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Old 14th August 2006, 19:04   #1
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Default Royal Bounty for Real Madrid

Royal Bounty for Real Madrid

August 14, 2006
Stanley Holmes
Business Week Online

Pssstdo you want to know a secret? The world's richest sports franchise has no flamboyant owner pulling the strings like George Steinbrenner does for the New York Yankees. Nor is it graced, like England's Chelsea, with a Russian billionaire who throws cash to acquire players. Of all the surprises and ironies in professional soccer, one of the biggest is that global power Real Madrid is a democratically elected nonprofit association.

That's right. This is the same club that created Team Galactico, a constellation of soccer's brightest global stars all showcasing their prodigious talents at a beautifully sculpted stadium that seats 80,000. This is the same club that broke the bank to attract such stars as Zinedine Zidane, Ronaldo, and David Beckham. After all, Los Blancos, as they are called, have been European champions a record nine times and have won a record 29 La Liga -- Spanish league -- titles. FIFA, the world governing body of soccer, ranked Real Madrid "the 20th century's best club."

The power of the Real Madrid brand can sell out stadiums in the U.S., too. Los Merengues, as they are also called, set the attendance record for soccer at Qwest Field in Seattle [66,830] on Aug. 9 for a friendly match against D.C. United of Major League Soccer. The club is expected to do the same in Salt Lake City on Aug. 12, when it plays the second of two matches on its preseason warm-up tour of the U.S. "We are trying to increase the potential of our brand," says Real Madrid president Ramon Calderon. "The idea is to be more and more popular in the rest of the world. We have been popular in Spain and Europe for a long, long time."


Real Madrid has to find ways to generate revenue while controlling expenses in a sporting industry notorious for its lack of financial discipline. But it is precisely a disciplined financial strategy that saw Real Madrid in 2004/2005 surge ahead of Manchester United as the richest soccer club in the world, according to accounting firm Deloitte, which conducts an annual survey of the world's top 20 soccer clubs. "We are not in the stock exchange," Calderon says. "We don't have millionaires signing the check the moment we lose money. That means every year we need to produce most of the budget with imagination."

For a nonprofit organization, Real Madrid is raking in the dough. The club boosted its revenues 17%, to 275.7 million [equivalent to about $353 million] and earned about $76 million in net profit. That was achieved through the strength of its merchandise licensing, sponsorships, and other commercial sources, according to Deloitte. Jerseys for Real Madrid stars like Beckham are hot sellers around the world. "This is the result of an outstanding transformation in its revenue-generating ability, which has seen revenues double in four years," Deloitte analysts wrote.

The key to this financial transformation has been a business model that is unlike almost any in modern professional sports. Only Spanish rival Barcelona follows a model that is part club, part nonprofit agency, part business enterprise, part sports team, and part public trust. Real Madrid's president is elected every four years by 70,000 club members who must pay an annual fee of $191 and must be season-ticket holders. In Madrid, even season tickets are a bargain compared with most U.S. professional sports -- ranging from as low as $575 to about $1,535. It's no wonder that the Bernabeu stadium, with a capacity of 80,000, has already booked 90% of its seats for the entire season before the first ball has even been kicked.


The elective process, of course, makes the position of Real Madrid president one of the most politically powerful in Spain. Calderon, a Madrid attorney and former Real Madrid board member, narrowly won a four-year term in July. The controversial election underscored the tension of managing a global business that is, at its heart, a local sports team controlled by 70,000 members, who expect the managers to treat it as a public trust and plow all the profit back into the club. "It's very romantic," says Calderon. "It's very nice to have a club that is owned by 70,000 members. And you don't have the possibility of any rich person or multinational who can come and change the philosophy of the club or change the model."

It helps to have a very popular brand. According to two different studies, about 500 million people have heard of Real Madrid, and about 150 million are considered serious fans who would purchase products and watch and attend matches. So, in the preseason, Real Madrid has toured Asia several years, it has visited the U.S. once before, and it plans to travel to India next year, Calderon says. "We have 500 million followers united by a brand, a philosophy, an idea."

That idea really took shape about five years ago. The club at the time was underperforming financially. It was saddled with about $300 million in debt and only 5% of total revenues came from sponsorship money. That's when the club brought in professional management to run the business. They sold off club property to clear the debts and then made a conscious decision to recruit the world's best players to elevate the club's style of attractive, attacking soccer.


Soon, Real Madrid was paying record transfer fees for such mega-stars as Luis Figo, Zidane, Ronaldo, and Beckham. The media dubbed them los galacticos, and suddenly revenues skyrocketed. "We married a well-known brand with top players," Calderon says. "That made something attractive for sponsors."

Today, about 45% of total revenues come from sponsorship money and jersey sales. About 30% is stadium revenue, and the other 25% is derived from TV deals. And perhaps contrary to its image as a big spender, Real Madrid is very disciplined in the transfer market, says Calderon. The club sets a limit of about $40 million annually from its own revenues for buying new players, and also uses any additional money from the sale of players to other clubs. "We don't move from that policy," Calderon says. "You have to keep the financial and marketing side of business done in the right way."

Ironically, the spectacular financial performance has failed to deliver on the pitch -- at least by Real Madrid's high standards. The club finished second in La Liga last year to rival Barcelona, they were knocked out of the Champions League in the quarterfinals, and they have won no major trophies in three years. Much of the blame for the weaker-than-expected team performance was pinned on former club President Florentino Perez. Critics complained that he micromanaged the coaches and dictated what players would be purchased and who would play. It's not surprising that Real Madrid went through more than five head coaches in three years.


But thanks to an elective system, Perez was forced to resign or get humiliated at the polls. Calderon, a modest man relative to most soccer owners, won a close election by promising to let the coaches coach the players and the managers manage the brand. His first decision was to hire the well-known Italian coach Fabio Capello from top Italian club Juventus.

"I respect many things that were done before," Calderon says. "But I'm going to do it my way. I don't think it was right to intervene too much in the sporting side of the business." If Calderon can fine-tune the performance on the pitch, then it will be no secret why Real Madrid will be the richest club in the world for a long time.
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