“Nothing is as powerful as an idea whose time has come”
- Victor Hugo
When Victor Hugo first dreamt of the United State of Europe, it might have been nothing more than a utopian dream. Today, it seems to be a logical conclusion. How far apart are the concept of this utopia and realpolitik, how relevant is it to talk of achieving this goal, these are the issues European Union needs to address in order to move out of the Sisyphean challenge it has landed into. EU is ’caught in the middle’, neither can it dissolve without causing significant distress to its member states, nor is it progressing along the path envisaged.
The need for European Union emerged out of the need for lasting peace in the wake of two world wars. The war is still on, but on the economic and political front. And if Europe wants to reclaim the competitive edge it once had, it might be a good idea to fight this war as one entity. European Union has evolved on the ’principle of subsidiarity’, i.e. the EU and its institutions act only if the action is more effective at the EU level than at national level. Today, it would be an exercise in futility for the European states to try and compete with the US and the emerging Asian economies on their own. Individual action is a luxury that few European nations can afford; the writing on the wall seems to point towards an integrated European Union.
In 2002, the Economist estimated Football to be a £150 bn industry worldwide. In England especially it is more than just a spectators' sport, with coverage and acceptance more far-reaching than any other game. It encompasses 7 million participants, 37,500 clubs and 2,000 competitions. According to Deloitte, English soccer has eight teams in the top 20 with a combined revenue of € 3.13 bn. In Deloitte's first report, in 1997, the total was € 1.2 bn.
Choice of Club
Manchester United (ManU) is our choice to study the business model of a football club. ManU is the biggest club in the English Premier League and has many credits to its name. In 1999, Manchester United became the first British club to be crowned world champions, defeating South American side Palmeiras by a single goal. 1998-99 was the most successful season in the club's history as United became the first English team to win The Treble - the league, the FA Cup and the Champions League in the same season. Manchester United has won the premiership league no fewer than 15 times in their history - 8 times in the last 11 seasons.
Club Financials
Last June, shares in Manchester United were de-listed from the London Stock Exchange after the reclusive US billionaire Malcolm Glazer bought the club for £790mn. Manchester United said they earned £46mn in the year ending June 2005. Despite an early exit in this season's lucrative Champions League, Gill said the forecast for 2006 was promising. Manchester United remains the most profitable football club in the world and the largest in terms of global brand revenues. Prior to being de-listed, the company's net operating revenues had risen to £169 mn in year 2004 from £116 mn in 2000. Its EPS had also risen to 7.4 pence in year 2004 from 4.8 pence in 2000.
BUSINESS MODEL AT MANCHESTER UNITED
(Based on an A.T. Kearney football club model)
Revenue-side Model
The revenue-side model for Manchester United like any other club can be looked at from two angles - Sales per Activity and Sales per Geographic Area.
Sales per Activity
The sales activities at Manchester United are pursued at three levels
Ticket & Program Sales (Match-Day revenues)
Broadcasting Television Rights (MU TV)
By-Products (MU Travel, MU Soccer Schools, MU Broadband, MU Now)
(MU NOW is a mobile phone service with Vodafone and other partners including Nike for selling MU merchandise) (See Graph)
Italian clubs like Juventus are able to negotiate individual broadcasting deals, with broadcasters willing to pay huge amounts for the rights of a select few clubs.
Real Madrid commercial success are its shirt sponsorship with Siemens worth an estimated £ 9.5 mn a season, a kit supply deal with Adidas, and a lucrative band of official sponsors including Audi and Pepsi due to the presence of star players like Beckham, Zidane, Ronaldo.
Sales per Geographic Area
Manchester United's core market is the United Kingdom which contributes upto 94% of its revenues whereas the remaining 6% come from other markets. The non-UK market is on the way up due to increasing demand pressures from Far East and South East Asian geographies.
The Cost-side Model
Players Wages
ManU is the highest paying club in UK. Roy Keane was offered weekly wage of £ 1,00,000 (highest in English Premier League) in the 2004 season. The top four players are amongst the ten most highly paid players in EPL.
More recently, the club spent over £ 25 mn on Everton forward Wayne Rooney and Fulham goalkeeper Edwin Van der Sar, including £ 2.2 mn in agents fees. The clubs are constantly on the lookout to acquire world class players. Cost of acquiring a player also include huge commissions to the player's agent.
Transfer Spending
The transfer market became very hot after Roman Abramovich, the 21st richest person in the world according to Forbes, acquired Chelsea club. Manchester United had put in
£ 57 mn in the transfer market. The top five clubs coughed up £ 239 mn in 2004, 44% more than the previous year (See Table).
Premiership football clubs spent a record £ 70 mn in the January transfer window this year despite the inactivity of previously big spending Chelsea who concentrated on loan deals. According to an analysis by Deloitte, more than half of the money spent during the latest window went to overseas clubs. January transfers brought the total amount spent by Premiership clubs in 2005-06 to about £ 300 mn, up from
£ 265 mn in each of the two previous seasons. United have made two new signings during the January transfer window this year as they look to rebuild their squad for the next season. French international Patrice Evra joined ManU from Monaco for £ 5 mn and Serbia and Montenegro defender Nemanja Vidic joined from Spartak Moscow for £ 7 mn.
Manager Wages
Sir Alex Ferguson, the Club Manager, earned £ 4 mn which was the 2nd highest salary in world football in 2004 season.
Merchandising
Nike manages the club's merchandising operation as part of their £ 303 mn, 13-year partnership deal. As part of the deal, Nike runs United's entire merchandising operation through its subsidiary Manchester United Merchandising Limited. Both Nike and United will have benefitted from the sale of more than 2.5 mn United replica shirts with 40% of those sales coming from outside the UK. Vodafone's £ 9 mn-a-year shirt sponsorship deal with ManU was terminated this season. This may provide an opportunity for United to increase sponsorship values further, but the club will want to improve its performance on the pitch. They finished bottom of their Champions League group this year.
Asset Utilization- Stadium Significance
Why are UK football clubs more profitable as compared to their European counterparts? The answer lies in the business models that these clubs follow. English clubs effectively use their stadia capacity whereas the other European clubs depend on their broadcasting revenues, mainly due to sole broadcast rights agreements.
The average attendance is rising in English football stadia especially in English Premier League as indicated by the table. Old Trafford (Manchester United), Highbury (Arsenal) and Stamford Bridge (Chelsea) are the grounds where fans turn out in huge numbers to watch the game.
Since the English Premier League was formed over £ 1.5 bn has been spent by clubs to increase capacities and upgrade facilities. English clubs, in general, own their stadia and can therefore make calculated investment decisions. A significant proportion of stadium ownership in mainland Europe is controlled by the public sector. Hence English clubs, with greater control over what can and can not be done, lead the way. Other European clubs are following suit but the primary dictator of what activity might be the most profitable are the demand and supply conditions in the local market. This is particularly true where clubs are looking to exploit the commercial potential of complementary facilities.
United leads the way in terms of match-day revenue. They generated £ 69 mn in 2004/05 and following the stadium expansion this should grow even further. A high proportion of English clubs like Manchester United manage yield, by categorizing matches according to the likely demand patterns, segmenting the stadium into defined areas and pricing those areas accordingly, and also offering enhanced ticket packages.
A crude measure of a club's ability to generate match day revenue 'annual match day turnover per average spectator' illustrates the differential between English clubs and their continental counterparts.
Business Strategy
The strategy of Manchester United is to convert more fans into business customers and enhance customer value through implementation of CRM tools. For this purpose it has tied up with the technology sponsors Dimension Data. Other strategies include:
ª To seek own routes to market for media rights
ª To deliver branded services to customers through MU TV, MU Now, etc.
ª To have proper mix of home-grown and imported talents
ª Groom players in-house (like Wes Brown and John O'Shea)
ª Acquire players in case of requirement (like Rio Ferdinand and Louis Saha)
Imminent
Malcolm Glazer's acquisition could change the way Manchester United does business. It might just come to be dominated by one man's decisions. If that happens, the above business model would also undergo a change particularly with respect to television rights, relationship between clubs and governing bodies and the role Manchester United can play in the wider community.
Conclusion
Manchester United has produced some legends like Cantona, Sir Ferguson, Keane and Sir Bobby which are now household names in UK. More than a football club, it is a complete entertainment center with four divisions: Football, Merchandising, Catering and Interactive Services. It offers everything right from hotel chains and pubs to conferences and from clothing and other merchandise to financial products like loans, etc.
The acquisition by Glazer may prove dear if he tries to implement the same individual broadcast rights model as other European clubs do. There is an evident danger of affinity overload with more and more products branded with logos and official status. Incidentally, crowd flow has already started falling (table on average attendance above shows fall in 2004-05). Live television is hitting crowds. Globalization strategy has its own limits.
You shell out 200 bucks for a service you are not sure you would like; you drive down 10 km to get there; you have no choice but to pay upfront; you have little or no say in where you want to experience it, or take a break when you want to; the service provider has rigid timings in this day and age when even the post office is operating at convenient hours! I get bemused when they call movie watching at theaters a customer-centric service offering.
Read more: A Marketing Manager's Guide to Enhancing Customer Delight at Movie Theaters
Prof. Wheelan holds a Ph.D. in public policy from the University of Chicago, a Master's in Public Affairs from Princeton University, and a B.A. from Dartmouth College. He has been the Midwest correspondent for The Economist. He has written freelance articles for the Chicago Tribune, The New York Times, The Wall Street Journal, and other publications.
His book, "Naked Economics: Undressing the Dismal Science," was published in 2003. This is what he has to say about his inspiration behind this book - “I've never liked how basic economics is taught - too dry, too mathematical, too detached from the real world. So I set out to write "economics for smart people who never studied economics." That really was our tagline until we realized there were even more people who had studied economics and couldn't remember any of it. Naked Economics was the end product.” His mantra for investors - "Save. Invest. Repeat."
Our Icon for this issue is Dr. Baba Kalyani. Forbes ranks him 22nd among the 40 richest Indians in the world - he heads the $1.5 bn Kalyani Group, one of the leading industrial houses in India, having core businesses in steel and steel based products, forgings and automotive components. Bharat Forge is the flagship company of the group and is the largest exporter of auto components from India and the leading chassis component manufacturer in the world. Boasting of clients like Ford, Volvo and General Motors, Dr. Kalyani's strategy has been crystal clear - capacity expansion at its Pune headquarters and acquisition of small and big companies the world over.
Born into an agricultural family in Maharashtra, Dr. Kalyani always showed a keen interest in the family business. He did his engineering from BITS, Pilani and his masters from Massachusetts Institute of Technology, USA. Team I-Mag spoke to him about various issues about management education as it exists in India today. Following are excerpts from the interview.
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