The Business of Football Transfers: An in-depth look at the Multi-Million Dollar Industry

During the FIFA Congress held in Kigali-Rwanda on 16 March 2023, the re-elected President, Gianni Infantino, revealed some of the “development of football” [1] promises for the next four years stressing on improving football regulations and FIFA statutes by continuing to look at the transparency of salaries in the transfer system and maybe introducing a cap.?

In recent years, transfer fees have become a contentious issue in the world of professional sports, particularly in modern football, where the highest transfer fees in history have been paid. Starting with the 222 million euro transfer of the Brazilian player Neymar[2] from Barcelona to Paris Saint-German in the summer of 2017 - creating the domino effect for the rise of the “Mega-money” transfer, followed by the 180 million euro transfer of Kylian Mbappé[3] to PSG, to the recent 121 million euro transfer of Enzo Fernandez[4] to Chelsea, clubs rushed spending millions of dollars to secure the services of top players.

The imbalance of financial resources among European clubs has created a disparity in the transfer market, leading to an unequal distribution of power. To address this issue, the UEFA Club Licensing and Financial Fair Play Regulations (FFP Regulations) were introduced to promote financial accountability and ensure the sustainability and long-term viability of European club football.

The cornerstone of the FFP Regulations is the "break-even requirement," which seeks to guarantee that clubs function solely on the revenue they generate and was designed to address the trend of wealthy benefactors investing vast amounts of money in clubs to acquire high-profile players, which had contributed to the inflation of the transfer market. However, criticism of the FFP Regulations has been widespread, with some claiming that they lack sufficient teeth. A study by the Technische Universit?t München[5] suggests that financially stronger clubs benefit from the FFP Regulations, while weaker clubs are hindered by them. The requirement that clubs operate based on their revenue favors bigger clubs with established brands and reliable income from sponsorships, broadcasting rights, and competition prizes. These clubs have larger budgets and can be more active in the transfer market. Meanwhile, smaller clubs lack the same revenue streams and cannot rely on external investors to inject funds due to concerns about the break-even result. This imbalance prevents smaller clubs from gaining competitive power and achieving parity with larger clubs, raising concerns about the financial sustainability of the sport, as well as the ethical implications of such transactions.

Although investing money in player transfers can have some positive impacts on sports, like supporting grassroots development and football community projects, there are concerns that large-scale transactions may cause clubs to prioritize short-term success and immediate gratification over long-term planning and sustainability. Some argue that this kind of spending could potentially have negative long-term consequences for the overall health of the sport.

In this article, we will explore the concerns surrounding transfer fees and evaluate possible regulations that could foster a more equitable and sustainable football industry.

Arisen Factors from the multi-million transfers

Several concerns or factors have emerged as a result of the multi-million transfer fees in football. The following are some of the most significant factors:

1-Inflation

Looking at the recent news about the spate of severe punishments Juventus Club is facing, a 15-point penalty for Juventus, a two-year ban from Italian football for Andrea Agnelli (the club’s former chairman), and a 30-month ban for Fabio Paratici, the club’s former sporting director who is now managing director of football at Tottenham for” financial irregularities” and “false accounting” in relation to historic transfer dealings- the exchange of players between clubs[6] , where it stands suspected of pumping up its balance sheet by deliberately inflating player valuations during transfers to boost “capital gains”. It is arguable that Clubs leading these types of transfers have been accused of creating a distorted market for player values by using inflated transfer fees to register capital gains on assets in an unlawful manner with the purpose of getting tax advantages and subsequently, more money in the bank to reinvest in the playing squad and the club.

However, some argue -including Juventus- that these accounting practices are not improper. The financial deals that Juventus are involved in are legitimate under accounting rule, and the football industry as a whole is following the same approach Juventus is just one among many. From my own perspective, I believe that driving up the value and cost of talented players generates a situation where player values are not based on their actual performance, but rather on the Club's financial resources and consequently misleads the investors over the actual financial position of the engaging clubs.

2-Players Welfare

Back to Neymar's historical transfer, his move to the French capital created further fallout in Europe, with the terms of his contract meaning Barcelona had no option but to accept PSG’s bid, as the latter had matched his release clause. Given this, many clubs began including excessive and unrealistic release clauses in their player’s contracts. Real Madrid led the way in this field, with Los Blancos signing Brahim Diaz from Manchester City [7] having had a €750 million release clause inserted into his contract. Such transfer restrictions can make it difficult for players to switch teams, as their current club may demand a high fee in order to release them from their contract, which can be described as modern slavery.

Consequently, it is having an impact on the players themselves. When the players' freedom to leave is restricted or when players are acquired for a high transfer fee, they often feel a tremendous amount of pressure to perform at a high level, and the expectations placed on them can be overwhelming. This can lead to burnout, injuries, and other health issues that can impact the player's career and personal life.

The welfare of players has been a continuing demand by the International Federation of Professional Footballers (FIFPRO), [8] where concerns have been raised about how transfer fees can limit players' freedom of movement and ability to choose where they play, which can have a negative impact on their mental health and well-being.

FIFPRO considers when a player is acquired for a high transfer fee, there can be immense pressure on them to perform at the level expected by the purchasing club. This can lead to stress and anxiety, particularly if the player is struggling to adapt to a new environment or playing style. In addition, high transfer fees can lead to players being viewed as commodities rather than people, which can be dehumanizing and demotivating. This can have a negative impact on players' mental health and well-being and may even lead to them being treated poorly by clubs or agents who view them as expendable.

3-Financial stability

Another critical impact of the Multi-Million Dollar transfer fees is the overall financial sustainability of football. Financial sports experts weren't shocked when Bury FC [9] - the 125 years English football Club was expelled from the English Football League in 2019 due to poor financial management that resulted in its bankruptcy. Not even when Barcelona closed the 2020-21 financial year with 481 million euros ($554 million) in losses[10] “caused by both falling revenues and the inability to contain spending.”?These two clubs are an expressing example of how the large sums of money involved in transfers place a major strain on club finances, with some clubs taking on significant debt to fund these transactions, increasing the risk of bankruptcy as they continue to spend outrageously well beyond their means.?

4-Competitive Balance

A further concern with transfer fees is the impact they have on the overall competitiveness of the game. When a few dominant clubs are able to spend millions of dollars on transfer fees, controlling most of the resources and talent, it creates an uneven playing field that can make it difficult for smaller clubs to compete. This, in turn, can lead to a decline in interest in Football, as fans become disillusioned with the lack of competition.

Potential solutions for regulating the multi-million transfers

In reflection of the foregoing concerns, regulating transfer fees has been the subject of intense scrutiny in recent years. In this context, a number of stakeholders, including football associations, clubs, players, and fans, have called for reforms to ensure that transfer fees are managed in a more responsible and equitable manner.

a-Salary Caps

One potential solution is to introduce salary caps, similar to the system used in some North American sports leagues. Major League Soccer (MLS) and the United Soccer League (USL) have implemented salary cap regulations[11] to promote financial stability and parity among teams. In MLS, the salary cap for the 2022 season is $7.1 million per team, with certain exceptions for designated players, who can be paid higher salaries outside of the cap. Each team is allowed up to three designated players, with the option to acquire additional designated player slots through trade or other means.

In the USL, there are multiple tiers of leagues, with varying levels of salary cap regulations. In the USL Championship, which is the second tier of North American soccer, teams have a salary cap of $645,000 for the 2022 season. However, teams are also allowed to sign up to two players who are exempt from the salary cap, known as "USL Championship Veteran Players".

Under such a system, clubs would be limited in the amount they could spend on player salaries, which would in turn limit the amount they could spend on transfer fees. While some argue that capping transfer fees would benefit smaller clubs and increase competition, by creating a more level playing field and promoting financial sustainability across the industry, others argue that it could stifle innovation and the free market.

It's worth noting that the concept of a salary cap is not unique to North American soccer leagues. Many other professional sports leagues around the world, including the NFL, NBA, and NHL in North America, have salary caps in place as a way to promote competitive balance and financial stability across the league.

b-Player’s Performance

Another factor that can be used in determining transfer fee regulation is to introduce transfer fees that are based on a player's performance, rather than their market value. In this system, a player's transfer fee would be determined based on their performance metrics such as goals scored, assists, minutes played, clean sheets, etc. It could be set initially based on the player's potential and past performances, but it would be subject to change based on their performance at their new club. If a player performs well and meets or exceeds the performance targets agreed upon by the clubs, their transfer fee could increase. Conversely, if a player underperforms, their transfer fee could decrease.

This system would provide an incentive for clubs to invest in players based on their potential and talent rather than simply their market value. It would also help to regulate transfer fees and prevent clubs from overpaying for players who may not perform as expected.

However, implementing such a system would require a standardized performance metric that could be applied across different leagues and countries. It would also require buy-in from all parties involved, including clubs, players, agents, and governing bodies.

c-Luxury Tax

Similar to the system used in Major League Baseball (MLB), considering the introduction of a form of financial penalty that is imposed on clubs that spend over a certain amount on player salaries or transfer fees might be one of the potential solutions. And this would incentivize clubs to be more judicious in their spending and provide additional revenue for the league. Where under this system, clubs that exceed a certain threshold for player salaries would be required to pay a luxury tax also called the "Competitive Balance Tax" (CBT) [12] on the excess amount. The tax is then redistributed in a standard manner with the aim of defraying clubs’ funding obligations, financing player compensation, and supporting clubs that did not exceed the CBT in that year.

d-Transparency

There have been calls for greater transparency in transfer transactions, with some advocating for the public disclosure of transfer fees and the associated financial details, claiming that Football fans and stakeholders have a right to know how much money is being spent on transfers. Nevertheless, the disclosure of transfer fees is becoming an industry-standard in football. Many top European leagues, such as the English Premier League and the Spanish La Liga, require clubs to disclose transfer fees. Thus, by requiring the disclosure of transfer fees, football leagues can align themselves with international best practices and promote the global standardization of the game. This would also help to promote long-term financial stability, and accountability in the industry and reduce the potential for corruption and unethical practices.

Final Words

In conclusion, regulating transfer fees in the world of modern Football is a complex issue that requires careful consideration of various factors. Implementing a fair and effective regulatory framework is challenging, as it would require collaboration and agreement from many stakeholders, including clubs, agents, players, and governing bodies. Ultimately, any attempt to regulate transfer fees must strike a balance between promoting fairness, competition, and sustainability, while also allowing for the free market to function and incentivizing more investment in talent development.

In my view, prioritizing the well-being of football players should be the foremost concern regarding transfer fees and other aspects of the industry. This entails guaranteeing their freedom to select their preferred team and advocating for more openness and fairness in negotiations involving transfer fees. By implementing these measures, we can enhance the protection and support provided to players while fostering a more sustainable and equitable football industry. Our emphasis should be on encouraging the development of young players, investing in community-level football, and maintaining transfer fees that accurately reflect a player's actual worth.

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[1] See FIFA Media Release on the 73rd FIFA Congress.?https://www.fifa.com/about-fifa/congress

[2] Check the most expensive transfers of all time. https://www.footballtransfers.com/en/transfer-news/eu-uefa-champions-league/2021/04/football-50-biggest-transfers-all-time

[3] Monaco star Mbappe completes €180 million Paris Saint-Germain move. https://www.goal.com/en/news/monaco-star-mbappe-completes-180-million-paris-saint-germain-move/13k7x4cozao191hcdgpw1kkrrt

[4] Enzo Fernandez: Chelsea sign midfielder in ￡106.8m British-record transfer deal from Benfica.?https://www.skysports.com/football/news/11668/12799395/enzo-fernandez-to-chelsea-blues-agree-premier-league-record-105m-transfer-deal-for-benfica-midfielder

[5] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2759335

[6] https://www.theguardian.com/football/2023/jan/20/italian-football-federation-prosecutor-asks-for-nine-point-penalty-for-juventus

[7] Real Madrid sign Brahim Diaz from Manchester City https://en.as.com/en/2019/01/04/soccer/1546615875_568058.html

[8] https://www.theguardian.com/football/2015/sep/18/fifpro-transfer-fees-could-go-fifa-brussels

[9] Former Bury FC chairmen declared bankrupt within months of each other https://uk.style.yahoo.com/former-bury-fc-chairmen-declared-050000934.html ???

[10] https://www.fcbarcelona.com/en/club/news/2283767/barca-presents-the-closure-of-the-202021-season-with-losses-of-481-million-euros

[11] https://www.mlssoccer.com/about/roster-rules-and-regulations

[12] Major League Baseball luxury tax?https://en.wikipedia.org/wiki/Major_League_Baseball_luxury_tax