The Real Madrid Way. Steven G. Mandis
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a stadium with an NFL team. The Athletics’ innovation in data analytics was driven, in part, because they have limitations. On the other hand, Real Madrid owns their stadium and benefits more directly from their innovations in broadcasting, marketing, and commercial revenues.
“Tanking”
No matter how bad the performance of an MLB or NBA team becomes, the team’s place in their respective “major league,” and their share of the national television contract, is assured. Therefore, in MLB or the NBA, teams can be incentivized to “tank,” or lose on purpose, in order to get a better pick for the draft. In addition, an MLB or NBA team can afford “rebuilding” years in which the team’s performance is bad, because they have the upside of being able to get a high draft pick to start to put together a good team and, in contrast, can’t get kicked out of the league.
European professional soccer teams have a much higher economic incentive to win because of “promotion” and “relegation.” Promotion and relegation are processes where teams are transferred between two divisions (think Major Leagues and AAA or NBA and Development League)19 based on their performance for the completed season. The best-ranked teams in the lower division are promoted to the higher division for the next season, and the worst-ranked team or teams in the higher division are relegated to the lower division for the next season. This would mean the Philadelphia 76ers, for example, would be moved down to the Development League if they finished in last place in the NBA, and the Santa Cruz Warriors or Rio Grande Valley Vipers would move up to the NBA if they finished at the top of the Development League.
In European soccer, being relegated means a team no longer participates in the revenue share of the first division, which can have a significant impact on a team’s finances and value.20 Therefore, even the teams at the bottom of the standings are fighting to win each and every game. The teams that can afford the highest payrolls and better talent might not be as concerned about relegation. However, it is possible for them to miss qualifying for the Champions League. In addition, in the English Premier League, national TV revenues are apportioned by standing, once again encouraging teams to fight for each win to finish in a position in the league standing that at least maintains their share of TV revenues from the previous year. Therefore, it puts pressure on the coaches of the top teams to play their best players more often, which increases tiredness and risk of injury. In contrast, there may be nights that a strong NBA team, for example, can rest their star players and still defeat a team that is “tanking.” In soccer, a team resting their best players risks losing points and standing in the league, which can have a financial impact. This has implications not only on how coaches must use their players but also the risks the organizations are willing to take. For example, in a 2014 interview with Sean Ingle of the Guardian, Billy Beane said it is arguably riskier for a European professional soccer manager to place huge faith in statistical analysis because, unlike in American sports, there is relegation. Beane said, “You don’t have a lot of time to be right in football. So ultimately, before you mark on anything quantitative, you have to make sure you have scrutinized the data and have certainty with what you are doing, because the risk is very high.”
13 In September 2015, Forbes revalued NFL teams. The valuation for the Dallas Cowboys was higher than Real Madrid’s valuation in July 2015. However, at the time, Forbes did not revalue any soccer or baseball teams.
14 “Top 10 List of the Internet World’s Most Popular Sports.” Topend Sports. http://www.topendsports.com/world/lists/popular-sport/fans.htm.
15 “Ranking Sports Popularity: And the silver goes to . . .”. Economist. http://www.economist.com/blogs/gametheory/2011/09/ranking-sports’-popularity.
16 I spoke to a leading sports industry mergers and acquisitions expert who has sold many leading sports franchises. He agreed that theoretically Real Madrid should be the most valuable sport team because of their sustainable economic-sport model, differentiated brand, and large global fan base in the world’s most popular sport. The potential buyers could be larger and more global than those for North American sports teams. A possible list would not only include billionaires who could leverage the sports team and its stars playing friendly games abroad to help their image and companies but also sovereign wealth funds, such as Qatar Investment Authority buying Paris Saint-Germain to help promote a country. In addition, unlike North American sports leagues where other owners must approve a potential buyer (which could restrict interest or those eligible), there are no such restrictions in European soccer. However, he raised the issue that at some point the potential valuation amount is so large that the potential buyers for the entire amount become limited, which could restrict the valuation.
17 The revenues by given years can differ or be inconsistent because of different season ends, different fiscal years, and currency exchange moves. The revenues for Real Madrid’s 2013–14 season were €550 million ($726 million).
18 Games between two rivals of close geographical proximity are usually called a “local derby,” or simply “derby.” In North America, the term “crosstown rivalry” is used.
19 This example is illustrative, but can be a little misleading. It is important to note that teams in the lower divisions in European soccer are not farm teams and are independent. Affiliated teams cannot be in the same division or league.
20 In the English Premier League, for example, there is a “parachute system” of payments for a few years to smooth out the financial impact of relegation.
AT THE CENTER of the Real Madrid way for success on and off the field are the values of their community and the resulting culture. Simply put, the shared ethos, expectations, and values of the Real Madrid community dictate the operations, behavior, and mission of every aspect of the entire club. The values and expectations of the community drive the decision-making throughout the organization, from on the field (in player selection, player behavior expectations, style of play, and priorities) to off the field (in business and management characteristics, strategy, marketing, investments, financial reporting, human resources, and technology). The Real Madrid management team spends their time reinforcing and solidifying increased personal connections, relationships, and communication directly with their community members. Management also pushes the community’s values throughout the organization and to their players. Management’s goal is to help the community connect to their intense passion of living Real Madrid.
Real Madrid’s management team believes that the community does not exist to serve the business or management; rather, the club exists to serve the Real Madrid community. While the community has a shared identity as Real Madrid fans, the club recognizes that members and fans are individuals with a wide variety of needs, interests, and responsibilities.
Professor Susan Fournier from Boston University and Lara Lee, former executive at Harley-Davidson, wrote an article titled “Getting Brand Communities Right” in the April 2009 issue of Harvard Business Review. According to them, “A community-based brand builds loyalty not by driving sales transactions but by helping people meet their needs.”21 Essentially, that is what Real Madrid is doing. The club is constantly trying to better understand their community members’ values, give them what they want, and improve and inspire their lives. They learned that those needs are not just about gaining status or identity through brand affiliation. Fournier and Lee wrote, “People participate in communities for a wide variety of reasons—to find emotional support and encouragement, to explore ways to contribute to the greater good, and to cultivate interests and skills, to name a few. For members, brand communities are