<B>Beckham: the strategic asset</B>

By Ignacio Urrutia. Professor at Instituto de Empresa

16 July 2003

Sports is big business. Spain’s Real Madrid soccer team pulled off a brilliant negotiating coup in signing David Beckham from England’s Manchester United.

In 1964, Professor Neale carried out an investigation to verify whether or not competitive leagues were necessary. He felt these competitive leagues enabled football clubs to get their finances in shape. The study’s most important conclusion was that, to maintain the clubs, the major players should be shared among them. This was because greater competitiveness and, as a result, greater public interest would be generated and this would permit revenues – and hefty salaries – to be shared among the clubs. It did not make sense for any one team to amass a load of stars, since at a certain stage the increased benefit arising from having one more star would tend towards zero. Accumulating players is an investment that can never be recouped. If the competitiveness of the league could be increased however, a situation could be reached where the clubs’ economies would also prove competitive.

It would seem that the management team at Real Madrid is determined to test this theory and has decided to carry it through to its logical end. On analyzing the conditions of their new signing, David Beckham, one of the first conclusions that may be drawn is that the signing apparently seeks to satisfy a commercial rather than a sporting necessity. After all, they are not signing a normal player; this is a strategic asset that will finally enable Real Madrid to break into the Asian market. It is estimated that, unlike other signings, the driving force behind this operation is more the marketplace than sport itself.

Moreover, it’s clear that Real Madrid management has decided that what motivates fans - and therefore determines the club’s future revenues - is the signing of major figures who can ensure both commercial and sporting success. As a result, one of the levers that will guarantee the club’s sustainability is its policy of new acquisitions. Although this seems obvious, when Real Madrid signed Luis Figo for 10 billion pesetas, Barcelona used the money to sign four new players at 2.5 billion each. The argument was that it is better to have four reasonably good players than one top-quality star. As things have turned out, at least on the commercial front, the effect is not the same at all – even less so on the pitch.

[*D The image business model is based on drawing players who bring in their wake a tremendous commercial potential *]

Real Madrid, and other teams highly attractive for the general public, can only maintain their position with a revenue strategy that follows the image-based business model; and, logically enough, this is rather different from the traditional football business model. Till now, clubs managed their assets with a focus on production; i.e. playing matches, in such a way that revenue was generated in the stadium through sales of season and individual tickets, publicity, etc. The image business model is based on drawing players who bring in their wake a tremendous commercial potential and then manage and achieve a return on their time. Given the figures mentioned, if the marketing team does its job, this signing at Real Madrid will pay for itself with the funds generated by the very operation, without the team having to pay anything out. It therefore seems radically different from the signings of Figo and Zinedine Zidane and manages to do away with the theory of paying up front for assets who are going to spend several seasons with the club. It has already been demonstrated that this provokes many clubs’ financial ruin.

At the same time, some curious objectives have been achieved. For example, one of the reasons Beckham has come to Real Madrid is because the team is made up of top-flight players and can offer him the possibility of winning championships, enjoying himself and, on top of it all, making money. This means that, throughout this spate of “galactic” signings, a true locker-room brand has been developed and has produced significant cost savings. Although the market is flagging, the conditions of Beckham’s signing have nothing to do with Figo’s or Zidane’s. Observing the life cycle of players, we find that the incremental cost of a new signing is getting lower, because players are not in it solely for the economic benefits, but also for the sporting benefits.

There is another fascinating issue: the tremendous negotiating capacity that Real Madrid clearly possesses. One of the conditions of the contract is that if the team, with Beckham, wins the Champions League, Real Madrid will pay Manchester United a further 10 million euros. Since when has a competitor offered an incentive to another that is contrary to its own objectives? It would certainly produce a paradoxical situation if we have a Manchester United – Real Madrid final. Can you imagine Iberdrola selling Endesa an electric power station and negotiating a clause saying that part of the price will depend on the profit Endesa reaps with that station? It is striking that one of the teams should put forward this option, but even more amazing that the other should accept it.

Finally, it is difficult to predict what Real Madrid’s great rival, Barcelona, is going to do. If they want to compete in the image market, they are undoubtedly years behind with respect to the competition. But what is worse is the fact that what Real Madrid is now achieving is what Johan Cruyff did in his day as Barcelona’s trainer: invest wisely, generate hopes and dreams, play better and win - which is what ensures Barça its critical mass of fans.

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