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Sport and free market rules: should Pandora's box have stayed closed?

View profile for Stephen Hornsby
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This article was first published in Lawyer Issue in July 2015,

In 1984, one of the very first complaints was made to a competition authority about the organisation of a sporting event. Its novelty caused some stirrings of interest in the EU Commission competition department. Swift action was required as it related to ticketing arrangements; after some deliberation no action was taken at all.

The head of the department took this decision at a time when other departments of the Commission were engaged in slow moving negotiations with UEFA over the “3 plus 2” restriction on player movement. This restriction was to remain in force for over 10 years despite manifestly breaking EU law until Bosman blew it away. The time was clearly not ripe for fresh interventions in the area. But more than that, the decision was taken on the basis that it was not a good idea to open Pandora’s box for fear of all sorts of unpleasantness being revealed which could not be resolved to everyone’s satisfaction.

Since that time, competition and other regulators and courts in Europe have been unable to duck a number of issues applying free market rules to a variety of sporting markets. As we shall see, the outcome of some of the major interventions tends to provide some support (albeit sentimental) for the initial “hands off” approach.

Nothing comes close to the ECJ’s Bosman judgment for its impact on sport. The consequence of the judgment – basically the mushrooming of player wages and the free movement of players to earn those wages – is very far reaching indeed in Europe’s biggest sport. For example, Ajax are unlikely to ever win a European cup as the best players leave Holland to work abroad in major leagues where greater populations generates more commercial revenues that find their way through to the players. At a national level, the likes of Blackburn Rovers are unlikely to ever win the Premiership again since players gravitate to the richest clubs.

In the price war for talent between clubs that Bosman helped unleash, there were a number of casualties .In response so called Financial Fair Play rules were introduced a few years ago which included a limited ‘break even’ rule. At the time, this initiative was rather foolishly applauded by the EU Commission for Competition. Abolition of these rules or substantial watering down of them) is a distinct possibility now they have been referred to the European Court of Justice (though UEFA has appealed). However, Bosman’s impact was not really lessened by Financial Fair Play but was simply harnessed for the benefit of established clubs by restricting challenger clubs ability to speculate to accumulate.

Is this process of applying free market rules started by Bosman a good result for sport? At one level much depends on who you support. But wider than the question of which club that might be, any sort of answer depends on whether evenly balanced and evenly spread competitions are considered desirable. In US sport, which has developed a special legal regime, balance is perceived as good – hence the draft and other equalising measures. In Europe however there is no such consensus. Uneven competitions seem very popular in England and Spain and elsewhere too; indeed such competitions have garnered increased commercial returns.

If the players are getting more of what they are really worth because of their freedom to follow the money (and because there is more competition in the broadcasting market) maybe the undermining of sport’s self-regulation that Bosman brought about has been beneficial. If this is so, it is fortunate: the chances of revenue sharing ever happening between clubs (which was mooted in the Bosman case as a less restrictive way of achieving competitive balance between clubs than restrictions on player movement), are remote in the extreme.

Consideration of Bosman’s impact reveals that defining what is good for sport is very difficult. One of the difficulties in analysing a regulatory outcome in sport is that the industry has many real (and imagined) consumers. Whereas in other industries such as energy or transport, the identity of the consumer is clear, in sport there are a variety of consumer interests. For example, final consumers may wish to watch sport on TV in a manner that is free at the point of delivery. The difficulty with that preference is that it not only means less revenue for the producers (the sport) but also that it freezes out commercial TV operators who are other potential consumers.

Some sort of compromise in this case has been attempted between producers and consumers by “listing” rules which restricts market forces; but the list of protected events has shut out commercial TV operators who have allied with the sports themselves to narrow the list of protected events. Listing regulations cannot be judged as a success; they leave everyone dissatisfied but a free market solution would also be unpopular.

Unfortunately, some of the interventions involving sport treat sport as a means to achieve other policy goals. Sport here is a pawn in a bigger regulatory game. Throughout Europe over the last decade, legal interventions – mostly but not entirely – under the competition rules, have been designed to share out prime sporting content as prime “content is king” (i.e, determine technological success). As a result of regulators’ attachment to this shibboleth, whilst collective selling has been permitted (because it supports solidarity between weak and strong clubs), resulting TV agreements have been limited in both time and scope.

The imposition of separate rights packages has been controversial. After a few market failures in the UK (e.g. Setanta) this attempt to promote competition in TV markets by dividing content into packages has smoothed the entry of the former telecoms monopoly (British Telecom) into the sports rights broadcasting market.

This has been beneficial for some (e.g. English rugby clubs whose former broadcast partner was really more interested in international matches) but the outcome for some consumers will be that they will have to purchase new subscriptions. In future, all consumers will be faced with increase in prices. Sport has become part of competition regulators’ determination to make it a key ingredient in new head to head competition between “quad play” offerers (that is companies who offer telecoms, television, mobile and broadband). Whether this works long term or not in the media markets, the intervention will leave many consumers of sports unhappy here and now as their interests take second place.

Difficulties in keeping all those who are interested happy is brought into very sharp focus by the EC Commission’s major case on the internal organisation of the sport (FIA). The FIA case essentially rose because in order to maintain Formula 1’s pre-eminent position, Ecclestone tied up all the racing circuits where race meetings could take place that might be competitive to Formula 1. His effective control of the regulatory body which fixed the racing calendar then meant that he became the gateway to the sport. As a result, he could control the sometimes very powerful teams and this assisted his ability to divide and rule. This probably had the beneficial outcome of increasing his ability to prevent a financial arms race which would have sent the weakest to the wall.

What eventually happened after the Commission cancelled the contracts of the circuits and separated the commercial and regulatory functions on legally orthodox lines? The speed with which the weakest went to wall simply increased. The strongest teams were able to resist cost control measures that helped the smaller teams by threatening a ‘breakaway’ credibly (having failed to threaten it credibly for many years as a result of Ecclestone’s control). It is well arguable that as a result of this intervention the “sport” is under threat as interest is declining.

Sports can certainly damage themselves and others by clearly anti-competitive rules but regulators and courts need to consider whether their intervention actually might make matters worse in some cases. A good starting point would be recognising the limitations of remedies. The basic problem here is that regulators cannot force unwilling partners to do business with each other. This stems from sports origins in voluntary associations which are inherently unstable. If you can join, you can also leave if you give notice and pay your dues.

A few years ago, at about the same time as the governing bodies’ self-serving attempt to lobby for a sporting exception for their benefit ran into the sand, a serious attempt was made by the French government to make sport fully regulated at EU level on a top down basis under public law with clubs subject to licensing controls, etc, etc. This initiative would have brought about a fundamental change by preventing ‘breakaway’ and would have eradicated sports’ voluntary association roots. The initiative was scotched by the UK, amongst other member states, on the grounds that sport should be left to them.

Governing bodies’ response once the ‘sporting exception’ failed was to hope that binding arbitration behind closed doors would keep legal challenges safely bottled up in Switzerland. It is unlikely that this will work as the German courts want all parties to be able to choose the arbitrators which lessens the attractions for the governing bodies.

So Pandora’s box will stay open in Europe and transparency is set to increase. To suggest it should have stayed closed, ignores the inevitability of legal intrusions where money is increasingly involved and conflicting interests are at stake.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 020 7404 0606 and ask for your usual Goodman Derrick contact.