Why do football players cost so much?

It is often claimed -moreover in times of crisis- that football players make way too much money; some even say that their salaries are immoral. The business-savvy replies that players are nothing but investments which generate more cash than what they cost, and therefore, their salaries are ruled by the invisible hand governing the laws of demand and supply.

Another point into the equation is the payment for transfer rights between clubs. Extraordinary players are scarce, and clubs' fighting takes place not just on the pitch but also in the backstage: it's a fight for resources which are vriso (Valuable, Rare, inImitable, hard to Substitute, easy to fit in the Organisation). In a fast growing industry (about 10% p.a. as an average in the UEFA space) it is somehow frequent to find brave club managers who do not hesitate to anticipate future growth and sign salaries which pay the money of today with the hopes of tomorrow. It is a risky practice which not always yields the expected results: i.e. Ibrahimovic was bougth by FC Barcelona just to be sold out again only one year later losing about 50 million Euros in just one season. Barça is still paying for this loss, which draggs their Profit and Losses accounts to red figures even in the most flourishing of the seasons. Indeed managers are brave, one cannot but wonder how easy it is to be brave with other people's money, mainly when clubs are not usually governed as listed companies and when lots of fan passion and political pressure are exercised to enjoy today what we may not be able to pay for tomorrow.

According to UEFA European Clubs spent about 20% of their budgets in buying new players in 2010. Not only that, another 15% was already standing as payables in their balance sheets derived from similar operations in the previous season. Furthermore, UEFA clubs reported a cummulate loss of ap. 1 Billion € in transfer operations: that is, money received for a transfer related to what they had paid for it before. Who thinks this is a good business? Indeed it is always reported as "income/loss derived from not usual activities" in the Profit and Loss account and little detail is often provided. As if "non-usual activities" had little impact on the bottom line!

It appears as well that players are not regular employees (no wonder at these costs): they cannot really choose the club they want to play for, since they do not normally own their own license, which is the asset which clubs deal with. It is often read about on newspapers that this or that player is not happy in their club, and that they would be happy about a change. The owner of their license may not however be equally happy, since releasing a player means destroying the future cash flows he would normally yield along the life of his contract. The selling club and the acquiring club need therefore to agree in a certain amount of money which bridges the gap between the dreams and the hopes of both parties, even further, their speculative approach to how much the market will grow in the seasons to come, and pray that the bubble does not finally burst.

As we mentioned in previous postings the strongest link in this negotiation is always the player. The acquiring club often appears to forget that they could buy that asset much cheaper, should the player agree that he would change his attitude towards his current employer: not scoring, not talking to the press, not smiling to sell T-shirts and merchandise: an underused asset with no value at all. Whether this is gentle or not is another subject, but if clubs were run under the predating principles of business and the invisible hand of economy, that would be the way to take. However players know that their careers are short and that any unpopular deed would be hard to repay for, so do clubs, and therefore they all prefer to feed the bubble, anticipate the future returns, and pay for the dreams of tomorrow with the debts of today.

What if players owned their licenses? The first conclusion is that they would be as free as any worker in Europe is to choose for which club to play and to negotiate a fair salary for their services to render. The second conclusion would be that there would be no three-side negotations. Trading of transfers would cease to exist, those assets would not be accounted for in the balance sheets and club value accounted for today would be destroyed. Thirdly. there would be constant changes in club membership, and a player scoring goals for Manchester United in the Champions League may play for Bayern München one month later, and end up playing the finals with Real Madrid.

My question is "why not?": is it players who take clubs to the final rounds of competitions or is it the club itself who makes it happen? There's some windows nowadays when players may be transfered, being the process banned thereafter. I do not know of many industries where such constraints exist. I think we should be posing ourselves the "What if" question more often, why not, when we think of football.

Club Value, Market Value, Book Value....

I'm coming back to the idea of how extremely competitive the UEFA Top5 cluster is. In the chart below you will see how the value of these clubs has evolved in recent years, it's million US$ in the Y-axis.

To many the answer to the question "how much is a club worth?" is obvious: "As much as someone is ready to pay for it". Not bad, ain't it?

This answer is not at all banal, since you will see how the value of Manchester United is much higher than the rest. It is true that they own a great Stadium in a cool area of Manchester, but so does Arsenal in London, FC Barcelona or Real Madrid in the most expensive area of the Spanish capital city. It is also true that they own a great set of players, but so do their competitors as well. Debtors? Nothing to mention either. Debt? Under control, better than the Spanish clubs, not so well managed as the Bayern....

So the reason why their club value is up there comes from the fact that the Glazer family bought it not too long ago and therefore they are entitled to introduce a line called "Goodwill" in their balance sheet. And that bridges the gap.

I know, some may rightfully claim that we cannot measure club value based just on their balance sheet, but when clubs are yielding -despite a yearly average of 10% income growth- such low profits and ROIs, it is possibly the value of their assets what makes a club more appealing for any prospective investor. And that means brick and mortar, not free cash flows.

I'm adding here another chart comparing the asset value of the Top5 clubs one to each other at the end of previous season, 2010-2011, and just as a present to you some blue dots pointing at an estimated market value.

In all cases where goodwill is not declared the blue dots are higher than the asset value. For ManU this is not the case, which means that the club has actually destroyed part of its value since the Glazer jumped in. Probably they paid too much, or they did not anticipate the depth of this worldwide money crunch we are still struggling with. Or maybe they found some other good reasons that are not so easy to speak of in monetary terms that made them take the step. Good luck anyway.

I guess the gap between book value and market value comes in this case from tha fact that assets are normally to be reflected in the books according to their acquisition prices, therefore not taking into account the huge inflation that affects not just those brick-and-mortar assets, but also the transfer rights of star players. Clubs do not report any value for their brand either. I'm not quite sure how well do they manage this last chapter, since Marketing and TV income appears to be attached to the image of footballers, rather than Clubs. Are therefore Clubs just a platform for players to bright? Do they take away the income whenever they change clubs? How can a club retain this value for themselves? Would football be the same with star-clubs rather than star-players? Can actually football players ever be considered "anonymous" employees? Would Barça ever sell as many shirts with their brand as Messi does with his name?

Why Barça is the only club reporting negative Equity and what does that mean? That's a hot question, maybe we'll come back to it later on.

The Champions League is also hot these days: within the Top5, the English clubs are struggling quite a lot, and staying out at this stage of the season would mean big losses for them on all fronts (.... more than a 100 Mio. € in turnover for this season only, all chapters included, plus a giant loss in their brand value?). I'm curious, let's see what happens next.