Thoughts for a lazy Saturday

By: Isaiah | July 18th, 2009

I know that Kevin just wrote a post for today, but I’ve got a few things that I’ve been thinking about that I’d like to throw out there. Hopefully you’ll forgive me for this incessant posting.

Throughout this transfer season, one of the major justifications for bringing in a different striker than Eto’o has been that Eto’o doesn’t produce as many jersey sales as others would or the reason that FloPer spent 8450 quadrillion euros on Cronaldo is that jersey sales will be through the roof. I’d like to take a moment here to discuss the finances involved in jersey sales to point to a common misconception within the soccer world. Others on this site have already made this point in the past (last summer, I believe) and I owe them a debt of gratitude for planting this little thought seed in my brain, though I’m not sure exactly who they are.

To the numbers:

1. Jerseys cost approximately €80 apiece.
2. Players such as Ibrahimovic (to use an easy example) cost somewhere in the €60m range.

Assume for a moment that the profit margin on jerseys is 100% (my math will make sense in a second) and that for every jersey sold, the club gets €80 in profit. Obviously this isn’t the case, but bear with me. In order to make up for the transfer price, Barcelona would have to sell 750,000 Ibrahimovic jerseys. I’m not sure that’s going to happen and that’s in a perfect world where production costs are €0. Considering that the profit margin is probably somewhere in the €10-30 range (I’m really not sure about this), the number of jerseys being sold due to the arrival of a player becomes, realistically, a non-factor in the original purchase. Just so you don’t have to do the math, assuming a €30 profit per jersey sold, the club would have to sell 2 million jerseys to make up a €60m purchasing price.

Jerseys are basically the supplemental income of a club. Whereas some of us take on a second job to help pay the bills, clubs sell jerseys. That means, of course, that the transfer fees are recouped in different ways. My main line of thinking on this — and you should feel free to add your own thoughts about this in the comments — is that it’s the media rights that bring in the real revenue and the marketing made possible by high-profile players that really does the trick. It’s obvious that the players personally get a cut of the advertising money, but it’s also obvious that the club gets a cut of its images rights being used in some of those commercials (for instance, note that a lot of commercials with famous players have nothing to do with their current team — they’re all dressed up in Nike or Adidas or non-obvious clothing, but other commercials have them in their full get up). Take the Nike Som Un commercials featuring Barcelona and several of its players. They are one and Barcelona gets some cash. Win-win.

Ibrahimovic’s profile will be raised on the global market if he does make the switch to Barça. The same would be true for Villa who, despite already being a major player in the Spanish ad game, would certainly receive greater offers throughout the country and perhaps Europe. Ibra can’t be oblivious to that, a factor Eto’o rarely deals with in Europe (he’s sponsored by Puma and has a large French-speaking audience in Africa, but it isn’t as lucrative as the European market*) and he’s not a Nike man on a Nike team. Ibrahimovic, of course, is a Nike man, meaning that Barcelona would able to use him to promote their new jerseys and their new seasons wearing said jerseys (Eto’o doesn’t appear in those ads, I assume because he’s a Puma man). Note that Villa is also a Nike man.

There are lots of tangled webs within any business and soccer is no different. No doubt there is pressure from Nike for Barcelona’s next major signing to be a Nike man, but I don’t know how much influence that has on the actual decisions being made.

Beyond all that, of course, are the media rights from TV channels showing the actual games. Barcelona, like RM, is able to negotiate for their own TV rights thanks to Spanish law. They’ve broken from the rest of the league and made their own way in a world where the bigger you are, the more valuable you are at basically an exponential level. That is, perhaps, something that should be change so that revenue is spread more evenly across the league, but that’s just one of the thing that needs to be changed about the general soccer world (salary caps and free agency, especially restricted free agency, should be implemented — but that’s for another post). As it stands, bringing in major names like RM has done only increases their bargaining abilities with the various TV stations, who pay them X euros a year to broadcast games live and in color and then recoup those expenses by charging a bit more to their advertisers, whose audiences are larger thanks to the bigger stars on display.

Thus I can imagine that sometimes, from the club’s point-of-view, there is more to be gained by selling a player with a quantifiable yearly return (in Eto’o’s case that’s goals) and replacing him with a player whose name will make a huge splash in the media and create a lot of interest from the fans. Eto’o, for all his brilliance, can’t draw in audiences like Ibra can because, well, he’s not new. He’s old hat, so to speak, in that he’s not a Leo Messi, whose star power is kept constant by his constant “magic feet”. Eto’o, despite being a magnificent player, isn’t the “magic feet” type and thus never really draws in crowds like Messi, Ronaldinho, or even a Cronaldo (ick). Ibra promises to be a blend of those two types, a magic man with predatory instincts and you can’t really fault Barcelona’s management for their desire to get him (even if you can fault them for other things). It might even be worth buying a player for far too much money in a bid to increase your revenue stream by a substantial portion of that fee. That is, if a player costs €60m, yet you recoup €25m extra per year thanks to increased media revenue, you’re likely to make that switch. Even considering a 5-year, €50m contract with the player himself, you’re still likely to make the switch because you come out €15m to the good in the end. Or you sell the player for €30m 3 years down the road and you make yourself a bundle of cash.

The math works like this:

€60m + (3 x €10m) = €90m
(3 x €25m) – €90m + €30m = €15m

In that sense, despite taking a financial loss on the transfers themselves, you’ve actually made a bundle of cash in a short period of time and you’ve assured yourself of overall financial success thanks to the fact that if the player completes his 5-year contract, you make €15m off of him on the media rights alone. Obviously this is an extremely simplified model of how the club runs (with made up numbers), but I think that’s the general gist of things, it’s just that when you combine all of the player contracts and the transfer fees, the total value of all your media rights (and ad rights) begins to make for some pretty intense math and negotiations. Successful clubs are obviously able to maintain the right balance and I think that, thanks to Laporta’s business sense (and that of the board in general), Barcelona is extremely financial smart. If we “overpay” for Ibrahimovic, we may very well be earning a massive amount of money in the end.

Now you may return to your regularly scheduled Saturday activities. Mine are pool + beer. Later, Gold Cup.

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* By the way, I don’t know enough about European ad markets to be able to make a statement about this, so I’ll just ask a question: are there a lot of black players making large ad campaigns in Europe? I could imagine the answer is yes in England and France and no pretty much everywhere else, but I’ve got no real basis for that. Thierry Henry makes a lot of money in ads I would imagine (he’s in ads here in the US, for instance, though I’ve seen fewer now that he’s not in the English game), but does he do a lot of ads in Spain? I could very well be wrong, though. Anyone out there have any opinions on this?