The Economics of Outlandish Soccer Transfers
WHY YOU SHOULD CARE
With European soccer poised to take off in America, you’d do well to know who Gareth Bale is and what he’s worth.
One hundred thirty-two million dollars. The amount surpasses the entire GDP of certain South Pacific island countries. It’s also the price Real Madrid paid for the right to sign a single player: Gareth Bale, the 24-year-old forward known as the Welsh Wonder Boy. And take note, soccer neophytes: Mr. Bale won’t earn $132 million. The ungodly sum is the amount Real Madrid paid just to rip up Bale’s contract with Tottenham Hotspur and negotiate a new one. His expected annual salary is nearly $25 million.
Arsenal boss Arsène Wenger spent his summer offseason defending his frugal shopping habits.
Even by the outlandish standards of a sport underwritten by oligarchs and oil barons, Gareth Bale’s transfer fee constitutes an all-time record. It’s part of a clear upward trajectory in soccer-transfer fees. With billions of fans, a global market worth nearly $30 billion, and a new generation of spendthrift owners, European soccer has become a conspicuous-consumption game. Competition for top players intensifies by the year. During this summer’s transfer market, outlays from the top five leagues in Europe surpassed €2.2 billion (about $2.9 billion). In England alone, Premier League clubs spent £630 million (over a billion dollars) this summer, shattering the £500 million ($800 million) all-time spending record.
The spending spree captured sports-bar talk around the world. Less so in the United States, of course, although European football, particularly England’s Premier League, is poised to take off in the American market. Already Americans own majority stakes in 6 of the Premier League’s 20 teams, while NBC just spent $250 million – outbidding ESPN and Fox – for the league’s U.S. broadcast rights over the next three years. NBC will show all 380 regular-season matches this year, has invested in a weekend studio production with a staff of 100 and has promoted the league during the preseason with a Times Square billboard of (who else?) Gareth Bale.
But European teams don’t necessarily get great value for their transfer fees. Much is “wasted on the wrong players,” according to Stefan Szymanski and Simon Kuper, who wrote the 2009 best seller Soccernomics. The authors found low correlation between transfer spending by English clubs and end-of-season rankings, but high correlation between player wages and club performance. The takeaway: “[It] may be better to raise your players’ pay than risk losing a couple of them and have to go out and buy replacements.” No need to tell that to Arsenal boss Arsène Wenger, who habitually spends his summer offseason defending his frugal shopping habits.
Animal spirits underlie stratospheric prices for new players – not rational strategy.
The main reason for the excess, according to Szymanski and Kuper, is that transfer activity is governed by animal spirits, not rational strategy. Managers shell out for superstar names to appease fans, and flavor-of-the-summer players – especially strikers – are overvalued year after year. The market has a life of its own. Even the president of Real Madrid implied that the Bale craze might be rooted in irrational fanaticism when he stated the obvious in early August: “€100 million seems a lot to me.”
So, is the transfer market just European soccer’s version of an arms race? The governing body UEFA seems to think so, especially as Middle Eastern oil sheiks and Russian oligarchs buy up clubs and pump outside funds into their squads. In 2010, UEFA passed Financial Fair Play rules “to introduce more discipline and rationality in club football finances.” Clubs are supposed to break even based only on their “football income,” an apparent effort to counter big transfer spending underwritten by Emirati and Qatari petrodollars. The sporting body is set to assess clubs’ compliance in May 2014. Rule-breakers could be banned from UEFA competitions, including the all-important Champions league.
The measures aren’t dampening many animal spirits yet. Aggregate transfer spending rose by 39 percent in the first half of 2013, which doesn’t include the two most active months, July and August. Critics of Financial Fair Play, including Szymanski, worry that the rules will turn the system into a “closed,” American-style one that will limit mobility and ensure already-elite clubs remain at the top.
Splurges by oil tycoons may just be the end result of billions of people, from London pubs-goers to sub-Saharan villagers, being fanatical about European football.
For all its waste and hysteria, the European soccer transfer market is relatively open when compared to transfers in major American sports — and perhaps more efficient, too. With five major leagues and more than 100 clubs, Europe is a hotbed of competition for players. In contrast, competition for players among American professional teams is limited and controlled. For instance, because the NFL is the only buyer of top professional football labor in the world, professional football players must ply their trade there. The situation is similar in professional baseball and basketball, where teams mostly just trade player for player. And controls like like salary caps and drafts indirectly suppress or alter the market, largely to the benefit of the leagues.
In the end, transfer-fee splurges by oil tycoons may just be the end result of billions of people, from London pubs-goers to sub-Saharan villagers, being fanatical about European football. As long as billions of zealots around the globe remain crazy about the game, its transfer market will likely only get crazier. It’s a state of affairs that suits the fanatics just fine.