The Economics of Relegation

With one month of the English Premier League left, the championship race seems to be all but over. With only six games remaining, Manchester United look set to claim their 20^th Premiership title and 5^th in the last 6 years as they have opened up an eight point gap over self-destructing second place Manchester City, despite City having a five point lead no more than a month ago. Regardless, soccer fans should not fear, as plenty of drama will be unraveled as the battle to avoid relegation heats up.
“Whoa what? Relegation? What the hell is relegation?”
A concept practically unknown in the United States, relegation allows for teams to be transferred between two divisions based on their performance that season. The highest-ranked teams in the lower division are promoted to the division above, and at the same time, the lowest finishers in the higher division are relegated to the division below.
More specifically, in the Premier League, teams are relegated from the top flight if they finish in the bottom three of the league at the end of the season. They get sent down to the Football League Championship, or the second flight, and must compete there until they win promotion again.¹ The leagues get lower and lower, so there is the possibility of getting relegated to League 1 (third flight), League 2 (fourth flight), etc. in the following years. On the other hand, there will be three teams promoted from the Championship that earn the right to participate in the Premiership for the following season – but they can still be relegated the following season, of course.
Teams are desperate to avoid relegation for financial reasons. Relegation will devastate a team’s finances in the following year. It has been calculated that teams that are relegated are due to lose about £25 million the next season. This massive shortfall is mostly due to lost television revenue. The bottom team in the Premiership earns around £40 million in United Kingdom and overseas broadcast income, compared to £3 million in the Championship. The Premier League does attempt to provide some sort of safety net in the form of “parachute” payments from the league to relegated teams for the first four seasons following their relegation. The first two years come with £16 million, the following two – half of that.
But that’s not all the suffering teams will have to endure if they are relegated. Teams also generally will lose their best players. They either must be sold to other teams in an attempt to lower the team’s salary paid to players and close the revenue gap, or the player simply refuses to play for the team with the rationale that he wants to compete for a team that plays at a higher level. Last season, West Ham United were relegated and forced to sell Scott Parker, one of the best midfielders in England, to Tottenham Hotspur (a Premiership club) due to Parker’s request to play in the Premier League and because West Ham needed the money.²
The system creates incentives that place a significant value on every single match. Teams need to earn enough points over the course of the season to avoid relegation. In soccer, where a win earns the team three points, a draw earns one and a loss no points at all, every point the team can get will be essential to remaining in the Premiership. Every point can be crucial heading down the stretch – in recent years the difference between 17^th (safety) and 18^th (relegation) has literally come down to nothing – one point or no points at all.³ And remember, this difference can save or lose the club £25 million.
Relegation’s emphasis on each match also can draw more fans to the league at the end of the season. It is true that a game has to have some importance to draw fans, but that importance need not have anything to do with winning the league title. The annual English relegation battle often generates more revenue for the teams at the bottom than the ones at the top as the season concludes.
The lesson here is that the incentive system produced by relegation can have positive effects for a league as a whole. Imagine how much more competitive the NFL would be if they instituted this system? Instead of Colts fans begging for their team to tank and chanting “Suck for Luck!” they might actually be cheering for their team to win. Imagine that.
Better yet, applying a relegation system to college football would take the drama of teams jumping from league to league, and move it out of stuffy athletic directors’ offices and onto the playing field. Combined with a championship playoff, relegation could rejuvenate the BCS.
Americans may never truly understand soccer. But by understanding the economics of the soccer industry abroad, we can gain valuable insight into how the sports industry in America can be improved. Relegating teams to the trash heap for the last month of a season doesn’t help anyone. Relegating them to a lower division can improve the quality of play, the meaningfulness of the games, and the league’s bottom line.