On the economics of transfers

Giuseppe Bellini

Football transfers aren't as black and white as two teams negotiating a reasonable fee for a player.

On the face of it, the economics of transfer seems trivial. If a club wants to acquire a player, they negotiate a fee with said player's current club, and if the two sides can agree on a deal, the player moves on. This simplistic picture is propagated by the idea that clubs "buy" and "sell" players, which makes transfers superficially easy to understand. We all know what buying and selling means, and even the more irrational of us have some grasp of a system of valuation.

Unfortunately, the current perception of the transfer market has very little to do with what's actually happening between clubs. The economics of transfers are significantly more complicated than most would allow, and a simple "buy-sell" model, although useful in allowing pundits and fans to come up with baying knee-jerk reactions to deals, is nowhere near sufficient to explain what truly goes on behind the scenes.

Why are football transfers so complicated? Because there aren't just two parties involved. The players aren't just a commodity with a set value -- they're trying to make as much money as possible out of any deal -- and thanks to way transfers actually work, their value can dramatically change simply through the process of being sold. What's actually happening here?

Ignoring the minutae, there are two steps to a transfer. The first step is the one everyone's familiar with. Two teams negotiate a fee -- easy enough so far, although it's often rather contentious. The second involves what's euphemistically known as "personal terms," which actually involves tearing up his old contract and signing a new one. That added element complicates things immensely. Why? Because a player's current contract is one of the pillars of his value to a club.

Every single professional footballer is worth some amount of money to his club. That's why he's paid, after all. Players generate value through performance (which leads to prize money, television deals and boosted attendance) and some supplement that by being exceptionally marketable. For that, they're compensated handsomely, with many of the top-level players looking at six figures a week.

We're less interested in innate value -- the weight of a player's performances and marketability -- than we are in surplus value. We can think of surplus value as that player's worth to a club minus what they're paying him. This is almost always a very large number, despite complaints about footballers' wages. It's surplus value that clubs are looking at. Having Lionel Messi is very well and good, but if you're paying €500 million a year for the privilege it's unlikely to lend your club much of a competitive advantage, best player in the world or no.

Bear in mind that surplus value is an immensely difficult number to nail down. Over the course of a five-year deal worth €40,000 per week, the only known factor is the €10 million total commitment. It's incredibly difficult to predict performance in the current season, let alone the next five, and tying that performance to a monetary value is much more art than science. But the number exists, waiting to be unearthed, a function of true value and cost.

What happens when a player is sold? A new contract completely changes the equation. If he gets a significant raise, his surplus value per year is naturally diminished (although true value can change. Cash isn't worth the same to every club; take Valencia versus Bayern Munich as extreme examples). But that has zero bearing on his worth to his current club, which gets to keep him on his current contract if he's not sold.

This implies that there are actually two conflicting valuations in a transfer. The first is the selling value, which will ideally be greater than or equal to the surplus value of a player under his current contract. The second is the buying value, which should be less than or equal to the surplus value of a player under his expected future contract. If the two aren't in sync, completing a transfer becomes very difficult.

The above explains why we most often see transfer for players whose contracts are set to expire. Although the most commonly cited reason is that clubs are looking to sell while they can, the fact of the matter is that players on expiring deals represent one of the only genuinely rational moves in a transfer market. A buying club can pay off one year of surplus value to the selling club and look to spread that out over five years of ownership -- while giving the player a raise. Everyone wins.

It's easy to concoct scenarios in which the exact opposite applies. Since Edinson Cavani is the biggest name being talked about this summer, let's use him as an example. In summer 2012, Cavani signed a contract extension with current club Napoli, and one very successful season later it looks as though a number of clubs might activate his astronomically high €63 million release clause and take him away from the San Paolo.

Perversely, this could actually be a middling deal for two out of the three parties (and Cavani himself would get a bigger raise if the price was lower). Cavani is one of the best centre forwards in the world, and although he's being paid well, he's on third-tier star wages and his surplus value to a Champions League level team could very well exceed €63 million over the next four seasons.

But as soon as he negotiates a new contract, much of that value evaporates. Depending on how much he makes, Cavani could end up costing his new club well over €100 million over five years (the fact that in football reporting, the 'cost' for a player fails to include wages is an embarrassing black mark on the industry and a huge disservice to readers). That amount of money requires a player to be one of the world's best for the entire length of the contract to be worth it -- not a wise gamble to take, as many big sides have found out over the years, although it's not entirely insane.

Without understanding a player's actual value to his club -- or, indeed, considering contracts at all -- it becomes impossible to comment fairly on transfer fees. A transfer isn't equivalent to going to the grocery store and buying an enormously expensive apple, entirely dictated by the market value for enormously expensive apples. It's a far more complicated beast than that (although the market is involved when multiple teams are willing to match the sale price), and even the most straightforward of transfers demands more reflection than they're given.

When it's plausible that a player like Cavani can simultaneously be worth less than and more than €63 million, depending on which side is doing the asking, it should be clear that the economics of transfers is a complex and fascinating field. Someday, the footballing world will write about it with the subtlety it demands.

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