Real Madrid wasn't bad as if they played horribly bad, but they were up against a far superior opponent. Even if you have a strong team on paper, in some years there are teams that are almost destined to win it and not many people had any doubts that last season Manchester City was overdue to win it. It was exactly the time when they peaked with their performance and the second leg was a lesson for Real Madrid against them. But that doesn't mean it will be the same this season. Everything is back to zero and regardless of the outcome of last season, Real Madrid is again one of the favorites for all three titles.
I would say that Real Madrid's performance last season was terrible because they were barely able to win any other title apart from the Copa Del Rey. Real Madrid failed in La Liga, they failed in the Spanish Super Cup, they also failed in the Champions League and it was a big blow for a team that was the favorite last season.
Last season Madrid played badly, that is a fact. I think you need to admit it even though some of your explanation about other teams are true. Real Madrid and all the La Liga teams that will play in the Champions League next season will return to zero, even for Manchester City who are the reigning champions.
Real Madrid wasn't the favorite last season. I would have agreed if you said they were
favorite among others last season. If any team really was the favorite, then the favorite was Manchester City. Benzema was nowhere near his shape from the season before and they had problems in both their defense and their offense. But I would still say that they weren't horribly bad. I mean they won the Copa del Rey and destroyed Barcelona in the second game, but that still doesn't make that season a good season, I understand. Horribly bad is a season like Chelsea played it and Real Madrid was more as if they were out of breath and not having enough intrinsic motivation. The success from the seasons before made them feel satisfied. That is how I saw them play.