The purpose of this paper is to evaluate one of the most phenomenal transfers in the football world. The transferred of David Beckham from Manchester United to Real Madrid has becoming the talk of not just football fans but the financial expert for the last 2 years. Unlike most transfers, the David Beckham transfer has revolutionized player transfer in the football world. It became the standing point on how football player is not valued according to their skills on the field but rather on their skills outside the field. The paper will evaluate the cause, the reasons and the effect of the transfer based on both technical and financial aspects.
In order to evaluate the transfer based on its financial aspect, we will use analytical theory of production and competition between firms.
Variable cost satisfies the following formula:
C: variable cost
S: unit price of the product
K: fixed cost
σ: rate of diffusion
r: discount rate
T: duration of the facility
With the formulas above, we try to justify the returns of the football clubs under different environment. From the calculations, we can see the change of revenue for the football clubs between fixed costs at different levels of market size.
David Beckham is an English footballer, widely regarded as the biggest icon in the sport. He currently plays for Real Madrid and he is the captain of England national team. David Beckham is especially noted for the quality of his crossing and the ability to hit free-kicks particularly from long-range and swinging corners. He is also famed for his celebrity lifestyle trappings, media attention and marketing potential. Early on in his career Beckham secured a number of lucrative sponsorship deals including Brylcreem, Adidas, Vodafone (which ended in July 2005) and Diesel. Despite the USA's uneven acceptance of soccer, Beckham's recognition in the USA is strong enough to enable him to appear in print and television advertising for various sponsors, including Gillette razors. He has become more well known in North America since the success of the British film Bend It Like Beckham, about a British Sikh girl who idolizes David Beckham and harbours ambitions of being a football player.
David was born on May 2, 1975 in Leytonstone, London to Ted and Sandra Beckham. David's parents were Manchester United supporters and he accompanied then to many of the games. He signed for Manchester United as a trainee in July 1991 and he was instrumental in helping the club win the FA Youth Cup in May 1992, scoring in the second leg of the final against Crystal Palace. His Premier League debut eventually came at home to Leeds United on April 2, 1995. Partially as a result of injuries to key starters, David established himself in the first team during the 1995/96 season. David's match-winning performances during 1996/97 helped United to win another Premiership title and reach the semi-final of the UEFA Champions League. On a personal level, he was voted Young Player of the Year and second in the overall Player of the Year poll. Manchester United's 1997/98 season was one to forget as they finished second to Arsenal in the League, lost to Barnsley in the FA Cup and were knocked out of the Champions League quarter-finals by Monaco. David enjoyed a memorable moment, when he was selected for England's World Cup Finals squad. He’s been a team member ever since. Beckham captained England for the first time in a friendly match in Italy and retained the armband for the friendly with Spain and the World Cup qualifiers against Albania and Finland, against whom he scored an important goal at Anfield.
Beckham made his 85th appearance for England in 2005 and is expected to captain the team at the 2006 World Cup in Germany. If so, he would become only the sixth England player to represent his country at three World Cup competitions (although Sol Campbell and Michael Owen are expected to achieve this feat at the same time), and the fourth (after Billy Wright, Bobby Moore and Bryan Robson) to captain the team at more than one World Cup. Beckham is also a reasonable candidate to record 100 appearances for his country.
He captained his country for a landmark 50th time in the friendly international against Argentina in November 2005. Beckham is one of only four players to have appeared 100 times in the Champions League.
First reason: David Beckham only had 2 more years contract with Manchester United and under the Bosman rule, every player can sign another contract with another team in the term of 6 months before his contract expired. Because of the clause of the Bosman transfer rule, any club can get David Beckham signature without paying any fee to Manchester United, if David Beckham decide not to sign any new contract within the next one and a half years, Manchester United would lose their biggest asset without getting any returns.
Second reason: David Beckham relationship with his manager was in the midst of trouble. David Beckham popularity has divided his concentration between his job on the field and on the runaway. With having conservative method of running a football club, Sir Alex Ferguson, Manager of Manchester United had concern that David Beckham was not performing as best as he should. Hence arguments had arisen in numbers of occasion.
Third reason: Pepsi and Adidas played a big role in forcing David Beckham to move to Real Madrid. For Pepsi, it would be more profitable for them to have David Beckham to play in Real Madrid because Real Madrid has three other players that have sponsorship deals with Pepsi. But the biggest influence came from Adidas, which is the main sponsor to David Beckham. Manchester Untied is sponsored by Nike, Adidas biggest competition in the industry and Real Madrid is sponsored by Adidas, so it would be so much better for Adidas to have David Beckham to play in Real Madrid instead of Manchester United.
Fourth reason: Manchester United needs more young players in their squad, while the average age of their rosters has reach 30 years old, Manchester United needs to find another potential young player to maintain their reputation, the sale of David Beckham would bring the necessary capital for the investment.
Real Madrid is a very successful club with champion’s reputation at their back, their starting lineup is filled with star players, hence their advantage was also their biggest weakness. With many star players in their team, Real Madrid has a high fixed cost in their operation, but most of their star players are not very commercial. Majority of the players are just big names within the industry or in the European market. Real didn’t have any network in the Asian and North American market at the time. With football to be the number one sport in Asia, Real Madrid was missing majority of the action. As a result in 2002/03 season, Real Madrid only spotted themselves the 8th on the list of the richest club in the world.
Real Madrid needed to find a player who would pioneer their marketing strategy to the whole world. They are not only looking for someone who can bring sponsors to their stadium, and not just a poster boy for the campaign, but also has the skills to show in the field. This is the ultimate reason why Real Madrid was very determined to get Beckham.
The effects of David Beckham to Real Madrid
Real Madrid's revenue from club merchandise, such as shirts, jumped 67 per cent in Beckham's first season alone, and climbed another 6.5 per cent in the year to June. Overall commercial income, which includes money from deals with the likes of Siemens, Adidas and Pepsi, which have all grown in value with the "Beckham effect", now stands at around £80m a year. Real Madrid also earned £48m (26 per cent of turnover) from match-day income (primarily ticket sales), £44m (24 per cent) from television, and £16m (8 per cent) from promotional activities such as lucrative overseas tours and friendliness, which have also become better earners because of David Beckham. And whereas Real Madrid's annual wage bill (£98m) now equates to 52 per cent of turnover, and is falling towards an expected ratio of 47 per cent next year.
With the financial improvement, Real Madrid is now the richest club in the world, beating Manchester United who won the title 8th consecutive years.
2005 Football clubs revenue ranks1:
1 Real Madrid (Spain) $330 million
Manchester United was No. 1 when it had David Beckham. Now Real Madrid has him and became No. 1.
2 Manchester United (England) $295 million Slips out of the top spot for the first time in the nine-year history of the rankings.
3 AC Milan (Italy) $280 million Nearly 60 percent, or $165 million, of its revenue is from broadcasting – more than anyone else.
4 Juventus (Italy) $274 million Averages only 26,600 fans but moves up from No. 5 last year thanks to a lucrative TV contract.
5 Chelsea (England) $264 million Its otherworldly payroll makes it No. 1 in annual net losses, which reportedly were $244 million.
Evaluating the transfer
In determining the justification for the transfer, we use the analytical theory to prove that even though Real Madrid paid a large sum of transfer fee and obligated to pay a high salary to David Beckham, the acquisition would profit Real Madrid more because the larger market size that David Beckham can open for Real Madrid.
To make the calculation to be accurate as possible, we had made some assumptions for the numbers used in the calculation. Reader should keep in mind that because Real Madrid is a private organization, it is very hard to find the actual data about their current and past financial statements. Nevertheless, we did our best to present the numbers as it would present the actual case scenario.
Fixed cost (K), because we do not have the actual numbers for the fixed operation cost from Real Madrid, we use the assumption that fixed cost would be equal to the salary of the players. We know that there are other things that contribute to the clubs fixed cost but for the sake of the formulation we are ignoring that. The fixed cost increased from $98 million to approximately $117 million because of David Beckham.
Discount rate (R), according to our research, the closest number that we found for the discount rate during that time in Spain, was the checking account interest rate, provided by the banks in Spain. Hence we use this number as our discount rate.
Term of project (T), David Beckham was 28years old when Real Madrid bought him from Manchester United, using the assumptions that most football players can play until the age of 34 years old, we use the length of project to be 6 years.
Uncertainty rate (sigma), if Real Madrid did not buy David Beckham, they would have an uncertainty rate of 50%, that is they either succeed or not. With David Beckham on their squad, they have bigger uncertainty because they have to add the possibility that will David Beckham can work together with his teammates and produce something positive for the team or will he have some problems in adjusting to the new Spanish strategy. From the marketing strategy, they would also be concern that if David Beckham’s fans would still like him in Real Madrid jersey.
The value of product (S), we used the assumption that major football clubs would want to have a success in both the domestic and international competition but as an organization major football clubs also want to bring profit for their business. Because of these factors we concluded that the value of S should be 2 instead of 1.
Market size, we use the assumption that Real Madrid previous market size which is the European market to be 100 and the new potential market involving the Asian and North American market would be 145. The 45% increase due to that in North America, football is not that popular, North American people would prefer to watch and buy basketball, American football, baseball or hockey. For the Asian market, the increase of market size would come from people that buy the merchandise, there is a little chance that they would come to the actual game.
Analysis & Conclusion
From the calculation, it proved that bringing David Beckham to Real Madrid squad was a positive move. The transfer has solved Real Madrid’s problem of having high fixed cost and low returns. David Beckham has managed to open the Asian and North American market for Real Madrid to expand, hence now Real Madrid with high fixed cost on their organization can work and do business more efficiently in larger market size environment.
With the emerging of internet and globalization, major sports clubs have tried to improve their business strategy by purchasing international players that can open more potentials market for their business. Another example besides David Beckham is the Chinese International Basketball Player, Yao Ming. Yao Ming was purchased by the Houston Rockets Basketball Club in US. With the help of Yao Ming, NBA (National Basketball Association of America) and Houston Rockets have managed to gain substantial market in the Asia. NBA opened merchandise stores all over Asia and has extradition match between American Basketball Club and the Chinese Basketball Clubs. Their website subscriber, www.NBA.com, has increase significantly during the past 2 years. With major website subscriber coming from the Asian market, it is only for certain that the expansion program will continue with other Asian basketball players coming to the NBA. In baseball, The Seattle Mariners imitated the strategy by purchasing a Japanese National Baseball player, Ichiro. Ichiro is now a market symbol for the major league of baseball, tourist flow from Japan has increased significantly to Seattle. American baseball has gain more popularity because of Ichiro. Ichiro merchandise is one of the top selling merchandise in the league.
The main reason for this trend among major sport clubs is the revenue coming from the selling of merchandise and television broadcast license. With the improve technology and internet, fans in other parts of the world can watch their favorite player and club match through website and live television broadcast. The distance and time factors have been eliminated by the technology, hence potential customer is closer in today time. Another factor for the trend is the sponsorship revenue coming from companies that want to put their brand on the team’s jersey. With sponsoring a sport club, major companies can make brand recognition by associating their brand to a specific sport clubs or players. The better the clubs perform, the better publication that the sponsor company will achieve. The last reason is the revenue coming from exhibition games. An exhibition game is when a sport clubs have a friendly match with other sport club from different country. Higher fee has to be paid to attract famous clubs to come to do exhibition match.
Today sport industry is not just about winning a game but also about how much money the games will generate for the clubs, the revenue and reputation are the two main factors that influence the livelihood of a sport club. The higher the fixed cost, the more necessary for club to find a player that can open bigger potential market.
Chen, J. 2005. The Physical Foundation of Economics: An Analytical Thermodynamic Theory. World Scientific, Singapore.