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Good Thursday Morning. Here’s the rundown of this week’s Sports Business Playbook:

• This week’s topic is the Wild West that is European football’s pyramid system and how one upstart team is proving to be the exception to the rule on promotion to the Premier League

• Want to show off your sports knowledge in a public setting but don’t have time to read the deep dive? Hit the “Impress Your Friends at Cocktail Party” section at the bottom for a CliffsNotes of this week’s topic

• “Whoa of the Week” - an impressive sports biz stat that caught my eye

• Reminders that sports are awesome

Hey team,

This week, we’re talking about the structure of European soccer (er, football) leagues and how one club’s story highlights that this system is both the ultimate meritocracy and an investor’s nightmare.

The Richest Match in Football

You may or may not have seen, but the “richest match in football” took place this past weekend at Wembley Stadium, the crown jewel of English football.

Two of the top teams in the league went at it for 90 minutes, with glory and a $200 million payday on the line. The score was tied and couldn’t be settled in regular or extra time, so they went to one of most dramatic events in all of sports: penalty kicks.

After a deadlock through 5 penalties on each side, one side emerged victorious, plunging a 6th goal into the back of the net and etching their names in the history books.

Now, what if I told you that the match took place between these two clubs: Luton Town and Coventry City?

Welcome to the wacky, wonderful, and risk-filled world of European football. Here’s how it works.

A Pyramid Scheme (but a nice one!)

The match above was played to decide third place in England’s second division, more commonly known as the Championship.

The reason this game is so important is that the top three teams in the Championship get moved up, or “promoted” to the first division (the Premier League, or the EPL), while the bottom three teams in the EPL are moved down to the Championship, or “relegated.”

Here’s where it gets wild: that interconnected, promotion/relegation structure applies to nine different tiers in England (note that only the top four are considered ‘professional") in what is known as the “Pyramid.” Most of the clubs were created by the workers in the towns’ factories or main industry in the late 19th/early 20th centuries, so they’re steeped in tradition and have deep, 100-year old ties to their fanbases.

To be clear, this system is not how American sports works. Let’s say my Denver Broncos finish at the bottom of the NFL - I know I’m putting this evil out in the universe by giving this example, but that’s how important you, my readers, are to me.

Anyway, if they finish last, the Broncos are not getting bumped down to the XFL. In fact, they’re ironically rewarded for their dreadfulness by receiving the top pick in the following year’s college draft, which should in theory help the team improve.

The Pyramid league structure, on the other hand, that is deployed throughout football leagues in all European countries rewards excellence and punishes mediocrity. Plus, it creates the opportunities for true Cinderella stories that battle their way through the divisions to stand toe-to-toe with the giants of the football world.

The shoe fits here for Luton Town, as the club was bankrupt in 2003 and irrelevant for much of the time after that, toiling away in the semi-professional fifth division just nine years ago. Since then, they’ve rocketed through the various tiers and will be in the Premier League next season, the first ever team to go from the 5th division to the EPL in under a decade.

The club’s incredible story showcases what makes European football so damn fun. Here are just a few of the team’s quirks:

• Their nickname is the “Hatters” due to Luton’s connection to the hat making industry, which dates back to the 17th century. And let me tell ya folks, this logo (above) is simply the best.

• Luton Town has never competed in the Premier League as we know it. The last time the club was in the top division was 1992, the year before it was rebranded as the EPL and new financial rules were implemented.

• Their total roster payroll for the year was $9 million, which pales in comparison to the other two teams who earned promotion by finishing first (Burnley — $33m) and second (Sheffield United — $22m) in the league.

• Their 120-year old stadium (below) only seats 10,356 fans, and in some instances fans have to walk through people’s houses to get through the stadium gates.

This plucky club underscores what many sports fans already know and love about the European football system: it is as close to a sports meritocracy as you will find, and it creates these amazing, David vs. Goliath storylines that remind us why we love these games so much.

Now it’s not just a feel good story for Luton Town. Let’s talk about the money side of things and what this victory means for the club financially.

Movin’ On Up

As with other major leagues, the most lucrative stream for European football leagues is the media rights, which all of you know about since you read last week’s article!

This revenue is split amongst the clubs, and it signals that Luton Town is about to get the bag (Mom, this phrase means they’re going to get paid a lot of money).

The Championship’s total media contract is worth $350m per year. The Premier League’s deal is almost 9x that, checking in at a whopping $3.1b.

So, for Luton Town, that means they’re going to receive $120m next year just for breathing the Premier League air. And if they get smoked next year and relegated back to the Championship, they will still receive an additional $70-80m in “parachute payments” over the following two years to help them adjust back to normie life in the Championship - an exit package that would make Wall Street bankers blush.

If they find a way to stay out of the bottom three and play another year in the EPL, this revenue figure balloons from ~$210m to $360m.

So, all in, this promotion probably 10x’s Luton Town’s revenue from this past season at a minimum.

While they will spend some of this money to sign players to create a top tier roster and improve the stadium to meet EPL requirements, it is ultimately a massive financial windfall for a club that was sold for $7 in 2003.

Luton Town’s good fortune is an example of the the monetary opportunity that has caught the eye of investment-minded owners the past several years, and there has been a recent influx of foreign capital into European football.

Everyone from Gulf State magnates to Asian billionaires to Hollywood stars are trying to get in on the action.

Here’s why I’m not so sure that’s a good idea.

Risky Business

European football’s structure is Newton’s Third Law in action. For every promotion, there is a relegation. And it’s not pretty when you’re in the latter.

In this year’s case, two of the three clubs relegated from the Premier League — Southampton (owned by London investment firm Sport Republic) and Leeds United (owned by London investment firm Aser Ventures and the San Francisco 49ers) — have institutional capital behind them.

What does institutional capital not like? Risk. What does relegation create? Risk.

This is why European football clubs, despite having more tradition and broader global reach, historically have had lower valuations than many of their American counterparts.

Yes, it’s sexy to say that you own a European football club. But this relegation risk plus the essentially uncapped spending limits on players means that unless you’re a Gulf State oil baron with bottomless pockets, you’re probably going to be giving yourself an ulcer each year trying to figure out how to make the economics work to ensure you move up to the Premier League and then stay there without losing money.

And therein lies the rub for me.

As we talked about in my write up on the Commanders’ sale two weeks ago, American sports have incredible guardrails in place that create constant parity and ensure that teams (and therefore owners) do not fail and fall into financial distress.

From a valuation perspective, this mitigates almost all risk for the investors and creates an assumed positive trajectory for them. And you better believe the American owners will never invite the risk that comes with relegation, despite the excitement it would bring to each season. The closest I think we’ll get is the NBA Play-In games in the playoffs.

With European football, it’s much easier said than done to try to overcome this risk. And the tradition of the Pyramid has essentially entrenched this model, despite the best efforts of the world’s top clubs to carve out their own mini-American sports league in the ill-fated Super League.

Luton Town punched through with its low payroll and miraculous nine-year run, but that’s the exception; not the rule.

For every success story, there are countless teams that have received foreign investment with the expectations they will move up quickly and get that big payday, only to be swallowed by relegation and the doldrums of finishing mid-table in these lower divisions.

So, if you’re a rich person and want to buy a sports club, you' more or less have two paths:

1. If you deem your sports ownership as an “investment” and want to make a good, safe return, you go to the States.

2. If you’re mildly masochistic, potentially an Emirati heir to an oil fortune, and/or love the world’s game so much you want to be a part of something both beautiful and chaotic, there are tiers and tiers of clubs waiting for you in Europe.

Regardless of your ownership preferences, we can all celebrate this fantastic story of Luton Town and the joy that this promotion brings to its fanbase.

Let’s go Hatters.

Impress Your Friends at a Cocktail Party

Want to show off your sports knowledge in a public setting but don’t have time to read the deep dive? This section is the CliffsNotes of this week’s topic

• European football (soccer) works on a promotion/relegation system called the “pyramid.” Top teams in the division below move up each year, while bottom teams in the division above move down.

• The “richest match in football” is the 3rd place match in England’s Championship division (second league). The winner (this year: Luton Town) is automatically promoted to the Premier League.

• Luton Town’s ascension to the Premier League is a true Cinderella story that defies all logic and highlights the beauty of the pyramid system as a sports fan.

• Luton Town’s promotion to the Premier League next year will also net it $200m, almost 10x what it made this past season.

• While this is a feel good story, investment in European football is a risky endeavor due to the relegation and uncapped spending limits. Buyer beware, in my opinion.

“Whoa” of the Week

Insane, mind-blowing things constantly happen in the sports business world. Here was my favorite of the past week.

1. American owners are growing their portfolio across leagues

Weekly Reminder that Sports are Awesome

This newsletter is, of course, mostly centered on the business side of sports and the things that happen off the field. That being said, it’s important to remember why we fell in love with sports in the first place, though.

This section is meant to highlight the amazing things that happened in sports this week that serve as that reminder.

1. Luton Town!

   https://twitter.com/ESPNFC/status/1662532793765711873?s=20

2. Liam Hendriks returns to the White Sox bullpen 5 months after cancer treatment

   https://twitter.com/FOS/status/1663362678541123585?s=20

3. Caleb Martin’s incredible story. From undrafted to becoming one of the key pieces in the Heat’s playoff run

   https://twitter.com/MiamiHEAT/status/1659997523748986880?s=20

Thanks for reading! Let me know what feedback you have.

Also, if you enjoyed this breakdown, please consider sharing it with your friends and network by clicking the social media icons at the top of the newsletter.

Until next time, sports fans!

-Alex