Putting a Lid on it: The Case for Wage Caps.

The present spate of transfer mania in European football is, in many ways, worryingly reminiscent of the peak of the property boom. Clubs are building up ever larger piles of debt, players are being traded for transfer fees that bear no resemblance to their revenue-generating potential, and the business plan seems to be buy, buy, buy. Most ominously, salaries seem to have lost any grip on reality. Without any form of regulation, catastrophe is imminent, particularly among lower clubs, but also among some of the biggest names in the sport. Even mighty Real Madrid are not immune from the danger, as mounting debts and a trophy drought may force a serious reappraisal of the clubs financial priorities.

Those footballing observers who subscribe to the ideas of Adam Smith and Milton Friedman might ask "so what?". The free market has losers too. If a club is dumb enough to overspend and goes to the wall, that's their business. The problem is that this presupposes that normal market forces are at play in Europe. This is a deeply flawed assumption.




Firstly, there are massive economies of scale in football, making it harder for outsiders to reach a critical mass. Most of a top club's cost base is fixed. Both Manchester United (revenue appr. €350m) compete in the same environment as Swansea (revenues appr. god only knows...). Granted, Manchester United do have variable costs as a result of their massive fanbase, such as having to maintain a bigger stadium or having to produce more merchandise, but the fact is, most of the money is available for players and staff. Given that their greater revenue does not oblige Man U to field more players, they focus on quality, with the result that United can command far higher salaries. And, in football, salaries equals results, results equals revenues, and revenues equals salaries. As a result, there is very little scope for outside clubs to break the dominance of the big guys. Furthermore, when they do, such as Bayer Leverkeusen in 2002, by dint of putting together a neat little team of previously unregarded players or youths, they find it nearly impossible to hold onto their top players. Bayern Munich essentially raided Leverkeusen for players in 2002, and even today Tottenham Hotspur's reward for breaking the Big Four's dominance in England is a desparate struggle to hold onto the likes of Luca Modric and Gareth Bale.
So, we have an implicit oligopoly, whereby a vicious circle of revenues, salaries, wages and results keeps smaller clubs out of the big leagues. While there is a case to be made that diseconomies of scale also exist in the game (bigger clubs tend to get less value for money than smaller ones, as sellers hold out for a better price), the converse to this is that bigger clubs have more prestige, which is a currency in its own right.

Ok, so far we have established that the system is inequitable, now let us look at how it is inherently unstable. Clubs' revenue models depend on improving or at least maintaining their position in the league. Every season, three clubs take a €50m hit from being relegated from the Premiership, and with the demise of the Big Four's dominance, as well as the increasing revenues to be made from Europe, competition for Champions' League places has gone into overdrive. The present spate of transfer mania in the Premiership coincided with this, as clubs like Liverpool seek to regain lost ground.

The reason for this is simple. Relegation or missing out on the Champions' League for a club that was a previous stalwart costs upwards of fifty million. That hit alone can force a newly minted Championship side towards administration. For a club that misses the Champions' League, the money gap reduces the chance of them regaining their position next season, which costs more money, and so on. Far cheaper in the short run is to splurge on salaries and transfers, which at least defers the cost. The problem is how the other clubs react to this: They do exactly the same.

The end result is a salary arms race where every party tries to improve their team with the result that nobody gains any advantage. Meanwhile, the debt mountain keeps on rising. So, a club, acting in its own self-interest, can choose between blowing up spectacularly a la Leeds United, or a slow strangulation through mounting debts. Either case, the market fails to solve. Like banks during the boom who, rather than write off bad debts, extended additional credit to patently unworthy customers, football clubs are merely deferring their day of reckoning.
Logically, in this situation, as clubs go belly-up, salaries would fall as top players come on the market. The problem lies in the likes of Chelsea, Manchester City and now perhaps QPR. These clubs don't obey the laws of economics, as they are not run for profit, and have near-infinite resources thanks to being owned by billionaires (United, too, if recent reports of Qatari finance are true). In a normal market, all actors are seeking a profit, and therefore in the long run costs and revenues reach an equilibrium point. The problem is that the owners aren't concerned about profit, they are concerned about results, and can be profligate as a result. Imagine if Apple started selling iPhones for a euro a go, because rather than turn a profit, they simply want to sell as many iPhones as possible. Dumb of Apple in terms of getting a return, but they don't care. Now, imagine what would happen to the other handset makers. They can either lose market or slash prices, sell at a loss, and hope Apple runs out of money. Now imagine Apple has infinite money. The other makers will eventually go broke.



This is what is happening in the Premiership at the moment. Free from any restrictions on how much they pay players or how much they pay for players, Chelsea and Man City are driving salaries through the roof. With the exception of Andy Carroll, the ten biggest purchases in Premiership history have been made by either Chelsea, Man City, or Man United. Suddenly, This leaves Liverpool, Arsenal and Spurs scrapping for the last vital Champions' League spot. Mid-table clubs are becoming little more than feeder clubs for the squads of their bigger rivals (Witness the exit of Phil Jones and Ashley Young, two of the most highly-rated young English players, to United). Further down, where a drop can cost a team half its revenue, there is a massive incentive to gamble on unsustainable spending, as happened at Portsmouth.



So the free market doesn't apply in this situation, and if it goes on it leads to clubs, through no fault of their own on or off the pitch, going bust simply because their rivals are rich enough to ignore market forces. While the prospect of their rivals going under might please fans of the bigger teams, it clearly isn't good to have a league where only a couple of teams will ever be financially sound or competitive. Real Madrid and Barcelona are the biggest clubs in the world by revenue, but collectively La Liga earns only half as much as the Premiership, and less than either the Bundesliga and Serie A, in a large part because only a couple of matches a year generate large TV revenues.

So, let us accept that unrestrained spending harms the game. What to do? I propose a (somewhat) radical solution: Absolute caps on how much a European club can pay its first-team players or spend on transfers. The figure should be set in terms of take-home income, rather than gross, so as to negate the advantage Spanish clubs enjoy from tax breaks on players' salaries. The figure should not be so low to create an absolutely equal playing field among a league, but nor should it be so high that clubs are effectively locked out.
Why do this? Firstly, it creates a modicum of financial stability. Clubs could then look forward to not having to continuously escalate expenditures. Secondly, by limiting the ability of top clubs to use financial clout, it makes leagues more competitive. A smaller club can now actually try to build a team, rather than look as players as assets to be sold when the market is right, or targets to be pirated away by bigger teams. This means that the events of the past decade, where the only team that wasn't one of the world's ten biggest to win the Champions' League was Porto, would not be replicated, as a good team, practicing novel tactics, might be able to break the dominance of the big guys.



Thirdly, it benefits fans. The spiralling price of tickets has in part been driven by clubs desperately searching for more revenue. Less outgoings means less need for revenue, meaning less necessity for high ticket prices. Also, the steady move of clubs towards private ownership could be arrested, as a locally owned club now doesn't have to fear being outpriced by its billionaire-owned rivals.

Finally, and most importantly, it benefits the game as a whole. Managers will have to be cleverer with team strategy. A strong starting eleven versus depth? Till now, clubs like Manchester United have used their massive financial clout to avoid those decisions. Now they will have to make tough choices. At a grassroots level, massive investment will go into the youth game. Young players require lower salaries, so there would be an attempt by clubs to groom as many young guns as possible, rather than (as Real, Chelsea, City and a couple of others seem wont to do) simply buying established stars for massive sums. Clubs would also have more stable squads, leading to a (hopefully) better team spirit.

I realise that this argument is incomplete. There are many issues with an absolute cap. The problem is, the alternatives aren't great. Requiring clubs to break even benefits the Spanish clubs' tax advantages, and clubs like United, whose primary outgoing is debt, will simply deleverage the debt the Glazers accrued buying them and continue as before. Meanwhile the billionaire-owned clubs will simply funnel money into their clubs through sponsorship deals and the like. Salary caps as a percentage of revenues benefits bigger clubs even more disproportionately, by preventing smaller clubs from trying to build themselves up by a couple of big-spending years. And the current free-for-all is breaking football. Any business whose debt exceeds its revenue is considered to be in danger of going bust, and in the Premiership, debt is approximately 140% of revenue, a roughly similar proportion to that of Greece. The difference is that Greece is trying to reduce its debt, while the Premiership is adding more.

Most of the time, the market solves. Sometimes, it doesn't. This is one of those cases, and the sooner the powers that be come to their senses about this fact, the better.

Greg Bowler once broke the Championship Manager 3 transfer record by paying £28.5m for Pablo Aimar, and has lived with the consequences ever since.