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Tuesday, 31 January 2012

Katonomics 10: IP valuation again --how much is a footballer worth?

You can't keep a good Katonomist down -- particularly on a date like 31 January.  That's the closing date for the English and Danish "transfer windows" within which football clubs can sell their overpaid, under-performing players to their rivals and use the money to buy overpaid, under-performing players from clubs that have to sell them because they need the money to cover the debts incurred by overpaying their under-performing football players in the first place.  Anyway, sensitised to the transfer market for professional footballers, the IPKat's treasured expert on matters pertaining to the point of contact between intellectual property law and economics Dr Nicola Searle takes a look this week at the question of the moment: how much is a footballer worth?

"When the IPKat first suggested this football related post, my first reaction was panic. I know next to nothing about football. Indeed my knowledge of professional sports in general ranks only slightly above my knowledge of aglets. However, the IPKat pointed out that lack of knowledge about football is actually a qualification for discussing the topic. Limited knowledge of a subject has not dissuaded economists before, so I pressed on.
To begin with, let’s look at some economic properties of the market for footballers. I would argue that footballers share many characteristics with performers such as actors and dancers. Footballers, like artists, are intrinsically motivated to play football. This suggests that footballers would continue to play football even if they weren’t paid. However, tennis player Serena Williams recently professed that she doesn’t like sports and prefers shopping, so perhaps intrinsic motivation isn’t as relevant as I thought. 
Vertical -- but are their skills differentiated?
In which case, it’s all about the cash! Like the arts, the market for footballers exhibits vertically differentiated skills. Put differently, it’s an A list/B list, winner-takes-all market. For footballers, being top tier means that they are more skilled or more popular than those below. That potentially small difference means winning more games and generating more ticket sales than second tier players. Losing teams don’t fare as well financially, so it’s in a club’s interest to have the best players. Players know this and successfully bargain to capture some of the club’s benefits from winning.
The A list/B list structure of the market means that some players earn a lot of money, but the majority don’t. For baseball, a slight difference in overall skill level means that American baseball player Alex Rodriguez earned US$27M in 2007 whereas his teammates at the bottom of the payscale made $327k. Don’t forget, these are the athletes that made it to the big leagues. Consider all the other wannabe athletes and lower league players that earn nothing or considerably less. Like law graduates who hope to make partner and drug dealers who dream to be gang leader, the economics of athletic careers mean that aspiring athletes take on a lot of risk. 
We could also look at the market for footballers as husbands and partners (economics of marriage), but that involves far too much fake tan for my taste. 
So, how do you a value a player? You could use this American patent. Or, follow British based researchers Tunaru, Clark and Viney, use of the options-based analysis I discussed last week (here). They also note that much of the recent wealth of clubs comes from television contracts, which are increasing due to the sport’s popularity. 
However, what about the brand value of players? French researchers Villemus and Gurău note here that the brand value of the player and the club are interrelated. They’re the ying and yang of football. After all, what would the Wimbledon Football club be without Pelé Best? And H&M FC without David Maradona? (I hope I’m managing to offend as many readers as possible.) 
The brand value of the athlete rests firmly on the base of the player’s athletic value. It is that athletic value and ability to win that attracts fans and builds up a brand value. Being good looking or sufficiently interesting/charming will increase value. Here, the income and market models play a role. As the stakes (television contracts, licensing deals) grow higher, so the cash flow associated with a player increases. Competition between clubs drives up the market price for footballers as they bid against each other for the best players. 
However, where do athletic value and brand value diverge? Pinpointing it exactly is difficult. Given that the spectacle of a football match is a performance, I would argue that nearly all the value of a footballer is in the brand. You don’t go to a match to watch generic skilled athletes, you go to watch those players for that club. Ancillary revenues from merchandising and advertising benefit from the higher prices associated with branded goods and the large fan base. Athletic ability may be the key to stardom, but it is the brands and fans that make it so profitable.
So readers, how did I do? Where do you think the value of footballers lies?".
The IPKat notes that it's not just footballers that have a market value and an economic impact. The same is true of football club managers. This Kat thanks Shmuli Phillips for this link to this recent piece in the Financial Times on that very topic.

3 comments:

Ben said...

I think you did pretty well Nicola - and 'Pele Best' and 'David Maradona' had me laughing out loud. Now I am a keen football fan (Leeds United FC if you must know, no longer in the top tier but with a relatively large fan base and generally hated) and whilst this might not apply to my own team, its no secret that for the top players, footballing income is an adjunct to other income, particularly revenues from endorsement and sponsorship. When Wayne Rooney had one of his unfortunate 'incidents' and sponsors such as Coca-Cola shyed away it was quite clear that despite a reported footballing salary of anywhere between £8 and £13 million each year from Manchester United (they are quite famous, honestly Nicola), his annual income from endorsements from brands like Nike was possibly more than equal to this. But of course Rooney needs to play and succeed on the pitch to keep his value up ('keepy uppy' is a very important footballing term). But David Beckham is even more extraordinary - and playing as he does for a US 'soccer' team (LA Galaxy, I say no more) does not seem to have devalued 'brand Beckham' in any way, and he is now so all consuming in our global awareness that he seems to exist as a brand whether or not he plays football - something clearly recognised by other brands such as Adidas and Samsung who contribute to an estimated annual brand Beckham turnover of $40 million.

Anonymous said...

It is not often that I agree with other commentators, but I must on this occasion confer with Ben!

WE HATE LEEDS
WE HATE LEEDS
WE HATE LEEDS

Ben said...

In the aftermath of the MPS v Murphy / FAPL v QC Leisure decisions by the European Court of Justice in November 2011, I spent some time pondering the role of competition law in the licensing of Premiership football rights (if indeed they are 'rights' as football matches were held not to be works for the purposes of copyright)across Europe and whether or not the decision, which was heralded of case of competition law 'trumping' copyright law, would actually lead to a reduction in the number of licences for Premiership football in Europe. When in the pub, the economics of football television licensing are just as fascinating as the economics of player power, and with the added 'penalty' of the competition law 'nutmeg', something I would love to see debated in 'extra time' - or even 'tackled' by the 'guvnor' - if Dr Searle ever had an inclination to so do. Coz it's all Greek to me.

My earlier musings were on the 1709 Blog at http://the1709blog.blogspot.com/2011/10/murphys-law-of-licensing.html

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