He’s the rich uncle who always gives the best presents at Christmas; the loaded mate who throws his gold-card behind the bar at parties.
This is decadence in its purest form, but no-one questions the motivations or morality behind it when it’s they who reap the benefits.
In Madrid, that man is Florentino Perez who, for the second time in a decade, has been elected as president of Real Madrid. The billionaire construction magnate stood unopposed for candidacy having emerged as the outstanding choice to succeed the previous regime, led by Ramon Calderon. Calderon’s administration was earlier this year accused of rigging a vote to approve the club’s financial budgets.
Perez is, of course, most famous for bringing about the ‘Galactico’ movement at Real Madrid in the early 2000s. In his first term as Real Madrid president, Perez endeavored to assemble a ‘dream team’, signing high-profile players such as Ronaldo, Luis Figo, Zinedine Zidane and David Beckham.
“A superstar every summer”, he said last time. Yet now, in 2009, Perez has bought several superstars in a matter of weeks. The Brazilian Kaka and the Portuguese Cristiano Ronaldo are the most high-profile signings, with French forward Karim Benzema and a series of Spanish stars – Liverpool midfielder Xabi Alonso most recently joining defenders Raul Albiol and Alvaro Arbeloa – completing the list.
Overall, Perez has spent over £200m on players this summer.
For, everybody loves Florentino in the summer. In the same way that everybody loves a generous uncle at Christmas.
But where, as many people are asking, is it that Perez and Madrid are getting all this money from?
The answer is, in fact, far less suspicious than the question suggests, and revolves around a simple philosophy that short-term credit should be invested in highly marketable commodities (in his case, players) whose high-profile ensures this money will be made back over time.
So, in the short-term, Perez has managed to secure a considerable bank loan – or a series of separate loans, depending on which story you believe – for a total sum of around, well, hundreds of millions of pounds. Catalan bank La Caixa are believed to have provided the majority of credit, whilst a number of newspapers have reported that Banco Santander have virtually single-handedly funded Cristiano Ronaldo’s deal.
How are they able to obtain such large loans, especially when the rest of the world are apparently undergoing a ‘crunch’ on the amount of money currently being lent by banks?
Well, Perez provides financial guarantees from the revenues of his construction company ACS (which generates over £4bn in annual revenues) and his political power – as well as the power Real Madrid has as a club – also allows him a favourable relationship with national banks. Because the club is seen as something of a national symbol, it is well supported by the city council and the Spanish government. Consider it in some way similar to such institutions as Wembley Stadium or the 2012 London Olympics in England. Barcelona, incidentally, maintains a similar position within the region of Catalonia.
With these loans secured, Florentino Perez plans to recuperate this money in the long-term via the implementation of a highly aggressive commercial strategy, the core activity of which has already been put in place through the purchases of both Kaka and Ronaldo.
Put simply, Perez believes that spending huge amounts of money on the world’s most high-profile players will generate commercial benefits so powerful that they greatly exceed the initial cost of the player. “Sometimes the most expensive players are the cheapest”, Perez said. "The cheapest player I ever signed was Zidane. Signing stars is not spending money, it is investing it."
In principle, the concept works. There are a small number of players whose global profile is so strong – that much stronger than anyone else’s – that their sheer association with a product (or football club) can increase the relative income of all other aspects relating to the club.
The most prolific example of this model in practice is David Beckham. Beckham cost Real around £25m in 2003, a fee which was more than recuperated in shirt sales alone. In fact, over a million ‘Beckham 23’ shirts were sold in the first 5 months of him joining the club. Furthermore, David Beckham earned Madrid more than £340m in merchandising alone over his first three seasons, increasing profits by 137%, or so the club claims.
The relative impact this then has on all other revenue streams is substantial:
Clearly, in terms of attendance, the presence of high-profile players means a higher demand for match tickets. Given that home matches regularly sell out, this is hardly a problem that needs to be addressed at the club. However, the potential is there – at least, in theory – to hike up ticket prices and still sell out.
Incidentally, Madrid’s matchday revenue has already increased significantly in the past couple of years due to the reconfiguring of specific areas at the stadium to increase corporate hospitality capacity.
The affect a big-name signing has on TV rights, however, is far more significant: Real Madrid negotiate the sale of their television rights independently – as opposed to collectively as part of a league, as is the case in England – which means they can command disproportionately high fees compared to most other clubs around the world.
To put this into perspective, clubs in England make around £28m per year from TV rights, whereas Real Madrid make approximately £120m a year, having secured a record-breaking global deal worth £1.1bn over seven years, in 2006. Considering the worldwide interest in these players – particularly in places like Asia – the arrival of Kaka and Ronaldo could mean Madrid’s next deal is even greater.
The situation is much the same with regards to sponsorship. The arrival of star names will add significant strength to the club’s ability to attract new (or renew existing) sponsors. Online gaming firm Bwin currently contribute approximately £15m per year, and Adidas pay significantly more in image rights.
There are also a number of other commercial opportunities open to Florentino Perez and Real Madrid. Merchandising – not just in terms of shirt sales – and overseas tours are part of the strategy to generate many more millions, particularly in the American and Asian markets. For example, Perez recently bragged about how, in the height of the original Galactico era, he once made the club €15m for playing two matches in Japan.
But commercial muscle does not necessarily mean success on the field, and people have short memories in this respect. There is, after all, a good reason why no-one wants to see gold-card party-boy friend every night – or ever in the daytime, for that matter.
Indeed, for all his extravagance and the excitement that surrounds him, Florentino Perez is also both a populist and an autocrat.
He likes publicity and dictates transfer policy – which means new Real Madrid coach Manuel Pellegrini will have to make do with what is bought for him, and that he is unlikely to have any control over transfers.
Pellegrini may also be forced to comply with the so-called ‘unwritten rule’ surrounding team selection. This basically means that superstar signings must start every game. Oh, and though shalt never drop Raul.
Perez’s failure to prioritise the importance of defensive players has also caused him problems in the past. In 2003, Perez was involved in a pay dispute with Claude Makelele which, ultimately, resulted in the Frenchman being sold to Chelsea. Perez was unwilling to pay high wages for a player he considered to be inferior to the likes of Ronaldo and Zidane, saying: "We will not miss Makelele. His technique is average, he lacks the speed and skill to take the ball past opponents, and 90% of his distribution either goes backwards or sideways."
Given the negative publicity that was generated from the Makelele affair, one would think that such a situation is unlikely to happen again. Although much depends on how much Florentino has learnt from past mistakes.
Clearly, no-one can doubt that the arrival of Florentino Perez has, so far, been impactful. But the question continues as to whether or not his policies are sustainable.
Some would argue that the continued use of the electoral system in place at Madrid fuels and ensures instability at the club: Wrapped up as democracy, the set-up ultimately only serves to further promote an institution of short-termism, populism and, therefore, superficiality.
In this sense, Florentino’s plans are exciting – ‘fun’, even – but a philosophy built on immediacy and commercially-driven success is simply not the best recipe for either the development or stability of the club. It’s certainly no way to build a team. But then this is Real Madrid, after all, and perhaps the soap opera was always destined to continue. I guess we’ll all just have to wait until Christmas to see what Uncle Florentino conjures up next. Whatever it is, Perez will do well to remember the following fact: that even the most expensive Champagne still leaves you with a hangover.
