Monday, June 15, 2009

More Money Than Sense?

Florentino Perez has returned as President of Real Madrid and has wasted no time in making his mark, splashing out £136m (€150m) on two players, breaking the world transfer record twice in four days. First, he bought Kaka from AC Milan for £56m, only to surpass it days later with an £80m bid for Cristiano Ronaldo. Rumours abound that Perez has a transfer pot of €300m and he will not be satisfied until further big-money signings are made, such as David Villa from Valencia, Franck Ribery from Bayern Munich and Xabi Alonso from Liverpool.

Perez is simply repeating the strategy from his previous reign, when he bought a star player every year to build the first team of galacticos: Luis Figo, Zinedine Zidane, Ronaldo (the original), David Beckham, Michael Owen and Robinho. Inevitably, his new team is already being described as galacticos mark II, but Perez is now a man in a hurry, seemingly aiming to replicate his previous squad, only desperate to complete it in year one. How about that for a “project”, Garry Cook ?

These transfers raise many issues, such as whether ManYoo will actually be better off without their preening peacock, who is undoubtedly a great player, but was relatively ordinary last year. Not only is he unloved by opponents, but he is not even that popular in the United dressing room, because, let’s be honest, he’s a bit of a tit. If you ever doubted the lack of honesty in football, you could review any number of quotes from Ronaldo pledging his allegiance to United, though he did spare us any badge-kissing. His manager, Alex Ferguson, has also hardly covered himself with glory when you remember his strident declaration that he would not sell Madrid a virus. Who will United buy to replace the winker? They could probably buy all of Newcastle from the car boot sale, though that would be the act of a madman (or an obese Cockney chancer).

What interests me most is whether Madrid’s strategy makes financial sense. On the face of it, spending on this massive scale could be considered as megalomaniacal madness, but, in fact, it is part of a carefully considered commercial strategy, which is less about building a team (see any defenders on the wish list?), more about building a brand, the Harlem Globetrotters of football.

Real firmly believe that they are in the entertainment business, so act like a content provider, similar to a Hollywood movie studio. For Brad Pitt, read Cristiano Ronaldo (albeit with a considerably larger Adam’s Apple). For this strategy to work commercially, it follows that they need the best content, thus they consider the likes of Ronaldo and Kaka to be solid gold investments, which improve their brand identity and can be leveraged into higher sales.

Perez would argue that this has worked in the past for Madrid, pointing to the tripling of revenue from €100m a year to €300m during his first presidency between 2000 and 2006. In fact, Real Madrid has topped the Deloitte’s Money League for four years in a row with annual revenue of €366m in 2008.

The engine driving this remarkable revenue growth has been the club’s ability to increase commercial revenue, which now represents over a third of their business with €129m. However, the largest revenue stream of €136m is actually broadcasting, thanks to the exclusive rights contract with Mediapro, which guarantees the club €1.1 bln over the seven years duration of the agreement running until 2013. Match day revenue is the traditional revenue generator for a football club, but is lagging behind the other revenue streams at €101m, though even this has been boosted by reconfiguring the stadium to increase corporate hospitality.

The galacticos factor has clearly been enormously important to the commercial revenues, securing major sponsorship deals and selling a shed-load of merchandise. Academics have conservatively estimated that David Beckham generated $300m additional revenue during his time at Madrid, when his crossing ability was outshone by his ability to sell a shirt. In fact, commercial revenue at Madrid actually fell following the departure of Brand Beckham in 2007.

But will Ronaldo earn it like Beckham? Becks married a pop star (sort of) and exudes a cuddly metrosexual charisma, while Ronaldo may not possess that “likeability” factor. On the other hand, Ronaldo has the appeal of a sulky boy-band singer. That petulance and rebellious streak may appeal more to youngsters – and that’s a bigger audience (just ask the music industry). Also, don’t forget that advertising is expensive, but news is free. Madrid’s shirt providers, addidas, wll be well aware of that.

Real also greatly benefit from their individually negotiated television contract, as opposed to the collective selling in other leagues, which means that the likes of Bolton eat into Manchester United’s potential revenue. You might argue that this is a good thing, but consider the implications. If clubs like United continue to lose their best players to under-achievers like Real, will this not hasten the day when the Premier League’s “big four” decide to cut loose from the pack, sell their own individual TV rights and help establish a European Super League?

As well as the huge income, the other factor driving Madrid’s strategy is obviously the powerful El Presidente. Florention Perez is a billionaire, who bought his company for a Peseta, before building a construction, engineering and energy conglomerate with revenues last year of €4 bln. A natural risk-taker and deal-maker, by all accounts Perez is very down to earth (favourite meal – egg and chips) with his only vice being president of Real Madrid. Last time around, Perez sold the club’s training ground and used the money to clear debt and finance transfers. This time he has secured a €300m four year bank facility.

That’s fine, but surely increasing your debt in these recessionary times cannot be a good thing? UEFA’s president, Michel Platini, was quick to condemn “these excessive transfers … as representing a serious challenge to the idea of fair play and the concept of financial balance”. However, Mr Fair Play himself, the FIFA president Sepp Blatter, insisted that the record deal merely emphasised the healthy state of football (under his presidency), bizarrely likening Ronaldo to a Picasso. Maybe these comments are best ignored, as we know that Blatter is a gigantic hypocrite, who four years ago vowed to stop “greed ruling the world of football”, as he launched a blistering attack (aka vote-winning campaign) on hugely wealthy club owners.

In any case, Real expect to reduce the debt by offloading a large number of their players, including most of their Dutch contingent, for around €100m. They also expect to increase revenue from tickets and commercial operations by €40m. When you consider that Real earned €15m for playing two meaningless friendlies in Japan in 2004 during the Beckham era, that does not seem too aggressive.

The reality is that the unique nature of the football industry will enable major clubs to be relatively resistant to the economic downturn. The revenue growth at these clubs has comfortably exceeded that of the “big five” European football nations’ economies during the last decade. Madrid don’t live in the real world, but a Real world, where they can continue to spend Ronopoly money and no bank wants to be the one denying a line of credit.

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