This has just gone on the sitehttp://www.theanfieldwrap.com/2012/06/lfc-fsg-ffp-and-market-inefficiencies/
By Sam Jones
John W Henry is on record as saying that his plans for Liverpool were contingent on the implementation of the Financial Fair Play rules, in 2010 he confirmed that FFP was key to his decision to buy the club.
Much has been written elsewhere on the subject of FFP in general, and there is probably not much to add to that, but what could it mean, specifically, to Liverpool?
It’s fair to assume that John Henry and FSG, given that they made their money exploiting “market inefficiencies”, will have looked closely at the detail of FFP and what it means for clubs, and given their area of expertise it’s likely they will spot any advantages that it may offer.
Football clubs operate within a market, various types of revenue exist, tickets sales, sponsorship and the like, all of these things are affected by market forces, supply and demand, for example determines the “market price” for a sponsorship deal or the cost of your match ticket.
The most obvious market in football though is for players. This too is subject to market forces – the smaller the supply and greater the demand the higher the price, with the converse also being true. This is what makes Ronaldo’s market price 80 million, players of that talent are in short supply, and more than one club is able to bid for them, so they are in demand and the price goes up.
The same thing makes an average player cheap. They are in plentiful supply and there is no particular demand so the price is consequently lower.
This affects not only the transfer fee, but also the player’s salary, the combination of which is the true cost of the player. All this is, of course, patently obvious. What has it got to do with Liverpool? What has it got to do with FFP?
Given that the transfer of footballers is a market, it is currently inflated. Chelsea, Man City, Malaga, PSG all benefit from the money their sugar daddies pour into the teams. Madrid, Milan, Inter and Juve have all had money put into them by wealthy owners or benefactors, though as this is the status quo it attracts less attention. All of these clubs live beyond their means, and this is what has allowed the market for players’ fees and wages to inflate.
And so, to FFP. If it has any teeth, and whether it does or not is a separate issue, then there will be an impact on the market. The impact will be twofold – a contraction in demand, as clubs have to be more financially prudent and the level of support from owners will have to diminish, and an increase in supply as clubs will need to trim squads and reduce wage bills.
This can only lead to a reduction in price. Supply and demand dictates that, and whilst this will start by affecting the most expensive of players, it will inevitably have a knock on effect for the cheaper ones too and the end result will be a reduction in the cost of most footballers. There will still be exceptions, of course, but the exceptions seem to be the rule currently, as the cost of the likes of Stewart Downing or James Milner tells us.
This is also, probably, obvious to most, but for Liverpool it has a potentially practical application, and that is in the timing of transfers. Under FFP there is a rolling reference period of 3 years in which clubs need to, broadly, break even. Many clubs will only be able to do that by being significantly less profligate in future seasons to offset their earlier spending, meaning that it is not for a couple of years that the impact on the transfer market will be fully felt, and, if you have saved up your money then spending it at this point makes sense for two reasons.
First, you will be buying in a deflated, not an inflated market, and secondly you will be in the minority in having money to spend. Your cash will go much, much further. So, if FSG want to take advantage of this it doesn’t make sense for them to spend all the money available for transfers this summer. Or next summer.
Obviously this would not be welcomed in some quarters, and the murmurings of discontent would doubtless increase amongst those who feel FSG should have injected large sums into the playing squad, however, they always claimed they would follow a sustainable model so this was never going to be the case. The point, though, is that Liverpool, without the competitive disadvantaged conferred by Abramovich et al, are more than able to compete in the transfer market.
If this is FSG’s strategy it will clearly need to be carefully managed. Expectations are high at Liverpool, particularly in an age where a large part of our fanbase seem to use social media and the internet to fuel the fires of transfer speculation, not a summer can pass without a Mata, Silva, Villa or Alves ruining things for months before signing for someone else. The thought of not spending big in an attempt to bridge the gap will be anathema to many and this expectation will need to be carefully managed, but can this be done?
The way in which this is most likely to be palatable is in the context of a long term project, and with the appointment of Brendan Rodgers the opportunity for this presents itself. Most fans will buy in to the idea of an overhaul of the way we work as a club. A new manager, head coach, call it what you will, coupled with a change in “technical staff” is certainly that. If FSG bill it as such people will have expectations that this will come to fruition not this year, but in two or three.
In the meantime, merely adding one or two first team quality players and getting the remainder of them to play to the level they should be at will see a significant jump in our points total, a step in the right direction that is, rightly, the expectation of many. If we can get back amongst the top four places and the jump in income that the champions league brings then a real opportunity to capitalise on FFP exists, as the Liverpool “brand” has the potential to bring in far more than anyone else in England, bar Manchester United. At the same time we will see the club on a far more stable footing both on and off the pitch, with only the question of the stadium to answer.
This is, of course, all speculative. There is the risk of falling further behind in the league but with the underperformance we have endured in the league for several years now that seems unlikely. There is also the possibility that top four this season is the number one priority and that we will spend accordingly, but FSG’s history suggests the long game. It appears unlikely that we’ll spend big on marquee signings, and the lack of champions league football may hamper our pursuit of top players anyway. Another transitional season looks to be on the cards, but if the transition takes us to where we need to be that doesn’t seem so bad.
So if this summer brings us not the flavour of the month, the Championship Manager signing, this year’s Juan Mata or David Silva, but a couple of decent, reasonably priced players and the advent of attacking possession football that makes the most of what we have, then maybe – just maybe – there is a plan at work and the sky isn’t falling.