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Tottenham Hotspur

Gareth Bale to Real Madrid: An Exercise in Economic Thought

So, as many of you have heard/read, Real Madrid has made a massive bid for Gareth Bale. The number seems to be 100 million (pounds or euros depending on the source)*. At least from Twitter (I know the greatest source to get the general feeling of events), many seem flabbergasted at such a bid. Naturally we have seen people wonder how one player could be worth so much money. However, let us get away from the absolute figures, and look at the value of Gareth Bale and 100 million to both clubs [1].

But first, let us dispel this idea that no play is worth x amount of dollars. The supply of money in football has increased greatly. When increases in the money supply (notice not demand or market efficiency) lead to increases in prices, you actually have inflation. With the amount of money that has come into the game from new owners, new TV deals, and the increasing popularity of the game throughout the world, the supply of money has undoubtedly increased. Therefore, fees and salaries of players were going to increase. This trend looks to continue. Unlike many American sports teams, European football clubs lack the organization, and maybe the right court precedents, to effectively collude against the players [2]. So when new owners come in with barrels of cash, it has a much greater effect on transfers and salaries, than Mikhail Prokhorov’s entry into the NBA [3]. So, expect more “outrageous” transfers unless clubs successfully collude or the fan support for football crumbles.

Also, remember that value, in particular marginal value, of any particular player is not equal between football clubs. A recent example of this is Javi Martinez. Bayern Munich paid 40 million euros to acquire him from Athletic Bilbao. He was the missing piece for an already talented Bayern side. His inclusion took them from the position of top 4 power in Europe to that of undisputed top team in all club football. Go beyond the marginal revenue added from finishing higher in the Bundesliga, winning the Champions League instead of losing in the semi-finals/finals, and winning the German Cup. Go further than the marginal increases in shirt sales, TV ratings, etc. from having such a great team. Remember, football, as any other sport, is not just about money; it is about glory. What price would you pay to take that step and become the greatest side in the history of a club like Bayern? What price would you pay for one of the greatest seasons in the history of club football and a chance to have become a pantheon side [4]? The transfer of Javi Martinez added that final piece, the missing piece, they needed to reach such lofty heights. Also, what other alternatives were there? Sergio Busquets would have been unsignable compared to Javi Martinez. I believe the same could be said about Arturo Vidal. It was in the 2012-13 season, not the 2011-12, which saw Ilkay Gundogan truly blossom as one of the world’s best all-around midfielders.  So is that marginal benefit of Javi Martinez worth 40 million euros? I would think so.

But it was worth it for Bayern Munich. Let’s say that Javi Martinez signed for Swansea City for 40 million euros. Now the difference between Arsenal and Swansea last season was 27 points. I doubt that Lionel Messi alone could bridge that gap from them, let alone Javi Martinez (though it would be awesome for Messi to do something like Maradona at Napoli). If used correctly, Martinez could add enough value to get them into the Top 6, but I doubt anything more. So he gets them a few places higher up, but still mid-table. That is not worth 40 million euros. Look at the form of many mid-table teams in the final ten games of the season and tell me that these teams care about getting 6th instead of 10th. Once safe from relegation and assured no hope of a Champions League place, the marginal value of going up or down a spot is the table is less than 900,000 pounds [5]. Unless Javi Martinez brings in a ton of marketing potential, can attract quality players to Swansea by his presence, or Swansea really value finishing 6th or 7th, then signing Martinez is a terrible investment for them.

Now let us look at the value of Gareth Bale to Real Madrid. Remember that Real Madrid care about more than wins and losses [6]. They, in particular Florentino Perez, want to a certain aesthetic appeal when it comes to their style of play and the players themselves[7]. And right now, though they may not admit this, but Real Madrid are being held hostage by Cristiano Ronaldo. Not only is he monumentally valuable to them on the pitch, he is the only player that can carry their global brand. Back when they brought Ronaldo to Madrid, I do not think they expected to be so dependent on him [8]. But now, Ronaldo holds all the cards. He can wind down his contract, and then go anywhere he wants on a Bosman after the 2014-15 season. He could command literally the highest salary that could possibly be paid to any player. If Real Madrid loses him, they lack that global icon that appears a necessity at Madrid. If they do resign him, it will be due to Ronaldo capitalizing on his leverage and making off with a king’s fortune as he goes through his 30s. To leverage a club so heavily, on a player in his 30s, is quite a risk.

Now you see why Gareth Bale is so important to Madrid. They probably see him as the best Ronaldo replacement in the world [9]. If they sign him now, they can groom and market him as their global icon. That is why Madrid would not want to wait a year or two to sign Bale. You lose a chance to exploit his marketability and lay the foundation for him to take over from Ronaldo as their global superstar. In fact, for the first time since Beckham, Madrid would have a star they could fully market to the English-speaking world. For a club that values maintaining and expanding its brand, this benefit should not be trivialized. After the 2014-2015 season, if Ronaldo leaves, Madrid will have their star to replace him. He would be a person the supporters and the world are familiar with and already associate with the white of Real.

On the pitch, having Ronaldo and Bale as inverted wingers in a 4-3-3 could become the scourge of Europe [10]. La Decima, La Liga, asserting themselves as the dominant power in both Spain and Europe, these potentialities are all on the table for Madrid if they acquire and integrate Gareth Bale. Combine this with the money saved in a Ronaldo contract negotiation (or letting Ronaldo go, not grossly overpaying a player in his 30s (with respect to performance and marketing), and having Bale be close to what Ronaldo is now), the potential money earned in a sale of Bale (Madrid are not bad when it comes to getting money from player sales), and the fact that Madrid do not have many suitable alternatives who could potentially replace Ronaldo. At least to me, 100 million (euros or pounds) does not seem that grossly overpriced when you consider the things that Real Madrid value.

The question becomes a little murkier for a club like Tottenham. Sure they could get 100 million euros (or pounds) for Bale, and that is a lot of money to go strengthen the squad.  But what good is 100 million if you cannot spend it? Remember, and this is woefully underrated in transfer talk, a player must agree to go to a club. Arsenal could activate Lionel Messi’s release clause (250 million euros I believe), but if Messi does not want to leave Barcelona, then he will not leave Barcelona. For a club like Spurs, with no Champions League, little to no domestic/international prestige, and now no superstar player, how well could they spend 100 million? What brings players to that other team in North London?

Look at their squad if you take out Bale [11]. Obviously, the strong part of the side is their (or what I think should be their) first choice midfield trio. In the 4-3-3 that Andre Villas-Boas would like to employ, Sandro, Paulinho, and Dembele, in theory, fit fantastically. It is an ideal Premier League midfield that blends power and pace with technique. They would have Sandro sitting deepest with Paulinho and Dembele playing further forward.  You could also say that the first choice center-back pairing of Jan Vertonghen and Michael Dawson are Top 4 caliber.

After that, there is not much to like about this team. Their fullbacks are nowhere near the quality needed to pose a Top 4 finish without Bale. Kyle Walker had a complete shocker of a season and I have never been high on Benoit Assou-Ekotto. Up front, on the right, Aaron Lennon provides pace and stretches defenses, but he compliments an attack, he does not lead one. On the left, there really is not much from which to pick. Honestly, their best option is probably Lewis Holtby, in a role similar to Santi Cazorla at Arsenal. Whether Holtby could adapt to playing on the left (really defending on the left) is a question that is unanswered (I would love to hear from anyone who really watched his time at Schalke). At this point in the transfer window, center forward remains a nightmare for Spurs.  On the one hand, you have a striker who can be productive but also picks up nagging injuries, at a seemingly high rate. On the other hand, you have Emmanuel Adebayor.

Can they fill all those holes with 100 million? How do you attract players when the current squad is far from Top 4 caliber and you cannot offer them Champions League football? Add in the fact that playing in the Europa League does not exactly help a club’s ability to compete in the league [12], and Spurs are left with few options. For a club like Spurs, the Manchester City route is off the table. They cannot and will not offer wages well above market value to attract quality players. I believe they would have to go after younger, underpaid players or players at clubs in financial turmoil. Adem Ljajic at Fiorentina is an example of the former while Valencia and Malaga would be examples of the former. However, how many quality pieces can be extracted from these sources?

Another problem for Tottenham is internal: Daniel Levy. Levy is notorious for leaving transfers to the last minute. Let us say that Spurs somehow fill their squad holes with 5-6 signings; many of those signings would be made late in the window. By that time, the season will have already started. The new signings will still need to get settled in England/Premier League/Spurs; Villas-Boas will need to find out how to best utilize these signings; the current Spurs players need to figure out how to play with their new teammates. To have that much turnover and with no pre-season to work together, Spurs will have dug an enormous ditch with respect to the table. When the season ends with a finish outside the Top 4, how many of those players will be willing to stay at Spurs? Spurs may be forced to sell these players to clubs that can offer Champions League football or risk having disgruntled players who could become cancers in the dressing room. It might serve them better to keep Bale for a season and if they get into the Champions League, keep Bale or sell him for a similar, if not higher, fee.

Is Gareth Bale worth 100 million? That is a question without a clear-cut answer. For Madrid, their need, for a potential global superstar, the ability to become the power in Spanish and European football, and a Cristiano Ronaldo insurance plan, may make this kind of investment a wise one. For Tottenham, they could be worse off without Bale and with the cash compared to keeping Bale, potentially getting into the Champions League, before selling him. The element that many people underestimate on the outside but are willing to pay to protection against is uncertainty. No one can predict the future [13]. Humans are generally risk-averse people. There is value in just removing variation without affecting the expected value of an event. Therefore, no transfer should be judged by the fee alone. We have to account of the value of decreasing uncertainty. We cannot assign absolute values to preferences (winning, making money, etc.) nor do we have full knowledge about the nature of every clubs’ preferences (if they have a certain preference and the magnitude of that preference). It is probably best to evaluate transfers deals by asking the question, “What were the other options and were they better options?” For both Real Madrid and Tottenham, at 100 million, there does not seem to be a clear cut better option than having Gareth Bale on their team.

*From this point on the bid is 100 million without a euros/pounds label since I do not know what the bid actually is.

1) Just for your information, I love economics, and I would not be averse to being call an F.A. Hayek supporter.

2) Anybody familiar with the actions of a central bank or federal reserve and the impact of these actions on liquidity in the market will know how injections of liquidity can be “multiplied” to create an increase in the money supply x times greater than the initial injection. The same thing happens in football as transfer fees received are often spent to acquire players from others clubs.

3) Last season all clubs receive a fixed 33 million pounds, money based off live TV matches, and money based off their league finished. League position awards went from around 800,000 pounds (QPR) to 15 million pounds (Manchester United)

4) My greatest sides of all-time (in order): 1970-1973 Ajax, 2009-2011 Barcelona, 1989-90 AC Milan, 1981-84 Liverpool

5) For example, the max salary in the NBA, franchise tagging in the NFL, draft pick compensation in the MLB, and those are the less obvious tools used by owners. FFP would actually serve to shift those resources away from players and back to the owners and clubs by allowing for investment in youth programs, stadia, etc. With some creative bookkeeping, I could see some owners just pocketing the cash. Personally, I think many prospective American owners look at FFP and see a potential gold mine, which explains their sudden increased interest in football clubs in the recent past. Well that and the fact that European football clubs are for the most part some of the most poorly run businesses. Effectively they are misused assets that are gushing with earning potential.

6) Talk to Jupp Heynckes and Fabio Capello about that.

7) Talk to Claude Makelele about that. In all honesty, if Perez falls off the wagon and goes all Galacticos, valuing star power over functionality, then Madrid fans should be very worried about their club. In terms of on-pitch production, Suarez at 40-50 million is a much better value and fit.

8) Pouring a 40 out for the brilliant career of Ricardo Izecson Dos Santos Leite until 2009.

9) Gareth Bale copying Ronaldo’s free kick routine reminds me so much of young Kobe trying to do press conferences like Michael Jordan. And no, Ronaldo is nowhere close to the same league as His Airness.

10) Defensively it could be a nightmare for Carlo Ancelotti. He relied heavily on the energy and ground covering abilities of Gennaro Gattuso and the all-world athleticism of Clarence Seedorf to defend while fielding an absurd number of playmakers. Even then, Milan had some terrible defensive meltdowns (see Deportivo de La Coruna in 2004 UCL and the 2005 UCL Final). Real Madrid look poorly equipped to have wingers who do not track back. Or maybe Madrid have found a way to clone Varane.

10) Why this angle? Because it would be too easy to describe how Spurs played last season without Bale to prove my point.

11) Whether players take that into account is beyond me.

12) Uncertainty principle makes this a reality, unless you are omniscient. In fact, if you do not believe in an omnipotent being (as in one that can place a particle anywhere and give it any momentum vector), then free will must exist. Obviously, this does mean that believing in God’s existence does not imply that you cannot believe in free will.

Real Madrid, in this situation may be a classic case of moral hazard as well. The incentive for Florentino Perez may be to acquire Bale for the purposes of elections, prestige, and his desire for stars, makes it the logical decision to make, even though it may not benefit Real Madrid (the club) enough to justify the price tag.

The original article can be found here on

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