How could the rising Premier League broadcasting revenue impact clubs' compliance with Financial Fair Play?
The Barclays Premier League (“PL”) has secured its second consecutive 70% price increase for the right to broadcast PL games live in the UK. The new £5.136bn deal agreed with BT Sport and Sky forseasons 2016/17 to 2018/191 is in addition to the broad range of other packages already awarded, such as for domestic highlights to the BBC for £204m2 and near live clip rights to News International.
This now places the PL second only to the NFL in terms of total revenue received for the right to broadcast matches.3 Clearly, the desire for live PL content, both domestically and abroad, has never been stronger and PL clubs will no doubt welcome this boost in revenue.
In this article, the authors consider how this broadcasting revenue is distributed to PL clubs along with those further down the football ladder, and reflect on what impact this may have on compliance with the financial regulations operated by UEFA, the PL and The Football League (“FL”).
How is broadcasting revenue distributed?
Half of the PL’s UK broadcasting money is split equally between all PL clubs (including a proportion to those recently relegated as is discussed further below), a quarter is paid based on league position and the remaining quarter is distributed according to the number of matches the club plays which are televised live or of which recorded excerpts are broadcast.4
Monies received by the PL from overseas broadcasts are distributed equally amongst all PL clubs.5 This meant that for the 2013/2014 season Liverpool, despite losing out on the PL title to Manchester City, received the greatest broadcasting funds at £97,544,336 from the existing broadcasting deal. This was just above the £96,578,329 received by Manchester City because Liverpool had more games televised.6 The new deal will push these figures higher still.
This model is to be contrasted with those seen elsewhere, for example in Spain, where clubs currently negotiate broadcasting deals individually and, therefore, a club’s broadcasting revenue depends far more on its negotiating position stemming from its size and television exposure (great for the larger Real Madrids and Barcelonas, but not so good for the smaller Cordobas and Elches). The revenue inequality this generates has led the Espanyol president, Joan Collet, to suggest that many of Spain's top-flight clubs will refuse to participate in La Liga if the Spanish government does not pass its long awaited ‘law on professional sports’ requiring the collective sale of TV rights.7
Unsurprisingly, given the size of the broadcasting figures in the PL, they equate to a hefty proportion of clubs’ revenues. By way of example, Swansea’s recently released financial results for the year to 31 May 2014 show that media revenue accounted for almost 82% of turnover.8 Given the increase that will filter down from the recent Sky/BT Sport deal, the reliance on these revenues is likely set to increase.
It is not just the incumbent PL clubs who will benefit. As part of the PL’s support for the wider football family, the PL provides a significant level of funding to the lower professional leagues in the form of parachute and solidarity payments. Parachute payments are made to clubs in the four seasons following their relegation, with the aim of easing their transition to life outside the PL. The level of these payments is calculated by reference to UK and overseas broadcasting revenue received by the PL9 so that, for example, a newly relegated club in 2014 will receive approximately £24m in its first season after being regulated.10 Eight Championship clubs were in receipt of parachute payments in 2013/14 at an average value of circa £18m.11 Under the current regime, payments are made for the four seasons following relegation but the proportion of PL broadcasting revenue received reduces in years two and three.12 Solidarity payments are made to FL clubs who do not receive parachute payments but are set at a much lower level than parachute payments.13 The PL and FL have recently entered into a new arrangement in respect of these funds, which we consider further below.
The importance of these payments (parachute payments in particular) can be gleaned through a quick look at the accounts of a club recently relegated from the PL - Reading FC. Reading won promotion to the PL in the 2012/2013 season, but were immediately relegated the following year. In their 2011/12 promotion season, where funds were received under the Championship broadcasting deal only, their media and broadcasting income stood at £5,075,166.14 This then ballooned to £43,766,333 (£40,029,786 of which was from broadcasting alone15) in 2012/13 when the club was in the PL. On their return to the Championship in 2013/14, media and broadcasting income did drop to £27,543,929, but this was nowhere near the level during their last stint in the Championship because they now were receiving parachute payments.16
The interaction with financial regulations
The new broadcasting deal will boost the balance sheets of clubs - not just in the PL, but also in the FL through the receipt of parachute and solidarity payments. How might these increasing payments assist English clubs in adhering to the various financial regulatory regimes that they must comply with?
For clubs seeking to play in the Champions League or Europa League, revenue received from broadcasting rights is to be taken into account for the purposes of the UEFA FFP Regulations.17 As such, these revenues will assist clubs in seeking to meet UEFA’s “break even” requirement.
The sheer size of the PL broadcasting deal has led to arguments by clubs in France’s Ligue 1 that it distorts the UEFA FFP regime by giving PL clubs an unfair advantage.18 Michel Platini’s understandable response was that this was just market forces in action and that there will be no change to the regulations in an attempt to even the financial playing field.19 Of course, it is not just broadcasting income that is taken into account under the FFP regime – those clubs with more sophisticated non-broadcasting revenue streams (such as merchandising and sponsorship) will have more to spend before falling foul of FFP regulations.20
Equally, the new broadcasting funds will count as earnings in relation to a PL club’s compliance with the PL’s equivalent of the UEFA FFP Regulations - the Profitability and Sustainability Rules.21The first assessment of compliance with these PL regulations will be carried out in 2015/16 on the basis of accounts from that season, along with those from the previous two seasons (so clubs will have to wait until subsequent reporting periods to benefit from the bumper new broadcasting deal).
Unlike the UEFA FFP Regulations (which focus primarily on club turnover and costs), the PL regulates both club turnover (through its Profitability and Sustainability Rules) and player wages. As regards the latter, the PL regulations draw a line in the sand by tying future wage expenditure to a club’s 2012/13 spend. In essence, clubs who spend more than the ‘wage floor’ (£52m, £56m, or £60m in seasons 2013/14, 2014/15 and 2015/16 respectively)22 cannot spend more than an additional £4m per season on wages, except where this is funded only by an uplift in the club’s revenue and not through central funds (such as from broadcasting, radio and title sponsorship).23 This restriction, which the PL has called the Short Term Cost Control,24 appears designed to ensure that broadcasting revenues are not simply channelled straight into players’ pockets. In this regard, clubs that are best able to maximise the value from their commercial deals will be in a stronger position to pay higher wages.
The rationale for singling out wages for special attention in the PL is clear – the prevention of a consistently upward spiral in player wages. By way of example, in the 2012/13 season, the combined wage bill for PL clubs stood at £1,783m - an average of £89m and 71% of total revenue per club.25 In comparison, the average wages to turnover ratio in the inaugural 1992/93 PL season was 48% (and, of course, in 1993 we would be looking at this being a percentage of a far smaller number).26
The wage floor restrictions currently catch a large majority of PL clubs – in 2012/13 all but five clubs spent in excess of £52m (the wage floor calculation for the first season of operation – 2013/14) three of whom have since been relegated (evidence for the view that a higher wage spend leads to greater success perhaps).27 Given the 2013/14 wage floor is set £37m below the PL average, it is likely to benefit those promoted clubs with a comparatively low wage spend, but who are looking to ramp up their spend considerably to enable them to compete following promotion.
Interestingly, the wage floor restrictions are due to expire before the 2016/2017 season – just as the new £5.136bn broadcasting deal kicks in. It remains to be seen whether the PL will seek to extend these restrictions. If they do, it may be that clubs push for the level of the wage floor to be increased to give clubs some leeway to spend more of the new broadcasting deal on player wages but, as mentioned above, if it is structured in the same way, it will not be a free-for-all.
Turning our attention to the top tier of the FL: at the end of last year, Championship clubs agreed a new set of financial regulations that bring the Championship’s approach in line with that of the PL. From the beginning of the 2016/2017 season, the ‘Fair Play Result’ for Championship clubs will, like PL clubs, be assessed over a three season time period instead of the current one year regime. The maximum level of permitted loss will increase from £6m per season to £39m over three seasons.28
At the time the new Championship rules were announced, the FL Board was given a mandate to complete a new financial arrangement with the PL (including changes to how solidarity and parachute payments are made).29 The newly agreed ‘rolling’ solidarity payment model will see parachute payments subsist for three seasons (rather than four) from 2016/17. In addition, the solidarity payment regime will be restructured so that payments will now be set at an equivalent of 30% of a third-year parachute payment for Championship clubs and League 1 and League 2 clubs will receive 4.5% and 3% of a third-year payment, respectively.30
These new measures appear to be aimed at levelling the financial playing field in the FL between those who receive big money parachute payments and those that do not (as, under the new regime, teams will receive parachute payments for a shorter period but the level of solidarity payments should go up). The new regime was also described by the FL as the “first contracted link between the broadcasting revenues of the two domestic professional leagues since the formation of the Premier League”.31 Allegedly, the PL has in the past threatened to stop making payments to the FL,32 therefore this new formal arrangement will give FL clubs welcome certainty that these important payments will continue.
In terms of financial regulation, both parachute payments and solidarity payments count as revenue for the purposes of compliance with the Championship’s financial regulatory regime. Therefore, the 70% increase in revenue from new PL broadcasting deal will have a welcome trickle-down effect on compliance by all Championship clubs with this regime.33
This new broadcasting deal must be viewed against the backdrop of the ongoing investigation by Ofcom regarding how the PL sells it broadcasting rights. At the end of last year, Virgin Media complained to Ofcom that the current arrangement of collective selling breaches competition law by restricting the number of live broadcasts available which in turn contributes to higher prices for consumers.34 On 28 January 2015, Virgin Media made an application requesting that Ofcom issue an interim measures direction to require the PL to suspend the auction of live PL rights until Ofcom had reached the next stage of its process in March 2015. Ofcom rejected this application, and the auction took place with spectacular success. However, it is interesting to note that the PL confirmed that it would be putting in place contractual arrangements with successful purchasers (BT Sport and Sky) to address the consequences of a potential infringement decision.35 The investigation is on-going, but there is a possibility that the new deal agreed with Sky and BT Sport may need to be amended or renegotiated depending on the outcome of this Ofcom investigation.
The interest in PL football is such that the PL is attaining ever-increasing payments for its broadcasting (and other) rights, both domestically and abroad. Many football fans are calling for clubs to use this cash to make the game more affordable and accessible, primarily by reducing ticket prices; whether this happens, remains to be seen.
However, it is clear from the current financial regulations operated by the PL that it is looking both to limit the ability of clubs to simply channel broadcasting revenues into players’ pockets, whilst also (no doubt following lobbying from the FL) looking to ensure that broadcasting funds continue to trickle down the football pyramid.
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- Tags: Broadcasting | Championship | England | Financial Fair Play | Football | France | OFCOM | Premier League | Spain | The FA | The Football League | UEFA | UEFA Club Licensing and Financial Fair Play Regulations
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Managing Associate, Northridge
Paul is a Managing Associate at Northridge. He specialises in commercial and regulatory advice to clients in the sports and media sectors. Paul’s experience includes acting for athletes, brands and rights holders on sponsorship, licensing and merchandising programmes. He also regularly advises on governance issues and financial regulation in the sport and on player contracts, football transfers and image rights structures.
Ben is a commercial litigator, with a particular focus on the sports sector. He works closely with sports governing bodies, teams, broadcasters and other commercial parties in relation to High Court litigation, arbitral proceedings (including before the Court of Arbitration for Sport), disciplinary cases (including before FIFA bodies) and regulatory matters.