The Real Madrid Way. Steven G. Mandis

Differences between MLB, NBA, and European Professional Soccer

      With Moneyball being such an imposing force on how we think about sports, it is important to remember that Moneyball is about an MLB team. There are several differences between the MLB, NBA, and European soccer leagues that are worth highlighting because they can have a meaningful impact on strategic decisions both on the field and off the field. The differences will highlight that Real Madrid needs to have a strategy in place regarding teamwork because of the interdependence of the sport (see “Interdependence” sidebar on page 39).

       Drafts, Taxes, and Revenue Sharing

      In European professional soccer, there are no drafts and no salary caps or luxury taxes. It is an open market. European professional soccer teams can either develop players through their own youth academies or buy the rights to players in the transfer market and pay them whatever they want. In 2011, UEFA enacted financial fair-play rules. Since then, teams that qualify for UEFA competitions essentially have to prove throughout the season that they have paid their bills. Since 2013, teams have also been assessed against break-even financial requirements, meaning that they have to balance their spending with their revenues, which restricts teams from accumulating too much debt. Without a salary cap or luxury tax on players’ salaries, only a limit based on breaking even, teams are economically incentivized to expand their fan bases, cultivate sponsorships, and find other ways to increase revenues to afford better players.

      The NBA and MLB, in contrast, have organized annual drafts to select players. Typically, the teams that finished with the worst record the previous season get to select first. This is to help with competitive parity. Therefore, a baseball or basketball team can draft a star player and not have to bid competitively for him. MLB has a “competitive balance tax” or “luxury tax” that is the punishment for large market teams that spend too much money. While MLB does not have a set salary cap, the luxury tax costs teams with high payrolls a considerable amount of money, giving them ample reason to want to keep their payrolls below the threshold level. The NBA utilizes a soft salary cap, meaning that while there is a salary cap, there are a variety of exceptions that allow teams to exceed it. In addition to the soft cap, the NBA utilizes a luxury tax system that is applied if a team’s payroll exceeds a separate threshold that is higher than the salary cap. Historically, around half of the NBA’s teams are over the cap. In both the NBA and MLB, big market teams like MLB’s New York Yankees or the NBA’s New York Knicks can generate revenues with their own sponsors and local television broadcasts and can afford to pay up to the cap or to pay the luxury tax if they go over the cap. Also, billionaire-owners such as the NBA’s Brooklyn Nets owner Mikhail Prokhorov, who was charged a reported $80 million in luxury taxes in 2014, can simply pay the tax. Small-market and other teams like the MLB’s Oakland Athletics in Moneyball may not have the financial resources, sponsorships, or local television broadcasts to pay up to the threshold, or may simply choose not to do so. However, the Athletics receive money from those that pay the luxury tax. In addition, in order to combat the growing revenue disparity among major league teams, MLB first instituted a revenue-sharing program in 1996 that, among many things, requires that every team pay 31 percent of their net local revenue, and then that money is divided up and equally distributed to every team (the NBA and NFL also have revenue sharing). Therefore, the small-market MLB teams have less of an economic incentive than a European soccer team to grow revenues because the latter would have to share the upside. The business conditions for a small-market team in MLB are similar to a “socialist” economic system, while European soccer is much more of a “free-market” economic system. The “socialist” economic system prevalent in North America has the leagues, rather than the teams, playing the dominant role in many marketing functions, especially internationally. A team like the Athletics has some constrictions in revenue growth, such as limits to their market place, sharing a market with a much bigger and wealthier team, and being the only MLB team to share a stadium with an NFL team. The Athletics’ innovation in data analytics was driven, in part, because they have limitations. On the other hand, Real Madrid owns their stadium and benefits more directly from their innovations in broadcasting, marketing, and commercial revenues.

       “Tanking”

      No matter how bad the performance of an MLB or NBA team becomes, the team’s place in their respective “major league,” and their share of the national television contract, is assured. Therefore, in MLB or the NBA, teams can be incentivized to “tank,” or lose on purpose, in order to get a better pick for the draft. In addition, an MLB or NBA team can afford “rebuilding” years in which the team’s performance is bad, because they have the upside of being able to get a high draft pick to start to put together a good team and, in contrast, can’t get kicked out of the league.

      European professional soccer teams have a much higher economic incentive to win because of “promotion” and “relegation.” Promotion and relegation are processes where teams are transferred between two divisions (think Major Leagues and AAA or NBA and Development League)¹⁹ based on their performance for the completed season. The best-ranked teams in the lower division are promoted to the higher division for the next season, and the worst-ranked team or teams in the higher division are relegated to the lower division for the next season. This would mean the Philadelphia 76ers, for example, would be moved down to the Development League if they finished in last place in the NBA, and the Santa Cruz Warriors or Rio Grande Valley Vipers would move up to the NBA if they finished at the top of the Development League.

      In European soccer, being relegated means a team no longer participates in the revenue share of the first division, which can have a significant impact on a team’s finances and value.²⁰ Therefore, even the teams at the bottom of the standings are fighting to win each and every game. The teams that can afford the highest payrolls and better talent might not be as concerned about relegation. However, it is possible for them to miss qualifying for the Champions League. In addition, in the English Premier League, national TV revenues are apportioned by standing, once again encouraging teams to fight for each win to finish in a position in the league standing that at least maintains their share of TV revenues from the previous year. Therefore, it puts pressure on the coaches of the top teams to play their best players more often, which increases tiredness and risk of injury. In contrast, there may be nights that a strong NBA team, for example, can rest their star players and still defeat a team that is “tanking.” In soccer, a team resting their best players risks losing points and standing in the league, which can have a financial impact. This has implications not only on how coaches must use their players but also the risks the organizations are willing to take. For example, in a 2014 interview with Sean Ingle of the Guardian, Billy Beane said it is arguably riskier for a European professional soccer manager to place huge faith in statistical analysis because, unlike in American sports, there is relegation. Beane said, “You don’t have a lot of time to be right in football. So ultimately, before you mark on anything quantitative, you have to make sure you have scrutinized the data and have certainty with what you are doing, because the risk is very high.”