ASSIGNMENT

Based on the information provided in the case study (posted below), please prepare the budget for the 2004-05 season. When preparing the budget consider the following:

Madrid is considering two options for player acquisitions:

Acquiring two megastars at an estimated cost of EUR 38 million each in transfer fees and an annual salary of EUR 10 million or

Acquiring four rising stars, young players with enormous potential at an estimated cost of EUR 15 million each in transfer fees and an annual salary of EUR 3 million.

When deciding between the player acquisitions choices, please take into account the relevant considerations (e.g. jersey sales, on-field performance, etc.). The immediate economic implications of on-field performance are as follows:

Advancing one more round in the Champions League increases Real Madrids revenue by EUR 5 million due to additional ticket revenue and increased participation in the UEFA marketing pool. Winning the Champions League produces a EUR 4 million increase over qualifying for the semifinal

Advancing one more round in the Champions League increases salary expenses by EUR 1 million and winning the competition will trigger bonus payments to players for EUR 15 million.

Create a budget incorporating your player and performance decisions with the info in the case.

Provide a seperate explanation (can be brief) that provides an overview of your budgeting process, the key decisions and rationale and address the following questions:

How can a club balance on-field success with financial success?

When should a club sacrifice one type of success for the other? Is doing so sustainable in the long-term?

****************************************************************************************************************************************************************************

This is the case study to assist in completing the assignment described above:

Case Study: Hala Madrid: Managing Real Madrid Club de Futbol, the Team of the Century

Introduction

InJune 2004, Carlos Martinez de Albornoz, corporate general manager for Real Madrid, a leading Spanish soccer team, was reviewing the Club's 2004-05 budget in preparation for a press conference scheduled by its president, Florentino Perez.

In the two previous years, members of the Spanish press had predicted a financial catastrophe for Real Madrid after the Club signed Brazilian striker Ronaldo and British megastar Beckham. However, after Florentino's 1 election as president in 2000 the team won seven official titles, including two Spanish "Ligas" and one European Champions League, and Real Madrid had become one of the wealthiest soccer clubs in the world. Despite these successes, poor team results during the last two months of the 2003-04 season2 (including being eliminated from the European Champions League and losing a record five games in a row during the national competition) had left executives, players, and fans alike with a bitter feeling, just when Florentino was up for reelection. The 2004-05 budget challenge was to include the cost of acquiring new players who could recapture the support of the team's fans while avoiding the excesses that had nearly bankrupted the team before Florentino's arrival.

Martinez de Albornoz thought of the decisions to be made during the planning process, knowing tha t Florentino would be probed on those decisions during his face-to-face with the press. Journa lists enjoyed specu la ting on how many more player acquisitions3 the team would make and who would be the next star to join the Real Madrid "galaxy." Although the media touted Real Madrid as an organization with limitless resources, its management team knew that overspending would bring certain failure.

History of the Club-Real Madrid, the Myth

When a group of soccer fans founded the Madrid Foot Ball Club in 1902, they were unaware that it would one day become a legend. Itwas renamed Real Madrid F.C. in 1920 when King Alfonso XII granted the title Royal ("Real") to the Club. On December 23, 2000, the FIFA (Federation Internationale de Football Association) elected Real Madrid the "Best Club of the XX Century." No other team had won so many titles: 9 European Cups,4 the most coveted title in European soccer, 3 Intercontinental Cups, 29 Spanish "La Liga" Titles, 17 Spanish Cups, 2 UEFA5 Cups, 1 European Super Cup, and over 30 other titles.

The Club's stadium, named after Real Madrid's most charismatic president, Santiago Bernabeu, was considered by many to be the cathedral of world soccer. Its mystique was rivaled only by Maracana (Rfo de Janeiro, Brazil) or Old Trafford (Manchester, U.K.).

The myth of Real Madrid began in the 1950s when the team won five consecutive European Cups, a feat unmatched in soccer history. After winning its sixth European Cup in 1966, the team continued to enjoy success, but not at the same level. During this time the Ajax Amsterdam, Bayern Munich, and A.C. Milan sports dynasties were born.

Real Madrid went on to win its seventh and eighth European Cups in 1998 and 2000, but by that time the Club was on the brink of bankruptcy. New leadership took over when the socios (club "partners" or "members") elected Florentino Perez president in the summer of 2000.

The Crisis of the 1990s

At the end of the 1990s, the total cost of soccer players had risen to new highs.6 Three main factors contributed to the rising cost of players:

Growth in revenues from TV rights

Greater investment of private personal fortunes in soccer clubs, such as Italy's Agnelli and Berlusconi or the U.K.'s Al Fayed

The so-called Bosman law, which transformed the European market for soccer players into a free-agent market

In this environment, the most successful teams were those with the greatest financial resources. The bidding wars for the best players, spurred by the availability of new revenue sources, led many teams to jeopardize their future by taking on excessive debt or selling future sponsorship and TV rights to fund current player acquisitions . For some clubs, the new revenue sources that were supposed to be a blessing had turned sour.8 Among the affected clubs was Real Madrid, which by 2000 had already sold most of its future TV rights and sponsorships, and had a net debt equivalent to two seasons' revenue or eight times the equity of the Club (see Exhibit 1).

Florentino Perez: Modernizing Real Madrid

In the opinion of many, the newly elected president of Real Madrid had inherited a dire situation that required a quick and effective resolution. 10 This was achieved with the sale of the "Ciudad Deportiva," the team's training grounds located in northern Madrid's exclusive business area. The resulting cash infusion allowed Florentino to "clean the house"-pay back all debt, repurchase the stadium boxes, repurchase some advertising contracts, sign Portuguese megastar Luis Figo, and initiate construction of a new athletic complex in the suburbs, Ciudad del Real Madrid.11 In addition, Florentino undertook a complete renovation and modernization of the Real Madrid management system. Florentino described his approach:

To guarantee a sustainable future of financial strength and sporting success, the Club had to excel in three strategic initiatives:

"Professionalize" the management team.

Exploit the enormous value of the Real Madrid brand and players' images to increase revenues, which would enable the Club to compete in the new financially driven soccer environment.

Impose financial discipline to ensure that the team did not become overextended. Key to this discipline was limiting the players' expense. With the new strategy of Zidanes & Pavones, Real Madrid would sign one star player per year and focus on the development of players through the farm system or cantera.

The "Professionalization" of Management

Real Madrid was a nonprofit organization owned by the socios; its ownership structure resembled that of a member-owned firm, such as a mutual insurance company.12 The socios had two main privileges: Special access to season tickets and participation in the election of the Club's president

(who must also be a socio). In the event of financial failure, Spanish law would require the team to become a corporation, and its shares would be auctioned to the public.

The president and board of directors, elected every four years, defined organizational objectives and monitored management. Martinez de Albornoz explained that "before Florentino's mandate, there was no clear definition of managerial responsibilities, and the board of directors interfered with the day-to-day operations of the Club. The employee compensation system mimicked the players', which included a basic salary and bonus based on the team's performance, regardless of the employee's role and responsibilities. Middle managers were hired ad hoc, and there were no formal human resources policies in place."

Florentino repeatedly asserted that the key to Real Madrid's transformation would be the modernization of its management. 13 First, he restructured the organization into four main units that corresponded to his strategic priorities (see Exhibit 2). The Presidency unit, which was responsible for the stadium, and the Marketing unit, which was responsible for the brand, were tasked with increasing revenue generation. The Corporate Division's mission was to instill the necessary financial discipline throughout the company, focusing particularly on the Sport Division, which incurred most of the Club's expenses. The middle managers' responsibilities were also adjusted to support the four new areas. Most importantly, the executive management of the Club was staffed with a higher-caliber team than before.

The performance-measurement and compensation systems were also revamped. Martinez de Albornoz explained that the objective was to increase employee motivation by implementing a variable pay structure that would improve internal equity14 without raising total wage costs. Non sports employee bonuses were no longer linked to the soccer team's performance. Under the new system, variable pay was determined by the achievement of financial and nonfinancial targets linked to the departmental and companywide business plan in the Balanced Scorecard framework (see Exhibit 3 for a sample evaluation sheet). A sophisticated management information system was implemented to facilitate continuous monitoring and measurement of this approach.

Leveraging the Brand

One of the keys to achieving Florentino's goal of sustainable success was to grow the Club's revenues. The name "Real Madrid" evoked in many the passion of soccer and the image of victory. A large and global support base and the Club's international name recognition represented enormous potential for leverage. The marketing unit's challenge was to commercialize this image while reinforcing the essence and traditional values of "Madridismo."15

Florentino's goal was to recapture the spirit that had characterized Real Madrid for the greater part of a century, best expressed as "a champion and a gentleman."16 A new code of conduct was developed for Club behavior that promoted the values of honesty, transparency, and concurrence. For instance, all contracts and supplies had to be publicly auctioned, and directors' outside companies were prohibited from participating in these auctions. Management communicated its

commitment to tradition by appointing the legendary Di Stefano, considered by many fans the best soccer player in history, as the Club's honorary chairman to remind the public of the Club's origins.

The Real Madrid Brand

Real Madrid was a powerful brand name. According to a survey performed by Landor in 2002, Real Mad rid was the only soccer team wi th a strong "global leader" profile, not only commanding the highest level of admiration and respect but also generating the least amount of animosity (see Exhibit 4). Even so, the Oub's image remained vastly underutilized until Florentino took over in 2000. Previously, Real Madrid's marketing activity was limited to technical (equipment-related) sponsorship contracts with sports apparel manufacturers, including Kelme and Adidas, and jersey sponsorship contracts mainly with Spanish companies, including Teka and Otaysa.17 The new management team decided to widen the scope of the brand by targeting international markets, and the 18 million 1999-2000 season marketing revenues grew to 85 million over the next four seasons.

Consequently, the Club decided to aggressively pursue three ways to exploit the brand: sponsorships, image rights, and advertising; distribution, merchandising, and licensing; and in ternationalization and new technologies.

Sponsorship, Image Rights, and Endorsements

Many companies were willing to pay handsomely to be associated with Real Madrid, but the chaUenge for the marketing general manager, Jose Angel Sanchez, was to maximize revenues and reinforce Real Madrid's image. All of Real Madrid's sponsors were selected because they shared the same values: tradition, leadership, high performance standards, and contribution to progress in society worldwide. Real Mad rid's model delineated three levels of sponsorship, depending on the partn rship's visibility and the economic agreement (see Exhibit 5).

Before Florentino arrived, endorsement fees were negotiated on a player-by-player basis, a very contentious process that sometimes created illwill between the Club and its players. Inan innovative marketing twist, the new management team established a policy requiring all new players and all contract renewals to cede all image rights to the Club. The players and the Club then split the revenue according to prearranged ratios. These contracts acknowledged that both Real Madrid and the players contributed value to advertisements. For example, if a commercial featured several Real Madrid players wearing their uniforms, lhe Club received 100% of the revenues because it was essentially considered a team commercial. When only one player was hired for a commercial and the Club owned his image rights, benefits were split two ways. If the player did not share the rights with the Club he would receive 100% of the benefits, but he was not allowed to participate in commercials wearing the team's uniform unless he negotiated separately with the Club.

Distribution, M erchandising, and Licensing

Before the new management team took over, jerseys were the only Real Madrid licensed product. Sanchez was charged with recruiting licensees to create Real Madrid products, bringing the Real Madrid brand to retail shelves. By 2004 he successfully grew licensing revenue to 51 million, representing 80 licenses for more than 450 products in 2004.18

Contributing to this growth, the Club opened several retail stores and decided against franchising them in an effort to protect the integrity of the brand. The stores, which featured only Real Madrid merchandise, were designed to live the "white" experience,19 with television monitors replaying team games and players' pictures and team memorabilia prominently displayed . The addition of an online store and catalog and phone sales extended the reach of the Madrid-based brick-and-mortar stores.

To support its growth strategy, Real Madrid started to standardize licenses and combat piracy. The standardization effort involved not only homogenizing the licensing contracts but also selecting top-quality licensees and controlling the consistency of the image portrayed by the products. To reduce piracy losses, the Club developed a less expensive line, the Hala Madrid collection, catering to specific market segments without cannibalizing the replica apparel line jointly commercialized with Adidas. In addition, Real Madrid took legal action against piracy where necessary .

Internationalization and New Technologies

Real Madrid was trying to increase its fan base both inside Spain and globally. Real Madrid was a household name in Spain and South America and a strong brand in Europe, but a weak brand in Asia and North America. To develop these new markets, the Club included them when planning the locations of their pre-season games and gave priority to signing star players who were already well known in Asia and North America.

Exhibition games, particularly during the pre-season, had traditionally been planned exclusively for training purposes. But during the Florentino era, these games also became an important element of the marketing strategy because they expanded Real Madrid 's fan base and also generated revenue (17 million, 5.5% of revenues, in the 2003-04 season).20

The team's victories, its stars, and its penetration into new markets such as Asia led to record sales of Real Madrid jerseys. In the 1999-2000 season, 80,000 jerseys were sold, half of them when the team won its eighth Champions League Title. In the 2002-03 season, sales volume exceeded Manchester United's 900,000 shirts sold. For the 2003-04 season, the 1.2 million jersey figure initially forecasted by the marketing department was surpassed by a wide margin, partially because of new star David Beckham, whose No. 23 shirts sold successfully to many fans of the British media icon.

In September 2004, the "Global Football Monitor" report published by Sport + Markt asserted that Real Madrid had a potential worldwide fan base of 490 million, "over 100 million more than closest rival English Premier League club Manchester United, which has a potential fan base of 350 million .

Even in the English market, 14% of those questioned said they were 'very interested' in Real Madrid, just 6 percentage points behind United. And only 1% behind PL club Arsenal."21

Finally, Real Madrid tried to capitalize on some of the content it generated through a coordinated effort to span a variety of media , including the Internet (www.realmadrid.com), television (RealMadridTV), 22 and even mobile telephony (content distribution through SMS messaging).

Revenues from internationalization and new technologies represented 8.5 million in 2003-04 or 10% of the total marketing revenues.

Zidanes & Pavones

In the game itself, Florentino wanted to revive the Real Madrid myth. In the years before his election more than 5,000 socios abandoned the Club, despite the team's victory in two European Cups.23 Winning was not enough for its fans; Real Madrid soccer had to be a work of beauty. Florentino decided to bring back a Real Madrid traditional strategy that was first implemented by former charismatic president Santiago Bernabeu, which mixed stars with the farm system or cantera24 players. Real Madrid hoped to use "Zidanes y Pavones,"25 as the press called this strategy, to regain its rightful place at the cusp of European soccer.

Signing Consolidated Stars

European soccer teams could "sell" or "buy" players in exchange for a transfer payment, provided the player and the teams agreed to the transaction. A transfer payment was the sole compensation that the selling team received from the acquiring team for releasing a player from his existing contract obligations. Using this vehicle, teams developed different strategies with which to build their squads. While a few teams did not hire players from other teams and promoted only from within, most teams acquired young promising players with the expectation that they would become stars.

Florentino's strategy was different because he pledged to hire one star player from another team each year. He repeatedly made public his concern that, for many years, soccer's greatest players did not come to Real Madrid-they went to Italy or sometimes to England or Barcelona . As president of the team, Florentino was determined to change this status quo.

Regularly recruiting established stars would help fuel the excitement and exhilarating game experience that fans loved-and it would reinforce the Real Madrid brand, helping the Club capture new marketing revenues from the loyal cohort of fans who followed their favorite megastars from team to team. Florentino called this strategy "priming the pump."

The first megastar to join Real Madrid was Luis Figo, from archrival Barcelona, who became the centerpiece of Florentino's election campaign. Florentino then hired Zidanonsidered by many to be the best active player in the world and one of the five best in soccer history-in 2001.26 In 2002 Florentino signed Ronalda, the world 's most renowned striker, and in 2003 English star and media icon David Beckham joined Real Madrid (see Exhibit 6).

Real Madrid could now boast one of the best squads in soccer history. In fact, five of the top 10 contenders for the 2003 FIFA Player of the Year award played for Real Madrid. This constellation of stars, nicknamed the "galacticos" by the press, spurred international expansion and marketing revenue growth. This strategy resonated so well with the press and the public that every spring there was enormous press speculation about who would be the next megastar.

Management of La Cantera

The other major source of Real Madrid players was the cantera, which usually had many outstanding prospects comparable to famous cantera players such as Guti, Raul, or Casillas.

The cantera had three main objectives: to identify, develop, and find an outlet for players. The scout chief's mission was to identify new young players with the help of his 24 scouts, 11 in the Madrid area and 13 elsewhere in Spain. The scouts were independent contractors who earned a very low retainer and a variable payment based on the performance of their recommended players. Outside Spain, the area manager performed the scouting function on a more limited basis based on observations in tournaments and third-party reports.

As for development, Real Madrid trained its young players and provided them with a general education.27 Player development was a delicate task, because too much responsibility too early on could cause burnout. Two possible solutions were a progressive incorporation into the first team or a loan to other teams. This critical function was performed by the coach, who had to weigh current sport results against the future of the team.

Finally, the coach of the first team was responsible for finding the players an outlet. He tested the players to determine whether they would be retained with the prospect of being promoted to the first team, loaned, or sold to another team.

One of the cantera's most important and difficult tasks was structuring players' contracts. If a player had star potential, a long-term contract was best because it helped retain him, whereas a short term contract would encourage the player to leave at the end of his contract, or possibly force Real Madrid to pay him a higher salary to stay. If this happened, the Club never reaped the benefits of developing him. The disadvantage of a long-term contract became apparent when the Club accidentally signed a mediocre player who refused to quit while he could collect a substantial salary. The same considerations also applied to salaries: If Real Madrid paid too little, a good prospect could be acquired by another team, and if it paid too much, it could get stuck with an expensive, mediocre player. As was the case with the consolidated stars, players' contracts included bonuses for sport achievements and number of games played, but did not include any compensation contingent on performance statistics such as goals, assists, or recovered balls.

The Budgetary Process

The corporate manager coordinated the development of the annual plan, which began when the team directors and executives defined the objectives for the coming season in early May (see Exhibit 7). These objectives, in turn, were used to produce the annual budget for the coming fiscal year as well as a midterm plan for the following three years. Although the budget had to be approved by the socios in the annual meeting, the midterm plan did not because it was used solely as an internal control tool.

With the guidance of the strategic objectives and the assumptions provided by the corporate manager (see Exhibit 8)1 each operating unit prepared a prelimi nary budget. Despite its name, this document was, in reali ty, an action plan that included a description of all the initiatives the unit intended to undertake during the following period and the set of Key Performance Indicators (KPls) against which the management performance would be evaluated. (See Exhibit 3 for examples of KPI lists.) The preliminary budget was accompanied by a list of resources needed by each unit to meet its objectives.

The resources requested in the preliminary budget were then assessed by the respective corporate units (Human Resources, Insurance, Infrastructure, etc.). Resources were preliminarily assigned to those initiatives with higher .priority, and operating units then revised budgets accordingly. The resulting plans were then consolidated across the four different management areas before being sent for approval to the management committee, the board, and the socios. During the economic assessment and consolidation phase, the corporate manager held numerous informal discussions with the different operating units, in addition to participating in the formal budget meetings.

The board of directors usually voted on the budget during the weekend of the first official home game of the season (late August or early September). Once approved by the board, the budget was submitted to the Liga de Futbol Profesional (LFP) and the Consejo Superior de Deportes (CSD).28 Failure to submit acceptable budgets to these organizations would exclude the team from official competitions. Later, in early October, the general assembly of the socios approved both the financial statements for the previous fiscal year and the budget for the current season.

Budget tracking and followup was carried out monthly by each area and department according to its Balanced Scorecard, which included both financial and nonfinancial KPis. In addition, two other internal documents were used to implement the budget: the UPA (Ultima Prevision Anualizada), 29 which was developed every three months as the most up-to-dale forecast uf annual performance, and the monthly Executive Synthesis of Economic Information, which analyzed the risks and opportunities of every area for the management committee .

Preparing the Budget

Ithad been a long day in the Santiago Bernabeu Stadium offices. Even though the 2003-04 season was over, Real Madrid's executive team could not afford a much-needed break. The year had been a disappointment on the sports side. Even though the team strove to win three major tournaments,

April and May's losses left them empty-handed. However, despite the sport mishaps, the season had been a total success from an economic perspective, generating record revenues (see Exhibit 9) and continuing the turnaround that had begun in 2000 when Florentino won the election (see Exhibit 10).

The disappointing sports results, together with the Club's upcoming presidential elections on July 11, made the 2004-05 budget process particularly complex. Valdano, the sports general manager, summarized precisely the importance of the budget: "Nobody has ever seen a concentration [of fans and players] at Cibeles30 to celebrate a balance sheet-but a healthy balance sheet is necessary if we're going to make it to Cibeles to celebrate."

The budget needed to be in reasonably good shape for the upcoming press conference and for the meeting of the management committee immediately before, where important decisions could be made. The committee and journalists alike would analyze all of the main budgetary lines and would question underlying assumptions to gauge the prudence of the plan. In that respect, understanding 2003-04 budget deviations would be important to improving the accuracy of the new budget (see Exhibit 11).

Revenues '

Club members and stadium Santiago Bernabeu Stadium had a capacity of approximately 80,000 regular seats and 200 private boxes. Real Madrid had sold 70% of its stadium capacity to season ticket holders. Season ticket prices commanded a discount of approximately 60% over single game tickets at face value, and ranged from 120 to 1,100 for 19 home games. Although Real Madrid could sell out the whole stadium to season ticket holders,'the Club preferred to leave 30% of the seats open to guarantee the extension and renovation of its fan base by allowing more people to attend. Manuel Redondo, the presidency general manager, pointed out that "this policy did not have any cost for Real Madrid as they sell out most of the games."

Historically the 200 boxes were rented out each year, and their prices, which depended on the number of seats, reached five times the level of regula r seats in similar locations. The waiting list for boxes was very long (over 300 companies). The Club's efforts to serve this valuable demand faced the architectural limitations of the stadium (although for the 2004---05 season, the Club managed to expand its capacity by another 20 boxes). Given the physical impossibility of satisfying this demand, Real Mdd riJ Lrnm;furm d some areas of the stadium into VlP sections, wi th upscale catering areas and restricted access. The VIP seating sections, which commanded a 300% price premium, were introd uced in 2002, and for the 2004 05 season their capacity increased from 670 tu 1920 seats. Following these improvements, the revenues from boxes and premium seating for the upcoming season increased from 12.5 million to 15.3 million .

The 2003-04 results that Redondo presented showed that the Club had just met its budget in this area, even though actual results had historically exceeded forecast. Redondo thought that the box office reven ues could not grow substantially going forward because:

His assumptions had already included sellouts for most of the official games, in line with past performances (see Exhibit 12).

Previous years' deviations had occurred because of the team's strong performance in the Champions League. For budgeting purposes, the executives had assumed that the Club would reach the quarter finals (Exhibit 8), even though Real Madrid had advanced to semi finals in five of the last six years.

For the upcoming budget, Redondo defended a 5% increase in stadium revenues from the seats added with a newly built balcony and the improvements described for the premium seating areas to reach a total of 68 million.

Preseason, international and exhibition games This revenue line included progress bonuses, bonuses paid by UEFA, the summer tour, and exhibition games. For the UEFA championship, Butraguefi.o, the deputy sports manager, had once again assumed in the budget that the team would advance only to the quarterfinals of the Champions League.

For the preseason games, the Club was under pressure because its participation in the preliminary round of the 2004--05 Champions League in mid-August would inevitably reduce the number of games that could be played in the summer Asia tour. However, af ter negotiating with the Club's Asian 'partners, Martinez de Albornoz and Butraguefi.o managed to fit the Asia tour into the shortened schedule. Thus, Butragueii.o expected to continue the growth of this revenue line and obtain 25 million from preseason games and Champions League bonuses.

TV rights/broadcasting This budget line included Real Madrid's share of Spanish- and European-league TV revenues, "pay-per-view" broadcasts, and RealMadridTV, a pay-TV channel with Real Madrid-related content. TV revenues had been flat from the start of Florentino's mandate until the 2003--04 season, when revenues increased from approximately 46 million to 69 million (see Exhibit 13). Revenues were expected to remain in the 70 million range for the next few years until existing contracts expired in 2008.

Marketing revenues Because revenues from ticket sales and TV rights were expected to remain virtually stagnant, the Club focused on marketing to increase its recurring revenue. Sanchez (the marketing general manager) had successfully steered the Club through spectacular growth in marketing revenues in previous years-but it was a growth pace that he was finding more difficult to maintain. He sensed that increasing merchandise sales and advertising revenues would be a huge challenge in the future.

Although it was not clear how the recent sport results would affect distribution revenues and worldwide sports-gear sales over the coming year, the Club expected to open three new retail stores in the Madrid metropolitan area, expand product licensing, and renegotiate existing licensing agreements that were up for renewal. The Club also hoped to sign more distribution agreements abroad, like their new agreement with Japan-based Platia . Reported advertising revenues, on the other hand, were expected to grow by 43% due to legal changes in the partnership that managed the Club's image rights,32 which now required Real Madrid to consolidate the partnership's revenues and expenses into its own financial statements.

The only other way to expand marketing revenues would be to attract additional sponsorship or player-endorsement deals, much like the sponsorship-contract extension that the Club had just negotiated with Adidas. The difficulty would be finding suitable candidates in new industries that did not conflict with existing partners and that formed a good fit with Real Madrid. Given the Club's marketing plans desc ibed earlier, Sanchez's unit expected to see growth of at least 40 million up to 125 million in the coming year-even more if it could unearth new sponsors. This number did not include increased promotional activity that would result from new player acquisitions.

Extraordinary results Nonrecurring revenues for the 2003-04 season were heavily affected by the sale of the training grounds. This transaction would have no impact on the 2004-05 financial statements; therefore, no extraordinary revenue was included in the budget except for the transfer of cantera players which could take place until August 31.

Expenses

Payroll The payroll was the single most important expense line and had been growing steadily over the past few years as new megastars joined the team. The increases were slightly mitigated during the 2003-04 season (see Exhibit 14).

This budget line was at the core of managerial decisions about which players to hire and renew for the next season. Butragueno, Sanchez, and the newly appointed coach, Jose Antonio Camacho, were key contributors to this discussion. Nevertheless, the board of directors always had the last word about player acquisitions, and it had always stood by Florentino's decisions.

For 2004-05, Florentino insisted on signing a world-class star who would help the team win more tournaments and whose worldwide popularity would support sustained revenue growth. At a gross salary of 10 million per yea r, recent history suggested that such a player would cost between 30 and 50 million, depending on his age and the number of years remaining in his current contract.33 Also, the management team had to decide which cantera players were ready to join the team and which should be transferred . Players promoted from within would command between 400,000 and 1 million . However, many argued that the team also needed less spectacular reinforcements in variow:; positions to give depth to the bench. This would be a significanl dtctuge fwm the previous Zidanes & Pavones strategy. Transfer fees for these players ranged between 15 and 25 million and their salaries between 2 million and 4 million per year.

The sports managers wanted to exercise most, if not all, of these options; however, each new signing further swelled the expense line and approached the limit set by Real Madrid for salary expenses-50% of ordinary revenues. Moreover, as the typical contrat had a four-year length, hiring decisions would influence financial flexibility in future periods. All these considerations made the budgeting process a difficult juggling exercise.

Before the new hiring decisions, the personnel expenses (including the basketball section and the management team) were budgeted to be around 130 million.

Operating expenses All of the remaining operating expenses including stadium operations, marketing, Real Madrid TV production, technology, and infrastructure still had to be budgeted . The operating expenses line would also increase for the 2004-05 season following the changes in consolidation criteria for Real Madrid Gesti6n de Derechos.34 The net effect of all these trends was that the operating expenses budgeted for the 2004--05 season would be 90 million.

Ordinary depreciation Depreciation of the property and equipment was budgeted to increase 20% to 16 million as the Club capitalized improvements to the stadium and the construction costs of "Ciudad del Real Madrid."

Accelerated amortization The amortization line captured the cost of the transfer fees. Despite the fact that Spanish accounting rules favored the amortization of transfer fees over the duration of the contract, Real Madrid chose to amortize the full value of the transfer fees in the year of the player's acquisition. In prior years the acquisition of the annual star player dominated this account (Zidane 2001--02, Ronaldo 2002--03, and Beckham and Samuel 2003--04). Real Madrid did not budget this line of the income statement and would decide on it by the end of the season, when the Club had a better understanding of the net income for the year.

* * * * *

As Martinez de Albornoz revised the preliminary annual plan once more, he thought of the decisions ahead. In the few years since Florentino's arrival, Real Madrid had become the most economically powerful soccer team in the world. A lot had been achieved, but maintaining this level of success would not be easy. Every move, be it the hiring of a new player or the signing of a new sponsorship contract, had to contribute to one single objective-making Real Madrid the Team of the XXI Century. In this spirit the team was considering the acquisition of several players. Doing so could definitely contribute to the success of the team; however, overspending on the roster might jeopardize the future financial wealth of the team.

Exhibit1 Real Madrid: Net Equity, Net Sales, and Net Debt 300 B Net Equity Net Sales Net Debt 271 a 245 Equity before the effect of 236 amortzation 214 200 152 138 millions 100 74 68 62 60 80 39 30 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 In the year ended June 2000, net debt was equal to two years of sales and eight times net equity In the year ended June 2004, net debt was equal to two months of sales and only one third of net equity Source: Club records Net Debt is equal to: Bank Debt+Long-Term Liabilities+Taxes Due-Cash-Net Working Capital-Long-Term Receivables Exhibit1 Real Madrid: Net Equity, Net Sales, and Net Debt 300 B Net Equity Net Sales Net Debt 271 a 245 Equity before the effect of 236 amortzation 214 200 152 138 millions 100 74 68 62 60 80 39 30 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 In the year ended June 2000, net debt was equal to two years of sales and eight times net equity In the year ended June 2004, net debt was equal to two months of sales and only one third of net equity Source: Club records Net Debt is equal to: Bank Debt+Long-Term Liabilities+Taxes Due-Cash-Net Working Capital-Long-Term Receivables