I have an article in The Times today about the anti-competitive implications of Financial Fair Play, which was prompted by Martin Samuel’s broadside in the Daily Mail. My article is based on a new paper (Peeters & Szymanski Financial Fair Play WP) which I have been working on with Thomas Peeters from the University of Antwerp. In the paper we simulate the impact of FFP as if the rules had applied in the 2009/10 season. To work this out we estimate the effect of spending on success, not over the whole season (like the chart in Soccernomics) but on a game by game basis- i.e. we treat the result of each game as a function of the wage spending of each team. We used a sample of over 20,000 games over 20 years for the top three English divisions. Our results then enabled to estimate how much teams would spend if they had not been allowed to exceed the FFP break-even constraint in 2009/10.
I should say that I was genuinely surprised by the results. Relatively few teams breached breakeven by much even then, so I expected a relatively small fall in expenditure. Instead, the reductions made by a few teams had a big knock-on effect on the remaining teams, who need to spend less to achieve the same level of success, such that overall wage spending would have been up to 23% lower than it actually was had the full FFP regime been in operation.
Another way to put this is that FFP works as a coordination device which enable clubs to cut spending simultaneously and hence increase profitability. If the Premier League voted to implement FFP I think this would then be a breach of Chapter One of the Competition Act, which prohibits agreements that “limit or control production, markets, technical development or investment”. To be sure, lawyers for the Premier League and the clubs would claim that the FFP rules have pro-competitive effects.
I’m not sure I can see what these might be. It certainly would do nothing to improve competitive balance among the teams, and to be fair to UEFA they do not even claim that it would. In our simulations the variance of points won in the Premier League is unaffected by FFP.
Salary caps (which is what FFP really is) are all about making teams profitable. The only reason that owners currently spend as much as they do is that the penalty for not doing so is the potential loss of PL television revenue. If the risk of losing such revenue doesn’t decrease with a decrease in wage/transfer spending then they’d do it in a second. Until you get to the Champions League spots, the marginal return on spending more money to climb the table is relatively small (roughly a million/place in the table). Given the modest upside, the unlikelihood of breaking into the Top 4 (outside of maybe Spurs or Liverpool), and the decreased downside owners seem likely to get more frugal while they watch their bank accounts grow.
You can’t just apply these controls on the premier league they’d have to be worldwide otherwise the best players would move to other leagues around the world.
FFP just won’t work, far from making it a level playing field it keeps the biggest supported clubs at the top.
At least clubs can dream now that one day they’ll win something, unless you’re a fan of Man United these rules would kill your chances.
I managed to read the Times piece. Unless I’m mistaken, you believe that clubs will spend less on wages because they will essentially be forced to be profitable, and therefore have no incentive to further compete to break into the top of the league table?
Is that correct? Or am I missing something?
In order to join the leading group you need to spend – FFP prohibits spending in excess of break-even. Teams chasing the top clubs will have to hope that their academy produces a Messi or they are able to hire a Brian Clough- neither of which happen more often than once in a blue moon.
“In order to join the leading group you need to spend – FFP prohibits spending in excess of break-even.”
This might be true for England.
There is a shortage of good managers, and a shortage of talent(value for money),
in BL there were now many youth trainer who did realy good with the first team.
Tuchel,Streich,Lewandowski.
Talent is cheaper in BL.
And those players wouldn’t switch to EPL so quick, because first someone wants to start the career. So if they move it’s maybe because contract runs out, and others would offer more money.
Top talent in East Europe, Japan,Korea sees BL as a better choice to start a career.
Standard in youth development, in 2.Bundesliga is also quite good.
Such players also more likely to move first to big BL clubs, as to EPL.
A good Sporting Director, a good manager(no Klopp needed just quite good).
And yes there is something possible, todo more with less as others!
But this is because of different environment.
The time of “Friedhelm Funkel” (probably you dont know him;) managers is over in BL.
Even small clubs don’t have anymore “gray mouse” managers.
Stefan,
It’s not quite right to say that a sports regulator would need to show “pro-competitive effects” to justify FFP (or any other form of financial regulation in sport).
The starting point, as you point out, is that all financal regulation in sport is not allowed. The Commission has identified a four step “methodology” for identifying whether sports rules breach competition law. To summairse, a restriction of this sort will be legal if it is (i) in pursuit of a legitimate objective and (ii) proportionate. Legitimate objectives (as identified by the Commission and in previous cases) stretch beyond improving competitive balance (which I agree is not addressed by FFP) to include objectives such as preserving the financial viability of clubs/the sport (which is). The issue is proportionality, a three stage test in itself and too much to go into here. Suffice to say that there are good arguments that FFP does comply with competition law (and the European Commission seems to agree).
I have spoken on this topic a number of times, slides setting out the legal position in some more detail are here: bit.ly/XXM2MM A general page with financial regulation in sport legal resources is here: http://bit.ly/X5xk63
Best,
Ian
Many thanks Ian- it’s very important to get the story straight from the lawyers- the devil is in the detail.
But I also think this is an economic issue, and I think the break-even rule cannot survive a proper economic analysis. the reason, which you didn’t address in your slides, is that it is not just a break-even rule, it is a break-even rule which also includes an arbitrary definition of what is income which has adverse consequences for both workers and consumers. Remove the arbitrary definition and I think you probably meet all the competition law tests.
I take your point and I agree that the economic analysis is a key step (the ecoomic effect forms part of the proportionality test mentioned above/in the slides). I don’t agree, however, that UEFA’s definition of revenue/expenditure is “arbitrary” (at least, not in the main part) nor that it would necessarily fall-over if tested.
To pick a couple of examples: excluding benefactor investment (by its nature unsustainable) from revenues could be justified on the legitimate objective (and FFP’s key driver) of encouraging clubs towards sustainability. Excluding investment in academies from expenditure can be justified on the (oft-quoted) legitimate objective of encouraging player training and development.
I’m not seeking to make UEFA’s case for them nor to say that there are no legitimate arguments against the legality of FFP. There are, however, good arguments that it does comply with European law and the Commission seems to have reached that conclusion, going so far as to hold out FFP as a model for other sports: http://uefa.to/GFzsYS
Yes, I agree it’s not “per se” illegal- all vertical (and horizontal) restraints must be analysed on a “rule of reason”. But some restraints are more obviously excessive and anti-competitive than others, and I think the break-even rule as currently written falls into this category. to take your examples-
-it seems self evident to me that benefactor investment is “sustainable”- the football business- and most other sports businesses have survived by it for more than a century. I’m not familiar with the use of the word “sustainable” as a competition law term, but in my reading of the economic literature relating to competition law this term is more or less unknown (though I’d be happy to be corrected on this). the more general principle, I believe, it that competition law exists to protect competition, not competitors.
– if a club borrowed excessively to invest in its academy and so became insolvent, how has the break-even rule served the stated goals of UEFA?
what I don’t understand about your analysis is that don’t appear even to consider potential harms. Why is that? Of course, if you ignore harms, you conclude it’s not harmful. If you read the paper by Peeters and myself you can see some of the potential harm. You say you’re not making UEFA’s case, but aren’t you really doing so if you do not engage in process of balancing harms and benefits?
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“I’m not familiar with the use of the word “sustainable” as a competition law term, but in my reading of the economic literature relating to competition law this term is more or less unknown (though I’d be happy to be corrected on this). the more general principle, I believe, it that competition law exists to protect competition, not competitors.”
Although you are correct that competition law generally serves to protect competition/ the consumer, sport is a little different. Sport is special as has been recognised by the European Treaty, the Commission and the courts. Sport has distinctive features which set it apart from other economic activities such as the interdependence of competing teams and its important social function. In that context, sustainable financing of sport is an important theme for the EU (I’m surprised you have missed the literature on this) and the “sustainability” of clubs (or “ensuring the financial stability of sports/teams”) has been recognised as a legitimate objective (see the Commission’s White Paper on Sport re. “ensuring the financial stability of sports/teams”).
“what I don’t understand about your analysis is that don’t appear even to consider potential harms. Why is that? Of course, if you ignore harms, you conclude it’s not harmful”
I wasn’t. All effects (positive and negative) need to be considered under the proportionality test (which understandably you are less familiar with). That a sporting rule has anti-competitive effects (which I acknowledge FFP, and many other sporting rules, will have) is not fatal provided those restrictive effects are inherent and proportionate in the pursuit of the legitimate objectives. It’s an assessment that has to be carried out on a case by case basis balancing the positive and negative effects. UEFA will argue that they have sought (through wide-ranging consultation) to identify the most suitable, least restrictive means of achieving its goals (which contrary to your article inarguably include “pro-competitive effects” or legitimate objectives). It’s a reasonable position and the Commission has endorsed it. Not that the ECJ could not ultimately find against it, but it’s a much more nuanced position than the one you presented and, on balance, I think UEFA have got it right.
I’m quite familiar with the proportionality test, thanks. What I still don’t see is any consideration of costs on your part, though I see plenty of talk about benefits.
I think we have a different perspective. I’m interested in assessing against objective criteria whether FFP is consistent with EU and English law, competition law in particular, primarily using economic analysis. Whether or not the Commission thinks it is consistent is not really relevant to this, especially since as far as I’m aware they haven’t conducted or published an economic analysis.
Others can decide who is nuanced and who is not, but I think a fair reading of your comments would be that you are trying to make UEFA’s case 🙂
“I’m interested in assessing against objective criteria whether FFP is consistent with EU and English law, competition law in particular, primarily using economic analysis.”
Unfortunately an economic analysis cannot tell you whether or not FFP is consistent with EU and English law. I’ve set out the process which the courts would follow above and the considerations are much more wide-ranging. I agree that our differing backgrounds and perspectives make it unlikely we will agree. My aim was not to get you to agree that FFP is consistent with EU and English law (it’s not black and white either way) just to point out that your initial position that FFP has no pro-competitive effects is incorrect and that its legality is a “nuanced” issue!
Well, I don’t decide the law but neither do you- the courts do. Surely it’s obvious that courts can and do decide that agreements are contrary to the competition law based on an economic analysis. I don’t really understand why you appear to disagree with this.
I’d also encourage you to read my paper with Thomas Peeters, which consists of an assessment of the potential benefits and costs of FFP as a vertical restraint.If you have read it I’m puzzled by you characterization of my position. But to be clear, I have never thought or tried to suggest that FFP has no pro-competitive effects!
I haven’t read your paper. I will now (I also ordered a copy of Soccernomics from Amazon yesterday FYI!). Of course I agree that economic analysis plays a part but courts do not decide whetherer a sporting rule is legal purely on that basis. The economic analysis plays a part of course but a negative economic impact can be overcome by other factors (provided it attains legitimate objectives (not necessarily economic) in a proportionate manner). So the fact that FFP has a negative impact in certain areas under your economic analysis is not a death knell. My comments above were based on your blog and not your paper, I will refrain from further comment until I read your paper!
Ok, I think we have now iterated to an agreement-I don’t disagree with anything in your last post! There must be some kind of joke here along the lines of “how long does it take for a lawyer and an economist to reach an agreement? until the client the is bankrupt…”