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Old 7th January 2006, 12:41   #1
TanyaT
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Default Net loss: Real less than sum of its pricey parts

Net loss: Real less than sum of its pricey parts
The Weekend Australian
January 7, 2006
MATP
Success on the field has eluded the commercially successful Real Madrid, writes 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 Perez, construction magnate and Real's president, 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 3 billion viewers worldwide watched Real Madrid's humiliation. Barcelona's game was so dazzling that Real fans even gave a spontaneous standing ovation to Ronaldinho, Barcelona's toothy Brazilian striker.

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

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

''Real Madrid has no game plan,'' wrote Santiago Segurola, sports critic of El Pais, 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, Perez was bombarded with angry text messages. ''Florentino, we want a real team, not a dysfunctional collection of overpaid has-beens,'' one read.

Perez 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 Perez 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 170 million 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 Martinez de Albornoz, Real Madrid's corporate managing director, recruited by Perez from Arcelor, the European steel company.

Shortly after taking over, Perez paid off Real Madrid's crippling debt burden by selling the club's training grounds, which occupied 120,000sqm of prime real estate in northern Madrid. The sale netted E500 million ($810 million) for the club.

Next, he went about assembling a team of galacticos -- 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.

On the day of the Beckham press conference , Real Madrid sold 8000 Beckham T-shirts at E62 to E78 each. A month later, Real Madrid capitalised on Beckham's popularity with a 17-day club tour of Asia. The tour netted about E8 million.

In many respects, Beckham's E35 million 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 E117 million, since Perez took charge. Income from sponsorship deals, the sale of image rights and advertising has grown sixfold. 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 E275 million 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 258 million fans worldwide.

''Think how far we can go with 258 million 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 E500 million on transfers during Perez's tenure. The club does not disclose how much income each galactico 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 E20,000 a year; today, Real Madrid charges E150,000 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 world's best players.''

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 underperforming 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 Jose Luis Nueno, a professor at the IESE business school in Barcelona and co-author 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.''

The fact that Perez 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.

''The club's financial solvency is the pre-condition 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.''
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