Football Transfer Economics

Football Transfer Economics

By Pete

Reading the ever more acrimonious debates over Arsenal’s summer transfer dealings (or lack of) has got me thinking a little more deeply over how the transfer market works – and whether the different participants are behaving optimally in a rational sense.

To whit, I believe the following factors in terms of transfer strategy are not always properly considered:

A Pound Today

The key concept is: will a pound today be worth more or less in the future in terms of purchasing power? With hindsight, it is clear that player inflation has built consistently over recent years – but will that trend continue?

If you believe that FFP and European economic difficulties have to have an impact, together with specific proposals such as Spanish attempts to have a more equitable TV money split (very bad news for Real Madrid and Barcelona) and the proposed French top-rate tax increase to 75%, then the best strategy is to hold off buying big as your pound tomorrow will be worth more than your pound today. Conversely, if you think the football bubble will continue to inflate (possible given the Premier League’s global appeal) then you should spend the money now. Please note that these considerations are independent of general inflation and interest rates.

One also needs to consider revenue growth, or otherwise – this will also impact the relative value of your pound tomorrow.

Deferred Gratification

Is it really worth blowing your one-time cash pile on 2 to 3 players that will move you from being 15 points behind the champions to 5 points behind? Does it not make more sense to hold on for a couple more years and then buy really big and actually win the thing? Why waste a lot of money just to finish 2nd rather than 4th?

Watch Arsenal Live Streams With StreamFootball.tv

Once the money has been spent, you can’t spend it again!

Asset Depreciation

There are two aspects to this:

– Age: Players typically peak between 24 and 30. As most contracts are 5 years (so would need to sell after 3 to avoid significant contract depreciation – see below), a 24 year old will have significant resale value after 3 years while a 27 year old does not. A 21 year old is potentially even better – except that you can’t be sure of how good he will become.

– Contract: As a player’s contract runs down the resale value dwindles at an accelerating rate – particularly in the last two years.

From an age perspective, you should really try to avoid paying a big fee for anyone over 25, 26 tops. Jovetic is 23, Bale 24, Higuain 25, Suarez 26 and Rooney 28 (I think). It is laughable for Liverpool to compare Bale with Suarez – even if the players are comparable (…); Suarez being 2 years older is significant. My sense is that Arsenal are already offering over the odds for Suarez. If Liverpool are stupid enough to turn us down then that is their problem.

From a contract perspective, you should target players in the last 12-18 months of their contracts. Selling clubs will be desperate.

Power Law

How much value would a 100mm player add to your club?

If you are Real Madrid, he may add you 7-8 points over a season.

If you are Hull City, he may add you 15 points.

But if you are Hull City, how much difference would 5 x £20mm players make? 25 points? Or 10 x £10mm players? 30-35 points?

On the other hand, if you are Real Madrid, 5 x £20mm players would make little difference as they would be unlikely to be significantly better than those already there, and would spend much of their time on the bench.

So what is the best strategy?

You should honestly assess where you sit in the hierarchy. Clubs like Tottenham and Liverpool would be better off cashing in on Bale (particularly) and Suarez and buying several players in £15-£20mm range. Arsenal would be better off buying a couple of £25-30m pound players than spending £50mm on Suarez.

The point I am trying to make is that the premiums demanded for the very top players are only worth paying by the most elite clubs because of the value-added over the player they are replacing.

So, how would I assess Arsenal’s approach?

I believe they are much more in tune with the above than other clubs. However, I believe the key factor preventing the completion of high end signings is that Arsenal think that future transfer values will decline while other clubs either believe they will increase – or are only living in the present. The worth of any asset is what someone is prepared to pay for it. Nevertheless, I think that touted fees for players in their late 20s are completely unrealistic from a rational perspective.

Which brings me to the final point: football clubs frequently do NOT act rationally in the transfer market. The emotional pull of marquee signings (fuelled by fans and the media) will make clubs over pay. Just ask Leeds and Portsmouth.

It is difficult. And the situation wasn’t helped by Gazidis publicly stating that Arsenal had significant money to spend earlier in the summer – so, paradoxically, by him trying to keep fans happy (“this time is different”) he has actually made things harder! It seems that Arsenal have been in for a number of targets, but selling clubs are holding out for valuations above Arsenal’s. In some cases the stand-off is continuing (Suarez), in other cases players have gone elsewhere (Jovetic, Higuain, Gustavo). I suspect Arsenal are waiting for the selling clubs to crack, which will probably be very late in the window, if at all.

At least I can have some confidence that Arsenal are spending money carefully – I always think it is a bit rich fans complaining that Arsenal won’t pay the extra few million while at the same time moaning about the cost of their ticket. Arsenal’s owners have not taken money out of the club in my lifetime and, assuming this doesn’t change, at least I know the unspent money will be there for the future.