Mendoza School of Business

Here’s how to fix FIFA

Published: June 2, 2015 / Author: Sheehan, Richard

Richard Sheehan is a professor finance at the University of Notre Dame. He specializes in the economics of sports and is the author of “Keeping Score: The Economics of Big-Time Sports.” The views expressed are his own.

Anyone hoping the corruption allegations swirling around soccer’s governing body might prompt reform need only look at the headlines this weekend for a reality check.

“Blatter: U.S. and Europe behind FIFA trouble,” read CNN’s headline Saturday, reporting the news that FIFA President Sepp Blatter had just been re-elected to another four-year term. This despite the indictment of nine FIFA officials over alleged kickbacks totaling more than $150 million.

Blatter’s explanation appears to be that it is the result of the actions of “a few individuals” combined with some U.S. and European sour grapes. “There are unmistakable signs: The Americans were candidates for the 2022 World Cup, and they lost,” Blatter said. “The English were candidates for the 2018 World Cup. They lost.”

Those are not the words of a man that is serious about reform. If there is going to be any change for an organization that has been dogged for years by claims of bribery and other corruption — including over the decisions to award the World Cup to Russia in 2018 and Qatar in 2022 — it will need to be externally driven. And the nature of those reforms may well lead to FIFA’s demise.

But how will such reform actually come about? After all, the economic incentives simply do not permit internal reform, given the unique nature of FIFA.

While it’s easy to compare FIFA with America’s NFL, a better comparison is with a National Collegiate Athletic Association (NCAA) bowl game committee, where the revenues are generated by the game, the profits stay with the organizer; and the teams receive a predetermined payout. Any increase in revenues then stays with the organization.

With soccer, FIFA handles the television and marketing rights, the sources of most revenue. The host country, meanwhile, provides the facilities and incurs most of the costs, but receives much publicity. The national teams, for their part, compete for the prestige and a relatively small financial payoff.

Under this system, any increase in media rights, for example, goes to FIFA and can be spent by FIFA as it wants. For the most recent World Cup, revenues were about $4.8 billion, while the costs of the games came to about $2.2 billion, leaving another $2.6 billion for FIFA salaries and travel and general development of the game of soccer.

So, does FIFA spend its residual for soccer development effectively? FIFA’s own financial documents provide the answer. Just look at the example of Indonesia, the world’s fourth most populous nation, where football is popular, but which appears to get no more assistance to develop soccer than a tiny country like the Cayman Islands. Such a situation is facilitated by FIFA’s one country, one vote rule, meaning Benin would have as much sway as Brazil.

So reform will have to come from the outside.

The problem is that while the mismatch between the countries responsible for generating most of FIFA’s revenue, and the countries benefiting most from FIFA’s largess will eventually prompt change in the system, “eventually” could be a long time away.

In the meantime, the takers have the votes to keep the system as it is; the makers don’t.

This isn’t to say that some redistribution isn’t a good thing. But as allegations mount of vote buying and deadly working conditions at venue construction sites, the makers ultimately have to ask whether continued participation in FIFA — or even cooperation with FIFA — is worth the costs.

And even if the calls for reform intensify, the United States is not likely to take the lead, despite this week’s intervention by the Justice Department. This shouldn’t be surprising — despite it’s size and contribution to FIFA’s coffers, it still has only one vote, is not one of the traditional soccer powers, and has a more marginal soccer following relative to other sports.

However, if the European federation, UEFA, decides reform won’t come from within, then all bets are off. A World Cup without Europe is simply not a World Cup, and this gives Europe considerable sway. But simply withdrawing from FIFA would in itself solve the underlying problem. Instead, two things are necessary to successfully bring about change.

First, countries favoring reform must be willing to withdraw from FIFA, a possibility that took a step closer Saturday when the head of the U.K.’s Football Association reportedly said he would support a UEFA boycott of the World Cup. Second, those countries must pressure corporations that are providing the television and marketing revenues not to deal with FIFA. In the short term, FIFA could survive a UEFA withdrawal. What FIFA would not survive would be the money spigots closing.

It might be too late to expect corporations to back out for the 2018 World Cup, to be hosted in Russia — the television rights have already been assigned and marketing agreements are being negotiated. Sponsors and potential sponsors may therefore have little appetite for withdrawing. Still, without the participation of Europe and the United States, the value of those contracts would be dramatically reduced. And if Europe and the United States withdrew and sponsorship money from those nations followed, FIFA would have a tough time balancing its budget.

Another change that will have to come is reform of the so-called development funds for smaller countries. Nations like the Cayman Islands might not be happy with the implications. But the truth is that the refusal of smaller nations to engage in reform — evidenced by Blatter’s resounding victory Friday — is what would have prompted the U.S. and Europe to back out in the first place.

Responding to this week’s developments, Blatter has effectively accused Europe and the U.S. of creating the current crisis, calling into question the integrity of the two in the process. This suggests that in the short run, the name of the game will be turmoil rather than soccer. But in the long run, UEFA has the power to pull the rug from under FIFA’s feet.

Blatter’s rule over FIFA has cost Europe too much. The question now is whether it will rise to the challenge he has laid down.

Read this piece on the CNN website.