The Economics of Promotion and Relegation
The worst team in a league should not be rewarded for poor performance. Yet in the National Basketball Association’s annual draft, the lower a team placed in the season, the higher their probability of having the first pick in the draft (Buckley 2017). Why should the worst team have the best chance of getting the highest-rated NBA prospect and all of the media coverage that comes with it? Sport is competitive by nature. Maybe giving a losing team this compensation can be seen as fair – but what does that do to an organization’s competitiveness? Players and team board members lose the will to do well because it may be more strategic to finish last than a few places above last. Fans support this behavior because they are already thinking of the following season. This mentality is one of comfort. Teams will stay in the NBA, and they’ll have the bookie’s rookie-of-the-year favorite on the court helping them do better than last season. If ONLY the worst teams in the league were punished, then the league would stay competitive for the duration of a season. In contrast to the NBA, the English football pyramid follows a model of promotion and relegation. This structure fosters a competitive culture for every team and fanbase involved, largely because of the financial implications associated with this model.
This article will focus on the uppermost tiers of the pyramid: the EFL Championship and the English Premier League. After the football season is complete, the three teams with the least amount of points in the Premier League will be relegated, or moved down, to the Championship. On the other hand, the two teams with the most points in the Championship will get promoted, or moved up, to the Premier League. Additionally, the third through sixth placed teams in the Championship will have a playoff style “tournament” for the last available spot in the Premier League for the following season. The playoff tournament sees the third placed team compete against the sixth placed team in a two-legged affair – both teams play at home for one of the games – and the team who wins on aggregate score after the two matches will then play in the playoff final at England’s iconic Wembley Stadium. This same setup occurs between the fourth and fifth placed teams (Kelly 2022). The winner of the playoff final will be promoted to the Premier League alongside the two teams who finished the Championship with the most points, thus making it so three teams enter the Premier League and three teams exit the Premier League. Why do teams care what league they participate in? This is where economics comes into play.
Aside from the pride that takes place in competing in the top flight of English football, and for some teams the historical expectations to do so, being relegated comes with extreme financial loss. Unsurprisingly, being promoted comes with major revenue gains. In 2018 when Stoke City FC and West Bromwich Albion FC were relegated to the Championship, Sky Sports cited the Deloitte Sports Business Group estimate of relegation costs as £50 million for each club in Premier League distributions alone (Smith 2018). Before the playoff final in the 2020-2021 Championship season, Brentford FC, a team who had not competed in the top flight for 73 years – but who went on to win the playoff final, was expected by USA Today to make £160 million of additional revenue if promoted and then relegated back to the Championship the following season. This figure increased to £265 million of additional revenue over five years if they survived relegation their first season in the Premier League (“Brentford to Earn $200M+ If Promoted to Premier League”). The difference in financial losses or increases for teams in the Championship and teams in the Premier League stems largely from TV money.
In broadcasting revenue, totalling domestic (UK) and international broadcast earnings in the 2020-2021 season, the Premier League had roughly £2.4 billion to distribute amongst its twenty teams1 (Premier League 2021). Meanwhile, the Championship had roughly £330 million to distribute amongst its twenty four teams (Sakr, Michel, and Doyle 2022) – making an approximately £2.07 billion difference in TV revenue between the two tiers. Each Premier League team earns an equal share of the broadcast earnings, approximately £79 million (Egerton 2022), an equal share of central commercial revenue2, merit payments based on final placing3, and additional facility fees depending on the number of times their matches are broadcasted. In the 2020-2021 season, facility fees ranged from roughly £24.4 million for champions Manchester City – who were shown live in twenty seven matches, and roughly £10.5 million for last placed Sheffield United – who were shown live in eleven matches (Premier League 2021). Calculated from the number of games shown live and the respective total facility fees earned by each of these two teams, we can see that Premier League teams earned approximately £925k in facility fees per match. In comparison, Championship teams earn between £10k and £100k every game they are broadcasted live – depending on if a team is playing at home or away (Hemmingham 2021).
Each Championship team receives an additional £4.5 million in solidarity payments from the Premier League’s TV money (Sakr, Michel, and Doyle 2022) – aside from the teams earning parachute payments. Parachute payments are a means of financially protecting recently relegated teams and providing them some stability. This comes over the course of three years with relegated clubs earning the equivalent of 55% of a remaining Premier League team’s equal share broadcast earnings the first year, 45% the second year, and 20% the third year4 (Summerfield 2022). A team receives much more from parachute payments than from solidarity payments, although in order to receive parachute payments a team must have been promoted to the Premier League in the first place. Each Championship team also receives £2.5 million from the EFL Championship’s own TV money (Sakr, Michel, and Doyle 2022).
According to Statista research, in the 2019-2020 Premier League season, the average revenue for a Premier League club who finished near the middle of the table was £141 million– with the vast majority being from broadcasting earnings. In comparison, the average revenue for a Championship club that is not a recipient of parachute payments was £20 million (Statista 2019/20). Keep in mind, this includes the Premier League’s £4.5 million solidarity payment.
Other factors aside from broadcasting revenue contribute to the financial differences between the Championship and the Premier League as well. Being a part of one of the most lucrative leagues in all of sport makes a team more appealing to sponsorship deals. Although a drop off from their annual earnings with their since-expired deal with Chevrolet5, Manchester United still make £47 million each year from their five year shirt sponsorship deal with global technology company TeamViewer (Ogden 2021). In the 2018-2019 football season, the Premier League attracted £1.6 billion in commercial sponsorships, while the Championship attracted £187.3 million (Carrera, Kendon, Sakr, and Doyle 2021). Player wages often become an issue for relegated teams as well, because the average Premier League player wage is £3 million a year while the average Championship player wage is £200k a year (Carrera, Kendon, Sakr, and Doyle 2021). As a result of the financial losses relegated teams suffer, which, aforementioned, largely stem from league differences in broadcasting money distribution and amount, newly relegated teams often have to offload players since the wages become too high of an expense considering the decreased revenue they are bringing in. In addition to relegated teams needing to get rid of high wages, quality players on relegated teams often want to transfer to a Premier League team in order to remain playing at the highest level. The combination of a high wage for a relegated player and a relegated player’s will and ability to stay in the Premier League usually results in a transfer. This was seen in the Summer transfer window following the 2021-2022 Premier League season, where Burnley FC defender James Tarkowski – who was tied for having the second highest wage bill at the club making roughly £45k per week (“Burnley Player Salaries 2021-2022 Revealed”) – transferred to Premier League club Everton, who narrowly avoided relegation and were in desperate need of defensive reinforcements. Offloading Tarkowski, rather than renewing his contract, saves Burnley nearly £2.4 million this year, while allowing Tarkowski to continue playing in the top flight of the English football pyramid.
The benefits of becoming, or remaining, a Premier League team are clear–and this is why the Championship’s playoff final match is dubbed as “the richest game in football,” as even a promoted team who manages to stay in the Premier League for just two seasons will earn at least £288 million (Scott 2018) – even more if they continue to remain a Premier League team. The pressure on teams to provide winning results week in and week out in order to prevent significant financial losses, or to obtain massive revenue gains, ensures the competitiveness of the English football pyramid for the season’s entirety – much to the pleasure of fans.
Subscripts
1 Of domestic TV earnings, 50% is shared equally amongst teams, 25% is merit money, and 25% is for facility fees. Of International TV earnings, 100% is shared equally amongst teams (Sillypen 2022).
2 Central Commercial revenue totalled roughly £118m in the 20/21 Premier League season, and each team received an equal ~ £6m share (Premier League 2021).
3 Total merit payments in the 20/21 Premier League season ranged from ~ £2.2m for last placed Sheffield United to ~ £42m for champions Manchester City–merit payments increase roughly £2m for each higher placement out of the 20 Premier League teams.
4 If a recipient of parachute payments gets promoted back to the Premier League, they stop receiving the payments. Additionally, teams only receive the third payment of 20% if they were in the Premier League for more than one season prior to being relegated (Summerfield 2022).
5 Manchester United’s expired shirt sponsorship deal with Chevrolet was for £64m each year and is the most lucrative football team shirt sponsorship of all time (Ogden 2021).
References
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“Burnley Player Salaries 2021-2022 Revealed.” WTFoot, October 28, 2021. https://www.wtfoot.com/salary-overview/burnley-player-salaries-revealed/.
Carrera, Kendon, Michel Sakr, and Connor Doyle. “Premier League VS Championship: Financial Comparison.” SQaF, November 25, 2021. https://sqaf.club/premier-league-vs-championship-money/.
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Scott, Matt. “Why the Championship Play-off Final Is the Richest Game in Soccer.” ESPN. ESPN Internet Ventures, May 29, 2018. https://www.espn.com/soccer/english-premier-league/23/blog/post/3512726/football-league-playoff-promotion-to-premier-league-richest-game-in-soccer-what-that-means.
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Summerfield, Jude. “What Are Premier League Parachute Payments?” 90min.com. 90min.com, May 3, 2022. https://www.90min.com/posts/what-are-premier-league-parachute-payments.