Figure 3.1 from Soccernomics, which shows a substantialcorrelation between wage expenditure and where a team
finishes in England's top two soccer leagues.
finishes in England's top two soccer leagues.
I mentioned in a previous post that I am reading the book Soccernomics, which is chock full of statistics that clarify or challenge conventional sports wisdom. The authors do a very good job of not only comparing differences in soccer leagues, but also across other sports with a special emphasis on baseball given it's similarly lenient financial rules. One of the more interesting aspects of international soccer versus traditional US sports leagues is the financial and transaction rules governing the game.
Most US professional sports leagues are governed by some form of salary cap to prevent runaway spending by big market teams that translates to widening disparities in competitiveness. The most successful model of this behavior is the NFL salary cap and it's resultant goal of "league parity". Transactions between teams nearly always involve player trades, and are often executed as much for salary cap management as for overall team improvement. This is due to the fact that the teams are often required to assume the terms - both financial compensation and duration - of the contract. This model minimizes costs, and provides a predictable and somewhat stable source of revenue and cost for owners.
International soccer, governed by FIFA rules, is completely different. Largely, there are no salary caps - although that may change as an emerging soccer debt bubble may cause governing bodies like UEFA to place "break even" financial requirements on clubs. Teams are free to spend what they want, where they want. When it comes to transactions, player swaps do not take place. Rather, a "transfer" will take place where the club and player are paid a one time compensation for the transferring of rights from one club to another. Transfer fees can be huge, as speculation plays a big part when rival clubs are bidding for a player's talents. They can be the difference between profits and losses for clubs.
The authors of Soccernomics have found out some interesting things related to transfers and team payroll.
First, there is very little correlation between the money a team spends in the transfer market and their success in the league.
But much of this [transfer] money is wasted on the wrong transfers. In fact, the amount that almost any club spends on transfer fees bears little relation to where it finishes in the league. We studied the spending of forty English clubs between 1978 and 1997, and found that their outlay on transfers explained only 16 percent of their total variation in league position. By contrast, their spending on salaries explained a massive 92 percent of that variation.
What's interesting is that even given this data, clubs still go out and blow huge sums of money on transfers. Soccernomics goes into many reasons why transfers largely fail to improve a club and why clubs continue to pursue them, but I will save readers from me regurgitating all of Chapter 3 of the book. Rest assured - transfers present a bad ROI, and you need to read the book to get the full story why.
Second, there is a good bit of correlation between the money a team spends on annual total player payroll and their success in the league. The graph at the top of this post shows the author's regression results when studying payroll and club success. While there is a substantial correlation, the graph must be deconstructed to understand the true magnitude of the trends given that logarithmic functions had to be used to get the linear fit. If one is to look at what it takes to move from mid-table on average to the top 4 positions, we could examine points that correspond to 0 and 1 on the x-axis. Adjusting both the payroll data and the finishing position data by their logarithmic functions, one finds that a club must spend about 3 times more money than the league average to achieve an average finishing position 5 places higher than the average club. Given a table of 20 teams, that means one must spend 300% more than the average team to move up 25% of the table - diminishing returns indeed! Given that finishing in the top of the league effectively means promotion - either from the Championship to the Premier League or the Premier League to the Champions League - and ever growing revenue, there is huge pressure on team finances to compete for those top few spots.
And thus, we get to the rub of soccer in the United States. The MLS player's union and ownership is locked in a stalemate over the terms of the next collective bargaining agreement (CBA). Players are asking for fundamental changes to the way the league manages their contracts - they are asking for free agency, terms closer to the rest of the world's players when it comes to transfer terms, and for an eventual dissolution of the league's single entity structure so that players can sign contracts directly with teams. The league's ownership is steadfastly refusing these terms - and for good financial reasons. No one expects MLS to turn into the Premier League overnight, but the failure of the NASL looms large as the cautionary tale of what happens when US soccer leagues don't run a conservative financial house. Given the expectation of US sports franchise owners that they should run their team like a business and make a profit (an assumption Chapter 4 of Soccernomics ultimately destroys), the owners can look at results like those from the English leagues and see what the end game is - large sums of money, often spent irrationally, producing unpredictable results and destroying the financial health of the league's teams. Teams like the Seattle Sounders, with deep pocketed owners and fans who set the league record for attendance in the team's first season, would look to use that financial position to build a permanent place at the top of the league for themselves.
As a Libertarian, I can't say I agree with the owners' position. There's a legitimate point to be made for workers' rights and against the business collusion of a single entity. But as a growing soccer fan that wants the MLS to be a stable, long-term venture I also can't disagree with the owners' approach of limiting the financial commitment required of teams. They are doing the rational thing of following the statistics, and recognizing that the league can't support such an arrangement at this time.
And thus, we get to the rub of soccer in the United States. The MLS player's union and ownership is locked in a stalemate over the terms of the next collective bargaining agreement (CBA). Players are asking for fundamental changes to the way the league manages their contracts - they are asking for free agency, terms closer to the rest of the world's players when it comes to transfer terms, and for an eventual dissolution of the league's single entity structure so that players can sign contracts directly with teams. The league's ownership is steadfastly refusing these terms - and for good financial reasons. No one expects MLS to turn into the Premier League overnight, but the failure of the NASL looms large as the cautionary tale of what happens when US soccer leagues don't run a conservative financial house. Given the expectation of US sports franchise owners that they should run their team like a business and make a profit (an assumption Chapter 4 of Soccernomics ultimately destroys), the owners can look at results like those from the English leagues and see what the end game is - large sums of money, often spent irrationally, producing unpredictable results and destroying the financial health of the league's teams. Teams like the Seattle Sounders, with deep pocketed owners and fans who set the league record for attendance in the team's first season, would look to use that financial position to build a permanent place at the top of the league for themselves.
As a Libertarian, I can't say I agree with the owners' position. There's a legitimate point to be made for workers' rights and against the business collusion of a single entity. But as a growing soccer fan that wants the MLS to be a stable, long-term venture I also can't disagree with the owners' approach of limiting the financial commitment required of teams. They are doing the rational thing of following the statistics, and recognizing that the league can't support such an arrangement at this time.
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