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I had a strange dream the other night.
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I dreamed that there was a vacancy in the online magazine I edit, Pragati, at thinkpragati.com
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and I needed to fill that post.
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Now in this actual world, I don't have a vacancy right now but in the dream I did.
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So I called up a talented young journalist I knew, told her about the job profile and
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the salary and asked her if she would like to come on board.
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She was gurgling with excitement as she said, yes, yes, of course I would.
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The job profile is perfect, the salary is perfect and most of all I will have the chance
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to soak up the life lessons that you impart in your sonorous voice.
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But there is one problem.
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I can solve any problem.
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She said, here's the problem.
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I already have a contract with my existing employer.
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You'll have to buy me out of that contract with a hefty transfer fee.
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This is journalism, not football.
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Welcome to The Scene and The Unseen.
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The English Premier League summer transfer deadline comes up in three days from now,
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In today's episode, I will try and demystify what exactly goes on in that mysterious transfer
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How do football contracts work?
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How do those transfer fees work and why are they so crazy?
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Sometimes insanely high and sometimes zero for players who should be worth something.
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The guest I have on this show today to shed light on this is Kartik Shashidhar.
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Kartik is an old friend of mine from a decade and a half ago when blogging hadn't yet been
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killed by social media.
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He was always the smartest geek in the room, sort of like Freakonomics personified.
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Well, after many years of nagging by friends, Kartik has finally written a book.
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Between the Buyer and the Seller is published by the Takshashila Institution, which also
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publishes prakriti, and will be released on September 8th.
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You can pre-order it now on Amazon.in.
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Kartik's book deals with the nature of markets and one of his early chapters is about football.
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So without much further ado, let's kick off the show.
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Kartik, welcome to the show.
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Kartik, I really enjoyed your book.
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It was an easy read, just like a storybook, but at the same time at the end of it, I just
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felt much smarter for having read it.
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So thank you for writing it.
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Well, thanks for the comment.
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One of the things that kind of struck me is one of your early chapters deals with a subject
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that's really in the news these days, football transfers.
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I mean, everyone's talking about Neymar's big 200 million euro plus transfer to PSG
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from Barcelona and so on.
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And you talk about the football transfers markets and why they are, you know, some of
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the prices seem absolutely crazy, both on the high side and sometimes on the low side,
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where a seemingly good player can't get anything absolutely, the value seems to drop to zero.
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But before we actually get into the meat of why that is so, as someone who follows football
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only occasionally, I want to ask some really newbie questions for you to demystify this
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whole thing, like how transfers work and so on.
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So how does the football market really work?
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Like when one club buys another player, you know, pays a transfer fee for say a hundred
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million or whatever, what are they really buying and how does all of this work?
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Who does a player have contracts with and so on?
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So the way it works is typically a player enters into a contract with the club.
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So and then like what happens in the transfer market is that the buying club essentially
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pays off the selling club to release the player's contract.
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So Neymar had a contract with Barcelona, which was supposed to last for another two, three
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And what PSG did by paying the 200 million euros is to tell Barcelona, OK, here's all
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I know that Neymar is legally contracted to play for you for the next two, three years,
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but take this money so that you can break off the contract.
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This is compensation for you for the services Neymar is not going to provide you for the
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And once you have released Neymar, then we are going to sign them.
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And so basically, like a similar contract.
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So basically then the buying club, which is PSG in this case has to negotiate with two
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They have to negotiate with Barcelona, which might often be a matter of simply meeting
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the clause in the contract, which says that this is the exit fee.
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And they have to also negotiate with Neymar in terms of what the salary that they pay
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him, which in his case, I think is more than 600, 700 euros a week or whatever.
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So that he agrees because his consent is also required.
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And there have been several cases in the past when transfers have not gone through
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for both these reasons.
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I mean, you have cases where you manage to agree a fee with the selling club, but you
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can't agree what football journalists call us personal terms with the players.
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Basically like the player, you can't agree on a particular salary.
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And it can also happen that like a player is particularly happy to play for you and
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you have agreed a salary, but the club is not willing to sell for whatever price.
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So yes, it is a kind of a double deal that you need to do.
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You need to deal both with the selling club and with the player.
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So now before we get to the meat of the episode, there is one question which struck me recently,
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which I can't figure out.
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And it'll probably seem like ridiculously basic to you, so just bear with me.
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So recently, you know, one got to read that, okay, Alexis Sanchez has a year left on his
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Mesut Ozil has a year left on his contract.
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Now the question is that whichever club would buy them would essentially be paying two tranches
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One would be the monthly salary to the player itself, which would come to X million a year
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and the other would be a big transfer fee, which would be 60 million, 100 million, whatever
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in the case of these two players, quite a lot.
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So the question is instead of selling off now and letting the club get the transfer
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fee, why don't they just wait for a year and just take the full amount themselves when
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So I think it's not entirely kind of in their hands as well.
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So see, from Arsenal's perspective, Arsenal is the team that both Mesut Ozil and Alexis
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Sanchez are contacted to right now.
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From Arsenal's perspective, they would rather want to sell them now when they can still
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get some value out of the transfer or I mean, 25 years back, there was this ruling that
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has come to be known as the Bosman ruling, which basically says that if a player has
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less than six months on his contract, he's free to talk to any new club and arrange his
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So if Arsenal doesn't manage to sell these guys now, what will happen is they might have
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to let go of them for a very low number.
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So what they are likely to do is that they'll either arrange a deal right now or they'll
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sign new contracts with these guys and extend their playing career so that next year if
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they have to sell them, they can at least get a good fee and so on.
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But since the consent of the player is also required, doesn't it make more sense for
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the player to just wait till he's a free agent and take all the money that is, you know,
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not just what their fee would be as a player as a weekly fee, but also what would otherwise
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be the transfer money, which the buying club is clearly willing to play, but will now have
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I mean, a player can, can technically do that, but then what can happen is he can get frozen
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So let's say if you are agitating too much either to get a transfer or to not get a transfer
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and you end up pissing off your club, remember that your current club is still your current
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employers and your manager might decide to not play you for the next one year after which
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your market value will go down, will erode if you haven't been playing.
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And so, and because of that, like players usually don't try to take such a risk and
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also remember it's a very small market, small number of players, small number of clubs at
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their very elite level.
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So there are, there can be enough people in the market who can be irrational enough for
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things like this to not work and so on.
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So now let's get to the meat of the subject.
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Your book is called Between the Buyer and the Seller and it's essentially about markets
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and how changes in the amount of liquidity in the market can make them behave in different
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So can you explain the central concept for me?
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Like what is a liquid market and you know, how would the football market qualify and
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what are sort of the effects of the football market not being very liquid?
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So the word liquidity, I must start off saying that it has no particular precise definition.
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I mean, it's a very overloaded term, it's used in several different contexts.
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If you hear an accountant talking about it, it means one thing, if you hear a monetary
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economist talking about it, it means yet another thing, if you hear a market guy talking about
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it, it means a third thing, a financial market guy talking about it, it means something completely
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So it's a very overloaded term, so because of which people get a little thrown off by
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But to put it very simply, liquidity is the ease with which you can buy or sell a particular
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So in this particular case, if you think about it, if you wanted to buy a hundred shares
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of Infosys tomorrow, all you need to do is to log on to your brokerage account or to
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call your broker and say you wanted to buy that.
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And the number of shares of Infosys traded on the Bombay Stock Exchange every day is
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so huge that you can get your 100 shares at the best price, at a price that is very close
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to what the prevailing market price is then.
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So in that sense, the Infosys stock is a very liquid stock.
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On the other hand, if you wanted to buy a stake in Uber, Uber is not a publicly traded
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So if you have to kind of buy some shares in that, then you can't just go to a central
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exchange where millions of shares change hands every day and so on.
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You have to call up one of the few people who hold the stock right now, convince them
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that they need to sell it to you, go through a protracted dance of kind of figuring out
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So the amount of effort that's involved in conducting the deal in order to buy or sell
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shares in Uber, which is not listed, is immense.
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So in that sense, it's a very illiquid stock.
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So liquidity is basically a measure of how easy or difficult it is to trade in a particular
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thing or a commodity and I'm just trying to pull out a quote from my book, which is what
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I start the book with and I think it's worth quoting here.
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This is by Michael Lewis in his book Flash Boys, which is about high-frequency trading
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He says, liquidity was one of those words Wall Street people threw around when they
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wanted the conversation to end and for brains to go dead and for all questioning to cease.
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And that's partly because it means so many things, but in your definition, a liquid market
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is one in which trades happen very easily without any friction and low transaction costs
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and a great example of this is obviously, like you said, a computerized stock exchange
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where, you know, it's very easy for buyers and sellers to find themselves.
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There's no cost to that.
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And also because there are so many buyers and so many sellers, you could say that whatever
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each thing is priced at is an accurate reflection of supply and demand.
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And an illiquid market is one where either it's very hard for buyers and sellers to find
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themselves or there are very few buyers and sellers, like in the case of if you want to
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buy Uber stock, you have to call one of the individuals or institutional investors who
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actually own some and negotiate with them one-on-one and that is illiquid and in markets
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like that, prices are kind of out of whack.
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So what is a football market like?
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So football market, I think, is like at the very elite level, it's fairly illiquid, basically
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and it's illiquid for a number of reasons.
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The first thing is that, like, I mean, it's very hard to kind of, there are a few reasons
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First thing is that it's very hard to classify players.
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I mean, you have four basic classifications, goalkeeper, defender, midfielder, forward,
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but even within that, there's so many sub-classifications that it's hard for you to find good substitutes
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So if you were to kind of lose a particular player, let's say Barcelona has just lost
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Neymar, it's very hard for them to find a comparable player or if PSG were to look at
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Barcelona selling Neymar and somebody else trying to sell a similar footballer and negotiate
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It would have been very hard for them to do that because you don't find another footballer
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like Neymar and the more elite you go, the harder it is to find the players who are similar
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to these players and so on.
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Second thing is that, I mean, it's a very small market, very small number of buyers
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So even if you manage to kind of pin down a particular class of player of whom there
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are quite a few, the number of clubs with whom you can kind of negotiate is really small.
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So that makes it a little harder to transact.
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The other thing is what we spoke about in the beginning of the podcast, basically, because
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you have to strike a deal, you have to strike two deals, you have to strike a deal with
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both the selling club and with the player.
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So that creates a further complication as well.
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So sometimes the deals can kind of fall through because of that.
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And fourthly, you have some traditional rivalries where certain clubs blanketly refuse to sell
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players to certain other clubs.
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I mean, there's absolutely no good reason to do that.
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So that's yet another reason.
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And then it's a fairly small and a bit of a national market, which makes it extremely
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No, and circumstances keep changing all the time.
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For example, Barcelona having sold Neymar because he wanted to go and PSG met the price
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is now desperate to find replacements.
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And at the time of recording this, on the 20th of August, we'll release this episode
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At the time of recording this, they've only managed to get Paulinho from China.
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And he's not a like for like replacement at all.
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In fact, he doesn't even seem to fit in the Barcelona system of playing.
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And it is likely that at 40 million euros, they overpaid for him.
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And what is now likely till the transfer windows ends on August 31st is that whoever they buy,
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they will overpay for him because they are desperate to fill the Neymar size gap somehow.
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And other clubs will take advantage of this.
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So other news from yesterday is that Barcelona has put out a bid for 120 odd million euros
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to buy this guy called Philippe Coutinho from Liverpool Football Club.
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Now, Coutinho is an excellent player, but he is not Neymar as in like they don't play
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Barcelona might have to change the system that they have been playing over the last
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three years in order to put in Coutinho rather than Neymar.
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And on the other side, Liverpool got a bid for 120 million euros, which is a huge sum
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And they rejected it, saying we are not a selling club.
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Basically, you also have this posturing because you don't want to give out the optics that
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like if you sell good players, it seems like you're not a great club and so on.
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So you have these things that go on as well.
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So yeah, so Barcelona can't replace Neymar.
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They might just get Coutinho, but I'm sure they're going to end up overpaying for it.
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And that's probably what Liverpool is holding out for.
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And you know, Coutinho is not like an infosys share that if one guy refuses to sell, you
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buy it from someone else.
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He is unique and they want him desperately.
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And the smartest thing for Liverpool would be just to play chicken and hold out until
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the very end when they get some really insane number, which Coutinho would otherwise not
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This is the deal that they turned down.
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And I think, if I'm not mistaken, is already the highest ever transfer price offered to
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Liverpool to sell one of their players.
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It's just about higher than what Barcelona had offered Liverpool for Luis Suarez, I think
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And so it is the highest price that we've offered.
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And there's still like, at the time we are recording this, 11 days left to go in the
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So I think there's a good chance Barcelona might come out with an even higher price and
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like Liverpool knows that.
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And so then what happens in an illiquid market basically is that the price gets set based
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on the party who is more desperate to do the deal.
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So in this particular case, Liverpool doesn't really want to let go of Coutinho.
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He's been a great player, he's got the most goals for them last season, and they really
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But they know that one, Coutinho wants to go to Barcelona and two, that Barcelona is
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willing to pay a good price for him.
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So they are just going to hold out until they know that Barcelona is not going to pay an
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even higher price at which the deal will be done.
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So what we see here is that it's a highly illiquid market and therefore because of that,
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because of these dynamics, very few buyers, very few sellers, all these circumstantial
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factors playing a part, that sometimes a lot of players get paid crazy amounts, which you
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would not imagine they're worth, and sometimes it's the opposite, where they seem to get
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absolutely nothing and nobody wants them, though even that surely can't be the case.
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And you've described this very well in your chapter and I'd urge people to read your
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But if I were to now ask you that, let's say that you have to play God and you have to
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design the football market in an optimal way so that it's best for both buyers and sellers,
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or it can lead to better outcomes for buyers and sellers, what would you change?
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Okay, that's a really hard question.
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I mean, like, there have been a few proposals on kind of changing the football market because
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like, I mean, obviously, what happens is like when you have these insane amounts being thrown
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around for purchasing people's contracts, you have people who say that, okay, this is
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not a great market, we need to reform it.
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And people talk about, like, say, the US market where, by the way, sports in the US works
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very differently from the way it works in Europe, because there it's a, in the US, it's
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a top down structure where the, where the league recruits the teams and so like, kind
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of the league has control of who kind of sells to whom, and so on.
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On the other hand, in Europe, it's the teams who own the league.
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So it's a very different structure.
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But in the US, you don't have the concept of a transfer fee.
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You can only like, in most sports, you can only like swap players, or like, just bring
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the contract to an end and so on.
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So what they're trying to do is to remove price from the negotiations.
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But what happens is that if you remove monetary price from negotiation, the price will find
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itself into the deal in other ways, and it just makes it even harder to kind of buy and
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So that's obviously not a...
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So, you know, I'll take this opportunity and ask you to demystify that a little bit
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So what do you mean that, you know, if price doesn't play a part, how do these things get
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decided and in what other ways does that value manifest itself?
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Yeah, so now just imagine that, for example, PSG wasn't allowed to give a single euro to
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Barcelona in order to buy Neymar.
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But you know that Neymar desperately wants to play for PSG, but he has a certain number
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of years left on his Barcelona contract, and Barcelona like him, and they don't want to
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So they can't like... so how do you kind of resolve this case?
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So what price allows in this particular case is an elegant solution, where PSG basically
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gives this money to Barcelona and say, okay, here's some good money to compensate for you
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not getting your services for next two years, please break your contract.
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And Barcelona will say, thank you, we are very happy with the money you're offering
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We are going to break the contract.
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If you don't have a price, you can arrange for some swaps.
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That's what they do in the US.
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But then what will happen is you can't have a like for like swap.
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So if you were to look at it from the price perspective, in order to compensate for Neymar,
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you would have to have PSG might have to sell their entire rest of their team in order to
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So this is obviously not a good thing to do.
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So in that sense, Neymar might just end up continuing for Barcelona.
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Both of them, he might get less money from PSG whenever he manages to move to them, PSG
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All parties are left significantly worse off than they are now when you have a transparent
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price mechanism, irrespective of how irrational it is.
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It's always good that like things are settled with money rather than through other things.
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So with the transparent price system, basically what it does is that it makes the market more
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liquid and makes outcomes better for both buyers and sellers.
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Yes, it makes outcomes better for both buyers and sellers for for sure.
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I don't know how I would be designed this market.
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I mean, like the other thing, I mean, again, I mentioned this in the book.
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The other thing is with football markets is that like, I mean, there's no good way to
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place a valuation on a football player.
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If you think of something like an Uber stock, right, it's again highly liquid, very few
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But at least like you have some models in literature on how do you value a company?
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How do you value a private company whose financial details you don't know and all that, there's
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still some theoretical backing to that.
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So because of which the price that a buyer will be willing to pay and the price that
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a seller will want is not going to be that much far off.
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But here because like football is a team game and it's very hard to kind of place a value
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on a particular player at any point in time.
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What happens is that like, I mean, to use financial terminology, the bid and the ask
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prices, the price that the buyer is willing to pay and the price that the seller wants
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starts off by being so far off that like it's a, it ends up being far more irrational.
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And you know, it's possibly to avoid that kind of irrationality that, you know, for
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example, the IPL in India has this cap on how much a team can spend during each auctions.
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But despite that, you have circumstantial factors playing a big role, for example, whether
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you're a player who set up early in the auction or right at the end of the auction can make
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If you're an all rounder early in the auction, you may not get so much, but if you come later
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in the auction when two or three teams are really desperate because they haven't filled
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that slot, they might be willing to pay more.
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Conversely, teams might have less money left at the end of the auction, having already
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So all these sort of factors of luck also play a part and somehow, and that affects
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the liquidity in your definition of the market and in arriving at what a good price for a
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player otherwise would be.
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And also IPL, I think it's like, I mean, because it's centrally controlled, like the U.S. more
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exclusively modeled on U.S. sports, it's not a great market.
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I mean, say for example, somebody like our Ashwin over the last couple of seasons, I
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think he was contracted to play for the Rising Pune Super Giants and he didn't really get
#
I think last season he didn't get to play much and this season, again, I don't think
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he played too much if I haven't been following the idea.
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What I heard on the gray point about last season apparently was that he wanted to be
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captain and he wasn't given the captaincy, so he was basically sulking, but that's just
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It might be, but what happens in a football context is that if you're sulking, the team
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knows that you're not adding any value.
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They're like, okay, I can get value for you by putting you out in the market because there
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are other teams that want you more than I want you.
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So I'm just going to sell you.
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In the IPL case, because it's all centrally controlled, you can't sell, buy and sell players.
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Every transfer has to be approved by the league and it's just too messy.
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It's just too centrally controlled for the market to...
#
And so the outcome wasn't good for Ashwin because he wasn't playing.
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The outcome wasn't good for Rising Pune Super Giants because they had to pay this guy his
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It's a fairly hefty salary and weren't getting any value out of it.
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And the outcome wasn't great for any of the other clubs because they could have very well
#
used the services and they were not allowed to do that.
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It's a lose-lose situation all around.
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So the greater the liquidity, the more the positive summons of markets actually kicks
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in and it's a win-win outcome for everyone.
#
Karthik, it's been a pleasure talking to you and one of the two big questions about football,
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about how these markets work has been completely resolved in my mind.
#
So thank you for shedding light on that.
#
The other big question is, of course, why so many Indians are fanatic supporters of Manchester
#
United or Liverpool or places they've never been.
#
That is inexplicable, but it's beyond the scope of our discussion and we'll handle that
#
But I can tell you why I am a big fanatic supporter of Liverpool, though I have never
#
So this was back in 2005, I was on a tube train in London and this was the day when
#
Liverpool was playing Chelsea in a Champions League semi-final.
#
And the train, halfway through my journey, the train got invaded by a massive bunch of
#
Liverpool fans who were on their way to watch the game and they were like a big bunch of
#
rowdy fans getting drunk, singing and it was a fantastic experience.
#
So it was almost like a religious experience and I got converted through the 10-minute
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You ended up joining that particular tribe.
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Well, good luck to you and good luck to Liverpool this season.
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Thanks a lot for coming on the show.
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If you enjoyed this episode, do buy Between the Buyer and the Seller, Karthik's book which
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releases on the 8th of September.
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You can pre-order it on Amazon now.
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You can follow Karthik on Twitter at KarthikS, K-A-R-T-H-I-K-S.
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You can follow me at Amit Verma, A-M-I-T-V-A-R-M-A.
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The archives of The Scene and the Unseen are available at sceneunseen.in.
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Do subscribe to us on iTunes, Stitcher or any podcast app of your choice.
#
If you enjoyed listening to The Scene and the Unseen, check out another hit show from
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Indusworks Media Networks, Cyrus Says, which is hosted by my old colleague from MTV, Cyrus
#
You can download it on any podcasting network.
