Beyond Bosman the end of all transfer fees in European football

dr. Stefan Kesenne

em. professor of sports economics

Univ. of Antwerp and K.U.Leuven

Two important propositions in Sports Economics theory

1. The Invariance Proposition: The competitive balance in a profit-maximization league will be the

same with or without a transfer system.

2. The Uncertainty of outcome hypothesis:

The competitve balance or the uncertainty of outcome in sports has a

positive effect on spectators’ interest, ticket sales and TV ratings

Does the Invariance Proposition also hold in a win-maximization league?

American sports economists always started from the hypothesis that their Major League sports teams are profit maximizers. But in European football, most sports economists consider utility- or win maximization being a more relevant hypothesis. It has also been shown empirically that win maximization under the breakeven constraint is the dominant objective of a professional football team, (see Szymanski and Garcia-del-Barrio, 2009). A win-maximizing team’s demand for talent (hiring of players) is determined by the team’s (net) Average Revenue function (R-c°)/t

because, after the subtraction of the non-player costs, a team spends all its revenue on playing talent. In the following graphical presentation, we try to show how the market equilibrium under the transfer system does not deviate from the free-market equilibrium.

C

tx ty

NARy

Ew

NARx

tW

TRANSFER SYSTEM IN A 2-TEAM WIN-MAXIMIZATION LEAGUE

50 / 50

ce

narY

narX

t*W

Talent supply

And overcompensated by the fact that the small team cannot pay the transfer fee of a player, but it can possibly pay his salary, which is only a fraction of the transfer fee.

In fact, this improvement of the CB under the transfer system is very limited.

In December 1995, the Bosman verdict of the European Court of Justice abolished the existing transfer system, allowing end-of-contract players to move to another team without any transfer fee. Nevertheless, after 1995, the number of transfer deals more than tripled, from 5 735 to 18 037 in 2010, with skyrocking transfer fees up to 100 million euro for top players like Ronaldo and Bale. Over the same period of 15 year, football clubs’ annual transfer spending has increased from 403 million euro to 3000 million euro, an increase of more than 700 %. Less than 2 % of the transfer money was filtering down to smaller clubs.

Turning to some facts and figures

What these facts and figures indicate is that transfer spending has become a quasi-closed money circuit among a small number of European top teams, that can only buy talent if they can also sell talent. The spending is concentrated in a few clubs with the largest budgets and the financial support of “wealthy investors”. As mentioned also by the KEA-study, the European football competition has become a ‘de facto’ closed league, comparable to the ‘officially’ closed major leagues in North America.

An important observation is that, although there has been an increase in the teams’ transfer spending, their net transfer spending, that is: paid transfer fees minus received transfer fees has not increased.

Furthermore, the total turnover of the first division championships of all 53 UEFA member countries together increased from 9 billion euro in 2006 to more than 12 billion euro in 2010. Nevertheless, overall net losses increased steadily to reach 1,6 billion euro, with more than 50 % of the clubs reporting net losses for the year 2010. Also, in many clubs, players are not paid or paid too late, because of serious financial problems, both in terms of solvability and liquidity.

Altogether, this indicates that European football is sick and in need of some fundamental cures and refoms, including an end to the transfer system and to the trading of players or player contracts.

What I try to analyse, using a simple theoretical model, is the expected impact of : 1. The abolition of all transfer fees for all players, end-of-contract as well as under-contract. 2. The introduction of a training compensation system that is not linked to the transfer of a player.

Transfer System and Youth Training

A transfer market is redundant and unethical,

all transfer fees should be abolished and forbidden.

The abolition of transfer fees for end-of-contract players didn’t have much impact because clubs reacted by lengthening player contracts, although FIFA limited the contract length in 2001 to a maximum of 5 years, which is still too long.

Also, some teams reacted by forcing players to sign a new contract before the old contract expired. This way, some players never reach the end of their contract before retiring age. The Bosman verdict created an open and competitive European player market, which detemines the allocation of players and the level of player salaries. What is a transfer system good for on top of the competitive player market ? Transfer payments do not exist in any other industry, why should they exist in Football? Moreover, this trade of football players and player contracts raises ethical questions as well, because it is modern (well-paid) slavery.

Impact of abolishing transfer fees on player salaries

Assume that the unit cost of talent (ci) is equal to the

salary (si) of a talent, added to the difference between the

paid transfer fee (tpi) and the received transfer fee (tri)

devided by the average contract duration (m).

( ) /i i i ic s tp tr m

In a perfectly competitive player market, there is one single market-clearing unit cost of talent c. It follows that:

( ) /i i is c tp tr m for all i

It follows that all si are different, i.e. under the transfer system,

equal talents don’t receive equal pay.

So, the abolition of all transfer fees will not have a significant effect on average player salaries.

i itp tr

,is c for all i and s c

In the quasi-closed money circuit of transfer spending

among a few rich teams, the sum of all paid transfer fees

is equal to the sum of all received transfer fees,

( )1 i i

i

tp trs s c

n nm

The average salary level per talent can then be written as:

Without transfer fees:

s cSo, the average salary level is:

Money disappearing in the pockets of player agents Net transfer fees paid for migrating talent in and out of Europe.

Transfer money filtering down to smaller clubs (less than 2%).

Possible deviations from i itp tr

i itp tr and s c

So, average salary level is lower under the transfer system.

Without the transfer system, player and team sign a contract with a duration of 1 to maximum 3 years, and these contracts should be honoured. As in any other industry, a one-sided breach of contract should be punished, not by a money fine, because this would reintroduce the transfer fee by the back door.

The punishment of a team that breaks a contract should be a loss of points in the ranking or relegation to a lower division. The punishment of a player who breaks a contract should be his suspension for a number of games or the rest of the season. Obviously, contracts can still be opened or broken by mutual consent, or by court decision if one of the parties is not honouring the contract.

One of the unwanted consequences of the abolition of all transfer fees is that teams with a well-established and successful youth training program might suffer.

However, this is not a justification for paying transfer fees? There are better ways to guarantee the compensation of youth training.

Football without a transfer system

Modelling the youth training compensation system

Assume that there are n teams in a league, and that each team’s budget is Ri

: 1iR with i n

1

n

iµ R

* (1 )n

i i i jjR µ R z µ R

Every year, each team contributes the same percentage µi of its

budget tto a youth training fund. So, the money collected by the fund

is:

This amount of money is redistributed among all the teams in the league,

in proportion to the teams’ relative effort (quantity and quality) of youth

training. So, each team receives a share zi of the collected money.

The after-sharing team revenue Ri* is then equal to:

* (1 )i i iR µ R nz µR 1n

iiz or with

,

i

i

i

Rz

R

In the particular case that each team puts the same effort in youth training,

the after-sharing revenue of a low-budget team will be higher, because it

receives more money from the fund than it has contributed to the fund.

Before and After* Sharing Budget

So, a team will see its budget go up if

* ( )i i i iR R nz R R

i inz R R

A small team’s after-sharing revenue will be higher if its relative effort in training zi is larger than its relative budget

1/ 1i iz n and nz * ( )i i iR R R R

Impact on Competitive Balance, player salaries and demand for playing talent

Because European football teams behave as win maximizers rather than profit maximizers, it can be shown that this sharing system also improves the competitive balance in league, because the small team will increase its demand for talent and the large team will reduce its demand for talent.

.

Furthermore, because the reduction in demand by the large teams is smaller than the increase in demand by the small teams, the total demand for talent in the league is higher and so are player salaries.

This system will create a strong incentive among teams to have the best youth training, because teams will have to fight for their share of the fund.

Finally, this compensation and sharing system does not violate any European competition law, because it is not linked to the move or the transfer of a player.

Conclusions

The abolition of all transfer fees will put an end to the unethical trade of players or player contracts, without affecting the competitive balance and the average level of player salaries. Together with the creation of the proposed Youth Training Compensation system, the competitive balance will improve and the total employment of talent will enhance. Moreover, the proposed Youth Training Compensation system will create a strong incentive to invest in youth training. Players are free to move at the end of their contract in line with the European competition laws, without discouraging youth training, which also solves the dilemma of the European Court of Justice in the 2010 Bernard case.