Will the new £5.1bn Premier League TV rights deal in football trickle-down to consumers in the form of lower ticket prices? What is the best pricing compromise between a club and its fans?
Sirhan Dharamsi (1405834), Siddharth Pothula (1546390)
Abstract
There have been numerous debates surrounding ticket prices since the announcement of the unprecedented £5.1bn TV rights deal last year. This report analyses the reasons behind football clubs setting certain prices on their tickets, discussing how they could help bring football back to the working-class with affordable prices to little detriment in revenue. Aided by diagrams, the report first considers the theory behind prices; including the price elasticity of demand, impact of foreign fans, objectives of the club and the power of the consumer. It then goes on to discuss a few policies in order to find the best pricing compromise, with the conclusion debating which policy would work best, along with its ease of implementation.
Literature review
The book ‘Football Economics and Policy’ by Stefan Szymanski provided various pieces of econometric data to support some very detailed analysis into all aspects of football and economics. Chapters 1 and 5 in particular link well with this report, but the TV rights figures are now outdated as the book was published in 2010.
If you would like to read further into the history and links behind attendance to games and TV broadcasts, as well as the data which illustrates the trade-off between performance and profits, I urge you to read this book. Having looked over Szymanski’s studies, we felt we should follow on with a report that analyses how the new TV rights deal will affect ticket prices and the measures that could be taken to find a happy medium between a club and its fans.
Introduction
Football in the UK has traditionally been the bastion of working-class culture. Over the last 20 years however, we have seen these fans being slowly priced out of football with the cost of games increasing year-on-year, the average price of a Premier League game currently standing at £41.28 [1]. With the new £5.1bn TV deal set to take effect in August 2016 through to May 2019, will we see clubs subsidising their fans in the form of lower ticket prices to bring it back to its roots, or have we seen the last of football as a working-class sport? This report will look into whether the money that clubs earn from the TV deal will trickle-down and recommend a compromise that will benefit both a club and its fans.
DETERMINANTS OF TICKET PRICES
We begin this report with a finding that is somewhat surprising – ticket prices outstripping the cost of living [2]. The study whose results were published in the latter half of 2014 when the TV deal was at £3.018bn [3], which at the time was the record deal and a marked increase from the £1.773bn preceding it, shows us that it had no positive effect for fans even with the extra injection of cash. With the additional revenue, it begs the question why clubs are inflating their prices when they could be subsidising tickets and building up a better rapport with fans.
PRICE ELASTICITY OF DEMAND
Ticket price increases can be partly explained by the concept of price elasticity of demand (PED). Tickets can be considered relatively price inelastic, in that price changes will have a less than responsive effect on quantity demanded. In context, a small change in price will not cause many fans to give up going to games, nor will it cause them to start supporting another club; so the lack of substitutes and the emotional attachment a fan has with their club causes the demand curve to slope steeply.
As can be seen in Fig. 1, the area under the curve (i.e. the revenue) increases as price increases, so it makes sense that if a club wants to increase their matchday revenue, they raise prices rather than lower them. An increase in price from P1 to P2 also causes a loss in consumer surplus between P1ABP2, with the new surplus being the shaded blue region. This means there is a smaller margin between the amount a fan is willing to pay for their ticket and what they actually pay.
PREMIER LEAGUE GLOBALISATION
Foreign Premier League fans who travel to Britain for football are worth £684m to the economy [4]. In 2014, a report by VisitBritain revealed that football tourism brought 800,000 international visitors, a 15% rise on figures found in the 2010 study. While the increase in visitors has served to bolster the tourism industry, it has been somewhat detrimental to local football fans. The high demand for tickets from foreign supporters has allowed football clubs to be able to maintain and increase ticket prices which has outpriced many local fans from the game.
Nevertheless, due to the monopoly power of football clubs, all supporters have an inelastic PED for tickets. The demand from international supporters is likely to be shifted further to the right than that of the British due to population – there are far more fans abroad which means there exist more who can afford to pay the higher prices.
As shown in Fig. 2, clubs lowering their prices to PL would benefit locals as it would be within much more of their budgets – but there is no reason why the club would feel the need to do this, as they can continue to sell tickets at price PF and still be able to fill capacity. As a result, foreign demand allows football clubs to keep high ticket prices.
OBJECTIVES OF THE CLUB
The manager of Arsenal FC, Arsène Wenger when queried about the implications of the TV deal said, “What will happen is the prices of the players will go up and you will need this supplement of money coming in to buy new players.” [5] This quote could lead us to assume clubs may choose not to use the extra income to lower the price of tickets, but rather for other objectives they may want to achieve.
This leads us onto the economic aims of a club. Fig. 2 illustrates the opportunity cost between profit and the percentage of games won. For clubs with many shareholders, ignoring those who bought into the club as fans; the aim is to maximise return off their investment, so they have no qualms about results – hence the perfectly horizontal indifference curve. It’s assumed that clubs run in this way would opt to raise dividends with the extra income and so they would aim to maximise consumer surplus.
In the case of a majority shareholder or owner, depending on whether they care for the welfare of the club’s fans, the increased revenue may lead to forgoing maximal profit to chase trophies (utility) – this would be the point (W1, P1). This is based on an assumption where the more money spent on players to bolster a club’s squad depth, the more competitive they are and the more games they will win. This can be evidenced by Manchester City, who won the league title in 2013/14 only to record a £22.9m loss; then came second the following season recording a £19.6m profit [6].
Maximising utility may not be solely dependent on trophies, for instance the owner may want the home crowd generating a boisterous atmosphere every game, which also has an inverse relationship with the cost of tickets. This is due to higher priced tickets pushing out the ‘true’ supporters with their seats being taken up by neutrals. In essence, it would depend on the nature of the owner to be able to derive conclusions on whether they would be willing to use the increased revenue to support fans.
CONSUMER BARGAINING POWER
So far, it’s been made to look as though the fans are helpless to changes regarding ticket prices, but they do in fact have some bargaining power. Recently, Liverpool fans staged a mass walkout in the 77th minute of a match in protest against a section of tickets rising from £59 to £77, following a £120m renovation of the new Main Stand from 2016/2017 [7]. This prompted a response from club owner, John W. Henry who reverted to the original price for the following season.
Thus, even with the monopoly power football clubs have, there is a point where an increase in prices could cause more damage to the reputation of the club, than a potential gain in revenue. With the TV deal and the result that ensued from this protest, we may see more of this in the near future causing clubs to find other ways of increasing revenue and possibly putting a downward pressure on the price of tickets. A report by Deloitte backs this up, who expect ‘the revenue a club generates from matchday to fall in significance even further than its current record low’ of
19% [8].
TICKET PRICE POLICIES
Now we move on to looking at different ways in which football clubs can help fans, and to determine which policy would be the best compromise.
PRICE CAP REGULATION
The Premier League could cap ticket prices which could reduce them below the market equilibrium value. If the price was left to the market, the equilibrium would be at a point where only the wealthy could afford to attend games.
As can be seen in Fig. 4, a reduction in price to PMAX would be beneficial for a wider range of fans, especially with those on lower income, but the disadvantage is that the market wouldn’t clear: there would be a shortage of tickets meaning some fans would not be able to attend games. The club would also lose out on revenue generated between P1 and PMAX.
With the £5.1bn deal coming into effect next season, one can argue that this would outstrip the revenue lost from a price cap: although some more so than others, depending on how far the cap falls from the club’s current matchday prices.
AGENT TAXATION
Agents earned a grand total of £129.9m from contract renewals and transfer fees for the players they represent moving to and between clubs in the Premier League [11]. Presuming agents retained a 10% commission for any agreement between player and club, the league could levy the same percentage for each deal.
The £13m saved could be distributed equally amongst clubs, with an added on condition that they use it to subsidise the price of tickets, rather than add it on to wages of players or their transfer budget. This would mean clubs could subsidise each home game by roughly £684,211, which, when divided by stadium capacity (take Arsenal as an example [12]), would be approximately £11.32 less per seat. This figure could easily be the difference between a fan affording the game and being priced out.
PRICE DISCRIMINATION
Football clubs could implement a policy of third-degree price discrimination. This could be achieved by raising the price of the most expensive tickets by a similar amount to that of lowering their cheapest. It makes sense that a seat with a better view of the game will have a lower elasticity than that of a seat with a poorer or obscured view, but a lower income fan would happily take up the cheaper seats given how they were priced out for so long.
A few clubs can demonstrate this policy today. Arsenal’s highest priced home ticket stands at £97 and their lowest at £27. On the other hand, Chelsea have prices which range from £52 to £87 [1]. The range of pricing that Chelsea have adopted leaves them with little room to manoeuvre their ticket prices across the stadium and only serves to cut out lower income supporters completely.
In essence, this policy is designed to increase a club’s overall range of ticket prices with potentially no detriment to revenue. This is based on the assumption that fans who pay for higher-priced tickets would still be able to afford, for example, a £10 increase in prices, whereas a £10 decrease in prices for cheaper tickets would cause demand for them to increase manifold – as many fans who were priced out could suddenly find prices to be more affordable.
CURRENT POLICIES
In March 2016, the Premier League announced a £30 cap on away ticket prices from 2016/17 until 2019/20, causing a great reduction to the cost of travelling supporters [13]. This was met with strong approval from the Football Supporters’ Federation (FSF), who have been campaigning for a £20 price cap on away tickets since January 2013 [14].
West Ham United are the first club to declare that they will be reducing ticket prices following the announcement of the TV rights deal. Co-owner David Sullivan stated, “It will cost us about £5m,” in regards to their new pricing strategy [15]. He went on to say this loss “won't make the difference between buying Cristiano Ronaldo and not buying him” and “set against other revenues, ticket income is not as important as it once was.” Deloitte’s figures back this up, with revenue gained from tickets as a proportion of total revenue falling from 33% to 19% over the last 10 years [8].
Consequently, with the substantial increase in revenue that each club will receive from the TV rights deal, many fans believe they have the capability and social responsibility to charge prices that are affordable to a wider range of supporters.
Conclusion
To summarise, we discussed three different policies: price cap regulation, agent taxation and price discrimination. We want to conclude with which one of these would be the best middle ground for clubs and consumers.
Indeed, the Premier League has introduced a form of price cap regulation already with the £30 cap on away ticket prices. This has gone down well with fans, with some clubs even subsidising these prices further [13]. It’s possible for the Premier League to introduce an overall price cap, but with some clubs still reliant on matchday revenue, this may not be considered a fair compromise.
Agent taxation could also work, as it would have little to no detriment on revenue for clubs. However, we presumed all commission is uniform when this is generally not the case, so it could very well be hard to find a best fit percentage that is fair on all agents; causing it to be hard to implement.
Price discrimination may be the best compromise, as clubs would be able to achieve the same amount of revenue yet also make prices more affordable for a wider selection of fans. The implementation would not be difficult either, it could be discussed at board meetings and be introduced as early as the following season.
With matchday revenues not as significant as they once were; it’s clear clubs charge higher prices not because they need to, but because they can and they want to. So, the £5.1bn deal could trickle down to fans, but this will only happen if the general club mentality on ticket prices changes.