Will the sun set? The shaky world economy has been unkind to English soccer—and it's not only the small clubs that are hurting

Soccer Digest, Oct-Nov, 2003 by Scott Plagenhoef

OVER THE PAST DECADE, MANY pundits predicted that small English clubs were in danger. In 1985, the process of gate sharing was eliminated, ending the collectivity in English soccer and giving Premiership teams a larger piece of the revenue pie. The emergence of satellite TV provided another obstacle to the loyalty of notoriously devoted English soccer fans. Does one stand around on a cold November day watching a Third Division match or stay in their cozy living room for a Premiership match? The choice seemed obvious.

In the time since, the naysayers have been proven wrong. Soccer is still a communal game in England, even though people are far more apt to move between communities than they were in past decades. The fans have remained loyal to their clubs---it's the men in the boardroom who always haven't. Today, it's not just the small clubs that hurt, however. The teams most at risk for financial ruin are those that have been recently relegated from the Premiership. Even one current Premiership team, Leicester City, was recently in administration--one of more than 20 clubs to opt for that route since 1992.

Administration is a legal procedure that allows a business in financial trouble to keep operating without being forced to sell assets to pay debts. A club's creditors prefer a period of administration to liquidation because it allows more of an opportunity for them to recover all of their money.

Under this agreement, an administrator runs the club, aiming to pay as much money as possible to its debtors without having to close the business altogether. When a club is in administration, the supporters are frequently removed from all decision making, and the team has no legal responsibility to announce their financial plight. Going into administration does not, however, eliminate the possibility that a club will eventually have to be liquidated.

In recent years, the number of clubs that have opted to go into administration has increased exponentially. The problem increased to the point that clubs that enter administration risk the possibility of losing points or being expelled from the Football League altogether. According to one government proposal, the penalty for going into administration would range from points being deducted to relegation, punishments which would go into effect at the start of the 2004-05 season.

Around Europe, other similar rules have been enacted. In Italy, Fiorentina was famously tossed out of the Italian league after authorities were not convinced that the team had enough money to finish the 2002-03 season. The German government needed to assist many teams after the collapse of the Kirch media company, which owned the nation's television rights. Dutch clubs are forced to apply for an annual license which is granted only if it appears they have the fiscal solvency to complete an entire season.

In England, there are only 20 clubs that get to divide the spoils of Premiership television rights each year, so although First Division soccer is the second most-attended sporting league in England--ahead of top-flight rugby and cricket--its clubs don't have any financial guarantees. The ones that are relegated from the Premiership and can't earn a quick return are particularly at risk. These teams, used to receiving a large income boost from the Premiership television contract, can't always adjust to the loss of that income, especially because they're still bound to pay heavy salaries to under-contract stars. This year, two longtime Premiership teams that became relegation victims, Sunderland and West Ham, were forced to unload a large portion of their wage bill just to keep from being overwhelmed by mounting debt. Other recent Premiership relegation victims such as Wimbledon, Ipswich Town, Coventry City, Derby County, Watford, Sheffield Wednesday, Barnsley, and Nottingham Forest are among the teams in danger.

Clubs relegated from the Premiership receive a "parachute" payment of 6m [pounds sterling] for two years. "I don't want this to sound like sour grapes but I'll take action to tackle the huge monetary gap between the Premiership and the First Division, which is still increasing," says Ipswich Town chairman and former chairman of the Football League David Sheepshanks. "The parachute system has become hopelessly inadequate in the new marketplace."

With debts of about 10m [pounds sterling], the relatively frugal Ipswich was damaged by the collapse of the Nationwide League's television contract with ITV Digital, a 315-million [pounds sterling] deal signed in June 2000. When ITV Digital collapsed in April 2002, lots of clubs that depended on the money earned from what they thought were guaranteed TV rights payments seemed at risk, as well. Up to 30 of the 72 Nationwide teams were considered candidates for bankruptcy.

Because of the ITV collapse, clubs lost more than 178m [pounds sterling], with First Division clubs forgoing 3m [pounds sterling] each, and Second Division and Third Division clubs 600,000 [pounds sterling] and 400,000 [pounds sterling] respectively. The league eventually inked a 95m [pounds sterling] deal with Sky to broadcast select games, but that TV income is about one-third less than the original deal. Now each First Division club is getting around 90,000 [pounds sterling] a year. Second Division teams get around 45,000 [pounds sterling] a year, Third Division clubs, a measly 35,000 [pounds sterling] a year. (By comparison, each Premiership team earned at least 17m [pounds sterling] from TV royalties in 2002-03.)