REAL MADRID CASE STUDY

Summary
Real Madrid is one of the most storied sports franchises in the world. It is one of the few sports teams with international appeal to a very broad fan base. This case delves into how Real Madrid transitioned from a good soccer team with a winning history into the global sports juggernaut we know today.
We first examined Real Madrid’s revenue streams and found that from their inception through the 1970s their business model was based almost entirely on their ticket sales. After the 1970s up until 2003 they had some media rights, a small merchandising department, and some other negligible streams of income. It was in 2003 that team President Florintino Perez decided to make Real Madrid into a special type of sports team that was akin to large global corporations like Walt Disney. After reviewing the facts we agree with the decision to shift the business model into its current position (as of 2003). After identifying and examining the lifetime values of different consumer groups which are listed below under the “Question 2” headline, we have found that each group has different desires in order to be completely satisfied. However, each group has a common denominator that will maximize utility across all segments and that is winning. A winning team sells more merchandise, can demand higher advertising revenues, and can attract the best players for less money which also leads to winning more often. We also quantified two types of consumers, the Socios and international fans. Using the data provided we found that the LTV of one individual “Socio” is about €16,245.88 and the LTV of an international fan is about € 283.82. The total value of the two segments for Real Madrid is about €942 million (Socio for lifetime) and €455 million (international for four years). Finally, we calculated the value of a very highly paid player in David Beckham. After applying the Net Present Value approach to Mr. Beckham we found that he ends up with a negative NPV at the current salary rate. However, we believe that he brings so many intangibles to the franchise (both as a player and a face for the team) acquiring him was well worth the capital spent.

Question 1
The Spanish soccer club Real Madrid experienced significant changes at the beginning of the 21st century. From a club with revenues based entirely on ticket sales in the 1970’s, the club transitioned to a multimedia content provider with a diversified merchandising business in 2003. The changes in Madrid were unique in terms of football club management, at the time they represented one of the earliest instances that a soccer club was ran like a brand.
A catalyst for the major transformation in Madrid was the election of Florintino Perez as club president in 2000. Perez subscribed to the conventional belief that a soccer clubs reputation depended on its success in great games, championships and having legendary players. But in addition to the conventional methods, Perez used new ideas to grow the brand by meeting the expectations of grassroots consumers and brand advocates that sought affiliation with a particular lifestyle.
The promotion of the Real Madrid brand was divided internally into a three interrelated stages strategy. First Real Madrid strived to obtain financial flexibility that would allow the club to obtain the best team in the second stage of the plan. This in its turn increased the value of the content and enhanced the Real Madrid brand. The third part of the plan included the creation of new channels for capturing value and projecting the Real Madrid brand and the content it creates to new and existing markets. Execution of each stage allowed Real Madrid to take in revenue through several streams such as match day and international competition, marketing(merchandise sold at the clubs web site and stores, sponsorships, fan cards, etc.’), broadcast and pay-tv revenue (Exhibit 1).
The club further evolved to identify 4 brand drivers that Perez stated would “nurture and project the Real Madrid brand worldwide.” The first was the size of the audience, secondly the frequency in which the audience engaged with the brand, thirdly, the socio-demographic characteristics of the audience and lastly, bridges that could be built to link the brand and the audience. Each of these changes reflected the clubs transition to a global brand with marketing capability.
Growth opportunities for Real Madrid existed in both new and existing markets. With content seen as the product, opportunities to provide new content to current markets were available through pay-tv and new technologies like movies, video games and use of the Real Madrid website. The website could also be used to for additional merchandising as well. For new markets, winning on the field was translated to good content and provided Real Madrid with an advantage over other clubs in the battle to recruit new fans from international markets.
The greatest risk to Real Madrid’s revenue streams was the prospect of losing on the field. Ideally, the most value the Real Madrid brand can offer consumers is a successful team on the field led by the most popular and skilled players in the world. But the allure of the brand is significantly reduced if the team is not performing well. Another risk to the brand is competition, several of the leading soccer clubs in Europe realized value players added to a clubs bottom line and significantly bid up the transfer fees for major free agent players. Revenues were also at risk to excessive merchandising that could result in over exposure and damage to the Real Madrid brand.

Question 2
Real Madrid’s customer base can be divided into five main segments: Socios abonados, Socios non abonados, Spanish supporters, International team supports and non-affiliated, local and mainly international, soccer fans.
Socios abonados
The Socios abonados are effectively the owners of Real Madrid and as such they require special attention from the club and its management. For many of the subscribed Socios, game tickets and merchandise satisfy only part of their utility while another important part of it is derived from the sensation of involvement in running the club. The most obvious expression of this need to take part in club management is the socios abonados right of to choose Real Madrid’s president every four years. However socios require much more than that and in Spain they (at least some of them) are infamous for spending many days wandering around the team’s training grounds and offices, requiring “special” attention from management and even players.
But maybe the most important thing for the socios abonados is simply winning. The socios are first and foremost die-heart Real Madrid fans, who grow up (and die) on Real’s ethos of winning at all cost. For instance, while some international fans might care more about photo ops with David Backham and less about title races against F.C. Barcelona, the Socios were those who voted Florentino Perez out of the club’s presidency exactly because he lost those races.
This is why the best way for Real to create value for the socios abonados is first and foremost to assemble a winning team. As for the revenue streams Real can use for capturing value from the socios abonados, there are the subscription fees, tickets for international and cup games and merchandise products. Real Madrid’s TV station, pay per view schemes (that broadcast away games) and the club’s official magazine can also appeal to hard core supporters such as the socios abonados. However, the reality is that growth opportunities in this segment are limited because of its relatively fixed and small size. And the possible implications of trying to increase profit margins by raising prices (for fees, tickets, or merchandize) for those who are essentially club owners. Socios non abonados
Socios non abonados are Real Madrid’s hard core supporters from the Madrid Area who for different reasons can’t put their hands on a socio abonado card (mainly because there are only 58,000 of those, but maybe also because of cost issues). Just like to socios abonados, for this group of loyal supporters winning championships, Copa Del Rays and Champions league titles (and if possible, defeating Barcelona along the way) comes before anything else. Another thing that could be important for non-subscribed socios is the sense of belonging and complete affiliation with the club. For the club, this could imply making an effort for narrowing (or at least blurring) the gap between the two socio groups and providing unsubscribed socios with a feeling that they are also an integral part of Real Madrid.
As for the channels that capture value from this second group of socios, there once again the ticket fees and merchandise sales, as well as the Real Madrid TV station and other content related products. This last channel is especially important for socios non abonados as they don’t get to go to as many games as their subscribed counterparts.
Real Madrid’s web site can also serve some of the need of both socio groups, although its main purpose is to serve fan groups with less direct access to the team.
Spanish Supporters
This group of fans is composed from football fans that are from anywhere in Spain which is outside of Madrid and its immediate surroundings (except for Cataluña and Pais Vasco probably). As stated in the case, many of these fans are socios, or at least fans of their respective local teams and support Real when it plays in Europe and in its rivalry with Barcelona.
This fan group is obviously also interested in Real’s victories, but more so on the European front. In the local sphere, many of Real’s Spanish supporters will support the team only to the extent it does not compete with their local teams’ chances. In most years however, this issue does not create any real contradictions for most fans, as Real and Barcelona are usually the only teams competing for silverware. In this rivalry many Spanish football fans support Real as a representative of all Spaniards against the separatist Catalans from Barcelona.
Appropriate channels the club might use to extract value from these fans are the sale of tickets and packages for games (mainly international ones), RealMadrid.com and completing merchandise stores, TV station and other TV schemes and the Real Madrid Magazine.
One unique channel that can directly target Real’s Spanish supporters (especially those who are not affiliated with other local teams) is the clubs fan card that can enhance these supporters sense of belonging to Real’s success story.
International supporters
The international supporters segment is obviously a very diverse segment that could easily be divided into many sub segments especially in light of the huge potential some of these foreign markets present. The US and China are maybe the most prominent examples of countries with huge populations, vast resources and a growing passion for the game of football (soccer) that present unprecedented opportunities for clubs like Real Madrid. In the US a large part of the potential comes from different immigrant groups who brought the love for football from their native countries. Another group that possesses a large potential for Real Madrid in the US are women who in the US play soccer more than men (who tend to turn more to football, Baseball, Basketball, etc’). In China Real’s opportunities are derived from the ever developing appetite for all world class brands, the sharp rise in life quality and income and the growing desire for the game of football. This means in many of Real’s potential Chinese fans are young man and women from the rising upper and middle classes who are looking to affiliate themselves with different cosmopolitan brands.
The revenue stream channels that are adjusted to accommodate the needs of the international fans are the internet web site and the evolving smartphone platforms with their completing merchandise stores. The Real Madrid fan club card is another channel targeting international fans. Exhibition games and tours around the world are other revenue producers teams like Real have increasingly used in recent years to extract value (and strengthen brand at the same time) in international markets. Special travel packages are another mechanism that can and be used to lure international fans (this channel will be greatly boosted if presidents’ Perez Disney World Madridista vision ever comes to life). TV rights and stretching the reach of the clubs TV station into new markets also might present a potentially lucrative opportunity.
One less direct but very important opportunity presented to Real by its international supporters, are the potential new and improved sponsorship deals it can lure with its growing fan base in desirable rising (and already big) markets.
Non-affiliated, local and mainly international, soccer fans
There are millions of people around the world who are non-fanatic sports and particularly football lovers. These are the people that Real Madrid can satisfy by presenting them with the most exciting and attractive football at the highest level.
This last group can provide Real Madrid with two main substantial opportunities: If Real can provide them with the most exciting football out there, the general football fans would replay by tuning in to Real’s games. This in turn would provide the club with the right to demand a larger share of the massive TV rights market. The second opportunity for Real derives from the high risk the non-affiliated fans are baring for becoming “real” football fans by choosing a club. If Real can be the “best” team out there, it might just be the club those fans choose to marry.

Question 3
According to the data given in the case, the LTV of one individual “Socio” is about €16,245.88 and the LTV of an international fan is about € 283.82. The total value of the two segments for Real Madrid is about €942 million (Socio for lifetime) and €455 million (international for four years). For details please refer to the tables in the appendix part of our report.
Based on our calculation and analysis, the international market has an obvious and bigger development potential than the local market. The margin that Real Madrid can get from a socio is a constant (€942 million for lifetime); while for the overseas market, the club can reach out to more areas for margin growth. So for future marketing investments, we would recommend that Real Madrid should allocate more of its budgets into the overseas market and maintain its socio segments by attempting to lower its expense.
Socio fans will maintain their loyalty to Real Madrid for their life time, and the space of increasing margin from this segment is very limited due to mature marketing operations. Winning games provides the most value to socio fans. Only with more victories are there more possibilities for the club to boost its merchandising and other related sales within the socio segment. Also the club can try to save cost from this part to better support development in other potential sectors.
For the international segments, Real Madrid can input more in the following parts to gain bigger fan base, higher retention rate and longer years of loyalty: 1) Merchandising: open more retail store overseas, especially in the countries where there are huge amount of fan such as Japan and China; making more fans to purchase club goods with easier access. 2) Develop TV site and official website with multi-languages: if the club can offer programs and articles with more languages besides Spanish and English, there will be more subscription from fans. Currently the Real Madrid official website already has Japanese version, which is a very good practice. 3) More international tour stops in different countries and cities; more show games with overseas teams: The 2011 Italian Super Cup was held in the National Stadium (“Bird Net”), in Beijing China. The game has brought the winner team of more than €10 million profit including fees from tickets selling, TV broadcasting rights etc. If Real Madrid can held more games like this, the potential profit margin would be very big. 4) Cooperation and partnership with overseas parties such as banks, beer companies and local commercial brands. Years ago two major banks in China issued credit card with Real Madrid stars’ image on it. With tens of millions issue number and future purchasing by cardholder, the team has made big profit from the usage of image right and other contracted revenues. The club can consider more partnership like this to extend its overseas market share.

Question 4
We have constructed a table that can be found in the appendix which shows the incremental cash flows generated to Real Madrid after the purchase of David Beckham.
Given the discount rate of 5%, the NPV of purchasing David Beckham will be -5.5 million Euros.
Based on the negative NPV, it seems that purchasing Beckham is not a profitable decision for Real Madrid. However, considering the brand image impact brought by Beckham, we might reach a different conclusion. Beckham helped Real Madrid increase its awareness and popularity around the world because he is not only a football player but also a public figure. For example, even though Beckham just changed his hairstyle the press would report the news. Thus, because of Beckham, Real Madrid’s brand could reach almost everywhere around the world, even markets without a relationship with football. Since Real Madrid’s objective is to nurture and project the Real Madrid brand worldwide, a sub-brand like Beckham would be a must to achieve this goal.
In addition, benefits from Beckham could still be generated in Real Madrid even after he transferred to another team. For example, people who don’t know football but join Socios abonados because of Beckham might become lifetime fans of Real Madrid even after he left the team. Therefore, both the positive impact on brand image, and the further incremental cash after the four-year contract proved that Real Madrid made the right decision to purchase David Beckham.

Appendix for Question 1:
Exhibit 1

Appendix for Question 3:
Socios:
Total Margin | €779.33 | Yearly subscription (weighted average) | €429.33 | Socio (season ticket holder) | | Number | 27,000 | Price | €370.00 | Socio (attend UEFA and King's cup) | | Number | 31,000 | Price | € 481.00 | Premium | 30% | International Ganes Attendance | € 150.00 | Merchandising | € 100.00 | TV Demand | € 100.00 | Average Cost | €120.00 | Discount rate | 5% | Retention rate | 100% | Total Socio numbers | 58,000 | LTV | € 16,245.88 | Total value of Socio | €942,261,000 |

International: Year | 0 | 1 | 2 | 3 | Total Margin | | € 350.00 | €350.00 | €350.00 | Game Tickets | | € 150.00 | €150.00 | €150.00 | Merchandising | | € 200.00 | €200.00 | €200.00 | TV Demand | | € 100.00 | €100.00 | €100.00 | Estimated average cost | | (€100.00) | (€100.00) | (€100.00) | Estimated acquisition cost | (€1,500,000.00) | | | | Discount rate | 5% | | | | Retention rate | 50% | | | | Present Value | | € 166.67 | €79.37 | €37.79 | Total international fan | € 1,597,216.00 | | | | LTV | € 283.82 | | | | Total Value of International fan | € 454,829,258 | | | | Footnote:
In the case, the estimated fans number worldwide is 93 million. According to UN’s statistic, the population of Spain in 2003 was estimated at 41,060,000. And according to a survey that conducted by an institution named the Centro de Investigaciones Sociológicas shows that 32.8 percent of the Spanish population supported Real Madrid. So we estimated that back to 2003, 32 percent of Spanish population supported Real Madrid. Suppose only 2% of the total international fans will consume any of Real Madrid’s products, we came out the estimated international consumer number of about 1,600,000.
Reference 1: Wikipedia-El Clásic, http://en.wikipedia.org/wiki/El_Cl%C3%A1sico
Reference 2: World Population Monitoring 2003, United Nations

Appendix for Question 4:

Year | 0 | 1 | 2 | 3 | 4 | Revenue (million Euros) | Profits from fans | 0 | 3 | 3 | 3 | 3 | Tours profits | 0 | 0 | 0.5 | 0.5 | 0.5 | Profits from an additional game | 0 | 1 | 1 | 1 | 1 | Profits from sponsors | 0 | 4 | 4 | 4 | 4 | Potential transfer fee of selling David Beckham | 0 | 0 | 0 | 0 | 30 | Cost (million Euros) | Initial transfer fee | -35 | | | | | Salary expense | | -7 | -7 | -7 | -7 | Incremental CF | -35 | 1 | 1.5 | 1.5 | 31.5 |