A Blog by Jonathan Low


Aug 13, 2017

Game Theory: Why Neymar Might Be Worth $262 Million

Big contracts in sports often don't work out. Just ask the New York Yankees about Alex Rodriguez (aka A-Rod), who they acquired for $252 million back in 2004 and who proceeded to help them do...not much.

But the economics of sports has changed with the web's winner-take-all philosophy translating human into financial capital. Neymar's social media following, off-field endorsements and potential to raise both play and the asset value of the undistinguished team - France's PSG (Paris St Germain) - acquiring him could make the investment pay out.

And then there is the fact that PSG is owned by Qatari interests, who may be concerned with the intangible value of having grabbed the world's most talked about soccer player to help gloss over the spot of bother that has embroiled that country in serious disputes with much of the rest of the Middle East. So, hey, it's all about content and timing. JL

The Economist reports:

Neymar is the most marketable footballer in the world: he has more followers on Instagram (79m) than does Nike. He was the only footballer to make more money off the pitch than on it. It is tempting to dismiss Neymar’s deal as a marketing expense for a Gulf monarchy in distress. But the evidence that it is far from madness is the lengths to which Barcelona went to keep him. It shows they believe the Brazilian’s market value is greater than the €222m they received.
POOR FC Barcelona. Four summers ago the club outfought all opposition to sign the golden boy of Brazilian football, a 21-year-old known only as Neymar. Details soon emerged of the financial acrobatics used to sign him up: his transfer fee was not €57m ($76m), as advertised to interested parties and tax collectors, but in fact €86m. In the wake of the scandal, Spanish authorities fined the club €5.5m and have charged Sandro Rosell, the club’s president, with misappropriation of funds (he denies all wrongdoing). The player and his parents have also ended up in court (and also deny wrongdoing).
Nonetheless, Neymar justified the hype. Delighting fans with fancy dribbles and flicks, he teamed up with Lionel Messi and later Luis Suárez to form the best attacking trio football has ever seen. Together, they scored 364 goals in just three seasons, while leading their club to two league titles and one Champions League victory.But after going through hell to acquire Neymar, on August 3rd the team’s supporters discovered that another club was even more desperate to have him than their own. On that day the Brazilian winger signed a contract worth more than €500,000 a week after tax with Paris Saint-Germain (PSG), a Qatari-owned French club. His transfer fee came to a whopping €222m, more than double the previous record. For Barcelona, Neymar’s departure represents the most devastating and acrimonious break-up since 2000, when Luís Figo, a former captain, left for the club’s hated rivals, Real Madrid. With just three weeks left in the summer transfer window, they will be hard-pressed to replace him with players near the same calibre.
One month ago, you would have struggled to find a Barcelona fan who did not think it worth the trouble or money to acquire Neymar back in 2013. PSG seems to have taken this philosophy to unprecedented lengths: with the industry’s revenues continuing to soar, virtually no amount of money seems too much for a superstar. If paying up for a young and unproven Neymar worked for Barcelona, can spending far more on him still make sense for PSG now that he has reached his peak? As a pure business matter, it is unlikely, though not impossible: to make a profit on the deal, the Neymar acquisition would need to set off a chain reaction of further player transfers and sponsorship agreements that would propel PSG into the sport’s global elite. Even if that does not happen, however, the club’s owners may well have reasons to pay through the nose for Neymar that go far beyond its bottom line.
A clause célêbre
Prying Neymar away from Barcelona is a particularly welcome coup for PSG, which has suffered through a string of bitter failures during the past year. In 2016 Neymar and his father, who is also his agent, held private transfer talks with Nasser al-Khelaifi, PSG’s president—only to use the interest as leverage to secure a juicier contract with Barcelona. Months later, Neymar added insult to injury by orchestrating Barcelona’s dazzling comeback victory over PSG in the Champions League, scoring two goals and setting up another in the final seven minutes. In May PSG lost the title in Ligue 1, the top division in France, for the first time in five years. And as the summer began, Barcelona looked poised to hand PSG another painful defeat by pursuing Marco Verratti, the French club’s best midfielder, as its top transfer target.
Instead, PSG managed to turn the tables on Barcelona. First, PSG firmly refused to sell Mr Verratti. Then, on July 17th, rumours began to swirl that the French club had struck a deal with Neymar, and was planning to trigger the €222m buyout clause in his contract with Barcelona. (For legal reasons, Spanish football contracts tend to allow players to pay a stated price to end the agreement early. When rival clubs want to acquire a player under contract in Spain, they can simply supply the money to exercise the buyout.) Neymar’s teammates begged him to stay, in private and in public. Moreover, hoping to prevent a star from jumping to a rival, Javier Tebas, the boss of La Liga, Spain’s top domestic league, accused the French club of “financial doping” and vowed to block the deal.
PSG was unbowed. On August 3rd lawyers for Neymar and PSG showed up at La Liga’s headquarters with the paperwork to exercise the buyout. In an unprecedented display of defiance, La Liga refused to accept the payment. But rather than heading to court, the lawyers simply hopped on a plane to Barcelona and presented the cheque directly to Neymar’s employer. The club duly complied with its obligation to let him go.
For Neymar, switching from glitzy Barcelona to the less prestigious PSG yielded one immediate benefit: a salary more than double his previous wage. Yet one day after the deal was finalised, he insisted that his decision had nothing to do with his paycheque. “Money was never my motivation,” the world’s new best-paid footballer told reporters. “I’m really sad to hear that people think this way.”
Such claims are hard to take at face value. Nonetheless, PSG did have more to offer Neymar than pure cash. With Barcelona, he was somewhat overshadowed by the dominant presence of Mr Messi, regarded by many as the greatest footballer ever. At PSG, in contrast, he will be the talisman of a team trying to rebound from a tough season. If it succeeds, there will be no confusion about where to direct the accolades. Another draw may have been that at Barcelona Neymar was the team’s lone Brazilian, whereas at PSG there are three others in the first 11. (A fourth, Neymar’s childhood friend, Lucas Moura, will sit on the bench.) Their playing time together will serve as excellent preparation for the 2018 World Cup in Russia.
From PSG’s perspective, the price tag requires close scrutiny. Although transfer fees have generally increased with the sport’s revenues over time, their share of clubs’ overall spending has remained more or less steady: big clubs are reluctant to surrender more than a quarter of their annual revenue on a single player. Just four of the 19 European transfers so far to have cost €60m or more have exceeded this threshold. Neymar’s deal blows through it: he is likely to cost PSG around 40% of next year’s turnover (see chart below). No top team has spent such a large chunk of its income on a player since the signings of Mr Figo and Zinedine Zidane at the turn of the century. The only other player to command more than 25% of a club’s revenues was Radamel Falcao, who was bought shortly after AS Monaco won promotion from France’s second division, where broadcasting and sponsorship revenue are much lower.
A simple justification for Neymar commanding a much higher price than other top players have is that he is a better footballer. Many fans would agree that Neymar is the world’s best player under the age of 30. Arguably, no one fitting that description has switched clubs since Messrs Figo and Zidane (a player’s transfer value declines as he enters his 30s, as his speed wanes and retirement beckons).
However, the difference between Neymar’s expected contribution on the pitch and those of lesser stars is far too small to account for the yawning gap in transfer fees. Judging from the betting markets, Neymar’s arrival has
small to account for the yawning gap in transfer fees. Judging from the betting markets, Neymar’s arrival has boosted PSG’s chance of winning the 2018 Champions League from 6% to 9.5%, while Barcelona’s has fallen from around 18% to 16% (see chart). Even if the windfall from winning the league were massive, only around two to four percentage points of probability can be attributed to Neymar.
And in fact, sporting glory itself is only so profitable. A first-place league finish in France delivers PSG a measly €2m more prize money than second place. Winning the Champions League instead of making the quarter-finals adds €25m or so. Neymar may well draw more fans to matches, but PSG already nearly sells out its home games: its stadium has a capacity of 48,000, while average attendance is 45,000. As a result, maximising ticket sales would add only €2m a year. Counting Neymar’s future wages, he will cost PSG over €500m by 2022. He cannot come close to generating enough revenue directly for the club to recoup this investment.
Mr Khelaifi is well aware that the numbers don’t seem to add up. But he claims to be playing a longer game. In modern football, what separates the business models of the most profitable clubs from those of their rivals is not television or match-day revenue but rather “commercial” income, chiefly from corporate sponsorships. And those contracts in turn depend on having global name recognition. At the turn of the century, Real Madrid successfully leveraged the signings of a bevy of name-brand stars, nicknamed the galácticos, to become a worldwide sporting icon and one of football’s highest-earning clubs. PSG, which already receives a higher share of its revenue from commercial deals than any other club, hopes to follow in Madrid’s footsteps. “When you think about Neymar as a brand,” Mr Khelaifi said on August 4th, “maybe it won’t be so expensive.”
There is no question that PSG has chosen the right player to pursue this strategy. Neymar is perhaps the most marketable footballer in the world, with an enormous reach on social media: he has more followers on Instagram (79m) than does Nike, his main sponsor (73m). PSG’s follower count, a puny 8.9m, rose by 10% in the week after news of his transfer broke, according to Socialblade, an analytics firm. Prior to his latest pay rise, Forbes reported, he was the only active footballer to make more money off the pitch than on it. Starting next year, Nike will pay Barcelona €155m a season to emblazon its logo on their jerseys; in contrast, the firm pays PSG just €24m a year. If acquiring Neymar narrows this gap even modestly, that would pay for a large share of his contract. And if other star players are sufficiently eager to play alongside Neymar that they too transfer to PSG, further burnishing its brand and propelling it to a series of Champions League titles, the eye-popping deal might actually wind up paying off.
It′s not about the money—really
The odds are probably against the Neymar transfer becoming a “tipping point” that transforms PSG into the next Real Madrid. Lots of clubs have paid through the nose for famous star players, but only a small handful sell jerseys around the world. Even if this gamble falls short, however, PSG may not regret it. The club’s owner is Qatar Sports Investments, an arm of the country’s sovereign-wealth fund. And 2017 has not been kind to the Qatari government.
Abroad, the country faces a blockade from a gang of several of its Middle Eastern neighbours. At home, low natural-gas prices have forced it to cut budgets, lay off workers and contemplate introducing an income tax. Moreover, football has compounded its public-relations woes. Mohammed bin Hammam, a Qatari administrator, has been banned from the sport for life after emails were published showing that he had made payments to members of other countries’ football associations in advance of Qatar’s successful bid for the 2022 World Cup. And the death toll among foreign construction workers building venues for the Cup, an effort costing the country €420m a week, has drawn fierce international criticism.
Qatar has already sought to use football to burnish its image. In July FIFA, the game’s governing body, fined the Qatar Football Federation after the national team warmed up for an international friendly sporting “a political image” (the likeness of the country’s head of state) on their shirts. Prominent players have also chipped in on behalf of the beleaguered country’s position: in June Xavi, a former midfielder for Barcelona who now plies his trade in the Gulf state, took to social media to denounce the blockade against the country. Although there is no guarantee that Neymar would be willing to speak out on behalf of PSG’s owners, Qatar might place a high value on the privilege of signing such a popular player’s paycheques. Chuteira, a Brazilian newspaper, has reported that the country may sign him up as an ambassador for its World Cup. At the very least, his acquisition reinforces the message that despite the political turmoil surrounding the country, all is continuing as normal with its sporting assets.
Regardless of whether the deal is a pure long-run business investment or a transaction with both political and financial motivations, it is sure to draw close scrutiny from the sport’s regulators. European football’s Financial Fair Play (FFP) rules, which were designed to prevent speculative or vanity investments by deep-pocketed owners that profit-minded businesses cannot hope to match, require PSG to keep its losses to within €30m over a rolling three-year period. Even after splitting Neymar’s buyout fee across the five years of his contract, he will still put the club €44m a year in the red. Nominally, it was Neymar himself who paid the sum rather than PSG, so it is possible that some or all of the amount will not appear on PSG’s books. If so, however, PSG’s rivals are sure to cry foul. The club’s past record will not help its cause with investigators: in 2014 it only managed to comply with FFP thanks to a hugely inflated sponsorship deal for €200m with Qatar’s national tourism body, another state-backed body. PSG was heavily fined for that indiscretion.
It is tempting to dismiss Neymar’s deal as essentially a marketing expense for a Gulf monarchy in distress. But the best evidence that it is far from madness is the lengths to which Barcelona went to keep him. First, it shows they believe that the Brazilian’s market value is greater than the €222m they have received (unlike in, say, 2009, when Manchester United gladly sold Cristiano Ronaldo to Real Madrid for €94m). And second, the club seems to have badly miscalculated by setting the buyout clause in Neymar’s contract at €222m in the first place. The price was meant to act as a “not for sale” sign to ward off suitors; PSG pounced. That the club failed to foresee just how high transfer fees would climb reflects poorly on its management. Rival teams with players whom Barcelona may be ogling as replacements will be well aware that the club now has €222m burning a hole in its pocket, and a gaping vacancy on its attacking line. Fans would be wise not to get their hopes up for a bargain.


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