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Transfer market trends: A 21st Club roundtable

As the most disrupted season in memory comes to a conclusion, our attention turns to the transfer market. The 21st Club Intelligence team sat down to discuss the trends we expect to see this summer

Omar: We’re entering potentially the most uncertain transfer window in the history of the game. Time to look into the crystal balls – what do we see as a big trend this upcoming summer?

Sophie:  I think it’ll be clubs hedging their bets, whether through the types of deal they pursue (like loans with options to buy) or just leaving their spending quite late. There isn’t much certainty about what next season will look like yet, and it’ll be difficult for clubs to update their budgets for the window without knowing what their revenues are going to be over the next year.

Aurel: The jury is still out on how successful historical swap deals have been but I think clubs may look at this avenue even more this summer, and perhaps even loan to buy obligations as clubs look to restructure transfer deals to spread out cost.

Alex: Definitely, I think the huge uncertainty around the risk of a second wave and the possibility of the entire 20/21 season being played behind closed doors will be a big factor. Particularly for lower league clubs who rely more heavily on matchday income.

Omar: That’s the key distinction for me in this window – clubs who have ‘protected’ revenues vs those that don’t. It’s not just lower leagues that rely heavily on matchday income, teams in leagues like Scotland and the Netherlands do too. They will often have more pressure to sell their players, unless they can find a way of drumming up demand. The trouble, as you say Sophie, is that buying clubs may be hedging their bets, which ultimately may leave everyone worse off. What would you recommend as a buyer and seller in this market?

Alex: As a seller, a crude metric could be to look at where you expect the market to be in 12 months time and to work out the amount lost or gained by selling during this window or by waiting until next year. For example, let’s assume the market in 12 months will be around where it is today. By comparing the transfer value of a player (factoring in the lost value that comes as a player’s contract runs down and the wages that will have been paid over the year) with the expected covid induced market drop, the optimum time to sell a player could be determined. If we assume transfer fees this summer will drop by around 30% then it would be worth selling a player who has two years left on their contract; our analysis has shown that the market value of a player moving into their last year will substantially decrease. Of course the difficulty with this approach is in determining the exact fall and subsequent rise in the market however, contingency planning in this way could still prove useful.

Sophie: I think on the buying side it might be a case of avoiding over-scouted markets. I wonder whether some of the leagues that have restarted earlier might have more interest in their players, particularly since we know transfer decisions sometimes suffer from recency bias. Plus opportunities for live scouting have been hard to come by recently. Much as players like Havertz have been on a lot of big clubs’ radars for a while, there has been a lot more conversation about them in the past month or so relative to the top players in other leagues simply because they’ve been the ones playing games. 

Aurel: Completely agree with Sophie’s point above here and I think perhaps the reverse could be true to a degree with players from Ligue 1 for instance. Although the quality of these players may not have declined, they are somewhat less spoken about at the minute with France being the only Big 5 league not going to finish their season. And to add to this, with a longer period of no competitive football, the risk of injury and form become more important factors to consider when considering players from these types of leagues. Eastern European and Scandanivan teams tend to be some of the youngest in Europe, could these types of clubs actually be in a better position than before if demand for young players increases?  

Omar: Definitely. In the big five leagues around two-thirds of spending is retained within those leagues – i.e. the vast majority of business is done within those markets. I’d suggest it’d be hard to find value this window for clubs in those leagues looking at those – and their internal – markets. We estimate that there are about 100 clubs outside the big 5 who are at a big five level, many in leagues that have small broadcast deals and the clubs will therefore need to sell.

Alex: I think as a buying club there will definitely still be value to be found. The growth in fees paid for younger players has grown significantly faster over recent years than older players. Comparing the transfer fees paid between 2012-15 with the fees paid between 2016-19, U21 players have seen a 70% growth in fees compared with a 45% increase for players aged 25-28. With longer careers ahead of them younger players are more likely to hold their market value over this period and so searching for peak age players could see better returns on investment.

Omar: So if you were a club looking to get in 3-4 players, you’d go for players in their late 20s, offer them 3 year deals, and look to buy some youngsters in future windows? I quite like that as a strategy, if the assumption is that young player values won’t really be hit this window. There’s also some suggestion it’s a buyer’s market, particularly for free agents – players lack negotiating power when clubs can cry poor, and the same might be true for those players in their late 20s. But it does feel to me that selling clubs are now beginning to price in the concept of ‘resale value’ into their top young players, to the extent that I think very soon for the average under-23 player ‘resale value’ may not exist.

Evaluating players during this period is obviously going to require a lot of context. Is it possible to do that through the numbers? How would you think about a player’s performance numbers dropping off (or getting better!) during the behind-closed-doors games, and would you place any significance on it? Similarly, is now a time to understand robustness of players, or again is it too small a sample to judge (and, if everyone is thinking the same way, is it best to do the opposite?!)?

Sophie: I guess there are 7 games left in the Premier League, so around a fifth of the season. I think the answer is broadly the same as in normal times: be careful not to put too much weight on a small number of games. There are perhaps some qualities that are hard to evaluate using data that this period might provide some interesting evidence on though, for example a player’s resilience to pressure or a higher workload than usual. There’s a chance we could get enough games to provide some evidence on these things, particularly for clubs still involved in the Champions League. As ever, it’ll depend on how big the change is relative to the variation we’d normally expect in players’ performances from game to game.

We’ve talked about the types of players it might be worth focussing our attention on, but what about which clubs and leagues might be a smart bet? What types of club do we think have been more or less vulnerable to the current crisis?

Alex: I think there are two significant metrics here, which we’ve briefly touched on, these are the wage to revenue ratio and the proportion of revenue that comes from matchday income. Clubs/leagues that have high values for both metrics are really going to feel the squeeze of this prolonged period without matchday crowds.

Aurel: According to the latest figures, the 2018/19 season saw significant revenue growth in the Austrian Bundesliga, over 40%, as the number of teams grew from 10 to 12. Teams such as Salzburg also tend to play in Europe on a regular basis which could help raise overall league revenue, as well as interest in the league in the coming years. The league has also managed to secure an option to extend its current broadcast rights agreement from 2022/23 which could see around a 20% increase in annual revenues. Many other European leagues may be in weaker financial positions and this could help Austrian clubs be more resilient, at least in the current crisis.  

Sophie: I agree that the source of clubs’ revenues is key, with leagues that can lock in broadcast deals a lot better protected than those reliant on matchday income as Aurel says. It was interesting that the Bundesliga managed to renew its domestic rights for 2021/22 onwards earlier this week with only a fairly small drop ($4.64bn last round, to $4.4bn this time). It’s a good test of how strong the broadcasters think the longer term picture is for the bigger leagues.

The other revenue source we haven’t really touched on is player trading. Those clubs that had banked on selling their star players this summer to balance the books are likely to still be forced to sell. While those that aren’t usually reliant on this stream of income can probably afford to wait a year and see whether values have rebounded.

Omar: There’s some suggestion that clubs who had their season curtailed will struggle more than those who are currently completing their campaigns; especially clubs in France. I think perhaps fortunately for French clubs is that it’s a bit of an overheated market in any case; clubs have tended to pay a premium for talent from France in the past, so if their curtailment drives more demand, that might net off the revenue issues the clubs face. 

Aurel: Perhaps this could be the turn of a new era where clubs try to optimise digital revenue and look beyond just fans in the stadium. Could a digital transformation be upon us in football?

Omar: The current crisis has certainly encouraged some digital innovations – fans on big screens, drive-in matches, and so on. To wrap up – prediction time. How much will total transfer gross spend by the big 5 European leagues fall this summer?

Alex: Last summer the gross spend of the big 5 was approximately 5.5 billion Euros, I’m going to use the 30% deflation as a baseline and then take off a bit more due to the continuing uncertainty surrounding a second wave. So I’m going to say the spend will be around €3.5 billion.

Aurel: I’m going to make a bold prediction and suggest that gross spending will drop even further, by around 40%, taking it to 3.3 billion Euros. I really do think we will see a big decline in transfer activity this summer as clubs will be reluctant to sell players below market value.

Sophie: I think my bet would be for around a 25-30% reduction, so a gross spend of around 4 billion Euros. I’d probably expect the impact on other leagues to be far greater, but I think the big 5’s broadcast deals give them the dual benefit of greater certainty and lower reliance on matchday revenues, and so they could be a bit more insulated.

About Omar Chaudhuri

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