Category Archives: Sport

Why Neymar's transfer fee could make economic sense.

Late August is often a very busy time for football clubs as the transfer window closes and this year was no exception with Neymar da Silva Santos Junior being signed by French club Paris Saint-Germain (PSG) from Barcelona for a staggering €222m. How can a club afford a record signing – more than double the previous record price for a footballer? To put this is perspective Paris Saint-Germain is owned by Oryx Qatar Sports Investment, a privately held company based in Doha, which is in fact an investment vehicle for the Qatar government. Neymar will cost PSG’s owners about €500m over five years but he is an investment which the club hope to take advantage of.

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.

Neymar.png

So how will PSG recoup the cost of Neymar?

  • Match day tickets and corporate hospitality sales.
  • Broadcasting rights – domestic leagues, cups and Champions League.
  • Commercial sources – playing kit merchandise – on the day the signing was announced fans queued up at the PSG merchandise shop and bought over 10,000 shirts at $118 each. Additional sponsorships and image rights given Neymar’s marketability. 59% of PSG’s revenue of €520m last year was commercial i.e. other than ticket sales and broadcasting fees.
  • Instagram – Neymar has more followers on Instagram than Nike and this following will help PSG negotiate a deal greater than the current €24m it receives from Nike each year. Barcelona are to receive €155m from 2018 for wearing a Nike playing strip.
  • Overseas supporters – Manchester Utd are the most popular team on Chinese social media although they haven’t qualified for the Champions League for the last couple of seasons. If Neymar can bring success to PSG maybe this will open the door to new and much bigger markets.

A good performance in the Champions League will no doubt lessen the burden on PSG – only time will tell. Their campaign starts on Tuesday with an away game at Celtic.

Source: The Economist – August 12th 2017

More loss aversion in male tennis players when behind.

A paper entitiled ‘Is Roger Federer more loss averse than Serena Williams?’published by By Nejat Anbarci, K. Peren Arin, Cagla Okten and Christina Zenker on tennis serving and loss aversion caught my attention. The paper found that:

Roger_Federer.jpg
1 a server will put more effort into his/her serve speed when behind in score than when ahead in score,
2 players’ effort levels and thus serve speeds get less sensitive to losses or gains
when score difference gets too large,
3 A female player, on the other hand, does not change her serve speed and thus her effort when behind compared to when the score is tied, while she serves slower when ahead than when the score is tied.
4. Overall servers will be more risk averse in the domain of gains than in the domain of losses.
Researchers used serve speed at different points of matches in the high-stakes, professional Dubai Tennis Tournament to test their theoretical predictions and whether overall players exhibited the fundamental bias of loss aversion.

 

Loss Aversion and the  Endowment Effect

Loss aversion can be explained by prospect theory, which states that an individual’s value function (whether for money or otherwise) is concave for gains but convex for losses. In other words, people are more sensitive to losses compared to gains of similar magnitude. This is illustrated below.

Prospect theory

The reference point in the diagram is the current position of the individual concerned. Gains and losses are evaluated with reference to this neutral reference point. The value function takes an asymmetric S-shape because marginal value (or sensitivity) declines as absolute gains and losses increase in size. A dollar lost more than outweighs a dollar gained. In conventional economics, gains and losses are treated equally – a dollar lost simply cancels out a dollar gained. Golf provides a perfect example of a reference point: par. Every hole on a golf course has a number of strokes associated with it; the par provides the baseline for good – but not outstanding – performance. For a professional golfer, a birdie (one stroke under par) is a gain, and a bogey (one stroke over par) is a loss. Economists have compared two situations a player might face when hear the hole:

  • putt to avoid a bogey
  • putt to achieve a birdie

One group of economists analysed more than 2.5 million putts in exquisite detail to test that prediction and found that whether the putt was easy or hard, at every distance from the hole, the players were more successful when putting for par than for a birdie. The difference in their rate of success when going for par (to avoid a bogey) or for a birdie was 3.6%.

 

Tourism booming in New Zealand and Lions tour still to come.

Recent figures show that the tourism industry is now a bigger export earner that the traditional dairy industry. For the year ending December 2016, total exports of dairy and related products were $12.05bn, accounting for 17.2% of all exports. Over the same period, tourism (including air travel) was worth $12.17bn, or 17.4% of exports. These compare to 18.2% and 16.9% (respectively) for 2015, showing the increasing importance of tourism to the NZ economy. After these two industries, the next largest export is meat, all the way back on 8.4% of total exports, leaving tourism and dairy well out in front. If you look at GDP figures – Tourism accounts for 5.6% whilst Dairy is 5% of GDP.

NZ Goods and Services Exports (Values $m)

Exports - Dairy and Tourism

NZ Visitor arrivals.pngWhat are the drivers behind the tourism numbers?
1. The growth of the Chinese middle class who can now afford to travel overseas and additional carriers operating out of China into New Zealand
2. The impact of The Lord of the Rings and Hobbit films
3. The 2011 Rugby World Cup and 2015 Cricket World Cup boosted arrivals significantly.

Also there are two further events which are bound the increase tourist numbers – The World Masters Games that finished today and the British Lions Tour in June/July. The Lions Tour is bound to have a significant impact on the economy especially with the hype that is currently building which largely comes about as the tour only occurs every 12 years.

British Lions Tour 2005 and its impact on NZ Economy

Contribution to New Zealand’s GDP – 16,000 supporters at approximately $10,000 per trip equates to NZ$160 million or 0.1 per cent of GDP. But spending doesn’t equate to value added. Value added is broadly a third of the initial spend therefore this leaves a direct macro impact on value added of $53 million. Second round multiplier effects increase the impact to NZ$132.5 million or broadly 0.1% of GDP.

Retail sales figures for June 2005 were up 1.2%. Accommodation providers, for example, experienced a 5.1% increase in turnover during June. And spending in bars increased by 3.9% in June from May and spending a café and restaurants increased by 1.3% while liquor sales surged 3.7%.

Some economic pricing invariably led to higher prices in some markets. A terrace ticket cost NZ$100 for the Lions vs All Blacks game at Eden Park but excess demand on the black market did mean that some tickets were double the face value. Also prices in bars and cafés increased significantly in the main centres.

Spending Spree
Sales figures for June and July 2005 released by credit card operator Visa International show visiting Lions fans pumped millions of dollars into the New Zealand economy.
UK and Irish-based Visa card holders spent $42.2 million during the two-month period, more than double the amount spent by cardholders during the same period last year. Below is some of the breakdown:

Hotels, motels, resorts: $5,967,931
Travel agencies: $4,927,429
Vehicle rental: $2,574,812
Restaurants: $2,245,621
Tourist attractions: $1,588,492
Air New Zealand: $1,446,342

Although results didn’t go their way, the Lions supporters certainly had a good time. The impact is bound to be significantly greater this year with numbers of supporters up to around 20,000. However as with the 2005 tour there will significant infrastructure problems in meeting this demand.

After the win in Australia four years ago maybe the Lions could pull off a series win – the last time was 1971.

Sunk Costs, Market Structure and Football Clubs

Over the holidays I read Stefan Szymanski’s book “Money and Football – A Soccernomics Guide”. Szymanski also co-authored “Soccernomics” with Simon Kuper. There were various references to economic theory through the book which I will refer to on this blog.

Market Dominance

Dominance in a market is often associated with the lack of competition whether it be due to monopoly power, predatory pricing, the scale of investment etc. However this is not the case when it comes to football. Szymanski mentions the fact that there are 27 professional teams withn a 50 mile radius of Manchester Utd. If fans don’t like United, there are plenty of alternatives as there are in Madrid which has 5 professional clubs. In some countries football rivals play in the same stadium:

  • In Germany: Bayern Munich and TSV 1860 Munich,
  • In Italy: Inter Milan and AC Milan,
  • In Switzerland: FC Zurich and FC Grasshopper
  • In Brazil: Botafogo, Flamengo and Fluminense

Football Clubs.jpgDominance in markets usually occurs because of the initial investment required to compete in the first place – set-up costs. If you look at the railway industry (which could be said to be a natural monopoly) the cost of putting down new train tracks by the existing ones or a new line would be excessive and the ability to cover these costs would very difficult. Any benefit that may arise from competition would be diminished by the cost of duplication.

Dominance is easy to explain if there are very large set-up costs, which, once spent, cannot be recovered other than by operating in the industry. Economist refers to these costs as Sunk Costs.

Dominance in a market can also occur in markets where there are less sunk costs. Take for instance the soft drinks industry as an example. It remains relatively inexpensive to set-up a production plant to bottle soft drinks but Coca-Cola dominates the world market with 42% market share, followed by Pepsi with 28%. Their dominance is through advertising which makes up the majority of the sunk costs. Advertising is an example of ‘endogenous’ sunk costs which are determined by the firm as opposed to ‘exogenous’ sunk costs which are determined by technological requirements.
Premier League Players.jpgIn professional football the focus is on player investment rather than advertising, where the big clubs are those that spend heavily on players and win league championships. Teams that win are more likely to attract a larger fan base and greater revenue. Szymanski states that the big difference between football and soft drinks is that the pattern of dominance looks the same in small markets. For instance clubs in the English Division 2 (Division 4 in the old days) still stay in existence mainly because they operate in a different market than the Premiership teams. Of the 88 clubs in the English Football League in 1923, 85 still exist, and most of them still play in the 4 English Divisions. Also those clubs in the lower Division do benefit from intense local loyalty especially through tough times with performance. When clubs get relegated to the Championship from the Premier League, although they lose revenue from TV rights their fan base remains fairly constant. However a lot of these clubs will find it hard breaking into the dominant group – Manchester City, Manchester Utd, Liverpool, Arsenal, Chelsea, Spurs – unless they receive significant funding from an investor who doesn’t expect to see a financial return or have an exceptional season without high profile players like Leicester City who won the Premiership in 2015/16.

Unlike most business in which loss-making firms shut down or merge into other businesses, football clubs almost always survive. This does not prevent dominance, but unlike most industries, it does mean that the pattern of dominance tends to look the same everywhere. Source: Szymanski

Economics – Holiday Reading.

I will be disappearing for a couple of weeks to the beach where there is no internet access. Therefore here are some books that might be worthwhile reading over the festive season – reviews are from amazon.com. I will be back again on 10th January – have a great xmas and new year.

makers-and-takersMakers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

Eight years on from the biggest market meltdown since the Great Depression, the key lessons of the crisis of 2008 still remain unlearned—and our financial system is just as vulnerable as ever. Many of us know that our government failed to fix the banking system after the subprime mortgage crisis. But what few of us realize is how the misguided financial practices and philosophies that nearly toppled the global financial system have come to infiltrate ALL American businesses, putting us on a collision course for another cataclysmic meltdown.

 

 

Circus Maximus: The Economic Gamble Behind Hosting the Olympics and the World Cup by Andrew Zimbalist

Circus Maximus.jpgThe numbers are staggering: China spent $40 billion to host the 2008 Summer Olympic Games in Beijing and Russia spent $50 billion for the 2014 Sochi Winter Games. Brazil’s total expenditures are thought to have been as much as $20 billion for the World Cup this summer and Qatar, which will be the site of the 2022 World Cup, is estimating that it will spend $200 billion. How did we get here? And is it worth it? Both the Olympics and the World Cup are touted as major economic boons for the countries that host them, and the competition is fierce to win hosting rights. Developing countries especially see the events as a chance to stand in the world’s spotlight. This book is also reviewed here by Michael Cameron on his blog Sex, Drugs and Economics.

 

 

Global Inequality: A New Approach for the Age of Globalization by Branko Milanovic

Global Inequality.jpgThis is a scholarly book about global inequality, that is, ‘income inequality among citizens of the world’. It is, as Milanovic explains, ‘the sum of all national inequalities plus the sum of all gaps in mean incomes among countries’.

In his study, Milanovic focusses on the Kuznets hypothesis – that in industrialized countries, inequality will initially increase and then decrease, resulting in an inverted U-shaped curve. In recent times, inequality seems to be rising when all the factors indicate that it should have followed the Kuznets curve. Milanovic explains why the projected pattern did not materialise. One can point to ‘the hollowing of the middle class and the rising political importance of the rich’, but there are other factors. Milanovic explains the phenomenon through the historical data of the Kuznets curve in countries across the world.

This is a learned, but dry and technical treatise on a subject that seems to evade comprehension even by renowned economists and political scientists. That is not to say that Milanovic is a boring writer. This book will be appealing to economic and political science students, but the general reader may find Milanovic’s 2011 book, ‘The Haves and the Have-nots’ more interesting and palatable.

Football salaries – superstar and tournament effects.

Amongst the extensive coverage of the Olympic Games from Rio, the start of the Football season in Europe has slipped under the radar. Michael Cameron’s blog post on footballer salaries was timely and in particular his discussion around the difference between the superstar and tournament effects.

Superstar effects – this is where a player is rewarded with a higher salary than his/her team mates for generating higher revenues for their club.

Tournament effects – this is the situation where wage differences are based NOT on marginal productivity but instead upon relative differences between the individuals. Ultimately each player only needs to be a little bit better than the second best player in order to ‘win’ the tournament.

Michael Cameron looks at the salaries of Ronaldo and Messi and states that it is unlikely that either of these players would generate more than twice as much value as the others on the graph below. Therefore the difference in salaries must be generated by something other than just superstar effects; that is, tournament effects.

Football Earnings 2

In contrast, the difference in average salaries in England between Premier League footballers (£1.7 million) and League Two footballers (£40,350) is likely to be a mix of superstar effects (Premier League footballers generate more value for their employers than League Two footballers) and tournament effects (there’s a limited number of places for Premier League footballers, so slightly worse players end up in lower divisions paying less). See graph below.

EPL wages.jpg

One last point: It’s been argued (I saw this argument first in Tim Harford’s book The Logic of Life) that the size of the ‘prize’ for a tournament will be larger the more luck is involved. That is, if the difference between the tournament ‘winner’ and the others is mostly luck, the size of the bonus for working hard to win the tournament must be high in order to sufficiently incentivise the worker to work hard. So, if you buy that the difference in the graph above is mostly a tournament effect, does that mean that the earnings difference between Ronaldo and Messi at the top, and Neymar in third, is mostly down to luck?

Source: Michael Cameron

Wages and performance in the English Premier League

With Leicester City being crowned as EPL champions it was only time before someone in the media produced data showing the correlation between a club’s wage bill and their final position in the EPL. What is so extraordinary about Leicester’s feat what that it wasn’t a one off victory in the FA Cup or something similar but a competition that involved 38 games in the season. With Leicester just surviving relegation last year the odds on them winning the EPL were 5,000 to 1. What is so unique about their feat is that since the 1995-96 season the champion side has spent 225% more on player salaries as the median team. Arsenal, Chelsea, Manchester Utd and Liverpool have paid the highest wages to its squad of players and finished in the top four positions in the EPL 80% of the time. The total cost of Leicester’s regular team (£25m, or $36m) this season was less than a quarter of what Manchester United spent on new players last summer. Furthermore, if you look at Leicester City’s wage bill this year it is 75% of the league median which makes them, after Newcastle Utd in 2001-02, to break into the top four with a below-median wage bill.

Temporary Situation

However, Leicester’s success means that affluent clubs will spend even more money on sports science, video analysis and get the best people to work in these departments. No doubt that this will move the transfer market towards ‘perfect competition’ as information will flow more easily and clubs will not be able to benefit like Leicester in picking up players whose value has been underpriced. Therefore an advantage by one club will lead to only a temporary advantage until other clubs catch up. Consequently things will return to normal as talent will be distributed to those who can pay the most.

Click here to go to The Economist website to access their interactive image.

EPL Wages and Position

Pay Ghanaian Police higher salaries and there will be less corruption? Yeah right!

I came across an interesting paper on the impact of higher salaries on corruption – “Does Raising Police Salaries Lower Petty Corruption? A Policy Experiment on West African Highways by Jeremy Foltz and Kweku Opoku-Agyemang. Ghana Road Network

The research focused on West Africa’s highways where the police were given higher salaries in the hope that this would lead to the end of corruption, inefficiency and bribery by the Ghanian police. However what actually transpired was that it actually energised police efforts to collect bribes rather than decrease petty corruption.

The data was collected using lorry drivers on the roads of Ghana and Burkina Faso. Drivers with all the correct papers were asked to record how many times they were stopped and how much money they paid to police and customs officials along the route – see map. On examining the data of 2,100 long-haul journeys they found that raised salaries for Ghanaian police officers and caused them to increase the effort they put forth to get bribes by 19%, the value of bribes taken at each individual stop by between 25-28%, and increases the total amount taken on the road, even while the reduce the number of times they receive a bribe. Therefore Higher Salary = Greater Corruption.

Economic theory suggests that the opposite should have happened for the following reasons:

  • Corruption involves risk and if you earn a larger salary the loss is much greater
  • Officials are thought to have income targets and they will only behave in corrupt manner to make up for the difference.

Why are the officials more corrupt when they get a pay rise?

  • The researchers suggest that corrupt superiors or greedy family members demanded more money from the officers.
  • Getting a pay rise might have boosted the self-importance of the police and therefore they felt they could demand more money at checkpoints etc.
  • The risk of getting caught is very low

The Economist makes a good point by saying “in Ghana some are astonished that anybody could have believed that higher pay would have made cops less greedy. That is just not human nature.”

 

Football Revenues 2016 – EPL teams dominate.

Football Rev - 2015Real Madrid topped Deloitte’s money league for the 11th successive year with $577m.  The combined revenue of the top 20 teams rose by 8% – $7.16bn – from 2013/4 season.

“There are a number of metrics, both financial and non-financial, that can be used to compare clubs including attendance, worldwide fan base, broadcast audience and on-pitch success. In the money league we focus on clubs’ ability to generate revenue from matchday (including ticket and corporate hospitality sales), broadcast rights (including distributions from participation in domestic leagues, cups and European club competitions) and commercial sources (including sponsorship, merchandising, stadium tours and other commercial operations), and rank them on that basis.” Deloitte Football Money League 2016

Barcelona’s achievements in the 2014-15 season have translated to financial success. The European champions have jumped ahead of Manchester Utd, with revenue of $560.8 as compared to $519.5.

However Deloittee predict that Manchester Utd will be making a big push for the top spot next year for the following reasons:

  • £75m kit deal with Adidas
  • £47 million-per-year shirt sponsorship deal with Chevrolet
  • £5.1bn television deal starting in 2016-17 season

The wealth of the English Premier League, mainly due to TV rights, means that 17 of the wealthiest 30 clubs are from the EPL. West Ham Utd sneak in at 20th place but Deloitte noted the success of English clubs was due to two reasons:

  • the relative equality of distribution rights in the English Premier League
  • the performance of the pound against the euro.

Paris St Germain and Bayern Munich who dominate their domestic tournaments are 4th and 5th respectively but to find an Italian club you have to go down to 10th place with Juventus the Serie A winners last season. AC Milan a regular in the top 10 have now dropped down to 14th place.

Game theory and drug taking in sport- Athletes, Organisers and Spectators

Lance ArmstrongDrug-taking in professional sport has long been a major concern and there is no better example than seven times Tour de France winner Lance Armstrong who admitted to doping. Furthermore in the period from 1997 until 2002 among 64 world class 100 metre sprinters 25% have been convicted of doping and this doesn’t include two American sprinters who tested positive this year. So why do athletes continue to dope eventhough you could get banned for life if caught?

Prisoners Dilemma to Inspection Game to Metagame

Game theory deals with differences of opinion between groups who know each other’s inclination but not their genuine objective or choice. It then concludes the optimum course of action for any rational player. In this scenario the parties involved are the competing athletes and although both are better off if neither takes drugs, they cannot trust each other so both engage in doping – Prisoners Dilemma. If you introduce an authoritative figure – the organisers – to test the athletes the fear of getting caught should ensure that athletes remain clean, referred to as the Inspection Game. However this cannot be said to happen at leading sports events as athletes, on the whole, don’t think they will get caught. Researchers from the University of Hamburg have introduced yet another party which they refer to as the customer (sponsor and spectators). Their critical role is the potential withdrawal of support which could see the sport’s demise. A withdrawal of one of these three parties can trigger the withdrawal of the other two. Sports events cannot survive without sponsors, withdrawal of the media restricts the access to the customers, and finally sport is only attractive for sponsors as long as there are customers. Therefore the strategies of the three parties looks like this:

Athletes – Dope or Clean (D C)
Organisers – Test or No Test (T N)
Customer – Stay or Leave (S L)

In the figure below organisers decide on the testing the athletes whether there was doping or not. But more importantly customers are to be informed about doping tests that turn out to be negative as well as positive. The customers then decide whether to stay or leave.

Tree - Game Theory

The assumptions are as follows:

Athletes
D-N-S > C-N-S = athletes prefer to dope if not tested.
C-T-S > D-T-L = athletes prefer to be clean and tested = customers stay, over being doped and tested = customers leave (assuming that customers don’t like doping *scandals)

Organisers
D-N-S > D-T-L = a scandal combined with a loss of customers is worse for organisers than undetected doping where customers stay.
C-T-S > C-N-L = testing clean athletes with customer support is better for the organisers than not testing clean athletes when customers leave.

Customers
D-T-L > D-T-S = customers prefer to withdraw support after a scandal
D-N-S > D-N-L = customers prefer to stay if there is no scandal.
C-T-S > C-T-L = customers prefer to stay if there is no scandal.
C-N-S > C-N-L = customers prefer to stay if there is no scandal.

*Dope & Test = Scandal
Dope & No Test, Clean & Test, Clean & No Test = No scandal

In reality customers who are ready to leave after doping scandals undermine the incentives to test athletes and find them guilty of doping. Consequently this encourages athletes to use performance- enhancing drugs and organisers to reduce their anti-doping methods in order to preserve the economic worth of the event – eg the Olympic Games.

Most athletes that have been found guilty of doping are not delinquent exceptions, but just unlucky scapegoats because the probability of being caught is low. The solution suggested would be to establish transparency so that the customer would know the results for all tests whether they were positive or negative. This allows the customer to condition their support on the presence of serious anti-doping tests. In practical terms this transparency could create a rating for each event based on how rigorous their anti-doping policy is.

Final thought

The vast majority of authorities in today’s sports events would state that their testing regimes were very stringent. However the likelihood of human deceitfulness is very realistic and in some cases it is not those that take the performance enhancing drugs who are the real cheats, but those who have generated an environment where athletes would be foolish not to.

References

Nobody’s Innocent – The Role of Customers in the Doping Dilemma. Berno Buechel et al. University of Hamburg. January 30th 2013

Athlete’s dilemma – The Economist Print Edition July 20th 2013