Real Madrid Analysis

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Real Madrid Club de Futbol

Team #1

Introduction

The Madrid Football Club was founded in 1902 by a group of Spanish Soccer fans. By 1905, they were playing their first international game, competing against Galia Sport from Paris. By 1927, the team was touring the United States, and in 1943, Santiago Bernabeu, a former star player, was appointed president of the team. After his appointment as president, he began building Spain’s largest coliseum, the Santiago Barnabeu Stadium, financed with bonds that were purchased by their fans. This decision clearly paid off, as it was recognized by the international press as the best stadium in Europe. From 1955 to 1960, Real Madrid won the first five European Cup competitions, with a sixth win in 1966. They were the world’s best-known soccer team at the time. In mid-2000, the club’s new management shifted the focus of the business and began treating it as a company providing content. Pérez, the club’s new manager, promised to bring in world-class talent, extend the club’s brand worldwide, and strengthen and restore the club’s finances. In 2003, David Beckham was added to the team as their new star player as a fulfillment of this promise. An acclaimed, 28-year old midfielder and international fashion icon, Beckham’s transfer captured global attention and Beckham fans worldwide shifted their loyalty to Real Madrid. With seven soccer superstars, by 2003, Real Madrid became the world’s fourth wealthiest soccer club. In this case, we will evaluate the sustainability of the business model Pérez established, with special attention to its revenue streams, their customers, and the power distribution within the industry.

Business Model

With a well-structured business model Real Madrid was able to steadily increase revenues while maintaining its’ position as the world’s fourth wealthiest professional soccer club. Real Madrid’s members own and make the club what it is today, “the club is not the property of anyone… but at the same time is the property of everyone” (Case, Pg. 8). The club is centered around its’ members to make them feel informed and involved. There are two types of members. The socios abonados are the prestigious cardholding members who have access to all benefits of the team, along with the exclusive right to vote for club presidents who serve four year terms. The socios non-abonados are the less prominent members who benefit from some price discounts and receive the club’s magazine but are not allowed to vote for the club’s president. Joining a socio member group is one of the value propositions offered by Real Madrid. The Socios added value for every member by discounting on games, and discounts on merchandise. As for the socios abonados, they are the only people in the world that have a direct say in the direction of the club with the voting rights available to them. Another value proposition provided by Real Madrid is the talent put on display for the customers to admire. “Attracting and retaining star players” (Case, pg. 11) was a key strategy for obtaining the clubs goals. This key resource of human capital formed what Perez called “The Galacticos”, or the galaxy of premier international and Spanish talents. Having and paying for a collection of the greatest players from around the world attracts and keeps a strong customer relationship between Real Madrid and the fans. Real Madrid reaches all types of customer segments. Young and old, rich and poor, everyone has a chance to watch either his or her favorite team or player. Real Madrid had multiple target markets for the varying customer segments. From the socios abonados, socios non-abonados, the non-dues paying member who attended matches whenever they can, or international fans, Real Madrid wanted to maintain a strong customer relationship through the wide variety of channels. Real Madrid built awareness through various channels including social media, retail stores, magazines, fan cards, TV deal, video games, a webpage, and the physical capital of tickets and stadium developments. The channels provided a “one-on-one relationship” with each fan leaving them with the feeling that they were part of the team. With the various revenue streams projected to increase for the year 2005, Perez’s business model looked promising. Intellectual capital like Adidas and Siemens Mobile IC are key resources that were considered as major sponsors and a high value revenue channel.

When Pérez was elected president by the socio abonados, he and his management team felt Real Madrid’s “operations and marketing approach did not match its reputation in sports” (Case, pg. 8). To the management team the most important and sometimes challenging thing to do when managing a modern professional soccer club is to think with their head and not their heart. Pérez had a unique outlook when planning his business model for the four-year term he was elected. He built a strong management team around him and used his substantial human and financial capital to create the business plan he wanted. Pérez wanted to structure themselves as “a company and began to think of themselves as a provider of content” (Case, pg.8). They wanted to be the best and most recognizable soccer club in the world while nurturing and projecting the Real Madrid brand worldwide. In order to do that Perez couldn’t do it alone so he relied on some key partners to help him. Perez created the Sociedad Mixta, which was a stand-alone legal entity that belonged to the clubs marketing division. The Sociedad Mixta contacted and negotiated with potential partners, and paid 25% of its’ direct income to Real Madrid. The club also partnered with Caja Madrid (Spanish savings and loans) and Sogecable, the leading pay-TV group in Spain, combined they paid roughly €110 million for a 30% share of the team. They later found more partners that would help support Perez plans to increase the physical capital of Bernabeu Stadium and the Galacticos. Real Madrid differentiated themselves from many other European soccer clubs during this time by focusing on the reach of their overall brand name rather than purely fixate on winning. To ensure this they added key activities like international friendlies with other nation’s club teams. This turned out to be a key resource when developing sound customer relationships with international fans. Also, Real Madrid forecasted goals and demand 20 years into the future, while most teams were just concerned with cash management. Jose Angel Sanches, the marketing director said, “to transform Real Madrid we partly went against what experts were used to” (Case, pg. 9).

Risks, Greatest Revenue Stream

Real Madrid had multiple different revenue streams. Real Madrid was the fourth richest professional soccer club in the world (Exhibit 1). Utilizing a stand-alone legal entity called Socidad Mixta, Pérez and his team projected revenue to be as much as €233 million for the year 2004. The Mixta managed all rights, or revenue streams, except audiovisual ones. One of the revenue streams, game day ticket sales, was the most important revenue stream before the 1990s. By 2003 Real Madrid had made 200 available VIP boxes available for the regular fans but was mostly used by major Spanish companies. These VIP boxes had become a big part of the match-day revenue, accounting for €16 million per year. By 2003 the boxes had already created a long waiting list. We believe by building more boxes, you would see an increase in the revenue for ticket sales. With the help of a 24 game winning streak and many other key victories, ticket sales had increased 55% since 2000. This shows us that we should not forget to always remember that our fans are there for the players. In exhibit 4a we see that the marketing sector created the greatest revenue. This could only be possible if your club has the talent that Real Madrid has. The players are the greatest resource the club has, and utilizing the talent will only help Real Madrid’s revenue. Because of the players, another source of revenue was in the retail/merchandise section. The retail revenue had nearly reached €4 million, with a forecast projecting revenue to reach upwards of €17 million in 2004. We believe a way to grow the retail stream would be using the already in place “Real Madrid fan card”. With a card, a fan receives discounts on merchandise inside the retail store. They also received Hala Madrid, a quarterly magazine about the Real Madrid team. This informed the fans and led to the increased retail revenue. If we continue utilizing this, and possibly increasing advertising for the fan card, it would lead to even larger retail revenues. The revenue stream that we believe has the greatest potential for growth is the Real Madrid Television network. By the 1990s TV rights were the largest source of revenue for Real Madrid. This has slowed since the 2001-2002 season, giving us the assumption that it could have a great growth rate if we use it to our advantage. The station had grown to 30,000 subscribers from 2001 to 2004. By playing international tournaments the customer awareness of the Real Madrid brand and players would intrigue the international fans. If we enter into the Asian, Mexican, and US television markets after the international friendlies were played we could see a high increase in viewers. The station is vital not only for the fan to watch games, but also inform the fan, which created a “one-on-one relationship” that the management team of Real Madrid desired. The fans would be well connected to the players and the brand would be expanded to more potential fans. The reason TV has the greatest potential for growth is because of the amount of international viewers that watch the games. The international fans watch Real Madrid in order to see their favorite player and or the exceptional class displayed by the soccer club. With 93 million fans worldwide, making the games available to all, via TV, would increase the potential revenues for the Real Madrid Television station.

With all of these different revenue streams, Real Madrid will face many different risks. Identifying the risks will help the management in continuing the revenue streams they currently hold. One obvious risk is the team losing. An example of losing profit because of losing a big match is when Manchester United lost in the quarterfinals of the Champions League. They lost the game resulting in approximately €10 million of lost revenue. With the talent on Real Madrid being the best in the world, losing was one of the lower risks on the managements mind, but definitely still possibility. The risk we found to have the greatest potential disaster was overexposure and excessive commercialization of the fans. Another example of this becoming a problem is with Manchester United. They “had been criticized for exploiting its fan by selling too many products and for constantly altering its strip design.” Manchester’s own club director said they “stretched the brand too far”. He also noted that the fans should always be considered the fans of the sport of soccer and not a customer of it. We found that this is a real risk for Real Madrid because the corporate general Director (Carlos Martinez de Albornoz) said, “the key is to convert Real Madrid fans into Real Madrid customers” (Case, pg. 11). If we recognize what happened with Manchester United, we will understand that there is a certain limit to which we value our fans as customers. The last risk we think could harm Real Madrid is the possibility of losing the world-class talent on the team. Soccer players are transferred and loaned throughout Europe. There are a lot of fans that are not only fans of the game but of a specific player. Keeping the key talent on Real Madrid for years to come is a major priority for the club. When big star players leave the team, so do the mass amounts of fans that are loyal to that same player. In order to minimize this risk, the management team should try to lock up key high class players to long term contracts in order to prevent the loss of the player and certain fans. The job of the Madrid management team should be getting talented and popular soccer players that win games. We also think that the Real Madrid management team should never treat the fans as customers because they are what make up the Real Madrid club. By using the Real Madrid Television program, fans will be able to see their favorite players play, allowing them to stay connected and interested. The TV station will also be able to control how much commercialization we give to the fans so that we don’t overdo it.

Customers, Market Segmentation

Real Madrid’s broad target market consists of individuals who simply enjoy soccer and are interested in seeing games or purchasing merchandise. The market segmentation can be divided into three different subsets of costumers who have common needs and priorities. Once those needs are established Real Madrid can design and implement strategies to target them.

The first subset is their local and loyal customers. These individuals have grown up a fan of Real Madrid and will always be a fan regardless of the players. These extremely involved fans are traditional culturally motivated fans. Targeting them does not take much capital. They do not need advertisement directed toward them because they will seek it out themselves and will always be in the know through the club. These are your prestigious cardholding customers. Although they do not need any advertisement they do need benefits and that is exactly what the club provides to the card holding members. Those who pay dues have access to every game and have the exclusive right to vote for the president. By allowing them to vote, they feel they are involved and that their opinion matters.

Another subset is the socios non-abonados. These individuals are mostly locals that care enough to be informed but are not as invested in Real Madrid as the socios abonados. They are the fans that follow certain players or the fans of multiple soccer teams. The socios non-abonados have very similar benefits like the socios abonados but are not allowed to vote. They are informed through the Real Madrid magazine that they receive with a membership. By maintaining opportunities through they club and keeping the action on the field worthy to watch, these members will stick around.

The third subset is the soccer fans in general. You will always have these fans at the games but they are typically international. These “6 million tourist visiting Madrid each year” (Case, pg. 2) need a lot of advertisement directed toward them in order to persuade them to see a Real Madrid game rather than another well-known team while abroad. Retail stores, billboards, TV ads and social media are all important in reaching these fans. As discussed earlier, TV is the most important revenue stream, which if executed correctly will greatly attract these non-dues paying fans.

Power: Real Madrid vs. Players

Many factors influence the success and strength of a soccer club. Within the club, there is a distribution of power that contributes to this success, but where does the real power lie? On one hand, Real Madrid has a huge amount of power as an organization. They are well established and, as we have discussed, have a variety of intensely loyal fans. On the other hand, what would a soccer team be without its players?

If we treat the soccer club as a company, as Pérez suggested, then the members are the stockholders and rightful owners of the company and the players, in a way, are the deliverables. Their wins and losses can almost be compared to stock prices, reflecting brand value. In this case, management serves on behalf of the owners to create value for them, and in turn, creating value for the customers. Managers themselves do not merely act on their own behalf, nor do they contribute to the intrinsic value of the brand; but rather, they act on behalf of the owners to create value in their company. The only way to create value is to strengthen the value of the deliverables and the perception of that value. In this case, players each come with their own intrinsic value and, often, their own stockholders, of sort. There are two basic types of stockholders/owners in this situation: those whose stock is on individual players and those whose value is on the team Real Madrid. For those who are loyal to the individuals, their “stocks” will move with that player. For those who are loyal to the team, depending on their personal intensity, their stocks will follow that company and their deliverables. In both cases, value can only be built in the company through the players and their performance. It is the managers’ job to hire the players that bring the most value and give the stockholders a vision for their company that persuades them to invest. The manager is the liaison, but do not have direct power or value. The team, considered as a company or “brand”, has no value independent of its players/deliverables. Given such strong brand loyalty among so many of the fans, this may seem counter-intuitive. However, there would never have been brand loyalty, or even a company in the first place, if the players had not succeeded so many times. The players are the ultimate source of value. This gives them the true power.

We can see several examples of this in the case, confirming our conclusion. From the beginnings of the club, star players have done much more than just play soccer. They are icons for fans, sources of intrinsic value for the team, and have even become managers. Ricardo Zamora and Santiago Bernabeu are two of the team’s first star players. Bernabeu eventually became a manager, and he had a vision for the team that changed it forever. After his death, the team suffered severely for nearly two decades. These star players have been said to be key to the strategies of the club as a company. When Chelsea allegedly offered to pay a Real Madrid player twice his salary to change teams, he declined. This is a reminder that it is the player’s autonomous decision to stay with the club. Not only are players the ultimate source of value, they are also autonomous decision-makers for the team.

Conclusion

Overall, we believe Pérez, the club’s manager, fulfilled his promise to bring in world-class talent, extend the club’s brand worldwide, and strengthen and restore the club’s finances. By bringing a collection of the worlds best players, he was able to bring the club to the level of success it’s at today. While keeping in mind the important risks of losing games, overexposure, and losing world-class talent, Real Madrid was able to increase the growth of the club through various revenue streams including game day ticket sales, retail and merchandise, and international television networks. Although all provide potential growth, we believe television networks will provide the largest. The reason TV has the greatest potential for growth is because of the amount of international viewers that watch the games. The international fans watch Real Madrid in order to see their favorite player and or the exceptional class displayed by the soccer club. The revenues streams are also a good indicator of who holds the power within the company. Because of the growth of sold game day tickets, purchased jerseys for specific well-known players, and international fans tuning in via TV, you can see the real power is held within the players.

Learned

After reviewing this case I think it is safe to say there is a lot more that goes into owning and running a business, let alone a world-renowned soccer club. After being elected as the President of Real Madrid, Perez had to make a lot of decisions that could have been deemed questionable compared to the structure of other soccer clubs. We also learned that the business model is a very useful tool when trying to figure out the foundation on which your business is built. We found that one of the most important aspects of the business models was the value proposition and the customer relationships. In order to have good customer relationships it is necessary to have multiple value propositions to support it. We also learned that if you took one part of the business model away from the whole, then the entire plan fails. Value propositions wouldn’t be possible if there weren’t key activities that are driving them, and the multiple customer segments that are trying to be reached would fail without the appropriate channels. This case was a great way to dissect the aspects of an entire business and evaluate the value that is trying to be sold.




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