Cracking the Code: How Manchester City F.C. managed to break into the Premier League Elite

Chapter 5: Entry barriers

Parachute packages

The Premier League has established a unique parachute package model for Premier League-teams that are relegated to the Championship.

After relegation the clubs receive a percentage of the Premier League broadcasting rights which drops progressively over a three-year period, starting with 55% in the first year, 45% in year two and, 20% in the third year.

The parachute package model has received criticism (Deloitte, 2020:24) because of the advantage this gives relegated Premier League-clubs when aiming for promotion back to Premier League.

A team like West Bromwich Albion was relegated from Premier League in 2017/18, received GBP 42m (62% of total revenues) from parachute money in 2018/19 before gaining promotion back to Premier League the following season.

Barriers to enter the oligopoly

Brand attractiveness of the top-6 clubs in Premier League make it easier for them to recruit talented players as they can offer better chances to win trophies. The best players are drawn towards the top-6 and smaller clubs often they end up cashing in on their most valuable assets before their contracts expires. This continuous recruitment of talent act as a barrier since the lower placed clubs are not able to sustain the sunk cost represented by increased player wages.

Symansky & Kuypers (1999) showed a correlation between the clubs winning the Premier League and the clubs with the highest salaries. Thus, clubs with the largest revenue streams will more likely win the trophies than those who have minor budgets.

Qualifying for Champions League by placing amongst the top 4 over a long period becomes important, since it propels the income of the club to the next level. As shown in figure 6 the top 6 clubs in Premier League have a big advantage when it comes to revenue and being able to sustain the increasing salaries.

Financial Fair Play as a barrier

UEFA financial fair play (FFP) is a set of rules which aim to prevent clubs to spiral into investing so much into players and salaries that they are not able to cover their expenses in the long run.

The flip side of FFP is that it can act as a barrier against minor clubs trying to attract investors injecting capital into a club over a period with the aim to increase the value of the brand by expanding the clubs market share, at the expense of the other top clubs. This of course is not something these top clubs want.

Figure 7: Collusion effect of FFP

The biggest clubs have the biggest turnover and can spend more than smaller clubs under FFP. The strong limitations generate a natural collusion effect that favours the oligopoly as it enables the riches clubs to put a higher price on their product as demonstrated in figure 7.

Smaller clubs are restricted to the competitive market of Q1,C1, while the bigger clubs can claim C2 for their product and reach supernormal profits (boxed area).

Manchester City FFP Competition investigations

Manchester City’s rise to fame has not gone unnoticed by their rivals, and Manchester City have received their share of bad press along the way. Most of the focus has been on the huge cost of building a winning team, especially for a newcomer that aims to break into the oligopoly, but has also been subject to voices of concern about the ethical side of the way the investments into the club had been tweaked to satisfy the FFP regulations.

As a result, Manchester City was investigated by UEFA and fined for breeches to the FFO both in 2016 and 2020. The last verdict also included a 2-year ban from participating in Champions League, which Manchester City challenged and won in the independent Court for Arbitrary Sport (CAS).

As Manchester City and UEFA were battling in court over the alleged breaches, 9 Premier League-clubs found it timely to write to UEFA and demand that the 2-year ban should be upheld until the case was determined (Cormack, 2020). A clear attempt to use FFP as a barrier against Manchester City.