European sports teams are dominated time and time again in Forbes’ list of most valuable sports teams by their American counterparts despite having bigger, global audiences. ITW Core’s Devanshu Bhatt explores why their valuations diverge.
The fallout from the war in Ukraine has had an impact on sport, but none more salient than what’s unfolding in London. Roman Abrahmovic, the owner of Chelsea Football Club had to put up his prized possession for sale for an asking price of £3 billion. Less than a week after that, the UK government has sanctioned him and frozen his assets. This means the club can no longer be sold unless there is government intervention. This move will likely drive down the value of future bids.
But how much is Chelsea really worth?
If you look up the de facto standard for such valuations – the Forbes list of most valuable sports teams in the world, you’d find that Chelsea is valued at £2.4 billion. If you look further up and down that list, another interesting trend emerges. In the 2021 list, 41 of the top 50 teams were American. The other 9 teams were Football (Soccer) teams from Europe. Despite having global audiences, European teams are dominated in these rankings by American teams. This is quite counterintuitive. Surely, more fans should equal more revenue? Evidently not.
We explore why that might be the case.
The Structure: Scarcity and Guarantee
The major difference comes from how the leagues are structured. The American leagues have a closed, revenue-sharing format which means that all the teams have a large amount of guaranteed revenue and performance is a smaller portion of the bigger picture. Given enough financial resources, there is very little stopping somebody from starting a professional sports club in Europe. In the US, the number of teams is limited, making it more valuable to own one. American teams also have a salary cap, meaning that one of the major expenditures of sports teams is kept well under control. The leagues have no concept of relegation. This ensures that they will continue to compete in the same league for the foreseeable future.
By contrast, European teams’ revenue is based on performance – leading to uncertainty. And this uncertainty by itself is enough to drive down the value of any asset. For example, for a European soccer team, the difference between winning the Champions League (the premier continental competition) and not qualifying for it can be over 100 million euros. The difference isn’t as seismic for an American franchise that, say, doesn’t make it to the postseason or win a title in their league. Moreover, many clubs have sponsorship clauses that pay out more in case the club is in the Champions League. And not qualifying for subsequent seasons can hinder a team’s ability to strengthen their squads, as the better players would be keener to play for clubs that are in the competition. Teams in the competition also have more financial muscle. This becomes a vicious cycle where clubs that have been successful continue to be so.
Inequality not Quality
That cycle is a major point of concern for European soccer as a whole. The American leagues and the European competitions are both decades old but the American sports industry moved to capitalize on the commercial potential of sports much earlier. Commercially successful Super Bowl ads have been airing since the 1970s. Coca Cola, now a global presence in sports sponsorship, found commercial success in the 1980 edition and Apple’s iconic Super Bowl ad aired in 1984. By 1993, Michael Jackson was the artist at the now iconic Super Bowl halftime show. To give some context, the Premier League and the Champions League had their inaugural seasons concluding that year.
So while the American sports market was maturing, European soccer was just starting out. However, when the European Soccer market did explode, it benefited a certain section of the clubs – those that were already successful at the time. The added commercialization meant that they could spend the extra money to keep their place at the top. This extended period of success also brought in a global fanbase that could be monetized. This effectively ensured that some teams remain near the top while the others have to grind it out over the remaining commercial opportunities. To enter this select group of teams, the investment required would amount to billions of dollars as was the case with Chelsea, PSG and Manchester City.
American sports teams still have some inequality, but this is kept in control by budget and salary caps. Similar rules exist in European soccer, but they aren’t as strict. Some franchises in American sport do recruit and build better roster and brands than others but this is not exactly a structural problem. In Europe, inequitable distribution of funds harms the growth of leagues. This was a problem faced by Spain’s top division – La Liga – where clubs negotiated their own TV deals. This led to a scenario where the top clubs had far more bargaining power and earned several times more than those near the bottom – leaving them unable to compete. The league required government intervention to adopt a model that ensured more equitable distribution, but that materialized fairly recently and the damage was already done. Despite having the world’s most valued soccer clubs in Barcelona and Real Madrid, and the world’s most recognizable names in Lionel Messi and Cristiano Ronaldo for a large part of the last decade, La Liga is unable to match the English Premier League’s overall popularity. The Premier League prides itself on the fact that it is the most competitive league in the world. And while this might not necessarily be true, the league realized that this narrative matters. More competitive leagues – whether real or perceived – derive more value as they are more exciting and engaging.
Audience Matters
Despite the quantum of American sports teams, the vast size of the continent also ensures that fans are not concentrated towards some teams, creating a more equitable distribution of revenue. At the same time, American audiences as a whole follow only one league for a given sport where most teams play each over the course of a season. The central coverage, including journalistic coverage, player interviews, and commentary are all in the same language everywhere. These factors make it easier for the sports leagues to engage fans and get them invested.
European soccer on the other hand is divided amongst various leagues competing with each other, often broadcasting at the same time slot. The Premier League’s English language coverage might be a contributing factor in its global popularity. These are primary contributing factors in the kind of TV revenue these sports are able to command. The English Premier League earns $3.33 billion a year globally, compared to the $10 billion the NFL earns just in the US.
Monetize This!
American leagues have learnt to optimize and monetize every aspect of the sports infrastructure. Merchandising is easier within the boundaries of the same country where the distribution network is more efficient as franchises don’t have to deal with different currencies and import-export related costs. American stadiums have the capability to host events like concerts that bring in extra revenue. Most stadiums have long term corporate sponsors. The Super Bowl ticket prices start from $5000-$6000 as compared to the Champions League final that range from $200-$750. While these are the result of better planning and long term growth, these may have a lot to do with fundamental cultural differences between the two markets in terms of monetizing sports.
Facets of Assets
Finally, assets are typically monetized to generate revenue for the club. However, assets also require upkeep and that adds to the cost. An example of such an asset is a stadium. Most teams in Europe own their stadium, a depreciating asset requiring repairs, maintenance and renovations to continue generating or even increasing revenue. In addition to having multiple uses, American stadiums are funded by the taxpayers, while the franchises keep the revenue they generate. Thus, owning a stadium might not necessarily be the advantage it appears on paper.
The other major asset for a team are its players. At least in Europe. Within American sports, players are contracted to the league(s) centrally, likening them to employees, rather than assets that can be bought or sold. Liquidity issues aside, players are still an asset for European teams and should be considered as such. Clubs often nurture players who they then trade in the transfer market, generating windfall revenues for themselves. Smaller European clubs sometimes treat this as a de facto business model.
Valuation (Finally!)
So, do all these differences explain why European sports franchise valuation diverges from their American counterparts, even when adjusted for the differences in sports? Kind of.
Valuation comes down to a few core principles – assets, revenue, cost and variance. Just like any investment, if the returns provided by teams fluctuate, they are less valuable. Since cost is generally in the hands of the team, it can be kept under control. While these revenues don’t take into account the value of assets directly, the revenue must account for the value generated by them. Assets in a better condition would also generate more revenue.
Therefore, American valuation models like that of Forbes usually use a revenue multiple model – where the revenue is multiplied by a fixed number. Since the revenue of American teams is fairly consistent, this revenue multiple model proffers a sensible value. Such a method can also be used for the bigger European teams because most of them are guaranteed a certain level of revenue, regardless of performance. For others however, these revenues fluctuate from season to season based on performance, producing values that will swing wildly. A solution to this would be taking a smaller revenue multiple – even with the variation, the valuation would be suitably understated.
Brothers in Arms
In less than 3 weeks, we will all tune in to watch a league that has an uncanny resemblance to American sports – the Indian Premier League. Salaries are capped, performance based revenue difference is minimal, stadiums are owned and managed by the state cricket associations. Mirroring the American structure has facilitated the IPL’s immense growth, producing a unicorn team in less than 15 years, an achievement nothing short of being remarkable. The next step the IPL can unlock is to mirror the global impact of European football. Why not have the best of both worlds?