Mass media in Spain are already speculating that Brazilian player Kaka may leave A.C. Milan for Real Madrid, and that Ronaldinho, the Brazilian s tar, will abandon F. C. Barcelona and go to Italy . The same kind of thing is happening elsewhere in Europe where soccer is the number-one sport. Summer is around the corner, the season when clubs buy and sell players, and the market for signing up players is already heating up. The first person to break the ice this year was David Beckham. The English-born player surprised half the world in January when he announced that he was leaving Real Madrid to join the Los Angeles Galaxy, a Major League Soccer team based in the United States .
Brazilian player Ronaldo, world champion on two occasions, has also left Real Madrid, signaling the end of an era that began under the club’s former president Florentino Pérez. His philosophy was based on s igning the leading stars of the soccer universe. Meanwhile, in addition to Beckham, Ronaldo and Brazil’s Roberto Carlos, Real Madrid has snagged such high caliber players as Portugal’s Luis Figo, France’s Zinedine Zidane and English star Michael Owen. The concentration of so many soccer stars on the Galaxy team has led people to call the team “the Galactics.” During the presidency of Pérez, who quit during the 2005-6 season, the financially healthy club spent more than 400 million euros on s igning players.
“Signing this sort of player is the most important investment of any sports organization,” said Ignacio Urrutia, academic director of the IESE’s Center for Sports Business Management. “It is more than just one component in the business plan of any sports team. It is also the means investing in future sales. It attracts corporate sponsors, increases the awareness of mass media, and is a powerful way to get fans excited,” Urrutia noted at the Third Annual Forum for Institutional Sports Management in Madrid . On that occasion, Urrutia presented his study called, “The Five Most Common Errors Companies Make when They Evaluate the Cost of Signing upPlayers.” His study, which analyzes 216 soccer signings worth more than 10 million euros each ($13.5 million) between 2000 and 2006, will be formally unveiled at the European Congress for Sports Management in September.
The owners of the Los Angeles Galaxy know all about the economic benefits of signing the right players. Their team has signed Beckham for the coming five seasons. Although the English midfielder will continue to play in Spain until this summer, his future club has announced that he has already earned about 10 million euros since it signed Beckham. Those revenues come largely from sales of season tickets and “premium” seats. In addition, the team expects to make about 185 million euros by selling sponsorships and team uniforms.
The Valuation Model
However, on many occasions, these multimillion dollar signings can wind up a failure, both on the playing field and on the accounting ledgers. Jesús García Pitarch, sports director of Club Atlético de Madrid, also participated in the Forum, and he has experienced these problems first-hand on two Spanish soccer teams, Valencia and Atlético de Madrid. He said that the main challenge when it comes to making an effective signing is “disagreements between the trainer, sports director, technical leadership, the management, and the [team’s] president.”
“It’s about errors of communication,” Urrutia told Universia@Wharton. When an experienced club commits a signing mistake, sometimes “it can be explained by the fact that the decision was made by the president of the club, who has nothing to do with managing the player. The president purchases the player much the same way an untrained fan might approach the process. Meanwhile, the person who has to work with that player realizes that the tam has signed someone it doesn’t really need, either because of his style of play or because there are other players who are better liked. Something very similar occurs in any business when you have to recruit a sales director or a business manager, and the person who makes that decision doesn’t have to work with the person hired.”
How can you succeed in this key process? What counts more – the player or the size of his salary? To address these issues strictly in terms of the business, how much impact does this sort of asset [the player] have on any team’s business model? In his study, Urrutia tried to answer the following questions: How do you determine the right price for a soccer player? Is there a model for assessing his real value?
According to Urrutia, the following variables had the most impact on assessing the value of a soccer player in 1999:
- The age of the player.
- How many seasons he played as a professional.
- The number of matches he played during the previous season.
- The number of goals he scored during the previous season.
- How many times he played in international matches.
- The number of goals he scored in international matches over the course of his career.
- The ranking of the team that sells him during the previous season.
- The ranking of the team that buys him during the previous season.
In his study of the signings of 216 players over a period of six years, Urrutia discovered that only four of those variables had a correlation with the cost of acquiring a player: his age; his experience as a professional; the number of goals he scored in international matches; and the position in the league standings that the team who bought him finished in during the previous year. Later in his study, Urrutia moved “onto the playing field” and did a series of interviews that showed what really happened when it came to signing players. He discovered that soccer teams often make a series of common errors.
The Five Deadly Sins of Signing
Urrutia outlines the five most common mistakes teams make when it comes to spending large sums of money on s occer players. The first mistake is “to spend a lot of money when the soccer player is still young, i.e., to buy on the basis of expectations about the future.” Urrutia draws a parallel with the business world in which this sort of thing happens in the stock market, “especially when there is a boom. You pay a high price because you have expectations about future returns.”
One such example is Gianluigi Buffon, Juventus’ current goalie. When he was purchased, Buffon had little experience, and he was only 23 years old. He had not scored any goals in international matches because, in addition to being a goalie, his team was quite low in the league standings. Nevertheless, Buffon was signed for 54.1 million euros, an exorbitant price for a goalie.
Urrutia says there is a problem with the auction process. “At times, you pay a lot for a young player because you get involved in an auction that, if it is good, makes the player look very tempting to lots of powerful clubs. You may get into the auction trying to buy a forward for five million euros, and you wind up paying 20 [million] because there are so many intermediaries and so many people hide information, so the price begins to go up.” Urrutia notes that the communications media add to the pressure by “making recommendations about which player your team needs, and how your team can prevent a certain player from leaving.”
The second sin is to “sell an internationally famous player for a low price.” The best example is Michael Owen, a Golden Ball winner who was sold by Liverpool to Real Madrid for only 12 million euros. Little more than a year later, his new team [Real Madrid] sold him for 25 million euros.
Urrutia says that “When you sell a player, if the factors that should have a major influence on his price aren’t taken into account, it is because the player wants to leave the team and you have to sell him at a low price because the player’s life cycle is coming to an end.” He suggests that “It is very hard to keep big stars on any team for more than three or four years.” This kind of players “needs new challenges and new surroundings, and you have to understand that fact when you buy or you sell.” If you don’t do a good job managing the player’s departure, “the price drops rapidly because there aren’t a lot of teams where this type of [costly] star can go,” he adds.
A third common error, he says, is “to rush into selling” [a player]. This is what happened with David Beckham, who wanted to leave Manchester apparently because he had confrontations with Sir Alex Ferguson, the club’s trainer. Manchester only received 25 million euros [for Beckham] from Real Madrid, a team that wound up becoming highly profitable because of all the media attraction s urrounding Beckham. Urrutia said that Beckham’s arrival at Real Madrid had “a large impact on the club’s bottom line.”
According to Urrutia, Beckham wound up leaving because he no longer thinks about playing; he focuses on other things. “People will notice his departure. When Manchester sold him, they got 25 million euros, and now Beckham has left, free of charge.” In his view, the situation has been mismanaged. “If you don’t know how to keep a player [on your team], he will leave you in four years.” This also happened with Ronaldo, who was signed by Real Madrid for 45 million euros, and was sold off to A. C. Milan less than s ix years later. Urrutia says that the Milan team “was waiting for him” and “Real Madrid should think about how it managed that sale.”
Fourth, Urrutia advises against revealing that you have enough money to buy a player you want. That’s because “when you have a lot of money, you’re dead when it is time to negotiate.” That happened to Barcelona after the sale of Luis Figo to Madrid for 60 million euros. Having so much money in the bank could have been a factor that sent prices skyrocketing for the signing of Cristanval (17 million euros), Saviola (35.9 million), Petit (15 million), Overmars (40 million), Geovani (21 million), Gerard (24 million) and Alfonso (10.5 million). “The pressure of having received so much money can lead you to act quickly in order to maintain the loyalty of your fans after one of their favorite players has departed,” said Jesús Garcia Pitarch at the Forum.
A fifth common mistake is “not to spend on s couting.” This could lead to paying 50 million euros for a player like Argentina ’s Hernán Crespo, whose value was overestimated. Within just two years, his sales price was cut in half. Currently, says Urrutia, teams are looking for players who are 10 or 11 years old. He believes this approach is not wise because the pressure to make money and win could mean that these players do not wind up winners. “What really makes a player stand out is the emotional component. You don’t get results when you create an artificial climate,” he says. Instead, Urrutia recommends spending more on s tructure, and not as much on players.
The Best Business Model
English teams are the most successful when it comes to the profitability of their business models. Their fans spend a great deal on their teams. Measured by revenues, eight out of the top 10 teams are English.
Spanish teams vary a great deal. The two teams with the highest revenues in Europe are Real Madrid, with 292 million euros, and F.C. Barcelona, with 259 million. The big Spanish teams negotiate their television rights independently from other teams in the country, so the Spanish league as a whole trails far behind other European leagues when it comes to total revenues.
Real Madrid makes only 125 million euros from selling its products. Its other sources of revenue include season tickets, sponsorship fees and television rights. Because TV rights are a form of fixed income, notes Urrutia, a team’s performance on the playing field does not make much difference to its overall revenues. Nevertheless, he says, “many sponsors pay because Beckham is Beckham. When Real Madrid has to renegotiate with sponsors [after Beckham’s departure] we’ll see what winds up happening” with its revenue stream.
