Robert Kraft got it right. Again.
In London for Wimbledon in June, Kraft, the owner of the New England Patriots and the New England Revolution, was quoted by CNN as saying that he would never invest in an English Premier League team under current economic conditions. “Manchester City won the championship this year and I hear they’re going to lose $156 million. I would rather give that money to charity if I had it. I want every business to stand on its own.”
This would appear to be a rather startling observation, given the glittering list of high-profile investors (including other NFL owners) who have taken controlling interests in EPL clubs. Yet Kraft, one of the NFL’s most powerful and influential figures, who took a moribund football franchise and turned it into the epitome of excellence both on the field and off, knows what he’s talking about.
A little background on the EPL: It is by a wide margin the richest and most popular soccer league in the world, a sport that is by far the world’s most popular. Its domestic TV rights dwarf those of the NFL on a per capita basis — and international rights are enviably large. Six English clubs are among the world’s top dozen in terms of revenue. The EPL attracts the stars of world football, and its trajectory has been admirably steep.
But beneath the surface, the EPL faces significant financial challenges. Specifically, it trails in the three economic underpinnings necessary to ensure the long-term health of any sports league:
• Sufficient revenue sharing among clubs.
• Some form of salary cap.
• An auditable limitation on club debt.
And the heart of the issue lies in the very fact of the incredible, unmatched popularity enjoyed by international football. Soccer is like water — a universal solvent. It reaches everywhere, and touches everything. As a result professional soccer can be thought of as an open system. Clubs playing under the auspices of dozens of different national associations compete with each other in the worldwide market for players, while any team’s popularity and revenue streams are directly correlated with its success on the field of play. Interest is compounded during the regular breaks in the season when players take leave of their clubs to play for their national teams, often against their own club teammates. Consider:
• Kids from anywhere in the world — Brazil, Ghana, Japan, Australia, the U.S. — can, and do, end up playing in England and other European leagues.
• Competition among clubs transcends national and continental boundaries. Even if you win your national league, there are always other champions to take on. Literally hundreds of clubs are in the annual chase to win the European Champions League, the most prestigious club title in the world.
• Top-level soccer is a meritocracy. Poor performance on the field leads to relegation to lower divisions (and much lower revenue), while success leads to promotion and income.
In contrast, American sports like the NFL are closed systems — essentially exhibition leagues where the exact same teams run through the exact same paces year in and year out. Further:
• Their player pool is small, essentially domestic, and self-contained, with no rival employers.
• One of the same 32 teams will always win the Super Bowl.
• There is no “death penalty” for poor performance (i.e. relegation and sharply reduced revenue) — everyone is coming back next year, no matter what.
• The whole operation is tightly controlled by just 32 owners.
The beauty of closed-system sports is that they are much easier to manage as businesses. Critical issues can all be addressed by a fairly small group of people with reasonably well-aligned interests. (Note that the NBA, MLB, and NHL, despite their wider source of players, are so much more economically powerful than their competitors that they can be considered closed as well.)
Top-flight pro soccer, on the other hand, plays out on a worldwide stage that precludes an NFL-style system. National federations vary in terms of wealth, size, and revenue distribution. (In Spain, Barcelona and Real Madrid take home more than half the of all La Liga revenue.) European employment law governs player movement and limits collective bargaining. And wealthy owners who want to compete at the highest level, regardless of cost, are not interested in spending limits.
All of this makes for a dangerous cocktail, with predictable results. Teams overspend wildly in their efforts to compete, and bankruptcies have become increasingly common. Storied names such as Leeds United and Glasgow Rangers have spent themselves into oblivion. Only the very wealthiest clubs — increasingly owned by international industrialists willing to buy championships regardless of cost — can thrive in such an environment. The usual suspects rise to the tops of their domestic leagues year after year.
The European governing body, UEFA, is well aware of these problems and is doing what it can to mitigate them. It has instituted Financial Fair Play rules, essentially mandating that a team spend within its means or risk being banned from playing in the Champions League. But these rules are very difficult to implement and limited in their effect. (Over here, MLS has avoided many of the problems by organizing as a single business entity, but this model may be tough to sustain as the sport’s popularity continues to rise in the U.S.)
As for the EPL, it has done an admirable job of growing revenue, and has transformed itself into a popular, family-friendly entertainment product. It has made significant advances in revenue sharing, and works hard to keep its clubs’ balance sheets stable. But as long as the usual suspects like Manchester United and Arsenal see as their real competition Bayern Munich, AC Milan, and Barcelona, they will have to spend, spend, spend. And no one should blame Robert Kraft for staying out of that game.
Thomas E. Spock (tom@scalarmedia.com), a former NFL and NBC executive, is a founding partner of Scalar Media.
