Penalties of a superstar strategy

Leslie Crawford

Real Madrid overtook Manchester United last year as the world’s biggest football club by revenues. And yet fans of the Spanish club are not celebrating.

The business prowess of Florentino Pérez, construction magnate and president of Real Madrid, has not been matched by sporting success on the field. In fact, Real Madrid has failed to win a single title, at home or abroad, since 2003.

In November Real Madrid hit a new low with a 0-3 defeat by arch rivals Barcelona. An estimated 3bn viewers worldwide watched Real Madrid’s humiliation. Barcelona’s game was so dazzling that Real Madrid fans even gave a spontaneous standing ovation to Ronaldinho, Barcelona’s toothy Brazilian striker.

Mr Pérez responded by sacking Wanderlei Luxemburgo, Real Madrid’s fifth coach in as many years. Like his predecessors, Mr Luxemburgo had failed to motivate the constellation of superstars who play for Real Madrid.

Firing coaches, however, has not endeared Mr Pérez to Real Madrid fans or spared him from criticism.

“Real Madrid has no game plan,” wrote Santiago Segurola, sports critic of El País, Spain’s leading daily newspaper. “It is the product of a commercial idea that has relegated the actual sport to a secondary role. It spends enormous sums of money signing up stars, but they do not make a team. They are, rather, a disappointing mosaic, with some players in their twilight years, and others included solely for their commercial appeal.”

For the first time, Real Madrid’s dissatisfied fans are questioning their president’s strategy. Underlying tensions between the club’s commercial and sporting aims have burst into the open. During a recent live television interview, Mr Pérez was bombarded with angry text messages. “Florentino, we want a real team, not a dysfunctional collection of overpaid has-beens,” one read.

Mr Pérez can hardly afford to ignore the feelings of his 84,441 members, who remain the owners of the club and have the power to vote him out of office.

But his tribulations also underscore a further problem that is not unique to the multimillion-dollar business of sport: how long can you pursue a successful commercial strategy if your product continues to flop?

When Mr Pérez was elected five years ago, he promised to restore the club’s finances, bring in world-class talent and extend the club’s brand around the world. Manchester United, a pioneer in the professionalisation of football management and a successful brand with 170m supporters worldwide, was to be Real Madrid’s role model.

“We structured ourselves as a company and began to think of ourselves as content providers. This was an authentic revolution,” says Carlos Martínez de Albornóz, Real Madrid’s corporate managing director, recruited by Mr Pérez from Arcelor, the European steel company.

Shortly after taking over, Mr Pérez paid off Real Madrid’s crippling debt burden by selling the club’s training grounds, which occupied 120,000 sq m of prime real estate in northern Madrid. The sale netted €500m (£344m) for the club.

Next, he went about assembling a team of galácticos – a galaxy of stars including Zinedine Zidane, Luis Figo, Ronaldo and David Beckham – not only to create an unbeatable side but to transform Real Madrid into a powerful international brand.

In July 2003, when Real Madrid introduced David Beckham, its newest player, the 11am press conference was timed to make the evening news broadcasts in Asia, where Beckham is particularly popular. The event had the world’s second largest live television audience, after the funeral of Diana, Princess of Wales. That day, Real Madrid sold 8,000 Beckham T-shirts at €62 to €78 each. A month later, Real Madrid capitalised on Beckham’s popularity with a 17-day club tour of Asia. The tour netted about €8m.

In many respects, Beckham’s €35m transfer from Manchester United became the symbol of Real Madrid’s transformation and growing global reach. It also marked the beginning of the club’s sporting decline.

On paper, the numbers look unbeatable. Marketing revenues have become the club’s biggest source of income, having trebled, to €117m, since Mr Pérez took charge. Income from sponsorship deals, the sale of image rights and advertising has grown six-fold. The club has launched a 24-hour satellite television channel and a website in three languages – Spanish, English and Japanese.

It has also entered into licensing agreements with content distributors in different countries, including Disney in the US, Platja in Japan and Citic in China, which will be responsible for developing the marketing channels for Real Madrid in their respective countries.

Total income, including ticket sales and television rights, came to €275m in the year to June 2005, ending Manchester United’s eight-year run as football’s highest earner.

According to Sports Markt, a German auditing agency, Real Madrid has also overtaken Manchester United as the club with the greatest number of followers, with an estimated 258m fans worldwide. “Think how far we can go with 258m customers,” says a senior Real Madrid manager, who asked not to be named. “The value of a brand depends on its audience, and we have only just begun to exploit Real Madrid’s marketing potential.”

Strong revenues have allowed Real Madrid to spend an estimated €500m on transfers during Mr Pérez’s tenure, which the club justifies on the grounds that “the best players pay for themselves”.

The club does not disclose how much income each galáctico earns for Real Madrid. The return on investment for each player, says a senior manager, is not really measurable. He gives an example: five years ago, a VIP box cost €20,000 a year; today, Real Madrid charges €150,000 for the same box. “You cannot assign the increase to a single player,” the manager says. “The fact is that companies are willing to pay for the privilege of seeing the best players in the world.”

But when the world’s best players fail to deliver the world’s best football, the commercial strategy comes into conflict with the demands of club followers. Getting rid of under-performing players, for example, becomes a much more complicated decision if, like Beckham, they also happen to be in the vanguard of the club’s expansion in Asia.

“Real Madrid has to satisfy two constituencies, and the interests of the two are not always aligned,” says José Luís Nueno, a professor at the IESE business school in Barcelona and co­author of a case study about Real Madrid for Harvard Business School.

“The first constituency are the club’s members, who have ownership rights over the club,” he says. “They want goals and championship trophies. The second constituency is the club’s larger fan base, including followers in the US, Japan and China. The second constituency follows individual players, not the club, and much of the merchandising is directed at them.”

“But it is the first constituency which has the power to remove the president of Real Madrid,” says Mr Nueno.

The fact that Mr Pérez was re-elected last year for another four-year term – despite a year without title wins – suggests that the tension between the business model and club results is sustainable, if not forever.

“The club’s financial solvency is the precondition for building a world-class team,” insists a senior manager. “There may be fallow periods in sporting terms, but it would be irresponsible to abandon the business model now.

“Unlike many clubs in Europe, which are owned by billionaires with deep pockets, we need to earn the money we invest in new players. We need to generate an operating profit of about €100m a year just to stay at the top of our game.”

José Luis Nueno opinion citation in Leslie Crawford’s article published in Financial Times, January 6th, 2006

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