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.