Real Madrid's shock early exit from the Champions League has raised uncomfortable questions about the unprecedented spending spree launched by president Florentino Perez.
Real Madrid's shock early exit from the Champions League has raised uncomfortable questions about the unprecedented spending spree launched by president Florentino Perez on his return to the club last year.
The Spanish construction magnate spent close to a quarter of a billion euros ($339 million) to lure players including Cristiano Ronaldo and Kaka to the Bernabeu, part of a bid to end Real's five-year Champions League drought and cement their position as the world''s richest club by revenue.
Real's dream of winning a 10th European title at their own stadium in May was shattered on Wednesday by French side Olympique Lyon, a club with just over a quarter of the annual income earned by the La Liga giants.
The latest setback, leaving the domestic league as their only chance of silverware this season, posed a serious threat to Perez's strategy to boost income from marketing and merchandise, in which winning titles was a crucial element, analysts said.
"Champions League success is key because it helps raise the club's international profile," Antonio Martin, director of the Masters programme in Sports Management at the IE Business School in Madrid, said.
"Although Real's brand remains very strong, this year could have been an historic one for them if they had played the final at their own stadium."
Revenue loss
Martin said Real's failure to progress beyond the last 16 of Europe's elite club competition for a sixth consecutive season would squeeze income in numerous ways.
The club would miss out on revenue from the competition itself of around 20 million euros and would earn less from audiovisual rights, marketing, ticketing and products and services linked to matches such as catering.
"More than the financial aspects, it will cause dissatisfaction among the fans and in the squad," he added.
"These concepts don't have a direct economic value but they can have an impact, for example in supporters deciding not to consume some of the Real Madrid 'products'".
Perez, who turned 63 on Monday, returned unopposed to the Real presidency in June and his splurge on players recalled his purchase of "galacticos" David Beckham, Brazilian striker Ronaldo, Figo and Zinedine Zidane during his first term.
Last summer, he spent a record 94 million euros on Portuguese winger Cristiano Ronaldo and another 67 million on Brazilian playmaker Kaka, adding to the club''s debts of around 680 million euros at the end of the 2008-09 season.
He argues that investment in high-profile players will pay for itself over time and is banking on a major boost to revenues from sponsorship and audiovisual rights, sales of licensed merchandise and gate receipts.
International standing
Real retained top spot in the Deloitte Money League for a fifth straight year in the 2010 ranking, with income last season of 401.4 million euros, ahead of European champions Barcelona with 366 million and Manchester United with 327 million.
However, their elimination from the Champions League threatens to knock them off the top spot and arch rivals Barcelona or United could overtake them, according to Jose Maria Gay, a professor of economics and expert on soccer finances at the University of Barcelona.
"It will limit their revenue-earning ability because a club like Real Madrid grows according to their international standing and not by winning the Spanish league," Gay told said.
"A club that wins the Champions League can negotiate better conditions in their commercial contracts, they can earn more from matchday revenue and their brand.
"Real Madrid will miss out on this extra income. If a club is not a winner their options for boosting revenue are limited."
Gay said there was even a danger the club could post a loss as their operating costs of 390 million euros last season would have increased this term, inflated by higher player salaries and amortisation of transfer payments.
"If income does not increase their profit-and-loss account will deteriorate," he said, adding that the club could be forced to sell assets to make up the shortfall.
Instead of spending huge sums to bring in top players, a better strategy might be to devote more resources and effort to bringing players through the youth academy, with whom fans could identify more easily, Gay said.
"The cost of a squad made up of players coming up through the club is always much lower than bringing in high-profile signings, who, let''s not pretend, are like mercenaries.
"It's the patriots who win the wars, not the mercenaries."
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