Why It's Insane to Pay $132 Million for a Soccer Player -- And Why It Isn't

The news — finally made official — that Spanish soccer club Real Madrid has lured Welsh player Gareth Bale away from English team Tottenham Hotspur for a world-record transfer fee of $132 million (or €100 million) has had the soccer industry on edge for weeks.

Even before the deal was confirmed, insiders rushed to condemn it. Arsenal manager Arsène Wenger referred to the staggering sum as "a joke," while new FC Barcelona coach Gerardo Martino upped the ante by saying the planned transfer showed “a lack of respect to the world in general.”

It does seem crazy to spend such a vast amount of money on one player, especially in a decidedly weak Spanish economy where unemployment is sky high and where many businesses — including Real Madrid, and indeed the majority of Spanish soccer clubs — face high levels of debt. And to offer Bale a salary of hundreds of thousands of dollars a week when so many people struggle to make ends meet seems downright absurd.

Yet the Gareth Bale transfer is only the latest in a string of big signings this summer. In his eagerness to criticize Barcelona's arch rival, Martino might have overlooked the fact that his own club is among the heaviest spenders in the world of football year after year. This summer, the club paid a reported $67 million for Brazilian star forward Neymar, while selling another player, David Villa, for $7 million only three years after having paid over $50 million for him.

And that's just one club: I could list dozens of other examples at clubs such as Manchester City, Chelsea, Paris Saint German, and Monaco. Knowing the money for Bale was on its way, Tottenham Hotspur itself has been a big spender, too.

And whether we like it or not, the soccer industry is far from the only sector of the economy that is turning into a so-called "winner-take-all market" in which the few who have risen to the top of their profession (think of professional athletes, best-selling authors and Grammy-winning pop singers, but also Fortune 500 executives, salespeople, and investment bankers) can earn extremely high fees while a much larger group of also-rans in these sectors barely earn a living.

What explains these exceedingly high bids? And does it make any business sense, in soccer or the world at large?

Most winner-take-all markets emerge because a large number of buyers, be they music aficionados or book consumers, are willing to pay a little more for the services of one performer over another. But one reason why the soccer market seems so out of control is that it is fueled by a small number of extremely wealthy buyers who are often intensely interested in a particular player. And when soccer club presidents and owners try to outdo each other in signing "the biggest name" (which may be exactly what is happening between Real Madrid and FC Barcelona)? the resulting bidding wars can quickly get completely out of hand. Club presidents or owners often become their own worst enemies in these situations.

However, not all big bets on star talent are irrational or otherwise ill-advised. That's because in many domains, including soccer, one individual can have a profound impact on success on and off the field of play. If Bale ends up being as consistent a performer in the Spanish league and in the Champions League as he was in Tottenham's past season in the English Premier League, the investment may start to seem a lot less outrageous. And because many star players are essentially strong brands, they can often be a deciding factor in a consumer’s decision-making process to attend a game, buy a jersey, or otherwise spend money that flows to the club.

In an increasingly global market where only a few clubs compete for the attention of billions of soccer fans, one high-profile star can have a significant positive impact on the bottom line. David Beckham — another of Real Madrid's acquisitions in the past — proved that point convincingly.

Having had a chance to study Real Madrid's business strategy, I know that these are exactly the kind of advantages that club president Florentino Pe?rez is banking on. His so-called "Gala?cticos strategy" has brought his club to the highest echelons of the sports industry. According to some studies, it is currently the top-ranked soccer club in terms of revenues and brand value. The growth of Real Madrid's marketing revenues in particular has outpaced that of their competitors.

Making such big bets on individuals is a risky strategy, for sure, but one that can have a tremendous pay-off commercially. Whether Bale will live up to expectations and will turn out to have been the right gamble is a big question — no one can know for sure at this point. Bale doesn't quite seem to have the global appeal of a Beckham or Cristiano Ronaldo yet, and it is a distinct disadvantage that he will likely never compete in a FIFA World Cup (because the chance that Wales will qualify is slim), but perhaps he'll grow into the role of superstar. What is certain is that his new club has the marketing experience and infrastructure to make his performance on the field count off the field, too.

The wider take-away here is that unless drastic measures are taken to curb the free flow of soccer talent across countries and clubs or unless soccer's governing bodies significantly alter the way in which contracts between players and clubs are structured, these winner-take-all trends are here to stay. The battle for top talent will only intensify, widening the gap between the "haves" and the "have nots." It won't be long before today's transfer record is broken yet again.

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Anita Elberse is the Lincoln Filene Professor of Business Administration at the Harvard Business School and faculty chair of the HBS Executive Education program, “The Business of Entertainment, Media, and Sports.” Follow her on LinkedIn (by clicking on the yellow box in the top right corner of this page), Twitter or Facebook, or pre-order her first book, Blockbusters: Hit-making, Risk-taking, and the Big Business of Entertainment.

Photo Credit: Mirror Online