.

Manchester United: What’s the value of this world-wide brand?

Introduction

Manchester United has set the standard for financial success in world football. At a time where money plays a pivotal role in athletic success for football clubs, due to the sky rocketing player wages and spiraling transfer prices, the way a club manages its finances will determine how successful a club is on many levels. A key ingredient of a successful strategy in modern soccer rests on the ability to structure the club as a company that sees itself as a content provider. How did Manchester United strive above other soccer clubs in the world to become one of the world’s most successful sporting brands? And what is the value of the Manchester United brand?

The Roots of Manchester United

Manchester United (“ManUnited” as the fans like to call it) was founded in 1878 by workers of the Lancashire railway company. At the beginning, the club struggled to survive, and in 1902 it nearly went bankrupt, and had to be saved by a last minute intervention of a local businessman that kept the club alive. The history of the club is full of successes, especially in the 1950’s, the 1960’s and the 1990’s, but also of moments of doubt and failure. Today, the club remains the best-supported club in England. Its venue, , comfortably seats nearly 70,000 people. The stadium, which has been renovated and modernized in the 1990’s, is a symbol for a football club and none is better than Old Trafford, also known as the “Theatre of Dreams”. This name was given by perhaps the greatest player who ever wore the Manchester United uniform, Sir Bobby Charlton. The new stadium was part of the whole remodeling experienced by the club during the 1990s. When took over as manager of the team in 1986, he began a new era for Manchester United. He took the club back up to the British First Division and won the inaugural season of the in 1993. Since Ferguson’s takeover, ManUnited has had much success on the field, becoming the most respected club in England and maybe even the world. Table 1 shows the football club’s honors throughout its centenary history.

This case was written by Antonio S. Mello, Lourenço Sampaio e Mello and Rasti Martos at the University of Wisconsin - Madison as a basis for class discussion. Copyright © 2006 by Antonio S. Mello. All rights reserved. To request permission to use and reproduce materials, e-mail to [email protected]. 1 Table 1 – Manchester United Football Club Honors European Champions Clubs Cup 1968,1999 European Cup Winners Cup 1991 FA Premier League 1993, 1994, 1996, 1997, 1999, 2000, 2001, 2003 Football League Division One 1908, 1911, 1952, 1956, 1957, 1965, 1967 FA Challenge Cup 1909, 1948, 1963, 1977, 1983, 1985, 1990, 1994, 1996, 1999 Football League Cup 1992, 2006 Intercontinental Cup 1999 UEFA Super Cup 1991 FA Charity Shield 1908, 1911, 1952, 1956, 1957, 1965, 1967, 1977, 1983, 1990, 1993, 1994, 1996, 1997

Origins of the Profit

The turnover that Manchester United makes does not only come from matchday earnings from Old Trafford or from the media, it also comes from a great amount of commercial activities and from sponsors. From 1993 to 2003, Manchester United’s revenue increased from £25.2 million and £4.2 million pre-tax profit to a staggering £173 million and £39.3 million of pre-tax profit. Most of this turnover comes from matchday, which represents earnings of 41%, as opposed to the 32% of media and 27% of commercials. Since 41% of the earnings come from match day receipts, it illustrates that success on the field is vital to keep the fans interested. Old Trafford fills up regularly, but it makes it much easier for the fans to stay interested if the club is performing well on the playing pitch. Especially important to the club are the Champions League games (see page 6), where not only each game is important due to the nature of the competition, which includes the best clubs across Europe, but also because the tickets are more expensive and the prizes are high. Playing well in Europe is also critical to promote the name of the club cross borders.

Manchester United saw a 20 per cent drop in operating profit from £58.3m to £46m for the 11 months to 30 June 2005 from 2004. Group turnover fell from £169m to £157.2m, and pre-tax profits fell from £28m to £10.7m. Media revenues fell with the club's share of Champions League television money falling by £7.7m and BSkyB revenue falling by £7.5m (Table 2). Financial results are unlikely to improve this season after the club failed to make the knockout stage of the Champions' League. However, Chief Executive David Gill does not predict profits over £50m in 2005.

Table 2 – Breakdown of Manchester United turnover 1997-2005 1997 2001 2002 2003 2004 2005 £ m % £ m % £ m % £ m % £ m % £ m % Matchday 30.1 34 51.8 40 56.3 38 70.6 41 61.2 36 66.2 42 Media 12.5 14 31.2 24 51.9 36 56.2 32 62.5 37 48.4 31 Commercial 45.3 52 46.6 36 37.9 26 46.2 27 45.3 27 42.4 27 Total 87.9 100 129.6 100 146.1 100 173.0 100 169.0 100 157.1 100 *Source-Manchester United Annual Reports (1997-2005)

2 Matchday

Table 3 shows matchday receipts, which have grown rapidly in 2003. This is mostly because since then Old Trafford has been remodeled and increased to a seating capacity of 67,700, at a price of £150 million. Due to the fact that Manchester United games regularly sell out, this adds up to an enormous increase in matchday ticket receipts. The seating capacity for Old Trafford also has a great impact because of other events as well. Its colossal seating capacity allows the venue to be host to many rock concerts, international matches, FA Cup semi-finals or finals, and or special football events, such as the 2003 UEFA Champions League final match. Overall, the matchday receipts for Old Trafford in 2003 amounted to £70.2 million. Old Trafford is currently going through an addition of 8,000 extra seats, which will be available from the end of 2007, and this is expected to boost revenues by about £2m a game. The price of expanding Old Trafford is estimated to be paid off in a span between 2.5 and 3 years.

Table 3 – Tickets Sold by Type/Matchday Receipts 2003 Number of Seats Price range (inc VAT) Season tickets Standard 41,000 £437-513 Executive/Box 5,500 £1,088-4,000 Match Day Receipts Visiting club 3,000 £21 Hospitality Packages 1,700 £55-150 Sponsor/complimentary 1,000 NA Other (members) 14,500 £18-27 Total 66,700 *Source – UBS Warburg *Includes all home games but excludes 1000 tickets for promotional purposes.

Executive Boxes sell at a higher premium than regular tickets and generate an estimated £12.5 million of revenue for the club. These tickets are good for all home league matches to be viewed. Furthermore, Manchester United games held at Old Trafford sell very early, and about 50% of all tickets are executive boxes or season ticket holders. This means around half of the money for home games comes in before the season even starts. This creates a cash reservoir that Manchester United can use in order to manage the financial situation much more at ease. In addition, Manchester United has excellent conditions for its fans and fantastic catering facilities. The club prepares about 100,000 meals per match day, which generates close to £4 million in revenue, not to mention on non-match days where the catering facilities are available that generate another £3 million in revenue per year.

Table 4 – Top 30 English Football Clubs by Attendance - Seasons 2002/03 to 2004/05 Club Average 04/05 Average 03/04 Average 02/03 Manchester United 67,750 67,640 67,602 Newcastle United 51,845 51,965 51,923 Manchester City 45,190 46,835 34,565 42,585 42,705 43,243 Chelsea 41,870 41,235 39,784 3 Arsenal♣ 37,980 38,080 38,042 Aston Villa 37,355 36,625 34,975 Everton 36,835 38,835 38,491 Tottenham Hotspur 35,925 34,875 35,897 Middlesbrough 32,010 30,400 31,025 Southampton 30,610 31,700 30,680 Leeds United 29,205 36,665 39,120 Sunderland 28,820 27,120 39,698 Birmingham City 28,760 29,075 28,831 West Ham United 27,405 31,165 34,432 Wolverhampton Wanderers 26,620 28,875 25,745 Charlton Athletic 26,405 26,295 26,256 Bolton Wanderers 26,005 26,795 25,017 West Bromwich Albion 25,985 24,765 26,731 Ipswich Town 25,650 24,520 25,455 Derby County 25,220 22,330 25,470 Norwich City 24,350 18,989 20,353 Leicester City 24,135 30,985 29,242 Crystal Palace 24,105 17,345 16,867 Nottingham Forest 23,565 24,750 24,437 Sheffield Wednesday 23,100 22,335 20,327 Blackburn Rovers 22,315 24,375 26,226 Portsmouth 20,070 20,110 18,934 Fulham 19,835 16,340 16,707 Sheffield United 19,595 21,645 18,069 * Domestic league matches only ♣ Arsenal will have a 60,000 capacity Stadium from 06/07 season * Source – footballeconomy.com

Media

Media plays a significant role in the generation of revenues for Manchester United. This is a combination of domestic revenues for the Premier League through BSkyB and a share of television revenues based on a club’s performance in other competitions such as UEFA Champions League and FA Cup.

The English Premier League On the domestic level, Manchester United plays in the English Premier League, which is the most competitive league in the entire world. The English Premier League consists of 20 teams who play each other twice each year, one home match and one away match. At the end of the 38 games played by each team, a champion is crowned and the four top spots usually have a shot at playing in the UEFA Champions League. The last three teams at the end of the Premier League table are relegated down to the second division, which sends up the top three teams to the Premier League. The Premier League is one of the best leagues in the world because every team is competitive regardless of their position in the table- everybody plays to win, at home or away. The winner of this

4 competition gets money from the English Football Association (FA) for their achievements on the field.

BSkyB and Manchester United Television has changed the game of football because it allows fans to be up-close with the team without going to the stadium every week. The British broadcasting giant BSkyB buys out the right to show Manchester United games on television and in doing so increases the total revenue of the football club. BSkyB buys the rights to televise these Premier League games, which then can be resold to many international broadcasting companies. For example, in the United States, BSkyB sells the games to Fox, which then plays them in one of its own channels, Fox Soccer Channel. In return for selling the rights to televise the games internationally, BSkyB makes a great deal of money, in addition to foreign channels, for example, Fox Soccer Channel, broadcasting Sky Sports News on a daily basis (Table 5). Because it is very hard to get tickets to see a football match live at Old Trafford and other Premier League venues due to excess demand, BSkyB agrees to pay the football clubs more each year, simply because every year more and more people all over the world watch soccer and have no choice but to turn to television to follow the clubs.

Table 5 – BSkyB revenue to Premier League 1996-2004E £Million 1996 1997 1998 1999 2000 2001 2002E 2003E 2004E Revenue 39.5 89.5 135 145 160 180 330 355 405 *Source-BSkyB

Table 6 – Television Receipts 1988-2004E

60

50

40

30 £million 20

10

0 1988 1991 1994 1997 2000 2003E

Television revenues offer the most attractive long-term growth for the industry. As shown in Table 6, television has had a constant annual increase in compound growth. In 2003, BSkyB agreed to a £1.024bn deal with the Premier League to screen a record 138 live matches a season until 2007, and paid a further £60m for the rights to screen all the remaining matches on a delayed basis. It is anticipated that any future deals beyond 2007 will be similar in structure and annual payouts. Fees are based on the number of times a team is shown in a season. It is anticipated that future broadcast revenues will be similar to the last two contracts.

5 UEFA Champions League The premier club football tournament in the world is the UEFA Champions League. This competition is prestigious not only for its sporting stature, but for the prize money available as well. To enter in this prestigious club competition from the Premier League, a team must finish in the top four places. The Champions League unites the best teams from each European national league and makes it a separate annual European tournament, so by winning this competition, one may consider itself a European champion. Due to the different levels of competition among domestic leagues in Europe, the UEFA Champions League committee decided to make it fair for the more competitive leagues such as the Premier League in England, La Liga in Spain, and El Calcio in Italy. Points are awarded to each specific league by UEFA according to how the teams in those leagues performed in prior Champions Leagues. The amount of points each national league has, determines the number of teams from that league that play in the Champions League. This tournament of European domestic champions is also a very good source of money for participating clubs. On average, a team who consistently gets to the quarter-finals will have close to 50% of its total income come from Champions League play. Manchester United is one of the few clubs that is constantly in the later phases of the Champions League. In 2003, the club made it to its seventh consecutive quarter-final elimination, which was a record for all clubs. As a club reaches the later stages of the tournament, the prize money earned increases substantially. For example, in 2002, Manchester United reached the semi-final of the competition. The money earned contributed to nearly 76% of the club’s total operating profit. Furthermore, if a club gets past the initial group stage of the Champions League, it earns €3 million (£2.1 million), if it wins the quarter-final matches, or the semi-final matches, the team earns €4 million (£2.7 million) and €5 million (£3.4 million), respectively. For clubs that reach the championship match, the winner gets €10 million (£6.9 million), while the team defeated earns €6 million (£4.2 million). These numbers make it easy to understand why sportive success is the best stream of revenue for European clubs, especially in competitions sponsored by UEFA, such as the Champions League.

Table 7 – Manchester United UEFA Revenues Year Total Operating Operating Profit Champions League Profit £millions from UEFA as a % of total Champions League operating profit £millions 2003 50.0 22.3 44.6 2002 33.9 25.7 75.8 2001 31.7 19.2 60.6 2000 30.1 16.9 56.1 1999 32.3 8.8 27.2 *Source- Manchester United Annual Reports (1999-2003)

As shown in Table 7, sportive success in the UEFA Champions League has been crucial for the financial development of Manchester United. Table 8 shows the European Champions League revenues in a complex formula, showing the ratio of winnings dependent on different results.

6 Table 8 – European Champions League Result Revenues CHF million Win Draw Lose Total Participation 2.5 Stage 1 1.0 0.8 0.5 4.8 Stage 2 1.0 0.8 0.5 3.0 QF 4.0 4.0 4.0 0.0 SF 5.0 5.0 5.0 0.0 F 10.0 6.0 0.0 Prize Money 9.3 TV Pool Fixed 29 9.0 Performance 29 7.2 Total 58 16.2 Champions 25.5 League total Euro total £m 10.6 * Source – UBS Warburg. CHF stands for Swiss Francs.

In the season 2005-06, for the first time since the mid 1990s, Manchester United failed to qualify for the knock rounds of the tournament. As ManUnited did not get out of their group, it did not get the £1.1 million bonus given by UEFA to the last sixteen in the competition, nor will Old Trafford host any more lucrative clashes with European clubs during the season, which will impact on gate receipts. ManUnited will also earn less of the pool money allocated to participating clubs. Should United not qualify for the 2006- 07 Champions League, it would cost the club something in the region of £10 million. There is a risk of ManUnited's decline becoming a vicious cycle. Stars could go elsewhere, and so could millions of ManUnited's foreign followers, taking their money with them to clubs such as Chelsea, Barcelona, Real Madrid or AC Milan.

The FA Cup The FA Cup is a knock out cup competition where all professional soccer clubs in England compete. The FA Cup provides an additional revenue source in terms of match day receipts, broadcast revenue and performance bonuses (Table 10). The winners of the competition enter the UEFA Cup the following season, a pan-European knock out club competition, different from the Champions League.

Table 9 – English FA Cup Prize Money - 2003/04 Stage of Competition No. of Clubs Prize Money 2003/04 Winners 1 £2,000,000 Runner-Up 1 £1,000,000 Sixth Round Proper Winners 4 £400,000 Fifth Round Proper Winners 8 £150,000 Fourth Round Proper Winners 16 £75,000 Third Round Proper Winners 32 £50,000 * Source – footballeconomy.com

7 Commercial

Sponsorship and Merchandizing Manchester United is considered to be one of the strongest clubs in terms of sponsorship revenues, with shirt manufacturer and shirt sponsorship being the lead sponsors (Table 10). Vodafone’s shirt sponsorship, which is finishing at the end of the 2006 season, is currently worth £9.4m per annum. On April 6, 2006, Man United sealed the biggest shirt sponsorship deal in the English football when it signed a ₤56.5 ($98) million four-year contract with American International Group (AIG), a US insurance company. The deal is seen as key to United as they look to bolster their squad to help them challenge for domestic and European honors1.

In 2002, Nike displaced the U.K.'s Umbro as United's uniforms manufacturer sponsor and merchandising partner. This record-breaking 13 year deal worth as much as £303 million requires the club to stay in the Premier League and in some form of European competition, preferably the UEFA Champions League. Nike has taken complete control of Manchester United’s merchandizing arm which is performance related. The thirteen year contract has a break clause that could be invoked at the end of the 2007-08 season if Manchester United fails to qualify for the Champions League. The contract is the largest commercial one that United has and accounts for 12 per cent of the club's turnover.

Platinum sponsors including PepsiCo and Anheuser-Busch pay the club up to £1 million per year for four years. United has also worked with PepsiCo on joint promotions in Southeast Asia, and with Anheuser-Busch, whose Budweiser has replaced Carling as the club's official beer. These key sponsors not only get to be exclusive providers to Manchester United within its stadium, but hope to leverage the value of the Manchester United brand with its fan base. The current platinum sponsors are: Vodafone, Nike, Centaury Radio (a Manchester radio station), Budweiser, Ladbrooks (a British betting company), Fuji Film (a imaging company), Pepsi, Schick (a male grooming company), Audi and Air Asia.

Table 10 - Practical Commercial Income Analysis - ManUnited 11 months ending 12 months ending 30-Jun-05 31-Jul-04 - Shirt sponsorship (Vodaphone) 9.4 million 9.4 million - Merchandising Deal (Nike) n/a 20.8 million - Champions League Money down 7.7m - BSkyB Money down 7.5m - Platinum Sponsors (8) 1 million 1 million each - Credit Card 125,000 users

Museum Visits per annum 200,000 * Source: Manchester United Annual Report 2004/05

1 http://news.bbc.co.uk/2/hi/business/4882640.stm 8 ManUnited operates a museum on the premises of Old Trafford since 1986. During the last fiscal year, the museum was visited by thousands of people who paid ₤9.50 (adult), ₤6.50 (discount), or ₤27 (family ticket) for the visit and tour of the stadium2.

In addition, Manchester United operates its ManUnited Soccer Schools in the United Kingdom and worldwide. It plans to run 39 2-day camps in various locations across UK. The club charges ₤29 or ₤49 for a 1 or 2 days, respectively. ManUnited will hold four team, two goalkeepers, and one girls-only residential camp in 2006. The cost of these training camps ranges between ₤399 and ₤495 per player3. Also, ManUnited Soccer Schools conducted its first camp tour of the United States in 2004. It attracted over 600 youngsters to attend its training camps. The soccer schools may not only help in popularizing ManUnited worldwide, but also generate an additional source of revenue for the club. Finally, as can be seen in Table 11, shirt sponsorship rights are an important means of generating commercial revenue.

Table 11 – English Premier League Clubs Shirt Sponsors - 2004/05 Club Sponsor (sector) £m per Year Expiry Date Arsenal O2 (telecoms) 5.0 May 2005 Aston Villa DWS (finance) 2.5 May 2005 Birmingham City FlyBe (airline) 0.75 May 2005 Blackburn Rovers HAS (insurance) 1.0 May 2005 Bolton Wanderers Reebok (sportswear) 2.0 May 2005 Charlton Athletic All:sports (sports retailer) 1.1 May 2005 Chelsea Emirates (airline) 6.0 May 2005 Crystal Palace Churchill (insurance) 0.30 May 2006 Everton Chang Beer (brewing) 1.5 May 2005 Fulham Dabs.com (electronics) 2.0 July 2005 Liverpool Carlsberg (brewing) 5.0 May 2005 Manchester City Thomas Cook (travel) 1.0 Feb 2007 ManchesterUtd Vodafone (telecoms) 9.4 May 2008 Middlesbrough 888.com (gaming / internet) 1.5 May 2007 Newcastle United Northern Rock (finance) 4.0 May 2006 Norwich City Proton / Lotus (automobiles) 0.35 May 2006 Portsmouth ty (toys) 0.33 May 2005 Southampton Friends Provident (finance) 0.5 May 2006 Tottenham Hotspur Thomson (travel) 2.5 May 2005 West Brom Albion T-Mobile (telecoms) 1.0 May 2006

For 2005/06: Arsenal change to Emirates (£5.5m p.a.), Chelsea change to Samsung (£11.0m p.a.), Fulham change to PIPEX (£1.25m p.a.) * Source – footballeconomy.com

2 Source: http://www.manutd.com/oldtrafford/museum.sps?iType=491&icustompageid=1101 3 Source: www.manutdsoccerschools.com 9 Manchester United Overseas Manchester United has enjoyed much sportive success in Europe, but its largest marketing brand success has come overseas in Asia, Australia and most recently North America. Football, as a sport, is growing rapidly in these markets, and Manchester United made a serious effort to spread its brand all over the world. YankeeNets is a company that owns professional sports teams in the United States that owns the New York Yankees, New Jersey Devils and the New Jersey Nets. In 2001, YankeeNets and Manchester United agreed to market their respective products in the opposite continents. This meant that wherever the Yankees sold their products, they would sell the popular Manchester United replica kit. In turn, Manchester United would aid the New York Yankees in selling the American products. The resources of YankeeNets, and particularly the popularity and regular success of the New York Yankees, should ensure that Manchester United will soon have a much stronger presence in North America. Moreover, YankeeNets will open up football camps for Manchester United when the team comes to the United States during their summer training. There was some speculation whether this was beneficial to the Manchester club, but the sales of Manchester United products in North America has been steady on the positive side.

Manchester United realizes more revenue from fans in Asia (£16.6) than in the United Kingdom and Ireland (£11.1). Approximately 90% of the merchandising business comes out of the United Kingdom. This just shows that there is a lot of room for branding elsewhere other than the United Kingdom. Manchester United took advantage of this marketing potential and decided to do their pre-season tours in Asia along with other European giants such as Real Madrid and Barcelona.

Another example of the impact of international tours can be seen with Spanish giant Real Madrid who has also increased revenues over the past five years from international tours, particularly to Asia. In 2004/05, revenue from international tours and friendly matches totaled €22.9m (£15.5m), driven mainly by a pre-season tour to China, Japan and Thailand.4

Long Term Process

Alex Ferguson was hired as the manager of Manchester United in 1986, when the club was going through a sportive crisis. One of the first things Ferguson did was to set up a youth academy to develop the best young players in the UK. Although this academy has not been cheap for Manchester United (£10 million in 2004), it has certainly paid off. Players such as , , , , Nicky Butt and were all fruit of this creative and intelligent system. All of these players came through the academy and played together since a very young age. In addition, they all reached the first team at around the same time, which made it much easier for Alex Ferguson to work with due to their familiarity of playing together. The youth academy paid off with on-field success such as five league titles between 1993 and 2003 as well as the 1999 UEFA Champions League. Winning these competitions was very important on many levels. Not only did the club win a considerable amount of money directly for

4 Football Money League 2006 - Deloitte 10 winning these titles, but it also gained popularity in the UK, all of Europe and the rest of the world. With this generation of players Manchester United was able to turn itself into the most popular club in the entire world during the 1990’s.

The on-field success has been imperative to a huge cash injection in the clubs funds, and its off-field effects were also noticeable. All these players had proven themselves in one of the most competitive leagues in the world (the Premier League), which inflated their value significantly. With new generations of players already lined up coming from the academy, some of the players from the first generation were ready to be sold for a healthy amount of money. This caused Manchester United to earn more money over recent years, and hopefully with new generations of players for more decades to come.

In addition to the players that came from its youth academy, ManUnited also has big name signings (Van Nisteltroy, , Cristiano Ronaldo). In 2004, Manchester United invested £57.3m in acquiring players, with Wayne Rooney accounting for £27million of this. This amount was up from £28.7m in 2003. Currently, the club has a total wage bill of ₤77m (Table 12). Additional financial information is available in Exhibits 1 and 2.

Table 12

* Source – Manchester United Annual Report 2004/05

“One United”

Manchester United is one of the best-supported clubs in the world with an estimated 50 million fans from the entire world. Although Old Trafford is one of the biggest venues for any sporting team, it still can only hold a small portion of the Manchester United fans. In 2003, “One United” was designed so that the 40 million fans that cannot make it to Old Trafford on a regular basis were as committed and involved as the ones who can. It is a program developed by Manchester United that allows anyone who desires to become a Manchester United official fan to do so by becoming a “One United” member through the internet. This has been a huge financial development for Manchester United, because it allows the fans that are not directly in contact with the club to generate additional revenue for Manchester United. To become a member, an adult person has to pay ₤26

11 while a youth membership costs ₤16 per season5. Six months after its opening, “One United” already had around 125,000 members injecting money into Manchester United.

Manchester United in the Stock Market: The Glazer Effect

Malcolm Glazer, an American tycoon who owns the Tampa Bay Buccaneer American football franchise, took charge of Manchester United in 2005 when he bought 75.7% of the club shares in a takeover offer. According to the bylaws of the club, Glazer needed at least 75% of the equity capital to be considered the owner of Manchester United. In May 2005 when he had 74.2% and bought 1.5% more shares to get to where it stands today. Many Manchester United fans deeply resent the fact that Malcolm Glazer is the new owner, because they believe he is only interested in leveraging the business side of Manchester United, instead of focusing on both the legend and the football aspects of the club. This is because Glazer has never had any contact with the sport, and is totally ignorant about Manchester United’ fans deep feelings for the club and its history. To many, this can be very detrimental to the club, because Glazer has leveraged the acquisition to the top, which could drive the club into bankruptcy, and his only interests are in the return from the venture.

Table 13 – Manchester United Revenue and Net Profit in £ million Year 2005 2004 2003 2002 2001 Net Operating Revenues 169.1 173 146.1 129.57 116.01 Net Profit 19.42 29.78 25 14.94 11.95 Earnings per share in pence 7.4 11.5 9.6 5.8 4.6 * Source - BBC Sports online

Notice in Table 13 that the total profit in the club has decreased significantly since Malcolm Glazer’s takeover in 2005, as well as the earnings of each individual share.

Different Approaches to Branding

Team Based Manchester United takes the approach that the club’s brand name is bigger than any one individual player. In this regard Manchester United is taking a more traditional approach to leveraging its brand than Real Madrid or Chelsea. The advantage of this approach is that it ensures that the manager can select the best team without having to be concerned about merchandising/commercial ramifications from fans following a particular star player. Thus, Manchester United can continue to thrive when players are sold. This brand management approach will work as long as a club is successful on the pitch, but is difficult to sustain in the long term if a club fails to achieve top performances.

Celebrity Driven Real Madrid has decided to focus on recruiting players, such as Beckham, Zidane, Figo and Ronaldo, emphasizing the marketing of individual players and hoping that this will impact on the overall brand of the club. This has been a catalyst for substantial growth in

5 http://www.manutd.com/oneunited/oneunited.sps?icustompageid=11283&itype=7279 12 merchandising and licensing revenues from Real’s worldwide fan base. The strategy has helped in both 2004 and 2005 with pre-season tours of Asia, generating nearly €6million per annum, building its support base and receiving lucrative appearance fees for matches in China, Japan and Thailand.

The Madrid approach has been to reduce its debt, attract big name signings and treat football as content – through international licensing, image rights and merchandising and sponsorship deals. The approach as been criticized by some Spanish media, as Santiago Segurola said “Its player focus is the product of a commercial idea that has relegated the actual sport to a secondary role. Real Madrid spends enormous sums of money signing up stars, but they do not make a team. They are, rather, a disappointing mosaic, with some players in their twilight years and others included solely for their commercial appeal”.

As an example of the careful management of individual players branding, the announcement of the signing of David Beckham for €35m from Manchester United was timed so that it would make the primetime broadcast news in Asia, a place where Beckham is very popular. On that day Real Madrid sold over 8,000 Beckham tee-shirts at €62-€68. The obvious downsides to this approach is the difficulty of managing a locker room full of prima donas, and how to dispose of financially lucrative players when they are not performing on the pitch.

Sport Markt, a German consulting company, estimates that Madrid has 258 million fans world wide, which has allowed it to enter into multiple content distribution deals and the opportunity to leverage its brand globally.

Impact on United Should Manchester United continue to have seasons similar to the last couple of years, and it risks that fans lose interests in the club, especially foreign followers. Fans in Shanghai are not necessarily aware that Manchester is an English city and their attachment to the club is based on its ongoing success. The consultancy FutureBrand has estimated that 30 per cent of non-European supporters follow a team because of certain players and the excitement of watching them playing together at high level competitions. United's money-raising tour of the Far East in the summer of 2004 was played out to surprisingly small crowds. Manchester United officially ceased to be the world's richest club, after eight years on top, when Real Madrid reported its annual income had risen to €275.7m, driven largely by income from sponsors and merchandise (Table 14).

13 Table 14 – Total Revenues 2004/05 (Euro Millions)

Lazio 83.1 Valencia 84.6 Everton 88.8 Manchester City 90.1 Celtic 92.7 Lyonnais 92.9 Schalke 04 97.4 Tottenham 104.5 Newcastle 128.9 AS Roma 131.8 Arsenal 171.3 177.2 Liverpool 181.2 Bayern Munich 189.5 FC Barcelona 207.9 Chelsea 220.8 Juventus 229.4 AC Milan 234.0 Manchester United 246.4 Real Madrid 275.7

0 50 100 150 200 250 300

* Source – Deloitte Football Money League (February 2006)

Competition

Manchester United faces competition from a handful of other domestic clubs and large international clubs. Domestically, there are a few clubs who vie for new supporters, generally children, who will base loyalties on location or club success and will remain supporting the club for life. International supporters are more likely to support Manchester United based on its success and thus it not only competes with English clubs in this regard, but also with some of the best known European clubs.

English Clubs

Arsenal After Manchester United, Arsenal has been the second most successful club in the Premiership (Table 15). The club should see its future earnings grow with a new £350m stadium with a capacity of 60,000 up from the old Highbury of 38,500, which is expected to generate up to £33.8m more in matchday revenue alone. To coincide with the new stadium, Arsenal has signed a sponsorship deal with Emirate Airlines worth £100 million.

14 This will be through naming rights of the new stadium6 and shirt sponsorship. Emirates will take over as the Club's title sponsor - including 'Fly Emirates' shirt sponsorship - for eight years, starting from the 2006/07 season, the first playing season in the new Emirates Stadium. The naming rights term continues until the end of the 2020/21 season. According to an Arsenal press release:

-“The sponsorship fees, of £90 million, will significantly enhance Arsenal's commercial revenues over the contract term. The sponsorship fees, which are payable by installments, will provide Arsenal with operational cash-flows of £72 million between 2005 and 2012 with the remaining £18 million receivable between 2013 and 2020. The present value of these sponsorship cash-flows, discounted at Arsenal's standard cost of capital and referenced against equivalent straight line cash-flows, indicates that the absolute value of the deal to Arsenal is in excess of £100 million.”

Table 15 – Arsenal Performance for the Past Two Seasons Competitions 2004/05 2003/04 - League 2nd place Winner - FA Cup Winner Semi-Final - League Cup 5th Round Semi-Final - Champions League Last 32 Q-Finals

Table 16 – Selected Financial Highlights for Arsenal FC Year Ended Turnover 31-May-05 31-May-04 Gate and other match day revenues 37,397 33,765 Broadcasting 48,594 59,780 Retail 8,389 6,885 Commercial 20,703 14,132 Property development 23,312 41,825 Player trading - 500 138,395 156,887 Operating Expenses 120,757 140,362 6,269 Operating Profit 17,638 10,256 Wage Bill 66,000 69,900 * Source – Arsenal FC Annual Report

Newcastle United Newcastle (NUFC) is, like Manchester United, another British based club with strong local following. However, ManUnited is considerable more successful at attracting commercial revenues as a result of both domestic and international results. NUFC resides at St. James’ Park stadium with capacity for 52,000 spectators. Group turnover amounted to ₤90.2 million and ₤87million in 2004 and 2005, respectively. In 2005, matchday revenues equaled 40% of turnover, TV and broadcasting revenues were 32% of turnover, and sponsorship deals comprised 11% of total club revenues. Further revenue and cost details are available in Tables 17, 18, and 19 as well as Exhibits 3 and 4. In addition,

6 Renaming Old Trafford would be difficult owing to its tradition and history. Most stadiums that have been named in UK sports are as a result of new builds. 15 sales of branded products were 9% of turnover while catering contributed other 6% of revenues. Newcastle acquired player registrations worth of ₤34.8 and ₤39.3 million in 2004 and 2005, respectively7. Also, the club opened a new museum in 2004 and it charges ₤10, ₤7, and ₤34 for an adult, discount, and family ticket, respectively8. At present, Newcastle does not operate any soccer schools and camps that would be a significant source of revenue for the organization.

Table 17: NUFC Matchday Revenues

Table 18: NUFC Salary Costs

Table 19: NUFC Media Revenues

*Source: www.nufc-finances.org.uk

7 Newcastle United Annual Report 2005 8 http://www.nufc.premiumtv.co.uk/page/MuseumDetail/0,,10278~799239,00.html 16 European Club9

Real Madrid Spain’s Real Madrid has grown its income from £83.0m in 2000/01 to £186.2m in 2004/05. Real Madrid has changed the manner of how to grow revenues and while matchday and broadcast rights continue to grow, the rapid transformation has been as a result of commercial revenues. Matchday revenues and broadcast revenues have grown by £15.1m and £20.3m, respectively, since 2000/01 (compound growth rates of 11% per annum in both cases). Commercial revenues have increased by €85.4m (£57.7m) between 2000/01 and 2004/05, a compound annual growth rate of 34%. Income from this source now accounts for 45% of total revenue (Table 20). Underpinning this commercial growth has been the club’s strategy of building ‘content’ in order to develop a product that people from around the world can identify with, and ultimately buy into. The primary content of course is players, and the club has built itself around a collection of identifiable world-class players.

Table 23

Real’s commercial strategy has been based on reaching and engaging fans, not just in its domestic market, but increasingly on an international basis. The club estimates that 40% of its merchandising revenues were derived from within Spain in 2004/05, with 60% internationally. This compares with five years ago, when the club estimated that between 80% and 90% of revenues were earned in Spain. The club has also gained increased revenues over the past five years from international tours, particularly to Asia. In 2004/05, revenue from international tours and friendly matches totaled £15.5m.

9 All European information based on Deloitte – Football Money League (February 2006) 17 Key Financial Trends

Since Deloitte’s first report on European football in 1996/97, the consultancy has reported that the collective revenues of the Top 20 clubs have risen from €1.2 billion to over €3.1 billion in 2004/05. Deloitte believes that an important factor to remain a strong club is a club’s long-term staying power – showing not just the ability to remain in the money list itself, but to maintain a consistently high position. This can only be done if a club consistently remains in close to the top of its domestic league and performs in the Champions League.

Overlook – Manchester United Going Forward

Manchester United is one of the few clubs that has embodied the future of football clubs due to its financial power. The question is: ‘how has ManUnited set the standard for every other team in the world, when 15 years ago the club was not even in the Premier League?’ The answer is great management, and the constant insertion of cash from different origins in the club’s money account. • The original money injection made by the owner of the club. • Manchester United flotation in the stock market, broadening the source of funds. • The sportive success, both in Premier League and in UEFA Champions League, led by the academy of youth built by Alex Ferguson. • The strategy of spreading of the Manchester United brand all over the world to North American, Australian, and especially Asian markets. • Sponsorships competing to represent Manchester United and commercials buying and using the Manchester United brand. • “One United” club membership program for the involvement of fans from all over the world. • Money from television broadcasting by BSkyB. • The sale of players after inflating their value from playing for a first rated team. • Match day receipts and the constant expansion of Old Trafford. • Manchester United Television, a growing TV network specifically designed to keep fans interested in the football club at all times.

All of the above are some of the ways that Manchester United is allowing itself to become one of the most powerful and famous brand name in all of sports. Using these correct and effective management techniques, mixed with the sportive success that the club has held on the pitch, ManUnited has set the standard to what modern day business for a football club looks like, a strategic model that other clubs are now copying.

The current 2005/06 season saw Manchester United knocked out of the Champions League at the group stage and knocked out of the FA Cup at the quarter final stage to Liverpool. The club looks set to finish second in the Premiership, behind Chelsea, thus immediately qualifying for the 2007 Champions League. During the summer of 2006, Manchester United will head to South Africa for a three-match, pre-season tour, aiming at increasing its fan base there. After that, Manchester United will celebrate the grand opening of the enlarged 76,000 Old Trafford.

18 Valuing Manchester United Brand Name

During the takeover deal by the Glazers, the bank advising the management of Manchester United repeatedly mentioned that a soccer club like ManUnited was not just franchises and players. Over the years the club structured itself as a company, with clear separation between ownership and professional management, listed on the stock exchange, and with a clear strategy of treating football as content. Income from marketing activities has boosted with marketing activities, with growth in licensing, image rights, merchandising and sponsorship deals becoming rapidly more important.

Several issues remain to be settled in calculating ManUnited brand value. The first is what rate should be used to discount the cash flows associated with the brand. In this instance, it is not possible to use the Capital Asset Pricing Model, because there is no way to compute the beta of the brand’s cash flows. The reason is that cash flows are not risk adjusted, while market returns are. So the alternative is to use the Certainly Equivalent Method. In this method, the future expected cash flows from the brand are adjusted by a risk factor and then discounted at the risk free rate.

Information on the term structure of interest rates in mid December 2005 for the sterling is provided in the following figure:

4.70%

4.60% 4.50%

4.40% 4.30%

4.20% 4.10%

4.00% 3.90%

3.80% 1 2 5 7 10 12 15 20 25 30 year year year year year year year year year year

The historical annual return on the FTSE Developed Europe Mid Cap Index is approximately 10 per cent, and the annual volatility 15 per cent. Core inflation in the UK is expected to be around 2% a year, equal to the value expected in continental Europe. According to a consultancy specialized in European sports, the covariance between the cash flows of a soccer club and the stock market index is 0.59, and for lack of better information, one could assume that the same number would apply between the cash flows of the brand and the market.

19 Exhibit 1 – Manchester United Income Statement ₤’000 Man United 11 months 12 months ending ending Year Ended 30-Jun-05 31-Jul-04 Turnover - Match Day 66,268 61,206 - Media 48,416 62,544 - Commercial 42,487 45,330 157,171 169,080

Operating expenses - Staff costs 77,010 76,874 - Depreciation 6,054 6,591 - Operating lease costs 790 1,169 - Other Expenses 33,240 32,697 117,094 117,331 Amortization of players’ registrations 24,159 21,839 141,253 139,170 Operating expenses - Exceptional items 7,286 148,539 139,170 Gross Profit 8,632 29,910 Total operating profit: Group and share of joint venture and associates 8,628 29,752 Profit on disposal of associate 215 173 Loss on disposal of players 556 3,084 Profit before interest and taxation 8,287 26,841 Net interest receivable 2,477 1,066 Profit on ordinary activities before taxation 10,764 27,907 Taxation 4,224 8,486 Profit for Period 6,540 19,421 Dividends 3,439 6,974 Retained profit for the period 3,101 12,447 *Source – Manchester United Annual Report

20

Exhibit 2 – Manchester United Net Assets Net book value of players’ registrations At 30 June 2005 75,351 At 31 July 2004 78,233

11 months 12 months Company Balance Sheet ending ending 30-Jun-05 31-Jul-04 Fixed assets 22,961 24,270

Current assets Stocks 122 216 Debtors 94,556 92,428 Cash at bank and in hand 39,160 31,341

133,838 123,985 Creditors - amounts falling due within one year -11,303 -14,454

Net current assets 122,535 109,531 Total assets less current liabilities 145,496 133,801 Provision for liabilities and charges -7,425 -8,518 Net Assets 138,071 125,283 * Source – Manchester United Annual Report

21 Exhibit 3: Newcastle United Profit and Loss Account

* Source: Newcastle United 2005 Annual Report 22 Exhibit 4: Newcastle United Balance Sheet

* Source: Newcastle United 2005 Annual Report 23