1. Describe the business model of Real Madrid (how does it generate revenues?

) and how it evolved during the years in the cases. Discuss the potential of growth and risks of each revenue source.

Business model of Real Madrid Up until 2007, when Ramon Calderon became a new president of Real Madrid, Perez and his management team made an effort to transform the Real. Perez set out to build a professional organization and regarded the Real as content provider. To become a worlds best soccer club, they identified 4 brand value drivers: (1) size of audience; (2) frequency with which the audience engaged with the brand; (3) sociodemographic characteristics of the audience; (4) bridge that can link the brand and the audience. In addition, the team set 3 interrelated goals: (1) give Real Madrid the financial flexibility to acquire top players and expand its brand; (2) assemble a team of top players; (3) leverage its brand and content across a variety of channels. Under the concepts and goals described above, Perez and his team had subsequently succeeded in acquiring at least one world-class player into the Real Madrid team each year such as Figo and Beckham. They believed that superstars would attract more

customers and be a key to expand their international business. According to the Exhibit 4a, Real Madrid generates revenues from the following 4 main sources: (1) match-day gate receipts, (2)

international competitions, (3)

broadcast and pay-TV, and (4)

marketing that includes the sales of branded goods and sponsorship). Each source of revenues increased during Perezs management. However, as the management team developed the new marketing strategies, marketing contribution to the entire revenue drastically increased and became the most important revenue source while gate receipts and TV rights that traditional business model emphasize were still important sources.

Potential of growth and risks of each revenue source (1)Match day Match-day gate receipts are expected to be stable or gradually grow. For most top clubs, match-day income is a declining source of revenue. However, Spanish soccer clubs were less affected by this trend because of season ticket sales. Real Madrids stadium has 80,000 seats but season tickets holders held 58,000 tickets. Furthermore, 4,000 seats were reserved as boxes and VIP seats. Given this situation, this revenue source would be stable with few risks. Stadium deterioration might be a risk, but that kind of risk could be improved via construction of more modern and comfortable stadiums. (2)International competitions Revenue from international competitions can be volatile and risky. This revenue source depends largely on a clubs participation and performance in major competitive events such as the European

Champions League. European Champions League related income includes prize money, but even though Real Madrid team consists of superstars, it cannot always win the game. The primary example is Manchester United, which unexpectedly exited the Champions League on March 9, 2004. (3)Broadcast and pay-TV Broadcast and pay-TV can be seen as the stable revenue source that has growth potential for the following reasons. First, in the 1990s, TV rights became the single largest source of revenue for many soccer clubs instead of gate receipts. Deregulation of the media industry in Europe led to competitive bidding for TV rights. Second, Real Madrid has its own TV station, which was launched in 1999. It had 50,000 subscribers in 2001, and the number increased to 80,000 in 2004. Considering that Spain has 3.5 million pay-TV households, growth potential is enormous. Third, Real Madrid struck a significant 4-year deal with Telefonica, which is Spains major telecom provider, to deliver Real Madrids content over Internet, broadband, and mobile services. (4)Marketing During Perez, revenue from marketing that includes the sales of branded goods and sponsorship has a large potential to grow as the Exhibit 4a shows. Star players could generate a large amount of merchandise sales and sponsorship fees from major corporations. In addition, the club can receive 50% of the image rights of every player

it hired. The strategy of expanding international market also could be the potential of growth. On the other hand, counterfeit could be a risk for the club. In reality, it faced the problem during the 2003 Asia Tour, cutting Real Madrid sales and disappointing sponsors such as Adidas. Also, excessive commercialization would be a risk for Perez strategy. The good example of this is Manchester United which had been criticized for exploiting its fans by selling too many products and for constantly changing its strip uniform.

2. Define the customer segments targeted by Real Madrid, describing their preferences (how do they maximize their utility or consumer surplus?), their characteristics, and their relation to the revenue streams in question 1.

Consumer segments targeted by Real Madrid can be divided into 4 categories: (1) socios abonados, (2) socios non-abonados, (3) supporters, and (4) international supporters. (1)Socios abonados Preferences and characteristics Socios abonados are cardholding members who paid their dues, had the right to go to the field every game. They can get discounts for seats and a vote to elect club presidents every four-year term. Season ticket holders can attend the Spanish League games. By paying additional 30% premium over league game prices, they can also

attend UEFA and Kings Cup games. Thus, they are the customers who maximize their utility or customer surplus by purchasing season tickets, getting discounts for seats, having the right to vote club presidents, and attending the Spain League games or UEFA and Kings Cup games. Their relation to the revenue streams They are related to all of the revenue streams described in question 1 via purchasing tickets and merchandise and becoming subscribers of pay-TV.

(2)Socios non-abonados Preferences and characteristics They are the customers who maximize their utility by getting benefits from some price discounts on available tickets and merchandise, attending 2 matches per year and receiving the clubs magazine. Their relation to the revenue streams They contribute to the revenue of two match-day gate receipts, and marketing revenue by buying products. They might be related to international competitions and broadcast and pay-TV revenue streams because some of them would attend the international matches and be pay-TV viewers.

(3) Supporters (except international fans)

Preferences and characteristics They are defined as a nondues-paying member who likes to attend

matches whenever he or she could by purchasing tickets. They might be a socios of another club, but they would support Real Madrid when it played UEFA games. They would attend matches together with local team fans getting benefit from discounts on games. Their relation to the revenue streams They are related to all of the revenue streams described in question 1 via purchasing tickets and merchandise and subscribing pay-TV.

(4) International supporters

Preferences and characteristics They are Real Madrid fans from all over the world. They are the customers who purchases products through Real Madrids worldwide retail network. They can maximize their utility by getting discounts from the Real Madrid fan card. Cardholders receive a free official club magazine, ticked preferences, and commercial discounts from partner companies. They might feel involved with the business of the Real Madrid. Their relation to the revenue streams They are mainly related to the revenue streams of international competitions and marketing via purchasing tickets and merchandise.

3. What is the lifetime value (LTV) of one individual socio (that is, the most loyal consumer that lives in Madrid) of Real Madrid and the LTV of one individual international fan? Approximately, what is the

total value of each these two segments for Real Madrid? Using your findings, provide recommendations for future marketing

investments in the two consumer segments, including how you would allocate a marketing budget between them.

Socio In this case, we can use the following formula.

LTV = m(1 + d ) AC 1+ d r

Gross margin per socio (m) = Spain League games (370) + International games (150) + Merchandising (100) + TV demand (100) promotion and gifts cost (120) = 600 (Promotion and gifts cost should be included as maintenance cost) Discount rate (d) = 5% Retention rate (r) = 100% Acquisition cost (AC) = 0
LTV = 600(1 + 5% ) 0 = 12,600 1 + 5% 100%

International fan We can use the following formula to solve the longtime value of an international fan.
LTV = ( m1 a1 ) * r1 ( m2 a 2 ) * r1 * r2 ( m3 a3 ) * r1 * r2 * r3 + + AC 1+ d (1 + d ) 2 (1 + d ) 3

Gross margin (m) = Game tickets (150) + Merchandising (200) + TV demand (100) + Real Madrid fan card annual

fee (38) = 488 Maintenance cost (a) = 120 Discount rate (d) = 5% Retention rate (r) = 50% Acquisition cost (AC) = 10 (In 2001, Real Madrid fan card was launched at a cost of 1.9mil and the Real issued 190,000 cards. We assumed that each international fan has a fan card and AC is 10.)
LTV = (488 120 ) * 50% (488 120 ) * 50% * 50% (488 120) * 50% * 50% * 50% + + 10 = 288 (1 + 5%) (1 + 5%) 2 (1 + 5%) 3

According to the LTV of each customer segment, LTV of socio is much greater than that of international fan. It seems that focusing on the domestic market is more effective than international market.

However, the number of potential international customers is much larger than that of potential domestic customers. Given the fact that Chinese market for sports merchandise was attractive, and that Real Madrids marketing department believed U.S. market could be worth as much as 45% of global sports merchandise returns, we recommend that a certain amount of budget should be allocated to acquire international fans. (I have no idea about allocation in detail.)

4. Calculate the value of a player, using as example the purchase of David Beckham by Real Madrid and applying the Net Present Value (Discounted Cash Flows) approach. Discuss your results in two ways: (1) profitability of the decision to transfer the player to Real Madrid, and (2) impact on the brand image and equity of the club.

Ye
(1) Profitability of the decision to transfer David Beckham to Real Madrid According to the calculation above, the decision to transfer David Beckham results in net present value of - 5.48 million. Additional economic profits that are expected to be gained by acquiring Beckham dont cover his transfer fee and salary. In terms of profitability, the decision doesnt make sense unless the club can benefit from other intangible values. Perezs Galacticos strategy works only if the club has enough money and the star player improve the clubs brand image for sure. (2)

Transfer fee Additional profit Annual tours pro Additional intern

Impact on the brand image and equity of the club

Acquiring a star player such as Beckham can immediately improve the clubs brand image. It is difficult to estimate the increased value of brand image, but superstars can attract peoples attention through media and many companies as a sponsor. Once people recognize the brand, the effect may last long even if a star player moves to another club. One good example of this is Antlers, the Japanese soccer club. In 1992, it acquired Zico who was one of the famous and popular Brazilian soccer players. At the time, soccer was not a famous sport in Japan, compared to baseball. However, the Brazilian superstar attracted a lot of attentions from Japanese media and soccer fans. The number of Antlers supporters drastically increased. In addition, he was not only the player but also the coach for other players. Actually he took command in games and led the team to win the first prize of the J League (Japanese Professional Soccer League) in 1993. He retired in 1994, but the club has been one of the most famous, wealthiest, and strongest soccer clubs in Japan since Zico joined. His contribution to its brand cannot be numerically estimated but it is obvious that the increased value of the brand went beyond the financial burden of his transfer fee and salary.