Matt Scott: How do you price a player? Football’s fundamental inefficiency


“Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.” Albert Einstein

When Einstein wrote the most famous equation in physics, he identified his inputs very clearly as energy, mass and the speed of light: E=mc2. But then the relationship between energy and mass is itself intrinsic, a fact represented in the paradox about what counts and can be counted.

In markets the relationship between what counts and what can be counted is necessarily less scientific. How does a baker price his bread? Or a real-estate agent a house?

As economists point out, there are certainly market indicators such as availability of the product and how competitors are pricing theirs. But when it comes down to any transaction the outcome depends more on art than on science. Unlike Einstein’s universally applicable theories more than 100 years ago, which are being validated as 100% accurate by discoveries in deep space today, there is no one-size-fits-all formula that can predict precisely what is a satisfactory price for all goods anywhere in the world. If there were, then stockmarkets would have a much more limited function than they do today.

In a market as illiquid as that through which footballers are transferred, the method of price determination is all the more haphazard. There are so many factors, many of them intangible, that will weigh on the cost of a player.

On talkSPORT Radio on Saturday night, I spoke to Steve Parish, the co-owner of Crystal Palace, who articulated how buying footballers is something of a finger-in-the-air process in many respects. “Getting the top players is difficult,” he said. “It’s a difficult transfer market right now, I think it’s kind of a bit blocked up really. Nobody really wants to go first, nobody wants to set the valuation. I think it’s always difficult.”

Parish is absolutely right about blockage in the market. There have been precious few meaningful deals and almost all have been limited to around £10 million. Arsenal’s purchase of Chelsea’s Petr Cech, Dimitri Payet, the France international going to West Ham United, and Nathaniel Clyne moving from Southampton to Liverpool all came in at around this figure, although clubs have been coy on exact details. Only Manchester United’s long-trailed move for PSV Eindhoven’s Memphis Depay, at around £30 million, involved a sum substantially higher.

As Parish makes clear, clubs prefer to move slowly and have others set the market benchmarks so as not to overpay. “For us to get in to the top 10 in the Premier League we’ve got to make sure we’re bringing in top-10 Premier League players. And it’s not easy, because everyone wants those players,” added Parish.

“It is important you don’t have just one target in a position because any number of things can stop you getting your first target and it doesn’t put you in particularly great negotiating position if everyone’s going for him and you only want that one.”

Parish and his peers are doing their best to create an effective picture of the market but economists would still probably disdain football as a supremely inefficient business. The amounts spent on players can be extremely wasteful. This is because of the absence of information – the lifeblood for effective price determination – as clubs prefer not to share in public the sensitive contract data around their players. Understandably clubs feel that in so competitive a market as football it would undermine their ability to perform.

At the very top end the inefficiency becomes even more acute. This is because it is impossible to have multiple choices for the best players in the world. There is only one Cristiano Ronaldo, one Gareth Bale or one Memphis Depay – this is what economists call an inelasticity of supply – so if you want that one player, you pay must dear for him. (Indeed certain clubs such as United and Real Madrid actively want to pay exorbitant fees in the transfer market, for marketing purposes, as it shows them to be the world’s most potent clubs. This is something economists would term conspicuous consumption.)

Inelasticity of supply is another input in the inexact science around the valuation of players. However one agency has now tried to break down the process of pricing players into what it perceives to be the constituent parts. Prime Time Sport, run by the former Barcelona commercial director Esteve Calzada, is a player-representation and commercial agency that has excellent pedigree in football and has launched its PTS Football Value Index.

It sets out its methodology thus:

· Current club’s average player-sale value; the origin club affects the player value
· Comparable football clubs’ average player-sold value
· Market value perception; press reports and transfer sites weigh on transfer fees
· Player’s on-pitch position
· Age
· Years outstanding on player’s contract
· National team appearances
· Minutes played
· Goals scored
· Injury history
· Image-rights value
· Technical quality

These are all important inputs, although I would argue that one of the most important is wages, but I can understand why this base is not covered since it is not publicly available information. Even so, it is as scientific an appraisal as would seem feasible for so inexact a process as player valuation.

Using these metrics, Prime Time has given a list of whom it believes are the 20 most valuable under-21 players in Europe right now, and its results are intriguing. It ranks them accordingly:

Since these top-20 under-21s alone represent a combined estimated market value of €485.4 million, Prime Time’s stated aims are important. This is because for footballers, there is yet another disconnect between science and reality. The accounting value of a player is entirely different to his market value.

The way a player is valued in a club’s statutory accounts relates to what it costs to purchase him, less the proportional time left on his contract, which is written down year by year under a process called amortisation. So if a player is bought for £10 million on a five year contract, after one year the accounts show he is now worth £8 million, after two years, £6 million, and after four years £2 million. After five years he is necessarily worth nothing as he can leave ‘on a free’.

But what the accounts will show bears little or no relation to a player’s market value. Raheem Sterling, as shown in the table above, has a market value of £35.5 million (at least). Yet in Liverpool’s books he will have no accounting value at all, since he was taken from Queen’s Park Rangers at a very young age.

This is where Prime Time’s index has enormous value to the football business. The rationale behind it, Prime Time says, is as follows: “Clubs need to know the REAL value of their main asset, the squad. The accounting value may differ significantly from this, so there are many situations when football clubs need the most accurate valuation of players or squads. The main usages are in transfers (to help in the decision process and in negotiations), in [acquisition] processes, in equity (when a significant difference between the accounting value vs the real value can affect the equity position of the club), to make a rational value allocation for insurance, to provide real and relevant information to investors, and to set guarantees in loans and other financial products.”

As the football business becomes increasingly sophisticated due to the amounts of money it generates, creating more interest to the wider world of high finance as a result, these aims are important to fulfil. A rational, independent and objective measure such as Prime Time’s index is unreservedly a good thing. If clubs start to consider it as a reference tool through which they enter negotiations with others over player purchases, it can only improve the economic efficiency of the game.

You don’t need to be Einstein to figure that out.

Journalist and broadcaster Matt Scott wrote the Digger column for The Guardian newspaper for five years and is now a columnist for Insideworldfootball. Contact him at moc.l1721320087labto1721320087ofdlr1721320087owedi1721320087sni@t1721320087tocs.1721320087ttam1721320087.