How can Real Madrid afford Ronaldo?

by Bill Wilson Business reporter, BBC News

Real Madrid are determined to conquer football markets around the world

From Puskas and Di Stefano to Zidane and Beckham, Spanish football giant Real Madrid have aspired to acquire some of the most talented and glamorous names in world football.

Now, in the latest chapter they have swooped in a matter of days for two of the biggest names in world football, Kaka and Ronaldo.

The signing strategy is being led by the returning president of the club, construction magnate Florentino Perez, who previously led the Spanish team from 2000 to 2006 - during its famous "galacticos" era.

It was under Mr Perez's first reign that the club initially aimed at becoming the world's richest and best known football brand.

REAL MADRID REVENUES 2007/08 Increased by 4% to £290m Driven by increased commercial revenues Commercial revenues accounted for 35% of income Broadcasting income accounted for 37% Matchday accounted for 28% Source: Deloitte

But how can they afford to pay the reported £56m for Kaka and offer a world-record £80m for Cristiano Ronaldo - existing as they do without the deep pockets of a billionaire benefactor?

Growing match-day revenues, increasingly shrewd and global marketing, healthy commercial income, and a ground-breaking domestic TV deal, have all catapulted the club to the peak of the Deloitte's Football Money League this year.

They have topped it for the past four straight years, despite being overshadowed in the Champions League by their bitter rivals Barcelona.

'Remarkable growth'

According to those most recent figures, for 2007/08, the club saw its revenue hit £290m during that season.

Real Madrid has a history of buying the world's best players

Whilst Real Madrid's 4% revenue growth in 2007/08 was more modest than in preceding years, it meant that across a six year period the club had doubled its annual revenues since 2002.

Perhaps crucially, it also gave the club a revenue lead of 41m euros (£32.5m) over Manchester United, in second place.

"The engine driving Real's remarkable revenue growth, and its ascent to the top of the money league, has been the club's ability to increase commercial revenue," said Dan Jones, author of the Deloitte report.

Matchday revenue has also increased significantly in the past couple of years thanks to the reconfiguring of areas of the club's stadium to increase corporate hospitality capacity and hence revenues.

Average attendances at their home ground - the 80,354-capacity Santiago Bernabéu football stadium - are the third-highest in Europe.

Emerging markets

After the purchase of David Beckham from Manchester United in 2003, Real Madrid cleverly projected their brand into East Asia, on the back of the England star's appeal.

"That was all about the race by the big European clubs to crack the East Asian, Indian and other emerging markets first, and the race is still going on," says Nigel Currie, of marketing and sponsorship giants Brand Rapport.

There will be massive TV deals coming up for them [Real Madrid] overseas in the next few years Nigel Currie, Brand Rapport

"However good the Premier League and Spain's La Liga are, there is an elite breaking away, led by the likes of Real Madrid."

He added: "What they are doing is partly a response to Barcelona's success, but these signings are them putting down a marker to be the top club and football brand in the world."

Mr Currie said Real were targeting the world's best players - who were also the world's most marketable players.

'Fickle allegiance'

That, Mr Currie added, meant that in emerging markets fans may swap allegiance, from - for example - Manchester United to Real Madrid, simply because they preferred to support star players rather than clubs.

"They are far more fickle in terms of allegiance," he said. "But it is not about Real looking to sell more merchandising in places like China, in fact they would not make a great deal from doing that.

Real Madrid will look to attract Kaka fans to their brand

"They are looking to make money from these signings by maximising their future overseas TV rights," says Mr Currie.

"There will be massive TV deals coming up for them overseas in the next few years, that is the big carrot.

"With the developments this week Real Madrid will already have restored their profile and status to number one in these emerging markets.

"And the team that has the most marketable players, and the most supporters, will get the best TV deals."

'Important role'

The television money, both overseas and at home, is crucial to Real's surge in income in recent years.

Since 1997 Spanish clubs have sold their own rights individually.

Real Madrid signed its latest deal in 2006 - for a reported record 1.1bn euros - with Spanish film and TV company Mediapro for seven seasons of broadcast rights.

That works out at a huge 150m euros a year.

"Spanish television rights have increased significantly in the past three years, and would no doubt play an important role in these large Real Madrid transfers," says James Pickles, editor of industry journal TV Sports Markets.

Big name sponsors

But overseas merchandising, domestic and TV rights, and matchday earnings are not Real's only income streams.

It also has a number of high profile sponsorship partners - Bwin.com, Adidas, Coca-Cola, Audi, and Spanish beer brand Mahou.

An image rights deal with Adidas alone in early 2007 garnered them 762m euros.

Real Madrid president Florentino Perez (l) with former glamour player Alfredo Di Stefano

Another benefit, one that helps attract top name players, is the fact that tax legislation allows their foreign players to pay tax at about 23% for the first five years that they are in the country.

It also helps that Real - from before the 1950s heyday of Di Stefano - is considered the "establishment team" and can call on close links with the government or city authorities when cash is tight.

Last but by no means least is the fact that Real, like Barcelona, are exempt from demands imposed on the majority of Spanish football clubs to become publicly listed companies.

Unlike the majority of European football clubs, Real Madrid are owned by its thousands of members, known as "socios", who elect the president.

That leaves it free of all the ramifications for takeovers and potential debt issues that being a listed company could involve.

In its report Deloitte said it would be difficult to see anyone topping Real Madrid at the top of the money league next year, but added "it will be interesting to see how the club copes with the loss of the Brand Beckham effect."

It appears Real are now answering that question by plugging that gap with the purchase of Kaka, and proposed purchase of Ronaldo.

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