Tuesday, June 21, 2011

Real Madrid And Financial Fair Play

So in his first season as Real Madrid manager José Mourinho justified his much vaunted reputation as a winning manager, but the problem is that his team only added the Copa del Rey to the trophy cabinet. This was just a consolation prize for the most successful club in Spanish history, especially as their eternal rivals Barcelona won the two competitions that really mattered, namely La Liga (for the third season in a row) and the Champions League, when they out-passed (and out-classed) Manchester United.

Of course, it is Mourinho’s misfortune to come up against a Barcelona side that is universally recognised as one of the greatest to ever play the beautiful game. Indeed, there is an argument that Madrid are the second best team in the world, but the nagging sense of disappointment among the Bernabéu faithful is almost palpable, as the club’s aspirations are to be number one.

Madrid have been champions of the Spanish league no fewer than 31 times, while they have been victorious in the European Cup (or Champions League) on nine occasions – more than any other club. However, they have not won Europe’s flagship competition since 2002, which is an eternity for a club of Madrid’s stature, aggravated by the fact that Barcelona have been triumphant three times in that period. Only this month Madrid’s flamboyant president Florentino Pérez said that he would not rest until the club had won a tenth European Cup.

"José Mourinho - still special"

Madrid have not held back from attempting to spend their way to success, splashing out around a billion Euros in the last decade in a fruitless attempt to emulate former glories. Pérez’s original Galácticos project failed to deliver sustained success on the pitch, despite shelling out vast sums for superstars like Zinedine Zidane, Ronaldo and David Beckham, leading to the president’s resignation in 2006.

However, he was back just three years later and wasted little time in making his presence felt, as huge amounts were once again invested in new talent, including Cristiano Ronaldo, Kaká, Xabi Alonso, Karim Benzema and Raúl Albiol with Pérez somewhat superfluously commenting, “Real Madrid’s philosophy is to have the best players in the world.”

Nevertheless, that 2009/10 season ended in another ignominious exit from the Champions League, when Lyon eliminated Los Merengues at the last 16 stage. This meant that Madrid had not won a Champions League knock-out tie for six years, leading the local media to conclude that their “stratospheric spending” was nothing more than a colossal waste of money. Even the conservative daily ABC was moved to describe it as “more than 250 million Euros down the drain.”

"Florentino Pérez - the minute you walked in the joint..."

This has lead to a fine-tuning of the big spending policy during Mourinho’s reign. Yes, Madrid have still bought more than their fair share of players, including Mesut Özil, Sami Khedira, Nuri Şahin and Hamit Altintop from the Bundesliga, but by their own prodigious standards the sums involved were relatively restrained with only the tricky Argentine winger Ángel di Maria costing more than €20 million.

Although this subtle change in direction might imply that Pérez’s strategy of recruiting world-class players has not worked, it has to be acknowledged that their presence in the Madrid team has helped facilitate a transformation in the club’s financial performance. Many people not unreasonably assume that Madrid’s spendthrift ways must inevitably lead to financial disaster, but that is not necessarily the case. Indeed, there has already been talk this summer of the club reverting to type, as they are reportedly wiling to splurge €45 million on the mercurial Brazilian Neymar or a similar amount on the exciting Argentine striker Sergio Agüero.

UEFA’s President, Michel Platini, has condemned Madrid’s “excessive transfers as representing a serious challenge to the idea of fair play and the concept of financial balance”, leading to the obvious assumption that Real Madrid would not be able to meet UEFA’s forthcoming Financial Fair Play (FFP) regulations that encourage football clubs to live within their means.

"Mesut Özil - the eyes have it"

Eminent academics appear to be in some disagreement whether Madrid’s business model is viable. Barcelona University’s José Maria Gay did not hesitate to put the boot in, “Real’s most important revenue streams won’t be enough to offset their spending. The costs have soared and they need to increase income by about 20 per cent to balance the accounts. It’s a very risky investment.”

However, while Simon Chadwick, professor of Sport Business Strategy and Marketing at Coventry University, largely concurred with this pessimistic view, he also pointed out that Madrid had “made a very simple and obvious investment decision that many businesses across the world make on a daily basis”, namely to spend generously in the hope of achieving “a level of success that generates revenue in excess of the costs incurred.”

And that’s the crux of the matter, as Madrid are in fact doing exactly that. In spite of their massive spending, the club is not only profitable, but is making large profits year after year: 2007 €44 million, 2008 €51 million, 2009 €25 million and 2010 €31 million. That works out to over €150 million of profit in just four seasons.

Not only did profit before tax increase by 24% from €25 million to €31 million in 2009/10, but EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) also rose 20% from €93 million to €112 million, which is 25% of revenue of €442 million. In other words, for every €100 of income earned, there is a surplus of €25 after covering expenses. This is important, because this is the main source of funds available to make investment in players and facilities after meeting the club’s financial commitments.

In fact, it’s actually even better if you include the profit on player sales of €34 million, mainly derived from the sale of the Dutch contingent (Arjen Robben, Wesley Sneijder and Klaas-Jan Huntelaar) in August 2009, which increased EBITDA to a very healthy €146 million.

"There must be an Angel (playing with my heart)"

Of course, that excludes the impact of cash spent on purchasing new players, which is only reflected in the profit and loss account via player amortisation. As you might expect, this has been on the rise and the combined player amortisation and depreciation figure now stands at €102 million, reducing operating profit (excluding player sales) from €17 million to €10 million.

It should be noted that Madrid have been accused of some fancy footwork in their accounts as well as on the pitch, which can be seen by the large number of exceptional items between 2005 and 2008, mostly relating to the purchase of players. During the first Pérez regime, the club decided to write-off the cost of new players in the period of acquisition instead of capitalising the cost as an asset and then amortising it over the length of the player’s contract.

However, this policy was not in line with international (or even Spanish) accounting standards, so was reversed in 2008, resulting in a large credit for the accelerated amortisation previously booked to the accounts. Only a cynic would suggest that the previous treatment lowered the exceptional profits made from selling the club’s training ground, thus reducing the tax payable to the authorities. Hopefully, that sort of creative accounting is a thing of the past and the last two sets of accounts look a lot cleaner, though this opinion is only based on a high-level inspection.

In any case, Real Madrid’s 2009/10 pre-tax profit of €31 million is very good compared to other leading European clubs, only surpassed by Arsenal’s €67 million, which was boosted by property sales. Perhaps surprisingly, it’s a fair way ahead of Bayern Munich, often held up as a paragon of virtue in the football world, whose profit was “only” €6 million.

However, it really shines when you look at the magnitude of losses made by some of Europe’s other big boys. Those made at Inter €68 million, Chelsea €84 million and new kids on the block Manchester City €146 million were covered by wealthy owners, while Barcelona €83 million were hit by a series of audit adjustments and Manchester United €146 million suffered from the mountain of debt placed on the club by the Glazers.

Essentially, Madrid’s profits are due to their astonishing ability to generate revenue. They are the only club to generate more than €400 million and have topped the Deloitte Money League for six years in a row. Although Deloitte’s revenue figure of €439 million is slightly lower than the €442 million reported in the club’s accounts, it is still over €40 million ahead of Barcelona’s €398 million and €89 higher than Manchester United’s €350 million.

To place Madrid’s revenue superiority into context, their annual turnover is more than €100 million higher than Bayern Munich, €150 million higher than Arsenal and an incredible €200 million more than Milan, Inter and Liverpool. From another perspective, Madrid earn the highest match day income and have the second highest television and commercial revenues streams.

All in all, it’s fair to say that the relatively modest performance on the pitch has not exactly hindered Madrid’s money-making machine. In fact, it’s the exact opposite, as they have grown revenue at a faster rate than all their peers with the exception of Barcelona. In 2003, Madrid were in fourth place in the Money League behind Manchester United, Juventus and Milan with revenue of €193 million, but they have managed to increase this by a very tidy €249 million (or 129%) to leave them comfortably ahead of the pack today. Only Barcelona’s revenue growth of €275 million (or 224%) has been higher than Madrid’s, but they started from a lower base €123 million, and the other clubs have all lost ground in relative terms.

Going back a little further, Madrid’s accounts reveal that revenue has grown at an average annual rate of 14% since the €118 million reported at the turn of the millennium in 2000. Much of that growth came in the early years, but Madrid still managed to increase revenue by an impressive 9% last season. Even more striking is the club’s claim that their income of €442 million is the highest in the sports industry anywhere in the world.

The other notable aspect to Madrid’s revenue is how balanced it is between the three revenue streams with about a third being sourced from match day, television and commercial. This diversified structure gives the club economic stability, providing some protection against future fluctuations in income.

A few years ago Madrid were unduly reliant on their marketing expertise, but, while this remains a very important element in their strategy, the other aspects of their revenue have grown much more, so that the split is now as follows: television €159 million, match day €149 million and commercial €135 million. Amazingly, each of those revenue streams on their own provide more income than the total revenue at every club except the top 16 in the money league.

Even though Madrid have been remarkably successful in producing a balanced revenue model, broadcasting revenue still provides them (and Barcelona) with a key competitive advantage over their foreign counterparts, thanks to their lucrative domestic deal. For example, Manchester United generated €31 million less than Madrid, even though they received €19 million more in Champions League distributions.

Unlike all the other major European leagues which employ a form of collective selling, Spanish clubs uniquely market their broadcast rights on an individual basis, so Madrid’s seven-year contract with Mediapro is worth a guaranteed €1.1 billion. According to the respected website Futebol Finance, this was worth €140 million in 2009/10, the same as Barcelona, and more than three times as much as the nearest competitors, Valencia and Atletico Madrid, with €42 million, followed by Villarreal €25 million and Sevilla €24 million.

In other words, Madrid and Barcelona on their own received around half of the total TV money in La Liga or 12 times as much as the €12 million given to the last clubs on the list (Malaga, Sporting Gijon, Tenerife and Xerez). This produces the most uneven playing field in Europe and compares unfavourably to the 1.5 multiple in the Premier League between first and last clubs.

Looked at another way, both Madrid and Barcelona received about twice as much from their domestic deal as Premier League champions Manchester United, even after a significant increase in the latest English deal. However, in stark contrast, West Ham, the team that finished bottom of the Premier League, received more money than Valencia, who finished third in the Spanish league. The logical result of such a disparity is a distinct lack of competition and a need by clubs such as Valencia to sell their best players, e.g. David Villa and David Silva last summer, which further reduces the chances of other clubs providing a stern test to the big two.

Such a revenue disadvantage is bad enough for one season, but it makes a gargantuan difference over time. As Sevilla president José Maria del Nido complained, “The two giants have earned €1,500 million more than the next club in the last ten years.”

One potential problem for Madrid’s TV revenue is the much publicised difficulties experienced by rights holder Mediapro, which are so severe that the company has sought bankruptcy protection over a dispute with Sogecable. However, they do have a bank guarantee supporting the contract, unlike Barcelona who have strangely only been given a “verbal guarantee of payment.”

"Xabi Alonso - far from shabby"

However, the strongest threat to this revenue stream is the proposal to move the current revenue distribution model towards a collective structure. Tentative agreement has been reached whereby Madrid and Barcelona’s share would be reduced to 35% (still more than a third), which would imply a reduction in TV revenue of around €34 million to €106 million. While this will clearly hurt their financials, it could have been a lot worse, especially as their nearest challengers Valencia and Atletico Madrid also had their share cut to 11%. As most clubs have contracts in place until 2013 or 2014, the new system will only be introduced in 2015.

There is a feeling that this might not be the end of the story, as two clubs have still not signed the deal: Villarreal and Sevilla. Although Madrid and Barcelona are by some distance the most popular clubs in Spain, it is equally true that there would be no league without the other clubs. In an echo of the threats that were used to persuade the leading clubs in Italy to accept a return to a collective deal in 2010/11, Espanyol director Joan Collett said, “Maybe we should play our youth team against Madrid and Barcelona.”

If that comes to pass, Madrid will have to make up the revenue shortfall somewhere, but they might just be able to do it from television – by taking a smaller slice of a larger pie. For that plan to work, the new revenue agreement would obviously have to be worth more in total, which does not seem completely unrealistic, given that the television revenue in La Liga is currently lower than the Premier League, Serie A and Ligue 1. The Premier League is the “daddy” when it comes to generating television revenue, so this is the one that the Spanish are examining for growth opportunities.

"Sergio Ramos - Madrid's heart and soul"

The current English deal is worth around €1.3 billion a year, which is more than twice as much as the €0.6 billion received by La Liga, the main reason for the difference being the hefty €575 million that the Premier League receives for foreign rights. According to an estimate by Sporting Intelligence, La Liga only gets €160 million for overseas rights, so the Premier League’s deal is worth almost four times as much.

That is a huge prize to go after, which is the reason why so many in Spanish football are now actively pushing to make the “product” more attractive to viewers abroad, as articulated by former Real Madrid legend Emilio Butragueño, “We want … a brand like the Premier League. The best players in the world are here in Spain and we have to profit from it.” Madrid’s own president, Florentino Pérez has also argued for an earlier kick-off for some games, so that they are more convenient for Asian TV audiences, “The change is vital if the Spanish league is to compete with the English.”

Another opportunity to increase broadcasting income is the Champions League. Although Mourinho’s men reached the semi-finals last season, where they were defeated by Barcelona (again), the last time they got beyond the last 16 before that was back in 2004, which has cost them millions in prize money – as well as gate receipts and sponsorship uplifts.

This is highlighted by the figures released for 2009/10, which show that Madrid only received €27 million compared to the €49 million awarded to the winners Inter. It was even worse before that, as the disappointing performances in the previous six seasons resulted in an average of just €19 million. OK, such amounts would be gratefully received by most clubs, but it’s no great shakes for Madrid.

There are two more interesting financial points arising from the Champions League for Madrid: on the one hand, it’s virtually a guaranteed source of revenue, given the lack of competition in La Liga; but, on the other hand, the money allocated from the market pool is much lower than for English clubs, as the TV deals in Spain have a lower value than England.

More impressively, Madrid’s match day revenue has more than doubled in the last five years from €71 million in 2005 to €149 million in 2010, though that was boosted by the hosting of the Champions League final at the Santiago Bernabéu.

The club’s accounts state that they have spent €184 million in the last decade on modernising facilities in the stadium, which has included the reconfiguration of certain areas to grow corporate hospitality revenue, such as three new restaurants and larger VIP boxes. As an example of how much money this can bring in, Bloomberg reported that Madrid sold 4,500 premium tickets, some costing as much as €1,652, for the Champions League semi-final against Barcelona.

The club has also raised membership fees and ticket prices, which may have contributed to crowds falling below 70,000 in recent years. Nevertheless, according to the Soccerway statistical website, Real Madrid’s average attendance in 2010/11 of 68,295 was still the fifth best in Europe, only behind Barcelona (yes, them again), Borussia Dortmund, Manchester United and Bayern Munich.

However, Madrid’s commercial philosophy is perhaps most interesting. The club’s stated strategy is to strengthen its brand through investment in top players, which it then monitises via merchandising, licensing and sponsorship. It’s a little bit like a Hollywood movie studio, which means that they need the best “actors” for their “show” that can then be leveraged into higher sales.

There are clearly risks associated with such a strategy, but in fairness it seems to have worked to date, judging by the revenue (and profit) figures. Madrid’s popularity has remained undiminished, which has helped drive the astounding commercial revenue of €151 million (after re-classifying membership fees), second only to Bayern Munich’s almost unbelievable €173 million in the money league. The only other club with commercial income approaching that was Barcelona with €122 million, which will rise to much the same level as Madrid’s once their first shirt sponsorship deal is included.

Madrid benefit from long-term sponsorship agreements with key partners. Their partnership with Adidas commenced in 1998, but that did not stop Pérez from negotiating a substantial increase after signing Ronaldo and Kaka, and it is now believed that Adidas pay €30-40 million a year for the privilege of being associated with the Les Merengues.

Similarly, the club’s shirt sponsor, online betting company Bwin, extended its agreement by three years until 2013 for €15-20 million a season. That’s pretty good, but recent sponsorship deals have raised the bar, such as Barcelona €30 million (Qatar Foundation) and Liverpool €24 million (Standard Chartered), so Madrid will undoubtedly be looking for an increase when the deal is up for negotiation. The club also has other high profile partners including Coca Cola, Audi and Spanish beer company Mahou (producers of San Miguel).

According to a report from Sport + Markt, Madrid earn more from merchandising than any other club, increasingly from sales abroad, boosted by frequent tours to other regions like the Far East. Along with Manchester United, they sell more shirts worldwide than any other club (1.2 to 1.5 million a season).

In the past, Madrid have maintained that they covered the transfer fees for players like Zidane and Beckham through shirt sales, though others like the former Barcelona economics director, Xavier Sala I Martin, have poured scorn on these claims, pointing out that you would have to sell tens of millions of shirts to recoup the money, given the low profit margin on each shirt.

"Welcome to the Pleasuredome"

That said, a player’s star quality can also help in other areas, e.g. Madrid take half of a player’s image rights, which can generate considerable money for the club. Furthermore, big name players could also help boost television income in the future. As Nigel Currie of Brand Rapport explained, “They are looking to make money from these signings by maximising their future overseas TV rights. The team that has the most marketable players will get the best TV deals.” There has even been some talk of building a theme park at the club’s training facilities.

However, it will be fascinating to see whether a team formed in Mourinho’s dour image is as appealing to sponsors as the previous star-studded elevens. Even the loyalist Madrid newspaper Marca described one of the displays as “defensive, ugly and rough”, while Barcelona president Sandro Rosell claimed that “this season Real Madrid have gone beyond all the limits of the necessary sports rivalry.” This may seem unconnected to Madrid’s financial prospects, but for a club so focused on its brand, this is a pertinent question.

So, there’s no doubt that Real Madrid have the highest revenue of a football club at €442 million, but they also have just about the highest costs at €432 million (including depreciation and amortisation), which is only surpassed by Barcelona €470 million.

Their wage bill of €192 million is actually only the fourth highest, behind Barcelona €235 million, Inter €234 million and Chelsea €207 million, but interestingly they have the best (lowest) wages to turnover ratio of 43%, which is a long way below UEFA’s recommended maximum limit of 70% and is actually within their “threshold of excellence” of 50%. Not only does this put into the shade other big spending clubs like Manchester City 107%, Inter 104%, Chelsea 82% and Barcelona 59%, but is also better than more frugal clubs like Manchester United 46%, Bayern Munich 47% and Arsenal 50%.

Moreover, Madrid’s wage bill is inflated by the inclusion of salaries for their basketball team. We don’t have the split for this figure in the latest accounts, but in 2008/09 this amounted to €23 million. If we assume that this was a similar figure in 2009/10, the football wage bill would reduce to €169 million.

That said, Madrid clearly pays top dollar to attract big stars, as reflected in the latest Futebol Finance list of the world’s top 50 footballer salaries, which includes nine players from Real Madrid – more than any other club (Barcelona 7, Manchester City 7, Chelsea 6). At the top of the pile is Cristiano Ronaldo €12 million, followed by Kaká €9 million, Emmanuel Adebayor (on loan from Manchester City) €8.5 million and then Iker Casillas, Karim Benzema and Gonzalo Higuain, all on €6 million.

Although the wages are clearly high at Madrid, the overall situation has been steadily improving in the past years. Back in 2002, the wage bill was €137 million, compared to a turnover of €152 million, leading to a very high wages to turnover ratio of 90%. Since then, wages have grown 40%, but that has been considerably outpaced by revenue growth of 190%, leading to the important wages to turnover ratio being halved.

However, Madrid’s budget for 2010/11 highlights an 8% increase in the wage bill to €208 million, which would reverse this trend, though still producing a very healthy wages to turnover ratio of 46%.

Similarly, the budget assumes that amortisation further rises from €102 million to €109 million, after rising by more than a third in 2009/10 from €76 million. Although Madrid now book transfer fees as intangible assets, the expenditure is reflected in the profit and loss account through player amortisation. As an example, Nuri Şahin was bought for a fee of €10 million on a six-year contract, adding €1.7 million of amortisation a year to the expenses.

In other words, although the full cost of a transfer does not hit a club’s costs immediately, it will catch up sooner or later, which is exactly what is happening to Madrid. The 2008/09 accounts revealed that the amortisation figure included €12 million of general depreciation. Assuming this was unchanged for 2009/10 gives player amortisation of €90 million, which is higher than any other club. The closest challengers for this unwanted title are Manchester City €85 million, Barcelona €71 million and Inter €65 million.

In the last ten years Madrid have spent €957 million on purchasing new players, though they have managed to partially offset this by €309 million of sales, giving a net spend of €648 million. Interestingly, their spending has been on a rising trend with net spend of €432 million in the last five years being exactly twice as much as the €216 million laid out in the previous five years.

By my reckoning, they have bought ten players in that period for a fee above €30 million. Although reported transfer fees are notoriously unreliable, the list includes: Cristiano Ronaldo €96 million, Zinedine Zidane €75 million, Kaká €67 million, Luis Figo €60 million, “Brazilian” Ronaldo €45 million, Arjen Robben €36 million, David Beckham €35 million, Karim Benzema €35 million, Xavi Alonso €30 million and Pepe €30 million.

However, Madrid have also spent smaller sums (relatively speaking) on recruiting players who have starred for other Spanish clubs, but are destined to only have bit part roles at Madrid, such as Sergio Canales, Pedro Léon and Esteban Granero. It’s difficult to say whether this is a gamble on young potential or an attempt to prevent other clubs from keeping their talents.

Over the last five years, Madrid’s net transfer spend of €432 million is only beaten by Manchester City with €460 million, but is over €200 million more than Barcelona €225 million and Chelsea €176 million. At the other extreme, we have thrifty clubs like French champions Lille and Arsenal generating net sales. Amusingly, Milan are also in the black, largely due to selling Kaká to Madrid.

There is talk this summer that Madrid will try to offload some players in order to recoup some funds, including Kaká, Lassana Diarra, Fernando Gago and Ezequiel Garay. However, when Madrid sell, it is traditionally a buyer’s market, as other clubs are keenly aware that they are looking to offload players who are no longer wanted.

One logical result of Madrid’s high transfer spending is high debt levels, which is true, but not to the extent that has been reported by the media. This is going to be a bit tricky to follow, but the basic point is that there are several definitions of debt.

At its simplest, Madrid have gross bank debt of €167 million, which is not too bad in light of their vast revenue, though for many years before 2009 they had no bank debt at all. The loans are split evenly between Caja Madrid and Banco Santander and were mainly used to finance the signings that summer. The interest rate is relatively low, but the loans do have to be repaid by 2015, though even here Madrid were given some leeway with lower payments in the first three years.

Furthermore, Madrid have cash balances of €93 million, so the net bank debt, the figure reported by English clubs, is only €74 million. Madrid say that this cash (along with the 2010/11 cash flow) will “allow us to comfortably handle payment obligations next year.”

However, what is very striking about Madrid’s balance sheet is the enormous amount owed to other clubs for transfer fees of €176 million (net €111 million after including €65 million owed to Madrid by other clubs). This appears to be Madrid’s principal method of financing transfers, a policy followed by many other clubs, but not to the same degree. In fairness, this has fallen by €100 million this year.

Adding the transfer fees payable to the bank debt gives net debt of €185 million, which is the definition used by UEFA in their FFP regulations. However, Madrid’s own definition of net debt also includes stadium debt, resulting in a balance of €245 million, an impressive 25% reduction from the prior year’s €327 million, though not quite as low as the €210 million forecast by Pérez at the AGM.

"Kaká - on his way?"

Other commentators have opted to use total liabilities of €660 million for the “debt”, but that includes trade creditors, provisions, accruals and deferred tax, all of which are explicitly excluded by FFP. If this measure were applied to other clubs to assess their debt, the headline figures would be equally shocking, e.g. Manchester United €1.2 billion, Barcelona €552 million. Even Arsenal, which is regarded as the poster child for sustainability, would have “debt” of over €500 million. To use an old adage, you have to compare apples with apples.

Of course, Madrid have got into serious financial difficulties in the past, which they only resolved by selling their training ground in 2001, a controversial move that effectively amounted to a state subsidy, as the city authorities reclassified the area as development land, thus significantly increasing its value.

However, as it stands, Madrid would comfortably meet UEFA’s guideline that net debt should be less than total revenue. Madrid themselves review the tougher solvency ratio of net debt/EBITDA, which improved from 3.1 to 1.7 last season. FFP also focuses on payables not being overdue, which might impact Madrid, though this is unlikely, as it is defined as “not paid according to the agreed terms.”

"Nuri Sahin - a sign of things to come?"

If Madrid required more cash, this would not be a problem. Although the club’s constitution does not allow Pérez to fund the club, his position as one of the wealthiest men in Europe with wide-ranging business interests clearly helps Madrid’s relationship with banks and sponsors, as he has a huge network of influential friends and contacts, maybe best demonstrated by the fact that a Catalan bank provided the €57 million guarantee that he needed to stand for the presidency.

Also, if financial matters deteriorated, would any bank ever dare to call in their debts? In many ways, Real Madrid are viewed as the establishment club in Spain with immense cultural and political significance, so are almost certainly “too big to fail.” Stefan Szymanski, co-author of “Soccernomics”, agreed, “Real’s really too big to disappear, whatever debt they incur. No bank would ever be allowed to be the one that sank Real Madrid.”

In fact, Madrid’s balance sheet shows net assets of €220 million, up €24 million from the previous year, even though the players are only included at net book value of €353 million, which is much lower than their true worth in the transfer market, which is estimated at €515 million by Transfermarkt.

To summarise, Madrid will be in line with UEFA’s break-even target for the simple reason that they make profits, but even if their financial situation were to worsen, there would be plenty of room to manoeuvre. For example, owners will be allowed to absorb aggregate losses (“acceptable deviations”) of €45 million, initially over two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions. The maximum permitted loss then falls to €30 million from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount).

Furthermore, clubs can exclude certain expenses, including depreciation on tangible fixed assets and expenditure on youth development and community activities, which would be worth at least €20 million for Madrid. On top of that, Madrid might argue that the loss made by the basketball team (€23 million in 2008/09) should also be ignored, though the FFP guidelines suggest that “other sports teams” should be included.

Perhaps the biggest threat to Madrid’s financial strength is the desperate situation of Spanish football in general. The 20 clubs in La Liga made a combined loss of €100 million in 2009/10, while many have large debts and are behind on wage payments. All this is exacerbated by the prevailing economic conditions in Spain with unemployment running at around 20% (and youth unemployment at 30-40%).

"Casillas thanks the crowd - the feeling's mutual, Iker"

The Sevilla vice-president warned, “There are six or seven of the 20 clubs in La Liga who are in bankruptcy or administration through difficulties with social security and the tax authorities.” That said, Spanish clubs appear to have become more attractive to foreign investors recently, as overseas money has bought into Malaga, Getafe and (less successfully) Racing Santander in the last 12 months.

While Real Madrid’s policy of buying the best players has clearly not guaranteed success on the pitch, it has been very good from a financial perspective. UEFA themselves pointed out, “The financial fair play rules do not prevent clubs from spending money on transfers, but require them to balance their books at the end of the season.”

The fact is that Real Madrid will pass the FFP test as easily as Cristiano Ronaldo goes past a tiring full-back. In fact, their remarkable ability to generate revenue will stand them in very good stead in the fair play era, providing them with a strong competitive advantage. As long as they can resist the urge to constantly change their manager and players, that financial strength could help them return to winning ways. If that happens, then it might be another case of the rich getting richer, as that is likely to translate into even more commercial success.


  1. Fantastic. Fascinating. I must laud all the effort that must've gone into putting this together and I thank you for making it a very fine read indeed. I feel like I've learnt more about football and finance in the last half hour than I could have in a week of reading elsewhere.

    Cheers, and here's to many more!

  2. Mr Parker's DogbiteJune 21, 2011 at 6:05 PM

    Another awesome piece of work. Thanks.

  3. this club knows what they r doing,otherwise they wuud not been on top 4 so many yrs.

    superb work.

  4. All that money spent for nothing ! How embarrassing ! I suppose they could parade that around Madrid instead of silverware.

  5. Once again, great great stuff....This is the type of sports journalism that is so refreshing. Thanks for your effort.

  6. Great again and very well put together and just shows that Barca are not all they are cracked up to be as they have a higher wage bill and make a loss to R.Madrid's profits.

    Could you possibly do a blog on Glasgow Rangers? I know you get hundreds of requests per week but with the recent debt problems with Lloyds banking group, the takeover and the upcoming HMRC liability there could be alot of interesting points

  7. Excellent job. Thank you very much.

    (Can be deleted before posting (I hope this doesn't automatically get posted ;-):
    there's small typo - sport + markt (not merkt))

  8. Another fine Ramble! thanks really interesting stuff.

  9. Excellent article once again Ramble.

  10. This is extraordinary.

    Thank you very much!

  11. Excellent article. There has been some discussion recently about the cantera system and the fact that players in the cantera really don't have any book value, since they've never been through the transfer market. My suspicion is that a lot of the profits from player sales come from this source. The big-money sales are impressive but have to be considered against the unamortized book value of the player. Anyway, it's a great article. I never viewed Madrid as a successful business model, but even though Barca get more of the headlines it appears Madrid is the better managed (from a financial standpoint, anyway!). Who would have thought.

  12. The new TV deal may cause some problems, but my biggest concern is a major change in individual and corporate tax structure in Spain. The debt crises could lead to increases on both persons and entities, which could lead to players returning to England and also Madrid losing a chunk of the pre-profit pie.

    Great stuff as always!

  13. @Allen Dodson,

    Good point about the cantera system. I actually wanted to include a discussion about Madrid's youth policy, but the piece was already an epic, so had to cut it.

  14. @elliott,

    Yes, tax (and indeed currency) issues can play a big part in a player's decision on where he wants to earn his living. It's actually also a problem in England with the introduction of the 50% top tax rate and the weakening of Sterling.

  15. @Anonymous (1:30),

    Thanks for alerting me to that typo. Now corrected ;-)

  16. Amazing article as always, the next-next decade is Madrids and Arsenals for the taking!

  17. Truly fantastic analysis.
    Just one issue to pick you up on. The re-curring theme of madrid's training ground sale "amounting to state subsidy". By that account any perfectly legitimate planning decision which allows a football club to make money from its property can amount to a "state subsidy". I suspect most European clubs would be subsidised in that case.
    Real owned some prime land in central Madrid which they sold legally. Madrid's residents gained, at no cost to them, a public park and a comercial development where there used to be a training ground for the sole use of a few footballers. That's sensible city planning.

  18. Another amazing piece of Journalism. Such a breath of fresh air when compared to the non-story drivel that comes from many football sites/blogs.

    Thanks and looking forward to the next one!

    Dara (Dublin, Ireland)

  19. In the section on a possible move to collective bargaining for audiovisual rights you say Real's revenue would fall to just over 100 million euros. However, Barcelona vice president Javier Faus has said that the income clubs get under the current system would be guaranteed and only whatever extra the clubs negotiate in any new deal would be shared. Talk has been of TV revenue increasing to between 800 and 900 million euros, compared with the 600 million they get now. All the best.

  20. @Anyonmous (12:21),

    It's not so much the sale of the training ground that's the issue, more the reclassifying of the land before the sale. That's why it was investigated by the EU Commission.

  21. @Iain Rogers,

    Thanks. I've not seen that, but I think that we're effectively saying the same thing, namely that any revenue shortfall from the lower percentages will be covered by a larger TV deal in total.

  22. On the Madrid training ground issue... “reclassifying” land is what city planners do all the time as a city develops. My point was that it was a perfectly legitimate, sensible, planning decision like countless others affecting football clubs across Spain and Europe (as the EU inquiry proved). To keep talking about it as a subsidy is wrong.
    Sorry to keep going on about it but it’s always cited as evidence that Real Madrid’s wealth is “from dodgy means”... something which the rest of the article addresses very well.

  23. Another great article Swiss.

    One of the most interesting aspects of Real Madrid’s business strategy is the fact that its in their interest to pay huge transfer fees when acquiring some players (to a point). The bigger the fee the more attention the transfer gets therefore raising the profile of the player. The player’s image rights become more valuable as potential sponsors take notice and Real pocket 50%!

    The genius of this strategy is that you don’t even need to win trophies, just ensure you remain competitive and maintain a constant presence in the champion’s League. Los Madridistas might see it differently and prefer trophies to profits but either way you have to say in financial terms it’s a great strategy and they’re well placed to whether any FFP storm on the horizon.

  24. On the Madrid training ground issue... “reclassifying” land is what city planners do all the time as a city develops. My point was that it was a perfectly legitimate, sensible, planning decision like countless others affecting football clubs across Spain and Europe (as the EU inquiry proved). To keep talking about it as a subsidy is wrong.
    Sorry to keep going on about it but it’s always cited as evidence that Real Madrid’s wealth is “from dodgy means”... something which the rest of the article addresses very well.


    Good point that.

    Except for that part it was a magnificent article though. Well done Rumble!

  25. Great read. I have been trying to figure this out myself, but this explains most of what I wanted to know.

    Do you have the whole accounts from 09/10? I found the one from 08/09 and a ~5 page summery from 09/10. Just wondering since you don't got the numbers from the basket department.

    Something that I think has been overlooked in Florentino Perez's strategy is the Beckham law. When he took over and said he wanted to make signings in one year that would normally take 3 years, I believe he had a keen eye on the Beckham law. Normally players pay around 43 % of tax, but outside "experts" can be brought to Spain and only pay 24 % in taxes in 5 years. That law was canceled just 6 month after Perez took over, but deals made before that day was still valid.

    Therefore Real Madrid only pays €35.5M to pay for the combined salaries of Kaka, Benzema and Ronaldo (€27M after taxes). Had the Beckham law not existed they would have to pay €47.4M. A difference of €11.8M. And that is without counting substantial bonus payments.

    I think this explains the strategy. Buy the expensive stars in the first year and pay the low taxes and then buy the cheap signings in the 2nd and 3rd year and pay the high tax. Brilliant economic thinking, but perhaps not so much sports wise.

    I have been wondering where do all the "objectives" go in the accounts? For instance Real Madrid paid €25 + 11M (confirmed by Benfica) for Di Maria and €35 + 6M for Benzema. In your summary of how much money is spend on transfers these figures does not seem to be included?

    And I also agree with Anonymous (1.38). The EU investigated, but didn't find any irregularities. Looking at Madrid city it makes perfectly sense to reclassify the land. The question was who should get the added value. The city or Real Madrid? I don't know what is fair, but considering the EU cleared the deal, I believe the sale followed the norm.



  26. @Lasse,


    I think I probably have the same as you in terms of the accounts, though 2009/10 is a 6 page summary.

    Yes, the Beckham law was certainly a factor in attracting foreign stars, though I decided to not mention it in this article, as it was revoked in 2010.

    Where transfer fees include add-ons for things like number of appearances, international caps, etc, most clubs treat those as contingent liabilities, which they mention in the notes to the accounts, but don't actually book until they become due.

    Take your point about the sale of the training ground, but it would be remiss of anyone writing about Madrid's finances not to mention it, otherwise there is a risk that the article becomes little more than a hagiography.

  27. This is the best FFP insight on a club i have read thus far. Great work.

  28. @swiss
    A marvellous read as always.
    I have a few questions to ask.

    1) Re: 50% player image rights. Do Madrid have to offer a player compensation ie higher wage or payment made via "other expenses". This would boost turnover but show up as an extra expense or higher wage.
    2) Re: Merchandising. Do Madrid sell their merchandising direct. If so this would boost revenue but would increase overhead.
    3) Re: Media revenue: do Madrid have to pay out a percentage of this revenue to other clubs.
    4) Re: Revenue from the basketball team. How much does this contribute to the revenue. Presumably it will be loss making/heavily subsidised but still it would be interesting to know.

  29. Great read. And I must admit, a good debate in the forum. Polish Fan

  30. According to todays Marca Real Madrid will close the 10/11 accounts with a revenue of €450M and a profit before tax of €30M.

    A bit surprised the revenue has not grown more (from €442M) with the increased success on the field. No further details are available.

  31. @steven,

    Thanks. Re your questions:

    1. There wouldn't be a payment to players in other expenses, but presumably the image rights is one of the factors when the club assesses the wages.

    2. I'm not sure if this is still the case, but a few years ago they outsourced the sale of their merchandising.

    3. Don't think so. At least I have not been able to find such costs in the accounts.

    4. The last fully detailed accounts I have are for 2008/09, when the basketball revenue was 7.3m out of 407.3m total revenue. The loss was 22.9m.

  32. @Lasse,

    Thanks, saw that. Interestingly, the revenue of 450m is exactly in line with the club's budget for 2010/11, but the profit of 30m is a bit higher than the budgeted 19m.

  33. El Confidential are reporting that the budget for 11/12 will be €510M in revenue.

    In 10/11 the revenue was divided in €160M from stadium, €158M from TV and €140M in Commercial (total of €458M). The wages increased to €210M.

    But take these numbers with a pinch of salt. Not official.

  34. so basically ... Real Madrid need to get to a new shirt sponsor (quite low compared to other clubs, surprised Liverpool's shirt sponsor is higher), get to a further stage of the champions league more regularly and improve their overseas market. Then they will be unstopable (economically)

  35. This article really rebukes the idea that statistical athletic analysis is the key to economic fortunes, though I wonder about how this relates to youth player http://www.associatedcontent.com/article/8172417/raves_and_rants_response_june_23_2011_pg3.html?cat=14


  36. Very nicely written. Such a detailed article. You have got a regular reader :P

  37. One thing that must noted is that this model is good for the sports department as well.

    Two or three years ago Madrid was not better than Manchester United, Barcelona, Inter, Milan, Lyon, Chelsea, Arsenal, Liverpool or Roma among others. Nowadays, Real have the biggest squad in Europe and quite probably the second strongest team only behind Barcelona. Most players are relatively young and the coach is one of the most talented ever.

    What I mean is that it's perfectly possible to achieve trophies with this model despite it's designed to be economically sound during the bad times as well.

  38. My main criticism on Florentino Perez's policy is that he doesn't seem too worried about the basketball section which is as historical as the football one, and has been a complete mess for far too many years now.

    Let's remember that this club belongs to the Socios who don't get to understand how other sides like Tau or Barcelona are so successful of late with inferior or similar resources.

  39. Thanks for this remarkable work! I hope you will continue in the same way.

  40. No doubt Madrid is the most formidable money making machine in the football world. But financial success has clearly failed to translate into football success in recent years.

    Unless the a more stringent financial fair play kicks in, the domination of Real and Barca will long continue. Surely, this will do no good for true football fans.

  41. at last!!! so bloddy good sent to evry football fan in my inbox?!!

    how on earth to bayern make all their commerical revenue is the german market that big?!!!

    but anyway, fantstic!! hungry for more

  42. Gran artículo. Saludos desde España. ¡¡HALA MADRID!!

  43. This is a great piece of work. Congrats!
    I think it debunks some of the myths about the finances of Real Madrid, but it is more important because goes to the point when you compare the situation with the most overrated, most publicized team in the world, FC Barcelona.
    FC Barcelona tries consistently to present itself as poor, humble, local team combating against rich and wasteful Real Madrid, and reality as everyone can see from this article is very different.

  44. Really great!!! Barcelona is not a poor team like they said, an also Catalonia is not an invaded country. Thanks for this!

  45. I'm the one who asked you to write on Palermo in Juventus commnets. Thank you! I'll read this through now.

  46. Awesome blog post ! I always like to read your blog post.
    trazado de recorte

  47. Din't Manchester United make loss of 80m last season?

  48. @Anonymous (4:58),

    Although you're quite right that Manchester United made a loss of £79.6m in Red Football Limited, I have taken the loss of £108.9m from the parent company Red Football Joint Venture Limited, as this includes the interest on the PIK loans.

    Please also note that the figures in the profit graph are in Euros, not Sterling.

  49. Great pices of work. Thank you. I think every one, especially those Chelsea and Manchester United fans who talk about Madrid and Barcas financial doping in various forums on internet should read this one:)...

  50. Great piece of analysis as always. Thanks!

    Fascinating approach by Perez from a marketing point of view. Not only higher fees support growth in commercial and media revenues but it also drives costs up for European competitors. Our beloved Arsenal with its strict salary grid would struggle against such a business model.

    Quick question: I assume image rights' revenues are included in commercial revenues. What proportion of the total commercial revenues do they represent?

  51. The Swiss Rambler:

    First of all congratulations for another excellent article. A relief to witness a neutral and thorough piece of work.

    As other people already have commented you probably receive a lot of requets but I would still like to ask you whether you could make a similar article about FC Barcelona this summer as a comparison to the one you made last year when Rosell won the presidency.

    Thank you very much in advance.


  52. Can't understand some points.

    Here http://3.bp.blogspot.com/-87dnCnkGlG4/TgCzXv4WICI/AAAAAAAADis/8bbVaCxmGl8/s400/5%2BReal%2BMadrid%2BProfit.jpg we see profit on player sales every year

    Here http://3.bp.blogspot.com/-Ir_-AtaPIq0/TgC2JpyezxI/AAAAAAAADkk/_JrLndvtDEM/s400/20%2BReal%2BMadrid%2BPlayer%2BTrading.jpg we see loss and it's much more closer to reality.

    So what's with first picture?

  53. @Alessandro,

    It's a bit confusing, but it's essentially down to the difference between the accounting world and the real world.

    The second graph on Player Trading reflects the transfer fees paid and received, so is closer to reality (though the timing of the cash payments will almost certainly differ).

    In the first graph the Profit on Player Sales is the difference between the sales proceeds and the book value of the player, which will have been reduced for the annual amorisation charges. It's probably easier to explain with an example:

    Let's say Madrid bought a player for 12m on a 4-year contract and sold him 3 years later for 5m. In real terms, that's a 7m loss (5m sale less 12m cost). However, in the accounts that would actually produce a 2m profit on player sale.

    Here's how.

    When the player is bought the full cost of the transfer is not booked as a cost, but is only written-off over the length of his contract via player amortisation. The general accounting rule is that this is charged evenly, so in this case it would be 3m a year (12m cost divided by 4 years of the contract). After 3 years the cumulative amortisation would be 9m (3 years x 3m), so the book value of the player would be just 3m.

    When the player was sold for 5m, the profit would therefore be 5m less the book value of 3m, giving 3m.

    Hopefully, that makes it a little clearer.

  54. @GreekGunner,

    Thanks. Yes, they would be in commercial revenue, but unfortunately the annual report that I have does not go to this level of detail.

  55. The Swiss Rambler:

    First of all congratulations for another excellent article. A relief to witness a neutral and thorough piece of work.

    As other people already have commented you probably receive a lot of requets but I would still like to ask you whether you could make a similar article about FC Barcelona this summer as a comparison to the one you made last year when Rosell won the presidency.

    Thank you very much in advance.


  56. What can I say, your article is much better than most of what you can read on the newspapers, even the economical ones. ;)

    Congratulations on your work and thank you very much for a wonderful reading.

  57. First of all congratulations for your work!
    I'd like to ask you however whether all this is based on sand. Barcelona's finances before Rosell came looked stuning as well. The team appeared to be maiking profit every year and according to the last data given by Laporta Fc Barcelona was the club with highest revenue in the world of sports reaching aprox 500 millions.
    How can we know that if a new president comes in madrid he will not give a completely different economic analysis?
    Also Barcelona part of the reason Barcelona pay such high salaries is because of the of the bonuses that are included due to winning titles.
    Another reason could be that Fc Barcelona have many more sports departments than madrid and an equally expensive Basketball department which of course increse operating costs as well as salaries.

  58. @missingpage3,

    That's a fair point, though some might argue that many of the adjustments put through after Rosell became president are highly judgmental, very prudent and have no cash impact. I wrote about this at some length last year:


    Quite right about the impact of the bonus scheme, which had a similar effect on Barcelona's 2010/11 results, though you do wonder why anyone would devise a bonus scheme that ends up with a loss.

  59. "Another reason could be that Fc Barcelona have many more sports departments than madrid and an equally expensive Basketball department which of course increse operating costs as well as salaries. "

    I would say that wages in all those other sports such as handball are pretty much meaningless compared to the overall budget.

  60. Amazing article

    Thanks a lot

  61. Amazing article...thank you very much the Swiss Rambler...I appreciate your effort and time into describing things in to such detail..I feel like I now understand truly what is going on financially at Madrid. Thanks again!

    From a Real Madrid Fan

  62. Have you considered/attempted doing cash flow analysis? The Income Statement is misleading, IFRS/accounting adjustments create a mess e.g. players values dont only decrease, they also go up, amortisation of players doesn't reflect the reality. It would be more appropriate to mark to market the players and push that through the IS...although that makes for overstating profit. Best just ignore the income statement.

  63. Above is not meant as critic...awesome blog!!

  64. @Anonymous (5:10),

    I take your point and often include an assessment of cash flow movements when I review a club's finances, but it was not really relevant in this case, as this piece focused more on how Madrid would meet UEFA's Financial Fair Play regulations, which are based on the P&L.

    I also usually mention the artificially low player valuations in the balance sheet, as produced by the capitalisation and amortisation method, but I don't think that a review of an individual club's finances is really the place for an esoteric discussion of different accounting treatments.

  65. Great article!

    Accounts 2010-11


  66. @Anonymous (10:27),

    Thanks very much for that link.

  67. One thing you are missing.. The depreciation of the £. Once taken in to account Real and Barca do not fair so nicely.. When they are kicked out of the Euro the cards will fall.

  68. I recall reading somewhere that there have been some creative financial arrangements made between the City of Madrid authority and Real M. Property tax subsidies or some such. Or was that related to the sale of the training ground?

  69. Another fine Ramble! thanks really interesting stuff.

  70. Hey great article !

    I've got a question how big the average profit that a club receives from selling one shirt?


Related Posts Plugin for WordPress, Blogger...