Why David Beckham’s salary is not an exaggeration

All those who like or just enjoy a bit football (or soccer for this matter) must have noticed that David Beckham has been signed for £128 million. Or in other words, $1 million a week. Excessive as it looks, this amount of money might actually make economic sense.

LA Galaxy, the club that is signing him, is a company. Hence it must have enough revenues to cover its costs. And these costs will rise considerably from April when Beckham starts playing. They must have a plan.

Although his right leg was still one of the best in Europe, Real Madrid, his present club was not signing him from Manchester United to become the new superstar. Beckham had to become a living advert. And he did. There were record sales of shirts, the team got exposure in the whole world. Everyone wanted to see Madrid playing to see Beckham.

LA Galaxy is signing him after a bad performance in the World Cup. He went to Real Madrid to win trophies, and to date, he has won nothing at all. But he is not being signed for being a quality player. He is being signed for being a celebrity-player.

He will boost the name of LA Galaxy around the world (very few people in Europe knew the name of this team until one week ago and now it is everywhere). Thousands of fans will be willing to see him playing, which will fill the stadium. In a moment where the fan base is still being built, this might attract some fidelities to Galaxy. The merchandise sales will soar. There will be a demand to watch the games all over the world, which will turn into TV rights sold. And in a advertising-driven-economy as the USA, advertisers will be pouring millions on the team. Not to mention, obviously, that with such player, LA Galaxy increases the chances to win the championship. And this will attract more fans, more attention, more advertising and more money.

What is hard to comprehend is the amount of money that he will generate now, and above all, in the future. This revenue will make the signing amount small. In that case, if Beckham is generating more money than what he costs, the signing amount is not exaggerated.

We could discuss if it is fair that a single person receives such an outrageous amount of money. That would put us in the realm of ethics, which are not strange to Economics. But leaving ethics aside, it is clear that Beckham is being paid in accordance with his contribution to the revenue of the company, and that is perfectly economics.

Richard Branson, Rupert Murdoch and the logics of strategy

I have said before that business strategy is like a war, and it is even fir to get hostages. Richard Branson, owner of Virgin, wanted to include ITV, the British Independent TV in his portfolio of Media, recently increased by the cable operator NTL. And then, out of the blue, monopoly concerns appear because the deal is not done. Who does understands this?

Not long ago NTL, soon to be renamed “Virgin Media” was bidding for ITV. And it seemed that everything was done. But then, all of a sudden, ITV rejects the bid saying that from ITV’s perspective there is little, if any, strategic logic for ITV to combine with NTL”.

The deal would be excellent for NTL, because it would include the capacity of producing contents of ITV, apart from the rights in UK for the Champions League. This detail might not look very important, but around the world, football is a major incentive for customers to subscribe to payment TV.

And for ITV? Well, given their recent problems of revenues, being part of NTL would ease this concern. It would give them new platforms to broadcast their content, and also the power of the broadband, which seems to be the future of TV.

So if they were happy with the idea some time ago, and it seems that the merger makes sense, why such harsh statement?

While the decision was taken, Rupert Murdoch increased his ownership of ITV to 18%. Murdoch is the owner of BsSkyB, the satellite broadcaster, owner of the majority of rights to the English football league, and who has recently moved into broadband.

Take this with a grain of salt, because it is just speculation but, what if Murdoch is using the old business strategy of weakening the enemy? Branson and Murdoch are fighting for the hill. Although Murdoch seemed to have it very well controlled, Branson has lately started a battle with new strength. Branson is dealing with a neighbouring tribe that was being neutral until the moment. He want them to join forces. But then, Murdoch manages to have a decisive authority in that tribe and make sure that they remain neutral.

Why is Murdoch not buying ITV himself? That would spread serious concerns of monopoly. But because the deal NTL-ITV makes a lot of strategic sense, Murdoch is making sure that it will not happen. This reassures him that NTL will not grow while he makes further deals to lock his position at the top of the hill.