Aug
27

Can the Australian Football League Justify The Single Economic Entity Principle?

This article explores Paul A. Czarnota’s newly released article, “The AFL, the joint venture defence and single economic entity theory“, which can be found in August’s edition of the Australian Journal of Competition and Consumer Law (AJCCL).

The Australian Football League (AFL) is one of the most unique sporting leagues in the world. Like the NFL, the AFL’s only professional league is in Australia, with 18 teams competing across the country. Of the 18 teams, a distinctive characteristic is that 10 of these teams are located within one state, with nine of those within one major city. The only league that can come remotely close to a statistic like this is the English Premier League.

Unlike many other leagues around the world, the AFL operates as a Single Economic Entity. A Single Economic Entity is described as one where all the members of the entity have a high dependence on each other, and thus can be classed as a single entity. Put simply, AFL teams need each other to succeed, because if one teams collapses, all teams are affected.

This is the justification put forth by the AFL, and while other leagues such as the NFL subscribe to this theory (to an extent), none are as extreme as the AFL. In order for all the teams to compete on a level playing field, the AFL has introduced some provisions. First, the media broadcast rights are pooled, and the clubs have no say in negotiations. Regardless of how big the market of a club is, it will receive the same share as others. There is a fixed salary cap for most teams (some teams have extra money due to cost of living and recent expansion), club sponsorship must be ticked off by the AFL and all proceeds from merchandise sold outside of clubs are evenly distributed across all clubs. It is the last point that stands an an anomaly. The AFL’s most popular club, Collingwood FC, would greatly outsell smaller clubs such as the Western Bulldogs or North Melbourne. The lesson learned here is that if you want to support your club, buy directly from them and not a third party, as all proceeds will go to them and not be distributed evenly to each club.

While these rules are imposed, it doesn’t prevent the richer clubs from succeeding. The aforementioned Collingwood FC has high membership, lucrative club sponsorship and high merchandise sales. An area that is not governed by the AFL is the football department, which consists of the coaching and administration staff. Collingwood has the highest bill of any AFL club in this regard.

Taking the principle further, the AFL provides extra money to poorer clubs to try and level the playing field. The Western Bulldogs receive more money than other teams due to its smaller supporter base, but as per the theory, the club is vital to ensure the other teams prosper.

These rules are a far cry from that of Major League Baseball (MLB). Contrary to the AFL, there is a soft salary cap, where rich clubs such as the New York Yankees or Boston Red Sox go over every year to gain a competitive edge. Each team is free to negotiate its own media rights, which in turn favors larger markets such as LA and New York.

An argument put forward by author Paul A. Czartona is that the AFL may use the joint venture defence when explaining its actions. However, there are many grey areas, such as sponsorship. Teams can be directly competing against each other for the same sponsor, therefore negating any theory that they co-exist to help one another.

Section 45 of the Competition and Consumer Act (CCA) is in place to stop anti-competitive actions by corporations. In respect to the AFL, this would be the league putting in place exclusionary provisions preventing and lessening the ability of the clubs from ‘competing’ against each other in the revenue streams previously mentioned. By creating and maintaining a competitive balance across all clubs, is the AFL breaching S.45? Does their argument that they are a Single Economic Entity justify the breach of these provisions?

If the AFL was to be subject to S.45 of the CCA, it may prove catastrophic for smaller clubs. The richer teams would get richer and develop a competitive advantage on field by using their vast amount of resources. What may become would be something similar to the English Premier League, where the rich clubs are the ones who share the spoils each season. Many clubs may stretch beyond their means, resulting in huge losses and bankruptcy. Therefore, in turn, the competition would suffer, as less teams would result in less games, meaning less revenue for the rich clubs. It’s a viscous cycle.

In conclusion, there are arguments supporting both sides. Is the AFL too altruistic in it’s plight to keep a competitive balance, or is it too restrictive to clubs to create their own opportunities?

  • http://twitter.com/kaylaramiscal Kayla Ramiscal

    I think an important distinction here is that the AFL is a win-maximizing league, as opposed to the profit-maximizing leagues of the US and as such, behave differently. This is why clubs spend more than they receive in revenues: the quest of a flag. The AFL regulates many revenue streams in part to promote competitive balance, but also because it is a single economic entity and needs each team if it is to be successful as a league (although there is talk of eliminating two teams…). The restrictions on the clubs can be inconvenient in terms of sponsorship, but the AFL does a good job adjusting rules and regulations in order to maintain competitive balance while allowing clubs to thrive on their own.

  • Michael from caulfield

    Very good argument here Chris, interesting read!