UnReal moneyWhy mega-transfers never pay off
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Late in last month’s Champions League final against Barcelona, Cristiano Ronaldo dribbled up yet another blind alley and lost the ball. Sir Alex Ferguson, Manchester United’s irascible manager, rose from the dugout as if to berate his winger.
Then he sat down again, instead of wasting breath on a soon-to-be former employee. It looked as if Sir Alex had already said a silent goodbye to Ronaldo. United had calculated that Real Madrid were offering more – something like the world record fee of £80m (€95m, $130m) agreed yesterday – than he was worth.
Like mergers in business, football transfers seldom add value. They rarely help teams win prizes or make profits. The transfer market is irrational. Real’s purchase of Ronaldo may merely offer expensive evidence of that.
The amount that a club spends on transfers bears little relation to its success on the pitch. Stefan Szymanski, economics professor at Cass Business School in London, studied the spending of 40 English clubs between 1978 and 1997 and found that clubs’ outlay on transfers explained only 16 per cent of their total variation in league position. By contrast, their spending on salaries explained 92 per cent of that variation. The more a club pays its players, the higher it finishes. But what it pays for players in transfer fees to other clubs does not seem to make much difference, explains Mr Szymanski in his and my forthcoming book, Why England Lose.
Transfers add so little value because there are so many inefficiencies in the market. For instance, teams usually pay far more for forwards than for goalkeepers, even though both positions may be equally significant. They usually pay more for players of fashionable football nationalities – Portuguese such as Ronaldo, say – than for unfashionable ones such as Albanians. And they overpay for players who, like Ronaldo, have recently achieved spectacular successes.
Buying a player at his peak is bad timing, like buying a stock after a run of good news. The market has seen his quality but he is exhausted and possibly sated with success.
Real may know they are paying more for the star forward than the benefit he is likely to bring the club in results or higher revenues. They have tried the strategy of buying great players, or galacticos, and failed. Between the summer of 2003 and 2006, Real’s expensive, star-studded team won no prizes. Florentino Perez, the president of the galactico era, has just returned to office. Last week he agreed to pay AC Milan a reported €65m ($90m, £55m) for the Brazilian Kaka. Mr Perez appears to have learned nothing and forgotten nothing about transfers.
But it would be wrong to imagine he aims only to win prizes or increase revenues. Hardly any football club behaves like a profit-maximising entity. Real is a populist democracy. Mr Perez was elected by the club’s 70,000 members, or socios. He bought Ronaldo to please them. The transfer is perhaps best understood as a marketing gift to Real’s fans, sponsors and the local media. Buying the great man is a way of saying, “Yes, we are a great club.”
It is just possible that Ronaldo will give Real a revenue boost commensurate to his cost. José Angel Sanchez said, when he was Real’s marketing director in Mr Perez’s first term, that “everything gets better” with the purchase of a galactico. Ronaldo has genius, and the appeal of a sulky boy-band singer. With him, Real can charge more from television companies, sponsors, and clubs inviting them to play friendly matches.
But Real are not very concerned with making money. The club has no shareholders, only members. Like most big football clubs, they happily incur debt. Such clubs know their brands are so strong there will always be another multimillionaire willing to bail them out.
Nor would any creditor ever dare pull the plug on them. Banks may go bust and disappear, but not big football clubs. They mostly disdain tedious quests for return on investment. Instead they live for today. That is the rationality of the Ronaldo transfer.
Then he sat down again, instead of wasting breath on a soon-to-be former employee. It looked as if Sir Alex had already said a silent goodbye to Ronaldo. United had calculated that Real Madrid were offering more – something like the world record fee of £80m (€95m, $130m) agreed yesterday – than he was worth.
Like mergers in business, football transfers seldom add value. They rarely help teams win prizes or make profits. The transfer market is irrational. Real’s purchase of Ronaldo may merely offer expensive evidence of that.
The amount that a club spends on transfers bears little relation to its success on the pitch. Stefan Szymanski, economics professor at Cass Business School in London, studied the spending of 40 English clubs between 1978 and 1997 and found that clubs’ outlay on transfers explained only 16 per cent of their total variation in league position. By contrast, their spending on salaries explained 92 per cent of that variation. The more a club pays its players, the higher it finishes. But what it pays for players in transfer fees to other clubs does not seem to make much difference, explains Mr Szymanski in his and my forthcoming book, Why England Lose.
Transfers add so little value because there are so many inefficiencies in the market. For instance, teams usually pay far more for forwards than for goalkeepers, even though both positions may be equally significant. They usually pay more for players of fashionable football nationalities – Portuguese such as Ronaldo, say – than for unfashionable ones such as Albanians. And they overpay for players who, like Ronaldo, have recently achieved spectacular successes.
Buying a player at his peak is bad timing, like buying a stock after a run of good news. The market has seen his quality but he is exhausted and possibly sated with success.
Real may know they are paying more for the star forward than the benefit he is likely to bring the club in results or higher revenues. They have tried the strategy of buying great players, or galacticos, and failed. Between the summer of 2003 and 2006, Real’s expensive, star-studded team won no prizes. Florentino Perez, the president of the galactico era, has just returned to office. Last week he agreed to pay AC Milan a reported €65m ($90m, £55m) for the Brazilian Kaka. Mr Perez appears to have learned nothing and forgotten nothing about transfers.
But it would be wrong to imagine he aims only to win prizes or increase revenues. Hardly any football club behaves like a profit-maximising entity. Real is a populist democracy. Mr Perez was elected by the club’s 70,000 members, or socios. He bought Ronaldo to please them. The transfer is perhaps best understood as a marketing gift to Real’s fans, sponsors and the local media. Buying the great man is a way of saying, “Yes, we are a great club.”
It is just possible that Ronaldo will give Real a revenue boost commensurate to his cost. José Angel Sanchez said, when he was Real’s marketing director in Mr Perez’s first term, that “everything gets better” with the purchase of a galactico. Ronaldo has genius, and the appeal of a sulky boy-band singer. With him, Real can charge more from television companies, sponsors, and clubs inviting them to play friendly matches.
But Real are not very concerned with making money. The club has no shareholders, only members. Like most big football clubs, they happily incur debt. Such clubs know their brands are so strong there will always be another multimillionaire willing to bail them out.
Nor would any creditor ever dare pull the plug on them. Banks may go bust and disappear, but not big football clubs. They mostly disdain tedious quests for return on investment. Instead they live for today. That is the rationality of the Ronaldo transfer.
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