The big dilemma

Imagine you are the President or CEO of a football club.

You are making budget decisions for the upcoming season and amongst the different meetings with your direct reports to discuss numbers, you had a meeting with the Sporting Director and another with the CMO — a first point here: too often there is no such thing as a CMO in a sports organization, which is shocking, but we’ll talk about this another day.

In the meeting with the Sporting Director, he/she asks you to sign a new hidden gem from Latin America. He is 19, only costs €5M and will be the next big right back. Initially, he will play for the second team but sure in a year or so will be in a position to jump to the first team.

A few hours later, in the meeting with the CMO, he/she asks for a €5M investment in a direct-to-fan project that will significantly expand the brand exposure and bring revenues of at least €12M in the next 3 years.

Where do you think the money will go?

You are right, we have a new right back in town!

Well Done Agree GIF by Liverpool FC

And you know what, that decision is perfectly understandable. I can empathize with that.

A new player means immediate excitement, a dose of dopamine for the organization, the media and the fanbase. That feeling of just having potentially signed the next icon. You and not your biggest competitor, which the press said was also very interested.

The brand project that would significantly evolve the connection with the global fanbase — yes, super exciting, but it will take time to build and the outcomes will not be immediate. The excitement it will generate is completely different. Less tangible, less populist.

And about the revenues, yes the brand project has big potential but if the right back is as good as they say his market value will be x10 in 3 years.

Light diversification

Obviously, we are stressing things up a little for this example, but similar decisions are made inside the clubs constantly, even if they happen unconsciously. These decisions end up, too often, with the strategic brand initiatives not moving forward, or doing so in an incredibly slow path that has nothing to do with how the world moves today, or moving forward with a quarter of the budget required.

And why is that happening?

It’s a combination of factors. First of all, and let’s be super clear about this: what happens on the pitch is the core business of a football club. Therefore, you need to make sure you invest accordingly. There is no doubt about this.

But secondly, too often there is a lack of vision and understanding of what investing in a brand will bring to the organization. And again, it is understandable: this is a totally different business than the core one and it’s really hard to find someone who can do an outstanding job in leading both.

Interestingly enough, the business side of a club is incredibly complex as there are multiple business units, but each with relatively low volumes of revenue. So it’s a really wide but not deep framework.

Think about it. A football club is in the B2B sponsorship business. In the events/hospitality business. In the retail business. Also in ecommerce. In the licensing and merchandising business. In content and media. Now increasingly in the crypto space, etc.

It’s insane.

The CEO who is making decisions on a right-back signing, is also overseeing the brand development, that new fan data project or how are we doing with ecommerce sales today.

So as you have width but no depth, and this is not the core of the organization, you have a highly diversified business with lots of potential, but lightly resourced in almost all the units – constantly struggling with talent, vision and internal alignment to properly exploit that potential.

Taking the money at what cost?

How should a club operate the brand and the business units outside sports to exploit all its potential and accelerate growth?

Well, that’s a really complex question, especially after the pandemic has stressed their finances even more.

The challenge here is having an integrated, strategic view of where we want to bring the whole organization in order to make the right decisions, minimizing the tempting pressure of the short-term minimum guaranteed — which will probably secure the immediate signing of that promising right-back but jeopardize the club’s potential in the mid and long run.

There are some formulas used by clubs today, such as finding a strategic partner to operate, during a certain period of time, a specific business unit, which should secure a more efficient execution and a substantial check guaranteed, while reducing operational complexity (Real Madrid with Legends and Sixth Street for the operation of the new Bernabéu, receiving €360M). Also, this is the model commonly used by the merchandising giants Fanatics.

Aligning incentives is one of the main challenges of such deals. It’s critical to establish mechanisms to ensure the club supports that business unit appropriately, even if it’s not directly managed by its executives.

Another path is selling a participation of a specific business unit to a strategic partner who will bring capital and expertise to accelerate it (that’s what FC Barcelona is trying to do with BLM and Studios).

One of the challenges here, similar to the startup ecosystem, is the valuation. The one in the moment of doing the deal (which the club will bring as high as possible) and the one it can achieve in 10-15 years after scaling up, where the club will not own 49% of a big business related to its brand.

But with limited resources and a sports operation that is highly capital intensive, the dichotomy is inevitable: should we sell an asset to an external partner, securing the funding to accelerate the business, or potentially postpone that acceleration “ad eternum“ because revenues will be mostly sucked by the core business in the upcoming years.

Building a Disney

What’s clear is that if there is someone willing to pay a big money for that asset or participation, it is because they see big potential if things are done the right way.

Does this mean big clubs can take a wider and more ambitious approach? Making that direct-to-fan operation the core business on a fully separated business unit? Building their own Disney to properly exploit the brand globally?

That operation would have the ability to hire top talent in each discipline. Objectives, strategy and products/services would be closer to those organizations in the Entertainment, Media or Digital industries.

All without being “contaminated“ by the dynamics of the sports unit. It would be one of the key investments of that operation, but not interfere in the decision making process of a CEO who would be solely focused on growing the business and the brand.

This approach has challenges, especially in the financial side while scaling up the business. But if a global brand from the most global sports in the world can’t make it, then who?

What seems clear is that clubs, specially the big ones, will try to find formulas to bring the brand and the fan at the core. And that will most probably require a separation from the sports operation. The opportunity is too big to risk it for a right-back youngster.

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