€ 222 Million: The New Normal

€ 222 Million: The New Normal

Analyzing the Inflation of Transfer Fees in World Football

By Cynthia Jiang

"I don't think it's going to happen."

When FC Barcelona sporting director Roberto Fernandez was asked of the possibility of star player Neymar Jr. leaving Barcelona in the summer of 2017, he was very blunt in his assessment of the situation. In the days before, there had been much transfer speculation about Paris St. Germain activating the €222 million buyout clause in Neymar's recently signed Barcelona contract; more than doubling the current transfer record of €105 million spent by Manchester United in the previous summer. To many pundits, such an idea was ludicrous; in their eyes, and that of Fernandez, no team would be crazy enough to pay €222 million for any player, no matter their caliber.

Three days later, Paris St. Germain announced the signing of Neymar Jr. for a record €222 million. 

The History of Transfer Fees
In order to understand the intricacies of the European transfer market and the significance of high transfer fees, it is important to understand how it compares to the player market for American sports. In order to leave a team in American sports, a player must either demand a trade or wait for their contract to expire (Culpepper, Goff). On the other hand, in Europe, a player can only move teams through free agency or through a transfer, which is usually paid for by the team that wants to acquire the player. In order to buy the player, the team must pay the price of the player as set by their current club via player value estimations or the contract release cause, along with the value of their contract (Culpepper, Goff). Because of new financial regulations issued by the European governing body of soccer, UEFA, teams must be careful to not overspend on players; as a result, many teams choose to acquire players by activating their release clause, which essentially buys out the player's contract and leaves the decision of whether to stay or leave to the player in question. 

The first transfer in the past decade to send shockwaves around the world was Spain's Real Madrid acquiring star French midfielder Zinedine Zidane for the equivalent of €77.5 million. This purchase began Real Madrid's "Galactico" era of spending money on huge players; in between 2002 and 2014, the team broke the transfer record twice through the acquisition of Ronaldo in 2009 for €94 million and Gareth Bale in 2013 for €100 million (the first player in world football history to break the three-digit mark). Past 2013, however, the transfer record was smashed by Manchester United, ironically through their purchase of another star French midfielder, Paul Pogba, for €105 million (SportsIllustrated.com). 

After Pogba's purchase, many analysts such as Gary Lineker of BBC Sports predicted that the increased spending power from huge TV contracts, sponsorships, and the growing popularity of the sport in emerging markets such as North America, the Middle East, and Asia would cause occurrences like the Pogba transfer to occur more frequently and potentially at greater sums (Stone). However, they, and the majority of the sporting world, couldn't have predicted that the transfer record would be more than doubled less than a year later. 

Where Does This Money Come From?
Named the most valuable club in the world 5 times in a row by Deloitte in the middle of their Galactico Era (Wilson), Real Madrid was able to fund their extravagant purchases through high gate attendance, rich sponsorships, exclusive TV contracts, and favorable tax laws in Spain. This is the most traditional way as to how clubs are able to acquire money to fund their purchases of players; clubs that have spent the most amount of money on purchasing players in the past 5 years (FC Barcelona, Manchester United, and Real Madrid), have also been consistently ranked at the top of Forbes annual list of most valuable soccer teams.

Less traditional ways of funding player transfers comes from foreign or private ownership of a club, usually by oligarchs or oil barons representing the interests of their respective countries in expanding the role of their country in the spot. Notable examples of this include Chelsea FC, owned by Russian billionaire Roman Abramovich, and the previously aforementioned Paris St. Germain, owned by the Qatar government via Qatari businessman Nasser Al-Khelaifi (Culpepper & Goff). Because the rules of financial fair play established by UEFA (the European governing body of soccer) only state that a club "cannot spend more than 5 million euro of what they earn" (UEFA.com), it is easy for these owners to pump in cash from their businesses via sponsorships to fund expensive player transfers and elevate their club to the next level. Particularly for clubs like Paris St. Germain who have the national interests of countries tied to their success (Culpepper & Goff), it is easy for them to circumvent these rules in order to acquire the best players to become part of the best.

Looking to the Future

The fee inflation caused by an increase in spending power and player quality alike has culminated with the purchase of Neymar; however, I believe that it is likely that the market will continue to trend in this direction, as traditionally mid-tier teams have already shown that they are capable of fighting for the best players alongside Europe's elite teams. 

Already, the fallout from Neymar's purchase has begun: contract renewals for even slightly-better-than-average players have already begun to include release clauses of €600 million. Neymar's old club, FC Barcelona, broke Paul Pogba's €105 million transfer fee twice to sign his replacements, Philippe Coutinho and Ousmane Dembele. Other teams, such as Manchester City, splashed the cash to buy players who previously were thought to be untouchable, because their release clauses were dwarfed by the enormous sum paid for Neymar.

I personally believe that the jury still remains out on whether or not Neymar's transfer fee will be smashed again in the next transfer window; however I think that it is evident that the costs of operating in the transfer market are higher than ever. Many speculate that like Bitcoin or the housing market, the transfer bubble will burst. Other experts believe that it is more likely due to the sport's rising global footprint, the advent of modern technology, and forces such as inflation, that the high transfer fees are here to stay.

Sources:

UEFA. “Financial fair play: all you need to know.” UEFA.com, 30 June 2015, www.uefa.com/community/news/newsid=2064391.html.

Stone, Simon. "Paul Pogba: Manchester United re-sign France midfielder for world record 89 million pounds." BBC Sport, 9 August 2016, http://www.bbc.com/sport/football/37016170

Rapaport, Daniel. "The Ten Richest Transfers in Soccer History, and How They Worked Out." SportsIllustrated.com, 3 August 2017,

https://www.si.com/soccer/2017/08/03/biggest-transfer-fee-soccer-history-neymar

Wilson, David. "Why Real Madrid is So Rich." Bleacher Report, 8 June 2009, 

http://bleacherreport.com/articles/194885-why-real-madrid-is-so-rich

Culpepper, Chuck & Goff, Steven. "Neymar’s transfer involves a record amount of money — and a whole lot more," The Washington Post, 3 August 2017,

https://www.washingtonpost.com/sports/neymars-transfer-is-about-a-record-amount-of-money--and-a-whole-lot-more/2017/08/03/586f5ef6-788b-11e7-8839-ec48ec4cae25_story.html?utm_term=.c433d51eae42

Rummenigge, Karl-Heinz & Centenaro, Michele. (2014).  "Study on the Transfer System in Europe." European Club Association