Real Madrid continue to pay exorbitant fees to add to their list of galacticos, but how do the Madrid club have so much money? Conor Heffernan discusses.
Unemployment in Spain is at 26%, and Spanish bank debt is roughly equal to the GDP of Singapore. Yet in this dire economic climate Real Madrid has increased its revenue and recently has been named the most valuable club in world football. How are Los Blancos bucking the trend and hauling in the cash whilst the rest of the country struggles?
Following the signing of James Rodriguez British newspapers have delighted in reporting that together Rodriguez, Ronaldo and Bale will have cost Real Madrid around €265M in transfer fees, about €20 million more than what Ajax have spent since their founding in 1900.
Even more shockingly the Rodriguez transfer fee is more than Almeria, Villarreal, Espanyol, Elche, Celta Vigo, Osasuna, Granada, Valladolid, Levante, Getafe, Vallecano, Real Betis, Málaga and San Sebastian combined spent on transfers last season. Where does the revenue come from to drive such astronomical deals?
Real Madrid is the king of branding in football. The club’s success since the 1950s has ensured that the club attracts a huge fan base around the world. Since the early 2000s under the presidency of Florentino Pérez the club has taken its branding to a new level. Take for example the purchase of David Beckham from Manchester United in 2003, Real Madrid cleverly used this as a foothold to project the Real Madrid brand into East Asia. Nigel Currie, of Brandrapport characterised the Beckham transfer as
“The race by the big European clubs to crack the East Asian, Indian and other emerging markets first.”
Beckham was a top class player at the time, but he was also one of the world’s most marketable players. This is why every season we are seeing a big name signing for Los Blancos. The club is constantly trying to expand revenues by tapping into football’s lucrative emerging markets. In Asian countries fans oftentimes support superstars rather than individual clubs, therefore bringing in such players is key to performing these markets.
2) TV Money
These emerging markets are more profitable for the TV rights than the sale of Real Madrid jerseys. The television money, both overseas and at home, is crucial to the Spanish club’s income surge in recent years. Real Madrid and Barcelona’s television revenue sees them take in about 6.5 times as much as the smallest team in La Liga.
Since 1997, under Spanish rules, clubs are free to sell their TV rights individually. This clearly benefits the bigger clubs such as Real Madrid as more people will pay to watch Los Blancos than Eibar. The smaller clubs in La Liga as are being outmuscled, both on and off the field by the bigger outfits.
Given the unequal distribution of TV money, it is little wonder that Real Madrid and Barcelona have dominated, while the rest are left to fight it out for a distant third. While the duopoly was broken this year with Atletico Madrid’s sensational title win, expect normal service to be resumed next year as the cash strapped champions’ squad has been raided in the summer transfer window.
According to business consultants Deloitte, the big two each had TV income of €188 million in 2012-13. To put that into context, two of Europe’s biggest clubs Bayern Munich and Manchester United earned €107 million and €119 million respectively from television rights.
There is a chance however that Real’s TV revenue may decline, as proposed legislation limits the TV earnings of the big 2 to a maximum of four times that of smallest club in La Liga. When and how this legislation will be introduced is something to keep an eye out for.
3) Big name sponsors
Tied in closely with Real’s branding and lucrative television deals are the number of high profile sponsorships Los Blancos can rely upon. Bwin.com, Adidas, Coca-Cola, Audi, and Spanish beer brand Mahou are all partners of the Madrid titans, with the Adidas deal alone netting Real €762 million in early 2007 .
Additionally Real profits from its own players’ sponsorship deals. When David Beckham signed for the club in 2003, newspapers reported that as part of the deal Beckham had agreed to hand over 50% of all personal sponsorship earnings. Just how profitable could one player be? In 2009 Florentino Perez, the club’s president, explained
“When Beckham came we went from earning €7m a year to €45m a year through our deals with our sponsors. There are certain players who are very profitable because they have spectacular commercial repercussions that earn the club money.”
Last year Gareth Bale agreed to hand over 40% of his individual sponsorship revenue to Real. Figures have yet to emerge regarding how much Rodriguez will agree to part with. Real’s business model is therefore working on several levels, the players they bring in help Real earn more in TV revenues and sponsorship deals with companies, on top of this Real gets a cut of whatever Ronaldo, Bale and now Rodriguez earn individually.
4) Preferential Rules in Spain
Real Madrid is owned by its thousands of members, known as “socios”, who elect the president. Because Real is owned by its supporters, and not stockholders, the Club is free of many of the the regulations relating to issues like takeovers and debt levels that listed companies must observe.
In 2005, the so-called ‘Beckham Law’ was passed, it specified that foreign workers, notably athletes, would pay only the minimum rate of 24 percent on their entire income. Under pressure from the EU and Spain’s popular party the law was changed this year to drop the special exemptions footballers had enjoyed, now they pay the same 45 percent tax rate as any Spanish worker who earns more than €60,000 a year.
Finally,the ‘establishment’ club can also use the close ties it is believed to have with local and national authorities for favours when needed. Investigations are still ongoing regarding allegations of illegal state aid given by the Madrid City Council to Los Blancos in 1996. It is hard to imagine other clubs receiving such preferential treatment.
Where does the money ultimately come from?
Real’s transfer activities provide great gossip for footballing fans. We often marvel at the latest signing, wonder where they’ll slot in, how far they’ll go and so on, yet we rarely stop and ask where does Real get the money for all this? The answer appears to be us. The World has bought into Brand Real. Whether this is a good thing or a bad thing is up to you to decide. Just remember that in a country where youth unemployment is at nearly 60%, Real Madrid have spent €90 million on a single player. In a League where established clubs such as Valencia have been driven to bankruptcy, Real Madrid has flourished. In a footballing sphere where the rich get richer, Real Madrid tops the pile and we’re all responsible.
Conor Heffernan, Pundit Arena.