The Pros and Cons of Ups and Downs

There are lots of differences between American and European sports, but I have come to the conclusion that the biggest and most profound is the lack of promotion and relegation between leagues in American sports. Not only is it the biggest, but it is, I think, the root of many other differences that are not obviously connected. This is too big a subject to cover in one blog, so I'm going to discuss it over the few remaining days before the new season kicks off on 8 August.

Imagine a league that had the same teams in it every year. No team would be removed from the league no matter how badly it performed. New teams would be added only by expansion, and these new teams would be created from scratch - ignoring the performances of the top teams in lower leagues. If you are American this sounds normal. It may not have occurred to you that it could be different. If you are European, you may not have realised that such a set up was possible. This is the fault line that runs through professional sports around the world.

You might think I am exaggerating, but you would be wrong. Let's examine the way the owner of a club in Major League Baseball faces the upcoming season. First of all, no matter how badly the play on the field goes, the club will still be in Major League Baseball next season. This means you can take chances. Hire that unproven manager that you have a hunch about. What's the worst that can happen? Attendances suffer when teams lose, but they do not disappear completely. There is still television revenue, merchandise sales, corporate entertainment, etc. Most importantly, the value of a MLB club does not go down significantly if a club comes in last. The value of a club is determined by the size of the market the team plays in, the stadium (or the stadium deal it has with the municipal government) and the television and radio packages. The New York Yankees are the most valuable club in the major leagues because they are in the largest television market.

The freedom club owners posses is not just to experiment. Losing is not just less risky, it can be downright profitable. Star players are expensive, and there is decent revenue to be had no matter how poorly the team plays. Why not cut costs dramatically and field a sub-standard team? It has happened. In 1914 the Philadelphia Athletics won the American league pennant (the title) with a record of 99 wins and 53 losses. At the end of the season the manager/owner, Connie Mack, ran short of money. He released his best players and signed new, cheaper ones. The result? The next year the Athletics came in last with a record of 43 wins and 109 losses. The good news for the Athletics' coffers is that after winning the title the year before, people still came through the turnstiles. Mack took this drastic action out of financial necessity, not profiteering, but as an owner he was safe doing this. His primary investment, an American League baseball club, was safe. If he had faced being relegated into the minor leagues after a last place showing he would have ended the season with an even bigger financial problem than he started with. He would have had to invest enough money in the club to at least ensure a mid-table finish and might have had to go into debt to make it happen.

Now consider Newcastle United, until recently of the Premier League. In the last twelve months Newcastle has cast itself as a case study for value destruction. After making a string of decisions that infuriated Newcastle's loyal fan base, owner Mike Ashley decided to put the club up for sale for a cool £450 million. Unfortunately, while he was trying to arrange a sale, the expensive players Mr Ashley had hired failed to do their job on the pitch . As the season progressed, the once unthinkable idea that Newcastle might get relegated started to seem realistic. The price of the club dropped to £300 million. After the fifth manager within a year failed to work any miracles the season ended with the club in the drop zone. Newcastle United can now be purchased for a mere £100 million.

This is the nightmare for all investors in football clubs. Your investment is not going to grow or shrink because you look after your customers (the fans) or because you balance your expenses in line with your revenue. Your investment is held hostage to the events on the pitch. If the team does well you can sell your stake for a profit. If they don't you can get wiped out. Owners are incentivized to do whatever it takes to field the strongest squad possible. This leads to fierce competition, fulfilled or crushed dreams, and mountains of debt.