs from South
Wales. The system of promotion and relegation established the template for the verti-
cally integrated system of club sport that has come to characterise UK and European
football. By 1951, 92 league teams were members of the four divisions of the EFL, and
in 1958 the geographical basis of the Division Three segmentation was replaced by a
Division Three and Four constituted on merit. In 1960 the League Cup, a knock-­out
trophy competition for professional clubs only was introduced, which has remained
as the second-­tier cup competition. The most recent major evolution in the structure
of the league was the withdrawal of the Division One clubs from the EFL to form the
Premier League (PL) in 1992. The three remaining EFL Divisions were renamed the
Championship, and Leagues One and Two in 2004.
Further significant developments took place through English football’s engagement
with international competition. Formed in 1904, the Fédération Internationale de
Football Association (FIFA)’s World Cup competition was open to national teams.
However, more regular international knock-­out competition for clubs, as well as
European nations, was established through the formation of the Union of European
Football Associations (UEFA) in 1954. From the three original European knock-­out
cup competitions, the Champions League was established in 1992, and the Europa
League was created in 2009.

17.3 AN EXPLANATORY FRAMEWORK

In order to explain the changes observed above, and the future challenges facing English
football, Figure 17.1 provides an overview of the economic structure of English foot-
ball. Within the regulatory constraints of English and international sporting govern-
ance, clubs are owned and financed to provide stadia and players to compete against

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 English professional football  ­279

PUBLIC POLICY
UK and EU

OPPONENTS CLUB DEMAND/REVENUES:

SPORT GOVERNANCE Regulation CLUB DEMAND a. Attendance
A. National b. Media
a.F.A. LEAGUE c. Commercial
b.P.L. Evolution STRUCTURE
c.E.F.L (Market)
CLUB SUPPLY
B.International
a.FIFA COSTS:
OPPONENTS a. Ownership a. Wages
b.UEFA
CLUB SUPPLY b. Finance b. Fees

Figure 17.1 The political economy of football

­ pponents, whilst receiving revenue from the joint production of competition.2 This joint
o
production is the basis of many of the historic regulations in football in which clubs are
viewed as collective economic entities in the football market. Examining changes in each
of the components of the schema, therefore, provides an opportunity to understand how
and why the changes described above have taken place. The schema also illustrates that
English football is ultimately subject to national and international economic regulation.3

17.4 DRIVERS OF CHANGE IN FOOTBALL

17.4.1 Public Policy and Governance

At the outset of professionalism the FA retained overall control of the development and
interpretation of rules of football and the parameters of its commercial activity, which
were highly regulated because of the joint production of matches. In no sense, however,
could it be said that government regulation was focused at all closely on sport.
The development of a league structure for the competition format was essential to
the generation of stable income flows to support the clubs’ activities (Szymanski and
Zimbalist, 2005). A ‘fixity of fixtures’ over the season, coupled with the regularity of
higher-­level competition, was necessary to harness regular demand and attendance
revenue and to plan for the hiring of playing staff. In turn this created a need to finance
stadium construction and development to meet the demand. The vertically integrated
links between the professional and amateur games also meant that the development of
rank-­order round-­robin tournaments provided access to the professional leagues, as an
audit of both sporting merit and economic competence. In this regard attention was
paid to the travel costs of fans and clubs with less drawing power, leading to the original
­geographic organisation of lower leagues.
From the outset there was a desire to prevent individual clubs becoming too strong
through the unbalanced accumulation of talent in larger clubs with the ability to

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280   Handbook on the economics of professional football

­ enerate the most income. Consequently, in 1895 the ‘retain and transfer system’ was
g
instigated so that players could only be transferred between clubs for the payment of a
fee agreeable to the clubs. Further, the natural escalation of wages that developed with
professionalism motivated the establishment of a maximum wage in 1901. The com-
mercial ambitions of clubs were limited by their governance statutes. Whilst professional
clubs changed their legal entity to limited liability status, this was primarily to raise funds
for stadium construction or other funding requirements (Szymanski and Kuypers, 1999).
However, owners could not invest in clubs for purely commercial gain, as dividend pay-
ments were limited and directors unpaid. Minimum ticket prices were also instigated to
try to guarantee income and to ensure the viability of clubs seeking professionalism by
a form of market segmentation according to the willingness to pay of fans. A variety of
gate revenue-­sharing arrangements were also established, to transfer income from larger,
more successful clubs to smaller, weaker ones (Inglis, 1988). Such restrictive practices
were generally accepted in English football, and went largely unnoticed by economic
regulators despite the strengthening of monopolies and restrictive practices legislation
after the Second World War.
However, beginning in the late 1970s successive Conservative governments embraced
a much stronger emphasis on free markets through deregulation and the privatisation
of state industries. Coupled with the UK’s entry to the European Union in 1972, with
an emphasis on free trade, these changes created a regulatory environment in which a
greater emphasis on the free-­market provision of football could take hold.

17.4.2 Attendance and Broadcast Revenue

The traditional source of revenue for professional football has been from live attend-
ances. There is a detailed literature on its specific match and seasonal determinants
(Borland and McDonald, 2003; Downward et al., 2009). In the longer run the market
size, success and heritage of the club, as well as the habit persistence and loyalty of fans,
and team and player qualities, all matter (Dobson and Goddard, 2011; Downward and
Dawson, 2000). It is generally recognised that fans’ demand functions are relatively
price-­inelastic, which has allowed admission prices to increase in real terms over the long
term.
Figure 17.2 illustrates the cyclical nature of football attendance demand. It grew
steadily to an all-­time high following the resumption of competition after the Second
World War, underpinning the rapid development and expansion of professional football
during the 1950s and 1960s. The post-­war surge in attendance was followed by a period
of sustained decline until the mid-­1980s, since when there has been a reversal and steady
growth. The data suggest a high degree of stability of the proportions of attendance
across the tiers of the game. Such longer-­term cyclical change was driven by structural
adjustments in tastes and the availability of substitutes. A rapid growth in working-­class
demand for leisure of the ‘shilling cloth cap’ (male) supporter took place immediately
after the Second World War, followed by decline as other post-­war leisure opportunities
developed. By the 1970s and 1980s the rise of football hooliganism reinforced the decline
in traditional support, leading to reductions in revenue. The perilous state of football’s
finances was initially identified in the Chester report of 1968. The coincident deteriora-
tion in the quality of stadium facilities, which contributed to the Bradford fire (1985)

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 English professional football  ­281

Millions
45

40

35

Div 1/PL
30
Div 2/Champ
25
Div 3/L 1
20
Div 4/L 2
15
Total

10

0
1922 1932 1942 1952 1962 1972 1982 1992 2002

Source: Dobson and Goddard (2011).

Figure 17.2 English professional football attendances, 1922–2009

and Hillsborough tragedy (1989),4 was recognised by the Taylor report of 1990, which
articulated an urgent need for massive new investment in all-­seater stadia.
The opportunity to reverse declining attendances emerged with the possibility that
media broadcast income could underpin the rebranding of football and contribute to
stadium development, which would subsequently help to increase attendances. Prior to
the 1980s, media income in football was extremely small. The BBC, formed in 1926 as a
publicly owned corporation funded by licence fees, had a historical right to cover major
sporting events such as the FA Cup final and international games live. Sporting events of
national significance were treated as ‘public goods’. Although the BBC transmitted live
coverage of some league matches on radio, it was not until 1964 that it began televising
highlights regularly on Match of the Day. The rights of the BBC persisted even with the
formation of the commercially funded Independent Television Network (ITV) in 1955.
ITV began broadcasting highlights in 1968, along with League Cup matches. The two
broadcasters essentially operated a buyers’ cartel, anchoring the low value of TV rights.
In 1968 each football league team received about £1300 per annum. By 1978 this figure
had increased to £5800 per team.
Impetus for change came when one of the ITV franchises sought exclusive rights to
televise football in 1978. Although the Office of Fair Trading ruled against this, the
annual fees paid to clubs increased with immediate effect to £23 900. A major shift in
the direction of market-­based provision of televised football took place over the next 15
years. The key technological change was the emergence of satellite broadcasting of an
encrypted signal, financed by viewer subscriptions.5 Significantly, sport was seen to be
the main driver of the growth of pay-­TV subscriptions.
In the face of strong competition, in 1988 ITV secured the exclusive rights to
broadcast 18 live matches per season for four years for a fee of £11 million. It could
easily outbid the BBC, because the latter could not seek to attract advertising revenue

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282   Handbook on the economics of professional football

to fund the rights bid. Of the £11 million, £8.25 million went to the First Division
clubs in total, and £3.5 million to Arsenal, Everton, Liverpool, Manchester United
and Tottenham Hotspur. Media income was concentrated because of a threat by the
Division One clubs to withdraw from the Football League and to negotiate independ-
ently with ITV. Significantly, under similar threats gate revenue-­sharing arrangements
were abolished.
The withdrawal of the Division One clubs to form the Premier League eventually took
place in 1992. This league had commercial independence from the FA and the EFL in
sponsorship and broadcast arrangements. One of the first acts of the PL was to set up an
auction for TV rights to broadcast live football, to capitalise on this emergent market.
Importantly, by this time debts had forced the merger of the initial satellite providers
into BSkyB in 1990, and subsequently Sky. A deal worth £190 million was agreed for the
live coverage of 60 fixtures per season in the PL. As part of the deal the BBC was left with
the rights to supply recorded highlights of matches. Sky renegotiated its deals in 1997 for
£670 million over four seasons, with contracts in excess of £1 billion for the seasons from
2002 to 2004, and 2005 to 2007.
Such rapid change in the value of sports broadcasting rights and Sky’s apparent
monopoly position caused public policy concern. An Office of Fair Trading ruling in
2002, however, ruled that whilst Sky had a dominant position in the market, it was
not working against the public interest.6 However, international regulatory scrutiny
emphasising free trade led to a European Commission ruling in August 2006 that exclu-
sive rights could not be sold to one company, and that separate packages of televised
matches should be sold for up to three years (Toft, 2006). In 2007 Sky and Irish-­based
broadcaster Setanta paid £1.31 billion and £392 million for four and two of the packages,
respectively. Setanta ultimately defaulted in 2009, unable to secure enough subscription
income. ESPN bought the unexpired component of the Setanta packages for £90 million.
For the seasons 2010–2013 Sky obtained five packages for £1.625 billion and ESPN
one for £159 million. In 2012, the Premier League awarded British Telecom 38 games a
season for the 2013–2015 seasons at £738 million. The remaining 116 games per season
were retained by Sky for £2.28 billion.
Reflecting a smaller market, from 1993 to 2000 ITV, and subsequently Sky, paid
smaller sums to broadcast EFL games. In 2000, ITV obtained the rights to show matches
on their digital pay-­tv service ONDigital for £315 million. The failure to generate suf-
ficient subscriptions, despite a rebranding to ITV Digital, forced the company into
liquidation in 2002, with a shortfall of payments to the EFL of £180 million. Revenues
have recovered somewhat subsequently. Sky with ITV (2007–2009), and Sky with BBC
(2010–2012), bought the rights to live and highlights broadcasts for £110 million and
£264 million, respectively. The League Cup was also televised as part of this latter deal.
The impact of these changes is shown in Figures 17.3 and 17.4.
The growth in media income, noted above, accounts for a large portion of the accel-
eration of revenues. Increases in ticket prices have also contributed to the growth in
revenue.
Sponsorship and other commercial income have given further impetus to the accel-
eration of revenue. Sponsorship of the English Football League and the League Cup
began during the 1980s. The FA Cup was sponsored for the first time in the 1990s, along
with the Premier League. As well as collective deals, sponsorship deals for playing kit

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 English professional football  ­283

Millions/ 350
£ Millions
300

250

200
Attendance
Revenue
150

100

50

0
1926

1931

1936

1941

1946

1951

1956

1961

1966

1971

1976

1981

1986

1991

1996
Source: Dobson and Goddard (2011).

Figure 17.3 Attendance and revenue in the EFL

£
12

10

8 Div 1/PL

Div 2/Champ
6
Div 3/L 1

4 Div 4/L 2

0
9

49

59

69

79

89

99
92

93

19

19

19

19

19

19
–1

–1

–
26

30

47

50

60

70

80

90
19

19

19

19

19

19

19

19

Source: Dobson and Goddard (2011).

Figure 17.4 Average ticket prices

and stadia increased significantly in number and value during this period. Figure 17.5
­demonstrates that the share of commercial income in total income almost matches the
share of attendance income for the Premier League, with broadcasting income having
grown to become the largest source of income.

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284   Handbook on the economics of professional football

3000

2500

2000
Commercial
€m

1500 Broadcast
Matchday
1000

500

0
95

96

97

98

99

00

01

02

03

04

05

06

07

08

09
19

19

19

19

19

20

20

20

20

20

20

20

20

20

20
Source: Deloitte.

Figure 17.5 Premier League revenue composition

The general growth in revenues is, however, also accompanied by a greater differen-
tiation in income across leagues and between clubs. Significantly, this is not driven by
structural changes in the traditional source of revenue from attendances which, as Figure
17.2 shows, have been relatively constant in proportion.7 On the contrary the growth has
come from new revenue sources, and the ability to differentiate prices across tiers. As can
be seen in Figure 17.6, the share of the PL in total revenue has increased, whilst Figure
17.4 shows that ticket prices have diverged, as well as having increased generally.
Finally, Figure 17.7 shows, that for an ‘average club’ the differentiation in revenue
growth is increasing across leagues, regardless of their source.
There is some evidence of interdependence between the sources of revenue within and
between the tiers of the league structure. For example, whilst both Forrest et al. (2004)
and Cox (2012) argue that broadcasting Premier League matches reduces attendances
at the games, the correspondent TV income offsets ticket sale losses, particularly for
the clubs at the top of the Premier League. The former, however, also argue that the
broadcasting of live Premier League matches can reduce attendances and revenues at
Championship games.
The ability to generate income varies widely within the PL. The funding formula from
media income is one of the main drivers of this variation. Since the PL was formed,
50 per cent of the broadcast income is allocated equally amongst teams, with the remain-
ing 50 per cent being split into a facility fee and a merit fee, each accounting for 25 per
cent of the total income. These two fees are allocated unequally between teams, based
on the number of times they appear live on television, and their league position. As the
latter can affect the former, particularly as closer contests between high-­ranking teams
are valued, these two fees tend to reinforce one another (Forrest et al., 2004; Alavy et al.,
2010). The ability to generate other commercial income also follows from the increase
in the clubs’ profile through success and consequent exposure to media audiences.
Figure 17.8 highlights these changes.

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 English professional football  ­285

100%
90%
80%
70%
Div 4/L 2
60%
Div 3/L 1
50%
Div 2/Champ
40%
Div 1/PL
30%
20%
10%
0%
9

9
92

93

94

95

96

97

98

99
–1

–1

–1

–1

–1

–1

–1

–1
26

30

47

50

60

70

80

90
19

19

19

19

19

19

19

19
Source: Dobson and Goddard (2011).

Figure 17.6 Share of revenues

120

100

80
£m

60

40

20

0
Revenue Revenue - Revenue Revenue - Revenue Revenue - Revenue Revenue -
Domestic Domestic Domestic Domestic
TV TV TV TV

2009 2003 2009 2003

PL Championship

Source: Deloitte.

Figure 17.7 Revenue comparisons

Finally, access to the Champions League is a source of additional revenue for the most
successful clubs, with the top four clubs securing automatic qualification for the fol-
lowing season. During the 2000s Champions League qualification was dominated by
Manchester United, Arsenal, Liverpool and Chelsea, but recently Manchester City has
replaced Liverpool in the list of regular qualifiers.8 The total value of Champions League

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286   Handbook on the economics of professional football

£m
60

50

40 Overseas
Merit Fee
30
Facilty Fee
20 Basic

10

0
1st 10th 20th 1st 10th

2009 2004

Source: Deloitte.

Figure 17.8 Distribution of broadcast income

qualification increased from €70.1 million in the 2002/03 season to €142.2 million in the
2009/10 season (Deloitte).

17.4.3 Wages and Fees

From the beginning of the EFL, and the onset of professionalism, it was recognised
that market forces operating in the players’ labour market could challenge the financial
viability of clubs and concentrate talent and success in the wealthiest clubs.
As noted above, the retain and transfer system emerged from regulations, introduced
in 1885, such that players were only eligible to play in competitions if they were regis-
tered with the FA. Consequently, when professionalism arrived fully in 1888, despite the
fact that playing contracts of different durations were awarded, players could not move
between clubs unless their registration was also transferred. Clubs treated this as an
opportunity to trade registrations as assets, and could control the effective duration of
a player’s eligibility to play. Likewise, if they agreed to a player move, a fee was paid to
the club. In 1901, a maximum wage was also introduced which, as noted by Dobson and
Goddard (2011), broadly added a premium to average skilled manual worker earnings.
Many clubs sought to bypass the regulations through the use of win bonus payments,
which were discouraged by the FA. Subsequently these became sanctioned in the post-­
Second World War period (Russell, 1997).
Regulation of their contractual status was not passively accepted by players, and a
number of footballers’ union and other legal challenges ensued, with limited success.
By the 1960s, however, significant changes were negotiated by players, following the
formation of the Professional Footballers’ Association as a rebranded union in the late
1950s. This new association, ultimately under the leadership of Jimmy Hill, helped to
achieve the removal of the maximum wage in 1961, and reform of the transfer system
in 1963. In the case of George Eastham against Newcastle United, a High Court ruling

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 English professional football  ­287

required clubs to remunerate players at a level at least as high as their former contract,
and to award a contract of the same duration, if the club wished to retain the player. The
player became a free agent at the end of his contract only if an offer of renewal on the
required terms was not forthcoming. Further transfer system reform came in 1978, when
a player at the end of his contract was given the right to refuse a renewal of his contract.
In this situation a transfer fee would still be payable if the player moved to another club.
Binding arbitration was introduced if a fee could not be agreed between the two clubs.
This latter requirement was subsequently removed with the Bosman ruling in 1995, initi-
ated through legal action in the European Court of Justice, rather than domestic com-
petition authority. Jean Marc Bosman established the right of out-­of-­contract players
to move between clubs across national boundaries within Europe without a fee being
required. The payment of a transfer fee in this situation was adjudged not in accord with
the Treaty of Rome.
Inevitably the logic of the Treaty meant that this ruling became applicable to intra-­
country moves as well. However, from 1998 English clubs persisted in seeking fees for
players under the age of 24, arguing that it provided compensation for player develop-
ment. By 2003 a European-­wide system of regulation had developed governing player
movement, contract specification and when fees are applicable.9 The rules include some
age restrictions, which arguably protect the clubs’ investments in player development.
Further protection for player development, though currently under scrutiny by the
European Union (EU), is provided by the ‘home grown players’ rule for all football clubs
participating in the UEFA Champions League, Europa League and Super Cup tourna-
ments, introduced by UEFA in 2005. This rule dictates that at least eight players from
a 25-­player squad must be locally trained, and of these eight, at least four must be club
trained.10 From the 2010/11 season the Premier League has operated its own version of
this rule; the EFL introduced a similar measure in 2009/10.
As with revenues, the increased role of market forces in the players’ labour market
has produced both growth and increased dispersion in wages. Economic theory suggests
that as markets become more competitive wages will increasingly reflect the marginal
productivity of players. Consequently, as labour market regulations are relaxed, then
players recapture ‘monopsony rents’ that had been previously extracted from them by
their clubs. The seminal analysis was presented by Scully (1974) in an analysis of indi-
vidual player salaries in US baseball. The literature also argues that intra-­team wage dis-
persion can provide incentives to increase general productivity among all members of a
team (Scully, 1995). Dobson and Goddard (2011) summarise the literature on European
football. Owing to a lack of available data on player-­specific English football salaries,
this literature focuses on player valuations and fees. However, data on aggregate wages
at club and league level reveals a pattern of development supporting the theoretical
predictions. In the first four years following the removal of the maximum wage, average
player earnings rose by 54 per cent in aggregate, but by 61 per cent for the First Division.
Figure 17.9 reveals the change over time in the average rate of growth of wages by divi-
sion. Figure 17.10 shows the impact on the levels of aggregate wages by division.
The effect of the changes in the labour market on transfer fees has been similar.
Szymanski and Kuypers (1999) note that with the exception of the period between 1913
to 1922, when some initial record fees were established, the annual rate of increase in
transfer fee payments was typically below 8 per cent from the onset of ­professionalism

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288   Handbook on the economics of professional football

%
30

25

20
1977–1982
15 1982–1986
1986–1997

10

0
Div 1/PL Div 2 Div 3 Div 4

Source: Szymanski and Kuypers (1999).

Figure 17.9 Average wage growth

£m
80

70

60

50
1999–2000
40 2004–2005
2009–2010
30

20

10

0
1

1
i
sh
iv

e
gu

gu
/D

on

a
PL

pi

Le

Le
m
ha
C

Source: Deloitte.

Figure 17.10 Wage levels

until the 1960s. In subsequent decades the rate of increase has usually been above 10 per
cent, with sharp rises in the 1960s and late 1970s associated with transfer system reform.
Transfer fee payments increased at a rate of 13 per cent per annum in the 1960s com-
pared to 5 per cent in the 1950s, and 17.5 per cent in the 1978–1988 period compared
to 10.3 per cent from 1970 to 1978. More recently there has been evidence of superstar
effects such as the world record transfer fee of £80 million paid for Gareth Bale by Real

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 English professional football  ­289

%
50
45
40
35
30
25 Proportion of total player cost
20
15
10
5
0
1995–1996

1996–1997

1997–1998

1998–1999

1999–2000

2000–2001

2001–2002

2002–2003

2003–2004

2004–2005

2005–2006

2006–2007

2007–2008

2008–2009

2009–2010
Source: Deloitte.

Figure 17.11 Transfer fees

Madrid to Tottenham Hotspur in 2013. Rosen and Sanderson (2001) argue that such
fees are possible because superstars are exposed to large audiences, even though each
individual audience member pays only a modest premium to view superstars rather than
ordinary players.
The players’ labour market remains a complex institution. Economic analysis might
suggest that the major challenges to the transfer system would cause transfer fees to fall
as they are gradually replaced by wages, as players capture their full economic value
in a competitive market. There is some evidence to support this claim, as shown in
Figure 17.11 which examines all top-­tier clubs.
However, the persistence of transfer fees reveals that clubs are prepared to buy in-­
contract players, transfer young players, and are subject to the influence of player repre-
sentation by agents in the light of complex contracts.
It is noted that contract durations first lengthened after the Bosman ruling and
then shortened, in England and Europe (Simmons, 1997; Feess et al., 2004; Feess and
Muehlheusser, 2003a, 2003b). The initial increases in duration could be seen as attempts
to lock in players for the long term. Whilst this proved to be a sensible strategy for clubs
like Manchester United, which signed long-­term contracts for their upcoming stars in
the 1990s, less successful clubs such as Leeds United found themselves facing large wage
bills that reduced revenues from declining success could not support, and in a situation
in which rival clubs were only too aware of the financial pressures driving the attempt to
sell high-­earning players quickly.11 Similar difficulties are manifest for relegated clubs,12
and some clubs insert clauses into player contracts ensuring wage reductions in the event
of relegation.13
The persistence of transfer fees in the players’ labour market thus partially reflects
transaction costs, and could support a ‘bargaining’ approach to player valuation
(Carmichael and Thomas, 1993; Dobson and Gerrard, 1999) more than a fully competi-
tive market (Simmons, 1997; Carmichael et al., 1999).14 A reconciliation of these views

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290   Handbook on the economics of professional football

£m
800

700

600

500
Overseas clubs
400
English clubs
300

200

100

0
1992–1993
1993–1994
1994–1995
1995–1996
1996–1997
1997–1998
1998–1999
1999–2000
2000–2001
2001–2002
2002–2003
2003–2004
2004–2005
2005–2006
2006–2007
2007–2008
2008–2009
2009–2010
Source: Deloitte.

Figure 17.12 Distribution of PL transfer spending

is possible, however, by recognising that once agents become involved in player negotia-
tions, clubs become primarily interested in the total cost of the player – that is, wages
and fees – with the allocation between these being of most concern to the player and the
agent. In German football, Feess et al. (2004) show that fees are higher when players
have a longer duration of their contract left, and salaries are lower at the buying club.
This evidence is consistent with the view that agents actively encourage player moves.15
A final important development worth noting is that transfer reform has produced an
internationalised labour market, as teams with large revenues pursue the best talent from
around the globe. This trend is illustrated in Figure 17.12. It is against this background
that the home-­grown player rules have developed.

17.4.4 Club Ownership, Profits and Finance

Historically, in amateur form, clubs were voluntary associations managed by a commit-

tee of members who were personally responsible for any liabilities arising from financial
activities and transactions. Pressure to change this legal form of organisation grew as
investment in stadia took place to support the professional game. Consequently, profes-
sional football clubs were incorporated into limited liability companies with a board of
directors and chairman often drawn from the local business community. By the 1920s,
this model applied to most professional clubs (Andreff and Staudohar, 2000; Buraimo
et al., 2006).
As noted above, initial governance guidelines attempted to focus investment in clubs
away from the pursuit of commercial gain, with directors being unpaid, and limita-
tions on dividends being paid to owners. Financial factors also shaped this emphasis in
governance as it was recognised that player wage escalation could lead to insolvency in
the face of uncertain demand for spectator attendance. Consequently, as Buraimo et al.
(2006) note, ‘financial crisis’ facing a club, followed by rescue through investment from

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 English professional football  ­291

local business patrons, is a persistent theme in football clubs’ histories. In extreme cases
teams have left the league. Thames AFC was founded in 1928, but was unable to attract
sufficient attendance to remain financially viable and so resigned from the League in the
1930/31 season after winding up. Wigan Borough, founded in 1919, gained access to the
EFL in 1921/22 having been the fourth club that attempted to become professional in
the town. Facing strong competition from rugby league, however, Wigan Borough also
resigned from the EFL in the 1930/31 season. Even clubs that are now globally recog-
nisable, such as Manchester United, encountered solvency problems soon after turning
professional, and during the 1930s, an era of economic depression which proved to be a
difficult time for many clubs. In this context it is not surprising that, as Downward and
Jackson (2003) note, several rugby and football clubs and players switched between the
alternative codes of football or rugby in search of an income stream.
The cause of clubs’ financial difficulties has consistently been an inability to attract
sufficient revenue to cover their wage bills. Consequently, it is of no surprise that with
the pronounced declines in post-­war attendance, coupled with wage pressures that
arose with increasingly deregulated labour markets, the financial problems facing clubs
became widespread. Such financial difficulties were the subject of the Chester reports
into football finance in 1968 and 1983. This persistent lack of profitability in clubs,
being underwritten by the wealth of local business leaders, suggested to early economic
researchers that football clubs should be viewed as utility-­maximising organisations,
as opposed to profit-­maximising organisations as is typically assumed in economic
­analysis.16 This is because club owners can be viewed as committing their personal
resources to maintain the club’s existence, which for reasons of status, influence etc. is
desirable to them.
Significantly the Chester report of 1983 suggested that a reorganisation of football
was required and, in particular, that greater commercial acumen and responsiveness to
consumer demand was needed. This report consequently both reflected and helped to
shape the changes that led to the formation of the Premier League, noted above. From
1981 payment to full-­time directors was permitted, and limitations on dividend payments
were first relaxed and then abolished in 1998. Perhaps as a result of this, and also because
the reorganisation of football required new facilities in light of the Taylor report, several
football clubs floated on the stock exchange to raise funds. The potential to earn other
commercial income also acted as a lure, with the possibility of profitable return in the
face of the growing revenue streams noted above.
Tottenham Hotspur was the first club to float its shares on the stock exchange in 1983,
and concurrently diversified into other aspects of business such as sportswear. However,
an inability to generate a profit meant that debts developed, with shares increasingly being
consolidated into small groups of owners, most famously Alan Sugar and, ultimately, an
investment company. In 2012 the company was delisted. Manchester United floated in
1991 and was subsequently the subject of a failed takeover bid by Sky. Whilst the offer
was accepted, the takeover was blocked by the Monopolies and Mergers Commission.
More recently, Manchester United was subject to a debt-­financed take over by Malcolm
Glazer, and was floated on the New York Stock Exchange in 2012. Shares were priced
at $14, lower than the $16 to $20 originally planned. Commentators speculate that this is
still too high, with values of $4 being more apposite.17 This perhaps reflects some realism
on the part of investors concerning the ability of a football club to make a profit. Despite

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292   Handbook on the economics of professional football

a number of other clubs being listed on the stock market, therefore, the trend towards
public limited company (PLC) status was soon reversed and now many leading clubs are
privately owned by extremely wealthy investors or consortia of investors that are debt
financed (Deloitte, 2011). In this respect the current model of the financing of English
football is not too dissimilar to its earlier incarnations, in the sense that business inter-
ests underwrite the clubs’ debts. What differs is that the values are now much greater,
and ownership is international. Extreme examples include Roman Abramovich’s £800
million investment in Chelsea since 2003, and Sheikh Mansour’s £540 million investment
in Manchester City since 2008. The nature of many of the leveraged buy-­outs of clubs has
raised concerns about the diversion of funds towards servicing debts, and the long-­term
survival of clubs in an industry in which profits are difficult to earn and sustain.
Table 17.1 shows an approximate doubling of revenue in the top three tiers of English
football between 2000 and 2010, and more modest growth in League Two. However,
only the PL has been consistently profitable at an aggregate level.18 As shown previously,
one of the main drivers of football’s loss-­making propensities is growth in wages relative
to income. As Figure 17.13 illustrates, the ratio of wages to turnover has been relatively
constant and in the range 60–70 per cent for the PL. This ratio is much higher in the
lower tiers, and it has even exceeded 100 per cent in the Championship.
For the Championship clubs in particular, the drive to be successful and seek promo-
tion to the PL to access its income streams creates commercial risk. Clubs need to buy
better players to generate success. Failure to achieve promotion, however, leaves clubs
with wage bills that are not covered by the lower revenues at Championship level. A
similar problem is faced by newly relegated clubs, which might find themselves with a
wage bill for players signed on PL contracts that are not covered in the Championship.
It is the relatively static nature of the lower tiers’ revenue opportunities compared to
the PL, combined with inflationary pressure on wages, that creates persistent financial
pressure on lower-­tier clubs. The demise of ITV Digital exacerbated the acute difficul-
ties faced by Championship clubs in the early 2000s. Figure 17.14 tracks the trend in the
number of football club insolvencies. There is a clear spike in the seasons immediately
after the collapse of ITV Digital.

Table 17.1 Profitability (£m)

League status Season 2009/10 2005/06 2000/01

PL Revenue 2030 1379 937
Operating profit 83 138 81
Championship Revenue 407 318 205
Operating profit −133 −53 −100
League One Revenue 159 102 81
Operating profit −52 −15 −25
League Two Revenue 68 61 46
Operating profit −8 −5 −13
Total Revenue 2644 1860 1269
Operating profit −110 65 −58

Source: Deloitte.

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 English professional football  ­293

%
120

100

80 PL

Champ
60
L1

40 L2

20

0
0

0
00

00

00

00

00

00

00

00

00

00

01
–2

–2

–2

–2

–2

–2

–2

–2

–2

–2

–2
99

00

01

02

03

04

05

06

07

08

09
19

20

20

20

20

20

20

20

20

20

20
Source: Deloitte.

Figure 17.13 Wage–turnover ratios

12

10

6 Insolvencies

0
1992–1993
1993–1994
1994–1995
1995–1996
1996–1997
1997–1998
1998–1999
1999–2000
2000–2001
2001–2002
2002–2003
2003–2004
2004–2005
2005–2006
2006–2007
2007–2008
2008–2009
2009–2010
2010–2011
2011–2012

Source: Deloitte.

Figure 17.14 Premier and Football League insolvencies

Because of the difficulties facing newly relegated clubs, the Premier League introduced
‘parachute payments’ to the newly relegated clubs in the 2004/05 season, to ease the
transition to a smaller revenue base. Initially these payments were for £6.5 million for
two years. Today, relegated clubs receive £48 million over four years. In 2003, sporting
sanctions in the form of league points deductions were introduced for clubs that entered
administration. In 2009, UEFA developed the Financial Fair Play regulations requir-
ing clubs that enter European club competitions to balance their revenue and football-­
related expenditure. Whether such changes prove to be effective is, of course, yet to be
established.

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294   Handbook on the economics of professional football

17.5 SUMMARY AND CONCLUSION

This chapter has described the evolution of English football from a mass-­participation
amateur game, through being a highly regulated professional sport, to its current highly
commercialised state in which sporting regulation has been relaxed and the economic
organisation of the sport is on free-­market lines. The transition to a market-­based model
has increased the level and dispersion of the value of transactions in football in both rev-
enues and costs. There has been a greater concentration of revenue in favour of the PL,
particularly through mutually reinforcing media income, sponsorship and commercial
income, as well as access to European competition and its revenues. There has also been
sustained inflationary pressure on wages in all tiers of the English professional sport.
Collectively, therefore, football remains an industry in which profitability is low, but
particularly so for clubs in tiers below the PL. The longer-­term financial viability of clubs
in the lower tiers appears to hinge on achieving greater control over costs. In contrast,
for PL clubs survival depends upon the ability to attract funds from investment consortia
or billionaire benefactor capitalists to service debts. Consequently, whilst football has
always been financially fragile and in need of external support to meet cost overruns, the
specific problems facing English football clubs are now of a different emphasis between
tiers.
Many academic commentators have expressed concern about this growing concen-
tration of resources and the effect on competitive balance, which might even threaten
the viability of the Premier League and Football League. However, it appears that the
importance of competitive balance may have been overstated. On the one hand, the rela-
tionship between competitive balance and attendance and revenue does not appear to be
particularly strong (see Dobson and Goddard, 2011; Downward et al., 2009; Szymanski
and Kuypers, 1999, for summaries). On the other hand, as described above, professional
football has historically always operated with a few dominant clubs. It seems, therefore,
that fans and spectators are accepting of a degree of competitive imbalance that does
not cause undue dissonance with their expectations.19 A return to a relatively heavy-­
handed regulatory framework in an attempt to address the current imbalance between
the financial resources of football clubs may therefore lack a strong sporting rationale, as
well as being difficult or impossible to accommodate within current UK and European
­competition policy and employment law.
Sporting regulations have been possible, however, in sports such as rugby league
and rugby union, which both have salary caps. The emphasis is primarily on
­promoting financial stability. It is unclear whether such a policy could be effective in
­football, given its global nature and the current thrust of competition policy. It is in
this context, thus, that the recent Financial Fair Play rules have emerged.20 If such
regulations prove to be ineffective, and funding becomes more difficult to obtain for
clubs, the outcome might well be that some clubs cease trading. This might also be
either accompanied by, or attenuated with, the greater income segmentation between
tiers in football, producing segmentation in the full professional status of clubs in the
future.

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 English professional football  ­295

NOTES

1. An amateur football association emerged in 1907, but this merged with the Football Association in 1914.
2. The joint production of sporting activity is considered a distinctive economic feature of sports (Neale, 1964).
3. See Andreff and Staudohar (2000) for a review of ‘general’ changes across European sport.
4. This is notwithstanding the incompetence of official responses and consequent cover-­up. See http://www.
bbc.co.uk/news/uk-­england-­19582072 (accessed 13 September 2012).
5. Cable television never really developed as a medium in the UK, though had been experimented with by
companies such as Rediffusion. Lack of market penetration through poor programming and consumer
expectations probably accounted for this.
6. No explicit ruling on the negotiation of pooled broadcast rights occurred. Perhaps in an attempt to
hedge against the possibility of a break-­up of the market and club-­specific deals, which exist in Italy and
Spain, the Monopolies and Mergers Commission blocked an attempt by Sky to purchase Manchester
United. The argument was that the action was predatory and this vertical integration would leave Sky
with undue control over future developments in the football market, by being linked to the market
leader in football.
7. It is worth noting that this stability is also, in part, affected by the shifting size of the PL from 22 to 20
clubs, and capacity constraints on PL attendances, with clubs operating at capacities of 94 per cent in
2000 compared to 63 per cent in Division One, with figures of 91 per cent and 70 per cent, and 92 per cent
and 69 per cent, in 2005 and 2009 respectively.
8. The number of teams that each country can enter into the league is based on UEFA rankings of teams.
These are based on five-­year averages of the performance of an association’s teams in the Champions
League and Europa League. Other teams can enter through pre-­qualification tournaments, access to
which is also based on these coefficients.
9. Its main features are: (a) compensation is required for players aged under 24 seeking to move; (b) players
can move during pre-­and mid-­season transfer windows only; (c) players can only move once a season; (d)
contract durations can be between one and five years only; (e) contracts can be enforced for up to three
years for players aged under 28 and two years if older; (f) compensation should be paid by clubs or players
that breach these regulations
10. A ‘locally trained’ player is either a ‘club-­trained’ player or an ‘association-­trained’ player. A club-­trained
player has, between the ages of 15 and 21, been registered with his current club for a period of three entire
seasons. An association-­trained player has, between the ages of 15 and 21, been registered with a club or
with other clubs affiliated to the same association for a period of three entire seasons. Nationality is not
relevant.
11. http://www.guardian.co.uk/football/2004/mar/07/sport.features1 (accessed 30 August 2012).
12. http://www.dailymail.co.uk/sport/football/article-­2114753/QPR-­owner-­Tony-­Fernandes-­faces-­financial-­
nightmare-­down.html (accessed 30 August 2012).
13. See also the discussion of ‘parachute payments’ below.
14. In the econometric literature the issue hinges on whether or not buying club, as well as selling club and
player characteristics affect fees. If the latter only are significant this suggests that the supply price and
human capital dominate, which reflects productivity.
15. http://www.dailymail.co.uk/sport/football/article-­2192584/Brendan-­Rodgers-­reported-­Premier-­League-­
Fulham-­Clint-­Dempsey-­chase.html (accessed 30 August 2012).
16. Fort (2000) discusses the potential similarities between the two alternatives. Nonetheless, as Kesenne
(2007) demonstrates, differences in the assumptions do matter for examining the likely effectiveness of
league management policies. In most of the literature the utility-­maximising hypothesis is presented as
win-­maximising subject to a minimum profit constraint.
17. http://www.standard.co.uk/business/business-­news/manchester-­uniteds-­float-­shares-­are-­worth-­less-­
than-­5–8038177.html (accessed 10 September 2012).
18. Operating profits ignore the amortisation of player transfer costs, profit or loss on sale of players, and
financing costs.
19. In the case of broadcast audiences and the scheduling of matches it seems that competitive balance is
more important than it is to live fans (Forrest et al., 2004).
20. http://www.uefa.com/uefa/footballfirst/protectingthegame/financialfairplay/index.html (accessed 12
September 2012).

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296   Handbook on the economics of professional football

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