“On a combined basis, MLS and its clubs continue to lose in excess of $100 million per year.” — MLS deputy commissioner Mark Abbott, October 28, 2014.
It was widely reported in October 2014 that LAFC agreed to pay a franchise fee of $110 million. Also that in May 2013 NYCFC agreed to pay $100 million, and that the Orlando (November 2013) and Atlanta (April 2014) expansion franchises agreed to pay $70 million each. Which raises the obvious question, by what logic do people pay large sums to enter into a commercial environment in which the existing businesses are already losing money?
Of course, this is a question one might ask about the soccer business globally. For years the accountants Deloitte, whose Annual Review of Football Finance supplies accounting data on English clubs, has bemoaned the persistent losses. UEFA in their annual Club Licensing Benchmarking Reports detail the extent of loss-making across Europe. I know of no country in the world where football clubs are thought to generate profits consistently.
Whilst loss-making in the rest of the world causes great anguish, especially when clubs become insolvent (even though any club of any size always survives), it is widely understood that owners are mainly interested in the status and the glory that goes with controlling the local football club: financial returns are not to be expected. The record of the seventeen clubs that floated on either the London Stock Exchange or the Alternative Investment Market between October 1995 and November 1997 is a good example. Four of them subsequently became insolvent (Leeds, Leicester, QPR and Southampton), all of them have now delisted, mostly without seeing any return on their investment.
A study of the returns on football clubs floated on the stock exchanges in Europe by Aglietta, Andreff and Drut found that average returns over the period 1991-2009 were 3.66% (and I suspect if you took Manchester United out of the sample the figure would be closer to zero), compared to 7.80% on European shares and 6.95% on European bonds. As they say, “with regards to institutional investors, our findings can explain why they do not favour investing in publicly traded football clubs. Football stocks are not attractive when an 8% return per year is required from a number of other financial investments.”
MLS, we are told, is different:
“We’ve got to be in a situation where our clubs are making money and not losing money, so that we can continue to invest in this business and continue to build quality of play, relevance of teams and passion of our fans in a way where we ultimately achieve our goals.” — MLS Commissioner Don Garber, March 2015
But how is that supposed to happen? Thanks to the help of an anonymous source with an intimate knowledge of MLS finances, I have constructed an approximate income statement for the league to demonstrate just why MLS loses money. Let’s go through the process step by step for the financial year 2014. Start with revenues:
- Ticket sales. MLS claim that attendance was 6.5 million in 2014, including playoffs and the All-Star game. They also say the average price in 2014 was $26. However, a large fraction of tickets to MLS games are given away via promotional schemes. My source says around 30% of tickets generate no revenue. Taking all this together gives us ticket revenues in total of $120 million.
- Broadcast. Until last year MLS and the USMNT had deals with ESPN, Fox and Univision worth about $23 million in total. However, my source claimed that the MLS share amounted to only about $13 million, which makes sense since USMNT games draw much larger audiences.
- League sponsorship. MLS boast 18 sponsors, and the largest deal is with Adidas currently worth $25 million a year. The new Heineken deal was reported at $10 million a year and the Audi deal is said to be worth $2-3 million. Allowing an average of $2 million for the remaining 15 deals, gives an annual league sponsorship revenue of about $68 million. But sponsors do not pay all of this in cash. Non-cash in-kind support probably accounts for one third of the total, so cash revenues are probably closer to $45 million.
- Team sponsorship. The biggest sponsorship revenue source is the jersey. These are estimated to be worth anything between $1 million and $4 million in value – around $48 million in total. Assuming that teams can put together other sponsorships which in total add 50% to this figure would mean total income of $71 million, but again after taking out a one third in-kind share, we are back to $48 million cash.
- Player sales. Far from buying in talent, MLS is a trading organization that according to transfermarkt.de turned a profit of around $7 million on player sales last year.
So that gives us an estimate for total revenue in 2014 of $233 million. In 2013 Forbes published estimates suggesting that league revenues were in fact $494 million- I find it hard to see how they got that and they didn’t respond to an inquiry from me. However, they also said that operating profits amounted to $34 million, when MLS themselves say that losses exceed $100 million.
Turning to costs:
- Players. Union figures specify total player wages of $131 million in 2014. However, teams often have additional contracts with players for marketing activities- especially for designated players. So real salary spending is much higher. For example, my source claimed the Seattle Sounders are spending $20 million on wages when the union data suggested spending last year was only $11.5 million. The real total must be at least $150 million
- Player development. Grant Wahl did some research on this last year and found that clubs were spending about $1 million a year on player development. Don Garber said last December that the league was spending more on development than on salaries in total ten years ago- which was about $1.7 million per team which would give a figure of around $20 million.
- Stadium costs. Each game day involves around 500 employees, and payments to various organizations such as the police. The new NFL Vikings stadium costs are estimated at $17.5 million a year including $3-4.5 million game day operating costs. With 7 guaranteed home games this works out at between $430,000 to $640,000 per game. My source claimed that the figure for MLS was around $400,000. This would amount to $145 million (363 games), more than wiping out the gate revenue. I will ignore other stadium costs, as well as other stadium revenues, given that this depends on ownership and is not strictly soccer related.
- Team back-office functions. My source claimed that franchises employ an army of staff on sales and marketing – as many as 40 full-time employees. A conservative figure for these costs is $3m per club, giving a total of $57 million in total.
So, this yields total costs of $372 million. Overall we arrive at an annual loss of $139 million, or just over $7 million per franchise in 2014. No doubt there are various tax write-offs to soften the blow, especially if losses can be written off against profits in other businesses. But I doubt that would make this a profitable venture overall.
I haven’t included MLS Head Office costs in this. The MLS website lists 80 employees; assuming average salaries are around $100,000 this adds up to $8 million. The rental on the league’s swanky Fifth Avenue offices must be at least as much again, and with other costs the annual total for the Commissioner’s office can’t be much less than $20 million.
So what can grow in the future to turn these losses in profits? MLS just signed an 8-year broadcast deal, which is much better than the old contract, but after taking out the USMNT’s share, leaves only about $50 million for the league. This is $37 million more than the old deal, still leaving losses at around the $100 million mark. And the next deal won’t come on stream until 2023!
Attendance revenue will go up, but attendance is already very good, and there’s another 3 years to wait for the World Cup bump, which is in any case contingent on the uncertain fortunes of the USMNT. Part of MLS’ attraction is that it is a cheap ticket for live sport, and that also won’t change soon.
Sponsorships will not grow significantly from current levels with the low TV audiences, and figures supplied by Sport Media Watch suggest that although MLS is doing better on TV so far this year, the new signings have not had a dramatic effect.
Without more revenues the league cannot attract better players, and without better players and a better quality of play most Americans are not going to watch this on TV- especially when they can easily watch better stuff from LigaMX, the Premier League, the Champions League, etc.
Commissioner Garber says “We have a goal in mind of trying to be one of the top leagues in the world in 2022,” but that would mean that MLS will employ a decent share of the world’s top players. Forget the Premier League, The Bundesliga, La Liga, Serie A – truly the top four leagues in the world – even to match the wage spending of the French and Russian leagues, would require an outlay by MLS of around $750 million per year, or roughly six times the current spending levels of MLS.
MLS cannot conceivably pay this amount AND have a situation where the clubs make money.
So one wonders what the owners of the expansion franchises think they are buying into. Since 2005 there have been nine expansion franchises paying money to the league (including San Jose whose owner had to pay to bring the team back), three more signed up in the last year (Atlanta, LAFC and Minnesota) and the promise of more to come. The amounts mentioned in the press amount to $550 million in total, probably enough to cover losses for some of the pre-existing schemes.
But now MLS starts to sound like a pyramid scheme. You can fund a loss-making enterprise from the entrance fees of new buyers for a while, but without making money, the only reason for doing this would be glory, not profits. Americans constantly tell me that owners of sport franchises in the US will insist on making money. If that really is the case, then I predict that MLS will collapse, and probably sooner rather than later.
As usual your analysis is reasonable. I see no other reason for having a sports team than fulfilling a Billionaire fantasy. It also enriches a city and provides entertainment. Beyond that it should not be treated as an “investment” per se. That is certainly where MLS is getting it all wrong.
You didn’t factor in local TV revenue, every club has a contract with a local TV network. There is a lot of potential upside here, look at the deals MLB teams are getting. You are not including local commercial revenue. Also, I think you are undervaluing the revenue generated for the clubs that own their own stadiums.
Local TV revenue would be worth something for some clubs such as the Sounders. Not sure it would add much for most clubs – but surely it will never be like baseball- one quarter of the games, and a lot smaller following. This blog has a nice summary of local TV broadcast deals- suggesting revenues of about $30m per year for “mid-market” teams (Toronto, Minnesota, Cleveland) – I think the best MLS franchise would struggle to make the same amount per game, which would mean revenue of about $8 million, at the bottom end I think they would struggle to get anything. So overall you might add $20-30 million of for this for the league.
Local commercial revenues will be something – I guess you mean car parking, concessions, merchandise – will add something.
I left out auxiliary stadium revenues but also maintenance costs, which can be large. There aren’t many acts that need a 20-60,000 seat stadium, and there are competing venues in most cities, so I don’t think profits from this source will be material.
But bear in mind that the $100 million loss is not my figure- it came from MLS and was confirmed by them. I showed them my calculation and they either confirmed the number or said that they did not reveal the information (mostly the latter). They could have said that I was omitting significant revenue streams, but chose not to.
The majority of MLS teams actually pay to get on to local TV or have owners who own the network they appear on (NYCFC, Colorado). Columbus is in the $200-500k/year range, the Fire is in the $500-900k range. Haven’t heard about what deal the Sounders got, but the Galaxy is the winner with revenue around $5m/year due almost solely to the local market for content in LA. That last number is a huge outlier, I promise you.
To your point, and fyi, Chicago Fire, MLS’s franchise in America’s third largest media market, PAYS for its local broadcasts on Comcast Sports Net.
You haven’t hit on the SUM of all revenue.
I assume most of that revenue is contained in the national sponsorship deals, which I have included. I think over revenues (e.g. staging the Pan-Pacific Championship) generates little or no profit- it’s really marketing.
The Pan Pacific Championship was last played in…..2009.
Also, SUM has marketing rights to the Mexican National Team in the US. I’ve heard many Americans actually will pay to watch the Mexican National Team.
SUM is really important to the whole enterprise, but you have dismissed it.
Also, MLS is not going to collapse, sooner or later. You’re going to make my list of infamous soccer quotes, right up there with Nye Lavalle.
You forget to consider the radical structure of the league (“single entity”) in your analysis of MLS. There are no team owners. Treating investor-operators as if they actually proper owners, & ignoring the uniquely anticompetitive (& anti-sporting) nature of MLS leads you astray. None of these sophisticated people/companies/sovereign wealth funds that are buying into MLS are victims of a Ponzi scheme, and they bought in specifically because competition caused by another owner trying to build a great team for glory would never be something bt gets have to worry about.
Just tell us where the money is
Why do WE have to come up with a second source? Did you consider trying to find a second source?
Oh, right. Europe. No one confirms anything in Europe before they write it. Could you just hack a phone or something?
We can’t make a determination about how much to trust your (single) source because we don’t know who they are. You can choose to keep them anonymous, but your audience is then left, basically, taking your word for it.
But, then, journalism ethics aren’t real big where you are. (And we could argue about whether or not this is actual journalism, but you’re positioning yourself as an expert and asking us to believe you, so part of that belief system has to involve sources we ourselves can believe in.)
I have no doubt MLS and its teams lose money. I think the magnitude is probably understated, given ( a ) no one REALLY wants to lose a lot of money, but our system makes it desirable to have the APPEARANCE of losing lots of money and ( b ) a capitalist never wants to pay more for labor than absolutely necessary, and saying you’re doing well when collective bargaining rolls around isn’t something you necessarily want to do, either.
A lot of really smart, really rich people are pouring a lot of money into this. (And not just in franchise fees and wages, but infrastructure.) Unless they’re ALL being duped, I’m left to conclude that you’ve started from a position that an American soccer league is untenable, found a single source willing to steer you towards numbers that would tend to confirm that and then turned it around to the readers to knock down your position. That seems odd.
I’m not even offended as a fan of MLS. I’m offended as a journalist.
But if you predict that MLS will collapse “sooner than later” (your words), how about this? $10,000 to the charity of the other’s choosing. If MLS collapses on or before April 23, 2020, your favorite charity gets $10,000 cash in your name. If MLS is still playing games on April 23, 2020, mine does.
Is it a bet?
Why turn a discussion about a business model into a series of personal attacks?
Here is what I wrote:
“Americans constantly tell me that owners of sport franchises in the US will insist on making money. If that really is the case, then I predict that MLS will collapse, and probably sooner rather than later.”
What is it you want to bet on?
‘Oh right. Europe.’
I believe Mr. Szymanski teaches at the University of Michigan, which, last time I checked, was in Michigan.
Wow. After a long series of detailed notes and quality journalism, you throw it all away with an overreaching conclusion. Ate you an advisor to thr NASL? They seem to make similarly odd statements….
I cannot foresee the time when MLS will become profitable. Can you? If so, how?
I cannot foresee the time when MLS willingly *claims* to be profitable, because as others have noted, Collective Bargaining concerns require them to always claim to be going broke so that they can pay the lowest wages possible. However, like every diverse mega-corporation, there are countless ways to make money on the side (like SUM, local deals, facility rentals, etc) and shield it from consideration about what makes the league “profitable”, that MLS will (continue to) be self sustaining for many years to come.
I’m not a soccer fan but I agree with your analysis. This was just irritating me when I saw somebody recently paid a 300 million dollar expansion fee – Charlotte and was curious as to how the leagues fiscal health is.
I enjoyed your analysis a lot. I agree with your approximated financial statement and overall pessimistic view of the league yet as well. foresee logical reasons, other than vanity and status, why billionaires would invest… Very interesting point in reference to the Ponzi scheme analogy. Each new expansion fee/team essentially reimburses owners who already paid the expansion fee. And the process is repeated until …? Its like a game of musical chairs; whoever isn’t sitting down at the end loses hundreds of millions of dollars. As much as i enjoyed your analysis, I have disagree with your overall assessment of the MLS teams’investment potential.
These guys are savvy, smart investors. There is a method to the madness. Also, every investment made is not governed by profitability alone…especially when operating at the billionaire level.
Hypothetically, your a billionaire with an existing sports franchise, the Broncos. The team is profitable yet financially inconsistent because of variable costs and overall illiquid as an investment. To offset this your other Investments include very conservative and liquid stocks and bonds. The Broncos have radically appreciated in value since 2009. You’re looking to make a investment somewhere and possibly use some of the newly recognized equity in the Broncos to do it. The problem is interest rates are so low and the rate of return for Investments across the board is historically low. Stocks and Real Estate are overvalued and bonds are paying out less than 2%. So you decide to make a bid for the MLS expansion team and you win!!! Here’s the investment strategy and thoughts behind MLS bid/win…
-Its an investment that directly benefits your existing team, the Broncos, and the local region overall through the immediate addition and presence of another pro sports team. The two teams will mutually benefit simply due to the presence of the other.
-Future appreciation potential (super high ceiling) off the charts. North American sports teams have appreciated at a crazy clip over the past few decades.
– It’s a long-term investment. Similar to the investment strategy regarding the Broncos. Looking at one, two or three year windows is wholly irrelevant… there is a 20 year strategy
– Create a sports conglomeration consisting of both the Broncos and the new MLS team. You will derive many benefits for this structure.
Example; Broncos have recently increased in value. Pull out the minimum necessary equity stake from the Broncos and use as a down payment to secure a loan for the MLS expansion fee. Thus, the MLS expansion fee is paid without having to liquidate investments or use cash whatsoever.
It was predetermined that the MLS team was going to lose money at the beginning. Thus, by fusing the teams into one entity the Broncos’ profitability will subsidize the MLS teams’ financial losses. The overall Corporate tax payment for the single entity is significantly less compared to $$’s due if teams were their own LLC’s.
You’ve made several (admitted) estimates that appear to be pure guesswork. Why one-third in-kind sponsorship contributions and not 30%? Or 27% Or 37% Why 30% of tickets generate no revenue and not 22% or 24%?
All these little guessed-at percentages add up.
If MLS were going to collapse, it would have done it before it was proven that 20,000 people would come to a domestic league match in this country on a fairly regular basis.
Well, of course, since the true figures are not published then there has to be guesswork- how else could you do it? Do you mean to say that unless I have access to the published data I am not allowed to speculate on the economic situation of the league. I was advised by someone who has reason to know MLS finances and ran my estimates past the league – and the $100 million loss figure is theirs not mine.
NASL had average attendance of over 14,000 four years before it went bust.
Well, a second source would be reasonable.
And the (original) NASL was also ( a ) losing teams left and right after ( b ) over-expanding very quickly to ( c ) poor markets with ( d ) owners who were not committed and who ( e ) got out at the first opportunity after they saw the losses they had incurred.
There is no parallel to MLS in the collapse of the NASL, which happened in a far different time in a different landscape when soccer was a fad here and our national team was a non-factor and people didn’t actually love the game itself in great numbers. There was not an NASL team in 1982 that had been around for more than 11 years. MLS teams have roots and permanence and they matter.
I agree that the parallels with NASL are not close, but at the time attendance levels were fairly good and that did not prevent them from folding (largely because of the failure to sign a national broadcast contract). The more interesting parallel is that NASL owners did not seem willing to sustain economic losses over an extended period – why are MLS owners different?
There are a ton of reasons why your revenue figures are half of Forbes. SUM revenues are completely left out. An investment company bought a piece of SUM a few years ago, putting SUM’s total value in the hundreds of millions.
Also, stadiums generate revenues from parking and concessions. Additionally, other events are held at the stadiums. MLS owners get to move expenses and revenues around to maximize tax advantages.
Regarding the ticket revenues, you’ve lopped off 30% as freebies; but do you really know that the average ticket price is $26 BEFORE the free tickets are distributed. I’ve also read articles about the 30% giveaway, and read further than some clubs were tightening up the giveaways.
In any case, what sane investor would plunk down $100 million just for the right to field a team, then pile on stadium costs, youth development, all the other startup costs … for the right to lost millions annually?
There is a huge, gaping flaw in your logic.
the logical flaw is to be found in your argument:
1. A sane investor does not pay $100 million to field a team
2. therefore Szymanski is wrong (it is a profitable investment).
Here are some other examples of your logical structure:
No sane person would buy a ticket on a ship that is going to sink
Therefore the Titanic will not sink
No sane person would buy an asset back security that turned out to be worthless
Therefore subprime loans will be profitable
No sane person would invest in a Ponzi scheme
Therefore you should trust Bernie Madoff
Are you starting to see the problem yet?
Actually, Ron is correct, SUM is one of the wealthiest sports licensing properties in the country with a wealth of several hundred million dollars and every MLS team owner owns a substantial portion of SUMs shares, which you conveniently chose to ignore in your condescending reply.
But aside from that, you’re not taking into account some major revenue streams for instance exhibition and all star games, where teams often make much more $$ than the avg game. I should also add that many teams profit from other events at their own soccer specific stadiums such as concerts and friendlies btw int’l teams etc. so to count only the stadium operating costs/losses without the gains doesn’t seem right.
But again, even all that aside, the logic isn’t flawed. Your argument is that mls is losing money and will not get any better at least until 2023, so investors who buy these teams are not making rational choices and are buying into an unsound investment scheme. Well, first off, the numbers show that even if you take the expansion factor out of it, the league is still growing in value, although obviously not as rapidly as adding up the total figures (incl expansion teams) would seem to suggest.
Second, the point is that this is not some get rich scheme these owners are buying into- many of them already own immense corporate empires, as well as other professional sports teams. They are incredibly savvy and eatablished business men and experienced investors, probably with an entire office assigned to assess their investment risks. They’re not the average joe who would likely get sucked into a Ponzi scheme. So, it IS reasonable to infer that these people see a good investment opportunity in MLS, and that it is a far less likely that these investors would be dumb enough to fall for an obvious pyramid scheme. It is fair to assume that there is a good opportunity for growth and success (whether we measure that by profit, value or revenue is an entirely different story), and that investors with experience owning and running other professional sports teams and corporate enterprises see that potential, especially since they get to see the ACTUAL financial numbers and not just estimates from a “source” whose “top secret info”, by the way, can be pieced together by information that’s already available all over the internet (ticket revenue, sponsorship agreements etc).
If the numbers truly were as bad as as all that then MLS would have had an obvious interest in opening its books prior to the 2015 CBA at least to the union to show that it simply is not in a situation to pay it’s players better, but as far as I know it did not, which indicates that they have something to hide.
I certainly don’t think the owners are stupid, but being smart, or rich, has never been a guarantee of making money. Many smart, rich people lost their shirts in 1929, 2008 and in many smaller crashes in between and since.
If, at the beginning of 2008, you had told shareholders in Lehman Brothers (many of them smart, rich people) they would not have believed you.
With all due respect, any article that begins with the equivalent of “I know a guy who told me…” shouldn’t be so certain of its conclusions.
Lots of revenues missed: jersey/branded merchandise sales, non-ticket stadium revenues (most are owned by the club, and suites/club seats are HUGE revenue drivers), local sponsorships…the list is so long that it’s almost shameful. We won’t even get into taking your source’s assertion that 1 out of 3 tickets isn’t paid (and of course, those free admissions never drink high-markup soda or buy a scarf).
We know that MLS does nothing if not tightly rein its expenses. There must be some sort of budgeting there that you (or more likely, the source you trust so dearly) are missing, just as you (he) has clearly missed on the revenues.
You can do better.
You are entitled to your scepticism – I know the guy I spoke to was in a position to know, but was really worried about being outed. You’d have to trust me- or not, your choice.
Interesting article, Stefan. I do wonder why this source would reveal this info? What’s the motivation? I am also surprised you would make such a … bold prediction based on info from a single source. Better to have omitted that part.
I suspect the league is not as financially well off as it portrays outside of labor negotiations – the small increase in the salary cap suggests so. But there sure are a lot of people making huge bets on the league’s future financial success.
Methinks predictions of the MLS demise are much like predictions of the European Union’s demise. The MLS, like the EU, will muddle through or find a way until greater prosperity arrives/returns.
Where I think your argument really breaks down is in its assumption that new owners like David Beckham will fork over millions to join a Ponzi scheme. At least SOME of the MLS owners must have done due diligence. Not EVERYONE can be duped, big ego or not. Even billionaires don’t throw money away and secrets like this don’t remain secrets forever.
I think the MLS will succeed based on a very idiosyncratic reason. Of all things to ask for a birthday present, my high school son requested half-season tickets to DC United – so he could go see games with a handful of friends who also have season tickets. (I paid about $400, or $24 per ticket)
He and his friends mostly watch soccer and find Americans baseball boring to watch! There is a sea change going on … (-:
So far today I’ve not seen any reason to change my argument. It might well be that there are enough potential new owners willing to sustain a loss. But I believe MLS when they say they lose money and I don’t see that changing soon. I’m sceptical that franchise values will continue to appreciate rapidly. So, if the owners do require a profit, they are likely to shut it down.
He may have been in a position to know, but did he have any ulterior motives? I can think of lots of reasons MLS might want to understate it’s business model. Lots of them are related to the recent union negotiations.
I think you missed a few steps from financial year 2014:
Toronto, Seattle, Portland and Vancouver made a total of $26m in merchandise profit in 2014. That includes online, physical stores and stadium sales.
You have included Cdn TV Rights with TSN/RDS, MLS Live, any local TV deals or International Broadcast Revenue.
And what “inside source” gave you ‘With 7 guaranteed home games’ for NFL teams? Hopefully not the same one who told you 30% of the tickets are freebies.
That should read ‘You haven’t included included Cdn TV Rights with TSN, MLS Live subscriptions, local TV deals or international revenue.
The profit comes when all the investments into these youth academies starts paying off. Start selling players for 5-10 million on a consistent basis and eventually those stars that start going for 50+ million. The league is still young but proper youth development is even younger. 2022 is too early of a goal in my mind. It’s about the 5-8 year old’s right now.
“No sane person would buy an asset back security that turned out to be worthless
Therefore subprime loans will be profitable
No sane person would invest in a Ponzi scheme
Therefore you should trust Bernie Madoff
Are you starting to see the problem yet?”
Well done Stefan. I see that argument a lot. So and so is rich. Therefore, he must be smart. Therefore, why would they make a bad investment. I mean, did 2008 even happen?
When do you expect MLS to collapse? I really don’t know how they can sustain this. I suppose this is why they’re adding new teams every season. I was suspicious of MLS being a ponzi scheme after the whole MLS going back to the failed Miami experiment, and the fact that MLS and USSF just ignore any questions about promotion/relegation.
I’m agnostic on the question of whether it will collapse at all- it might well be that the owners are willing to sustain endless losses- owners in the rest of the football world are willing to do that.
I think you are grossly over estimating front office costs and game day cost. Many of the front office employees are young interns or college grads working for next to nothing Furthermore, they are paid in some extent via sponsorship trade-outs. This is the case with every professional team in the states.
I think you are also underestimating positive net revenues from games. First, the 30% “free” tickets may be accurate for franchises struggling to fill the seats, but I assume LA, Sporting, Seattle, Portland, Toronto, and other higher profile franchises have a number close to 0%.
There are other areas of your analysis that provide head scratching conclusions which have already been addressed. Which is disappointing because I have read an entire book of yours that had less “WTF is he talking about?” moments than this blog post.
The biggest piece of the equation missing in your analysis is the assumed terminal value investors should assume. The value of professional franchises in America continues to skyrocket (It could be a bubble or due to the need of having that competitive fix) and MLS franchises are climbing consistently and in lockstep with these trends. In the long term, demographics for soccer get more favorable every day (BTW – the specific increase in the type of demographic is favorable (Young and Affluent). The league has grown steadily and in the long term these franchises will be much bigger than they are today and thus viewed as more valuable.
On the “biggest piece” – the point is that asset appreciation in the rest of the world has not been great, even when revenues have grown- hence the reference to stock market returns in Europe. Given that talent is acquired in global market, in this respect I think the US is not different from the rest of the world.
The rest of the soccer world has no mechanism to control costs.
The rest of soccer world doesn’t have the uniform market the US has.
In the long run I expect players to become more interested in playing in the US. The list of general advantages to living here are too long to list (big factor with the WAGs). The players ability to increase endorsements will improve. The players can live under the radar vs. the BS that comes with being a big fish in Europe.
I also think we will see the number of Central and N. American players with serious ability come up and be groomed here. MLS will not have to directly compete with European leagues for these talents. Furthermore, it has proven hard for up and coming players to receive work permits in Europe. This will continue to subsidize MLS since they will not be required to match out of control salaries of European soccer.
Finally, I am basing my expectation of rising values based on what has been occurring. There are very few professional franchises one can choose to own – this happens to be one of the most limited supplies in the world. There are very few leagues when it comes to soccer that don’t contain the downside risk of relegation. And there are none that focus on competitive balance.
I can’t find much about European Soccer Club values that directly apply to the value of an MLS franchise. Your core concept of player cost doesn’t seem to hold up.
Your numbers are way, way, way off. You use the broadcast revenue from the previous deal, not the current deal, to conclude MLS’ broadcast revenue is $13 million per year. However, the new deal is for $90 million per year, of which MLS receives approximately two-thirds, or $60 million per year. So that is $47 million a year in revenue which you omitted.
You omit concessions, parking, and merchandise. I am a Galaxy STH, and while tickets to a Galaxy game can be purchased cheaply, for say $35, it is in parking, concessions and merchandise where the Galaxy make its money. Parking at the Stubhub Center is $20 per game. A Guinness is $12. A hot dog is $6. A jersey is $90. A t-shirt is $30. So whatever attendees spent on tickets, they spend two or three times as much on parking, concessions, and merchandise. I have two tickets to every home game and I never leave a game without having dropped at least $100 for parking, beers for me and my guest, and some snacks. The StubHub center has a number of stores selling Galaxy merchandise at every game and the gear in those stores flies off the shelves like hotcakes. There is actually a line which winds outside the large merchandise store and down the concourse because the store is so packed with people buying gear that people have to wait in line to get into the store. It’s crazy. All those “Beckham” “Donovan” “Keane” and now “Gerrard” shirts sell like mad.
These are not the only revenue streams you’ve excluded from your calculations. The most obvious is your exclusion of SUM, which is one of MLS’ largest revenue streams.
You omit local broadcast deals. The Galaxy’s local broadcast deal with Time Warner is for $55 million over ten years, or approximately $5.5 million per year, JUST for the Galaxy. If other MLS teams have deals that are only half as much as the Galaxy, then that’s an additional $57 million per year that you omitted from your estimate of MLS’ revenue streams.
I will ignore that you account in no way for capital improvements and infrastructure as assets which gain value in their own right. However, most MLS venues are owned by MLS and those venues also earn money from other events. The Stubhub Center not only hosts Galaxy games but also hosts concerts, US Soccer games, and a half dozen types of other sporting events, including high school and college football championships, lacrosse games, etc.
You should fire your “inside source” – bad numbers make for bad conclusions.
Hmm, sure, I could discard the opinions of an industry insider because a STH in LA told me it was all wrong… or I could decide that a STH in LA is not the natural benchmark for the performance of the entire league, and that being irritated by how much you paid for parking is not a good basis for measuring profitability…
Get your industry insider to give you information on the amount of money the average fan spends inside the stadium on concessions and merchandise. Also get the average amount spent on parking controlled by the stadium.
Those numbers are there, at least on a per team basis. And they are very relevant to this discussion. The question is how to get those numbers out of the teams. But, you keep touting this industry source, so get them to give you some of that information so you can pass it along? Please? many people are curious about this type of information.
They are relevant, and they must add up to something- but for the record my source say they are not significant overall- and before someone shouts “Galaxy!” or “Sounders!” – remember that I am trying to look across the league as a whole.
K, I won’t scream “Galaxy” or “Sounders”
How about most of the rest of the league?
A league averaging 19k+ a game @ 340 games played across the season.
That is 6,460,000+ fans a game. Multiply that by the average amount of money spent by a fan at a game on concessions, merchandise and team controlled parking. Lets just say a conservative estimate is $20. I suspect its higher though. So you are looking at $129,200,000. Obviously you need to figure out the profit from that, then divide the profit among the parties who receive a share. But that is a significant amount of the puzzle that you are blatantly ignoring regardless of what your source tells you.
And keep in mind that because of the various companies set up by the investor operators you end up with those investor operators receiving shares from their different companies they set up. So they can make a profit on one side of that while still reporting losses at the team and league level.
SUM is a similar set up but at a larger scale of operations.
So first, take out the no-shows – my source says that a large number- say 25%. Margins on F&B are usually in the region of 100% so we’re down to about $50m profit- assuming that staff costs etc are already in the $400k game day costs (which might not be true), then divide by 19, and we have another $2-$3m to deduct from the losses. Not exactly a game-changer. Since in any case the exercise is to square the revenue and cost numbers with the league’s admission that losses are $100m, you’re no further forward. All you really need to say is that Don Garber is lying and MLS franchises are owned by smart investors who could never lose money and you have proved me wrong 🙂
Irritated? I’m not irritated. I could care less how much the Galaxy charge; it’s pocket change and the game-day experience is well worth the expense. $20 for parking in LA is standard. You fail to refute or explain the fact that you are using old numbers on the national broadcast deal and ignoring local broadcast deals, ignoring international broadcast deals, ignoring revenue from SUM, ignoring team-specific sponsorship deals, ignoring revenue brought into MLS venues by non-MLS events, ignoring merchandising revenue, ignoring concessions revenue, and ignoring all other gate-related revenue streams. Oh, and you also ignored the stadium sponsorship deals. I forgot to mention that in the first post.
Putting aside the $90 million dollars a year in national broadcast rights from MLS recent 8 year deal, and however many tens of millions of dollars of local broadcast revenue that you omit from your estimate, MLS also recently signed international broadcast deals with the following companies: Sky Sports (UK Broadcast rights) Eurosport (non-UK European broadcast rights), Globosat (Latin American broadcast rights), and Abu Dhabi Sports Channel (Middle East and North Africa broadcast rights). These broadcast deals are worth at least an additional $10 million a year or so.
Oh, and where did you get your numbers on the sponsorship deals? First of all, MLS has more than 18 sponsors. It has 19 major sponsors listed on its website: Adidas, Advocare, Allstate, AT&T, Audi, Chipotle, Coca-Cola, Continental, EASports, Etihad Airways, Heineken, The Home Depot, Jeld Wen, Johnson & Johnson, Kraft, Makita, Mondelez, Windows and Wells Fargo. However, this is not a complete list of MLS’ sponsors. It has many other sponsorship deals (e.g., Visa, Gatorade, Red Bull, El Jimador, etc.).
Further, your conclusion that these deals total $45 million per year is incorrect. Even if your numbers were accurate (which they are not as set forth below) and the Adidas deal was $25 million a year, the Heineken deal was $10 million a year, the Audi deal was $2-3 million, and MLS had 15 other sponsorship deals worth $2 million, that would total more than $45 million per year, even if non-cash services were part of the sponsorship deal.
But why did you arbitrarily estimate that the remaining sponsorship deals are worth $2 million a piece? The Coca-Cola deal was reported as a “high seven figure low eight figure annual deal” (in actual news outlets, not from anonymous sources) which means it is anywhere between $8 million and $15 million per year. MLS’ deal with AT&T was also reported as an “eight figure annual deal” which means it is over $10 million per year. In fact, a lot of these deals were reported as eight figure annual deals, which means your “$2 million” estimate is sheer conjecture. You could just as easily have speculated that each of MLS’ remaining 15 sponsorship deals are for $10 million a year, or $20 million a year. By my calculation, based on the numbers actually reported in the media, MLS’ sponsorship revenue is closer to $200 million a year, not $45 million. Even if it is only half of what was reported due to most of the value coming from service agreements, you’re still way off.
You also ignore all the revenue from the fact that each MLS team has its own private sponsors. For example, almost every MLS team has a private sponsorship deal with a craft beer company, a soda company, etc. Some teams have deals with health care providers, car companies, credit-card companies – the list goes on and on. All of these deals add millions of dollars in revenue for the teams. For example, after Heineken inked its deal with MLS, the Chicago Fire entered into a private sponsorship deal with Heineken for over a million dollars a year. Visa has private deals with the San Jose Earthquakes and the Houston Dynamo. Orlando has a private sponsorship deal with Fairwinds Credit Union. Every MLS team has private sponsorship deals. So in addition to ignoring league-wide sponsorship revenue, you also ignore team specific sponsorship revenue.
I don’t have a problem if you want to create some traffic for your blog or argue that professional sports are generally not profitable for their owners, but you should at least preface your post by acknowledging that you’re just spit-balling the numbers. Suggesting that MLS’ broadcast revenue is $13 million a year when it was widely reported in the spring of 2014 that MLS had entered into a new $90 million annual deal for its national broadcast rights undermines your credibility and insults the intelligence of readers.
I used the words “approximate” and “estimate”, so I don’t really see your problem here. Had I claimed these numbers were based on an inspection of the audited accounts you would have a point. Sure, we can argue details all day- it is admitted on all sides that we do not know the true numbers. Sure, there are things I left out that can be added – but won’t that be true for costs as well as revenues? You really think I have identified every possible source of cost?
As for looking at 2014 numbers- surely we don’t know much about 2015 – so I looked at 2014 for consistency- but then wrote after that about the new broadcast contract. Imagine I had tried an approximate forecast for 2015- you would have been even more incensed 🙂
MLS also keeps investing and reinvesting in itself. So money that comes in is going right back into things like building infrastructure in: stadiums, training facilities/grounds and academy set ups. Also investing in more non player employees to boost their sales staff, marketing staff, training and coaching personnel as well. The league has been doing more investing in the infrastructure of the league than player personnel. You have heard it from players coming over that they are impressed with our facilities. I think it is part of the leagues strategy to build this very strong base and foundation so that everything is in place once they start significantly raising player salaries to reach their loftier goals.
All these investments are growing at a steady rate by MLS teams. Look at all of the recent stadiums that were built or are being built? How much debt is in those investments currently? Because that has been a key driver of MLS’ success, them getting into their own stadiums. The league keeps improving on this front, especially getting the team with one of the worst situations into their own stadium. DC United always had a large burden hanging over their head and the league with the cost to rent RFK, now they will finally get their own stadium.
When you give us your list of costs, why do you include the army of sales and marketing employees while ignoring what they are selling? You leave out merchandising and licensing from all the different sources. How can you just simply ignore that large of an aspect of the leagues revenue?
To help you out, depending on where merchandise is bought the money is distributed differently. In stadium purchases, league website, team website and stores, 3rd party vendors, etc are all treated differently with respect to how much money the team gets vs what the league gets.
Merchandising and licensing are too important to ignore completely as a revenue stream while including some aspects of them in your costs.
Go back to your source and see if they can get you data on these things.
As anyone who follows the league knows, the league IS NOT profitable. But the question has always been about how much goes to all the other entities surrounding the league and its investor operators that do make money off the league. SUM is just the major and most visible of these. There are countless others. Like the organizations that operate and run the stadiums who happen to be ran by the teams investor operators. Or in some cases the media companies that are owned by the same people who own the team they are broadcasting, how do you account for that?
Well, until MLS decides to reveal the books to us we are both speculating. I’m not the optimist that you are. My source told me other revenue sources were negligible- I have more faith in him than you 🙂
I don’t buy it.
You are telling me that merchandising and licensing fees are negligible?
How do you respond to sources saying the amount of bad info in your article is staggering?
So we now have conflicting sources.
And your arguments are lacking on why you exclude important data points.
Let’s ask MLS 🙂
1) Stadium sponsorship.
2) In-kind share of jersey (plus a criminally low add-factor of 50%- see the DC United report page 31, which suggests it should be more like 100%) sponsorships are 33%? How much bread is the Union receiving?
3) Stadium revenues take an average ticket price and subtract 30% based on a conversation with a source – the DC United report has the actual numbers if you are interested. Page 25, chapter 3. Paid attendance is a much higher share of actual attendance for 2013 than 70%. In addition, the average ticket price likely includes the freebies: median ticket price was over 25 dollars with some significant skew.
4) Game revenues unrelated to the ticket – parking, concessions, jersey sales, you know – the stuff that is included in the same report I mentioned (40 percent of the value of ticket revenues, per page 45). Pretty much every team controls this money, but you don’t want to include it. But then you do this:
5) Stadium operating costs of $400,000. That’s the Vikings game day operating costs. In case you were wondering, the entire stadium costs to DC United is estimated at $6.8 million, or $400k per regular season home game (they are estimating 3 additional games in their report, but let’s forget that for a second. You think you have neglected ANY stadium costs like you say you have? No, you’ve done the opposite. You have included the full year-round operating cost of a 20k stadium, divided by a fraction of the games that will be played there. This number includes insurance, administrative, utilities, etc. (see page 44).
5) TV revenue doesn’t include small international contracts. It doesn’t include the uneven local contracts (which you acknowledge but don’t justify – the 10 million per year from the sum of the Sounders and Galaxy is a big enough number to add in right off the bat). It doesn’t include the Canadian contracts (rumored to be as big as any of the other big contracts). It doesn’t include MLS Live revenues. It doesn’t even include an add-factor that you make up.
It doesn’t even appear that you have the correct TV number – 13/23 is likely the wrong numerator, and it is certainly the wrong denominator. You can find these details online, you don’t need an inside source. The three big contracts add up to 28-30 million depending on who you ask.
I’m losing energy here, but I have a question. Why do you think you would come up with a better estimate of 2014 revenues than Forbes did of 2012 revenues? You didn’t do anything close to comprehensive here, and you didn’t give SUM a rigorous treatment.
I was basing this on what I was told represented a reasonable average for the league- not DC United. Clearly, some MLS franchises do better than others. So what?
Why do I think my figures are better than Forbes? Because MLS say they lose $100m and I believe them – my figures are consistent with that. Forbes say they make a profit.
Be very skeptical of what MLS reports. It is a single entity business that pleads poverty so it does not have to pay it’s employees higher wages. Lower costs translate into more money for the owners. It is to the owners advantage to exaggerate and mislead about their finances so players don’t demand more or strike.
Sure, but that cuts both ways. I chose to believe what MLS told me and that they are not liars- that relates to losses but also to tickets sold and ticket prices. If you say they are liars, then they could be lying about many things.
i appreciate your insightful assessment that MLS investment has the characteristic of “pyramid” scheme. two questions may be you could share your thoughts?
1. i doubt many “investors” buy into MLS for “glamour” effect. buying Orlando FC in MLS is not like buying Leicester or QPR in EPL. at least QPR plays a few games with Man U or Chelsea with GLOBAL TV exposure with hundreds of millions (if not billions) viewers watching. MLS is mostly unknown in the world. there is little “glamour” effect from owning a MLS team. even in US, Deford said “nobody cares about MLS” -:)
2. Black Swan effect. some Bitcoin promoter wrote on pro Bitcoin blog that Warren Buffet is investing $200 million in Bitcoin thus supporting the notion Bitcoin has long term value. what they missed is, Warren Buffet has $500 billion plus asset under management, putting $200 million (0.04% of total asset) is like an average joe spending $2 on Powerball lottery. buying into the Black Swan (rare event) (Nassim Taleb’s investment style). i don’t have the math on MLS, but i suspect most MLS investors have only small % of their portfolio in MLS. they are fully expect to lose the $ but it is only $2-, so who cares?
You’re right, if these are small value out of the money options being bought by the mega rich then there’s probably nothing to worry about
I writing to debunk the commenters misbeliefs and the completely unnecessary attack on Dr. Syzmanski. From an economic perspective Syzmanski is spot on, the league financially will not make it in the coming years; however, there is more to sport business than that. Owners generally fall into three categories 1) The next logical toy to buy after a private jet is purchased. 2) A great way to promote their other business interests and network. 3) A combination of both.
The vast majority of owners fall into category #3. It is understandable that Szymanski would not understand this because he has not dealt with sports owners before. Furthermore, based on his writing, he won’t be anytime in the near future either .
A team puts an owner into the public eye which opens door that even a previously wealthy businessperson can’t buy. For example, team owners get to know local and state politicians, which opens doors far beyond the sports domain. There are countless other examples of the “Non economic” benefits of owning a team, as I am sure you can imagine.
Based on all of these benefits that can not be calculated financially, a person with a net worth in the hundreds of millions or billions does not mind taking a yearly calculated loss for alternative gain. Think about it, a $10 million loss per year owning an MLS team in order to have a local mayor on speed dial for one’s main business interest is an excellent deal.
Szymanski is an economist and is trying to get his name out there for the media, but in my humble opinion he is not doing his due diligence on the realities of sports business. Before he has the audacity to say a league is going out of business for “Economic reasons” he should explore the business more thoroughly.
With that said, people should be much more respectful of a man who is writing about his opinions and is smarter than the average pundit on TV.
Well, I’ve written a lot about status and buying sports teams- so you probably need to do your due diligence on my work before you judge.
And thankfully I have the opportunity to talk to plenty of owners 🙂
Mr. Michael Williams, with all due respect, I humbly disagree with you;
in particular your statement on Szymanski’s “trying to get his name out”, “has not dealt with sports owners won’t be anytime in the near future”, “not doing his due diligence on the realities”.
in a free speech society, everybody is entitled to expressing their ideas irrespective of motive. you get into speculative territory when you guess others motive. i care more about the idea (content, concept, knowledge) than the motive of the speakers. you become more ad hominem when you stated Syzmanski “has not dealt with sports owners” and “won’t be anytime in the near future.” how do you know? it is the “anytime in the future” that bothers me. i always get intimidated when people making predictions. by the way, Szymanski based his analysis on MLS’s own data released to the public.
i believe Szymanski delivered some insightful observation and unique ideas. at least i haven’t read about this on many MLS stories on NYT, SI, SB until him. in fact, his analysis reminds me of Dr. Robert Schiller (Case-Schiller Index) who in 2005 assessed the housing bubble by applying housing data. during the time (2005-2008), dissenters rebutted Schiller with similar lines “housing has long term appreciated value”, “early stage of investment with long term growth”, “glamour”, “intrinsic value”.
i do not know if there is a MLS is truly a good “intrinsic”/”glamour” investment or a bubble. but i sure enjoyed Syzmanski’s analysis which at the very least, provide me with a new perspective supportable by reliable data points.
Disclosure: i do not know Syzmanki. i enjoy Sounders, NYRB, LAG.
Your number of $400k of operating expenses is EXTREMELY high. Think about it, to open a 60k+ football stadium they say the low end is $430k. How could the AVERAGE of MLS stadiums that mostly are 18k-22k be the same as some 60k football stadiums? Those 60k stadiums have SO many more staff members and operational issues, a football stadium is gigantic compared to soccer stadiums.
The cost operationally, and I have put on large soccer games, is easily less than $100k on average. Maybe Seattle or NYCFC at Yankee Stadium have higher rates. But Chicago, Columbus….any soccer specific stadium is going to be less than $100k.
My source knows about MLS soccer stadiums.
Your number of $400k of operating expenses is EXTREMELY high. Think about it, to open a 60k+ football stadium they say the low end is $430k. How could the AVERAGE of MLS stadiums that mostly are 18k-22k be the same as some 60k football stadiums? Those 60k stadiums have SO many more staff members and operational issues, a football stadium is gigantic compared to soccer stadiums.
The cost operationally, and I have put on large soccer games, is easily less than $100k on average. Maybe Seattle or NYCFC at Yankee Stadium have higher rates. But Chicago, Columbus….any soccer specific stadium is going to be less than $100k.
OK – Decent research but you failed to mention their #1 source of revenue which puts them in the black.
What if your assumption is wrong?
What if the owners don’t own MLS teams to make a profit? What is your conclusion then?
Then the league will not collapse. This is the case in the rest of the world- so probably the more likely scenario. My argument has long been that in this respect the US is probably like the rest of the world take a look at my post on American sports capitalism form a few weeks ago.
You actually believe numbers MLS lets you know around salary negotiations? A ton of rich people aren’t buying into it because they’re actually losing money hand over fist. It’s like believing David Stern in a negotiation with the NBA players union. Nobody should believe it when a franchise is selling for $2 billion. LAFC and NYFC are the same deal. No smart rich person is spending $100 million+ a year to lose money. The league isn’t losing money. Certain franchises are and those are picked up by the bigger name franchises that aren’t. If you actually think the league is losing $100 million a year you might as well admit you are drinking laced Kool-Aid.
This cuts two ways- if you say they are lying about losses then why aren’t they lying about attendance? The figures are not independently audited
I applaud you for excellent analysis. All these other posts trying to point to other revenue streams or tweaking them really don’t change the overall argument you made.
I want to see MLS be a strong, global league but when you take an objective view (which I’m afraid many aren’t), it’s not hard to see that the league is on a wrong / negative path.
Well if the actual revenue number for 2013 were in the $500mm range like the last time a professional outfit estimated it (Forbes), that would change the analysis pretty severely – the league would be profitable.
The whole thing depends on getting revenues and costs in the right ballpark. Expansion and buying in to the league either looks healthy or it looks pathological, all based on whether the league is/will be profitable.
The 30% ticket freebie information is shocking if accurate.
There seems to be a chicken/egg issue. Which comes first?: (1) spending big on players to drive increased TV revenue, or (2) earn increased TV revenue to have the money to buy better players. Seems like the league has to take a leap of faith eventually and spend big to see if it turns into bigger TV ratings which will lead to bigger TV contracts.
IMHO, the owners know they are going to sustain losses for the near future (perhaps until 2023 or beyond). I think the owners are trying to plant some roots in their markets and slowly build fan loyalty. They’ll probably add 1 or 2 DPs during the term of this CBA which would allow some teams (LA, Seattle, NYCFC) to have a payroll of $20-$25 million over the “cap”.
Are you taking into consideration the capital appreciation of a team’s value? Do you think the owners of the Sounders or Timbers (I know I’m cherry-picking) have “lost money” when you compare their total financial outlay versus their capital appreciation of the franchise’s value? If the Sounders sold their team today or in 10 years, would they recoup or make money on their total spend over the life of their ownership? That is the real question to me. Making money on an annual basis < making money when selling team.
You’re right that some franchises would sell at a premium now, but I’m sceptical about long term appreciation on average- not normally the case in soccer- hence the references in my blog on stock market returns to football clubs in Europe.
Would the depreciation of player salaries offset some of these losses.If I am not mistaken, owners can depreciate player salaries over a 5 year period. Using your figure of $150 million, that would be $30 million. Using a conservative tax rate of 30%, the owner would see a benefit of $9 million that would offset the $7 million loss.
My calculation is probably very simplistic, if not flawed, but these owners ore not generally stupid people. They must see some future value.
There may well be a tax benefit associated with player costs. A tax shield is valuable if there is taxable income against which to offset it- if the league loses money then there’s no taxable income. But then the shield may be transferable to other businesses in the group- it will all depend on the overall tax position of the owner.
Another aspect of these investors is often they are not simply building soccer specific stadiums. They are envisioned, and often actualized, as a focal portion of a larger real-estate development scheme. Office towers and retail shopping are integrated into the stadium construction. This is happening in Europe, also (see Tottenham’s new stadium that includes such things). These are presumed to be revenue generators. Person goes early to soccer match, or stays late and eats at restaurants, buys from merchants, etc. In the USA, attending a match is a suburban/urban outing day that may include more than just going to the match. For instance, Sporting KC’s relatively new stadium is associated with a huge and popular retail development called Village West. These business owners are not looking at their sports teams as simple profit centers, but as integrated within larger businesses providing added value and new revenue streams to those other businesses.
Also, critically, the October 2014 statement by MLS was at the start of new contract negotiations with the players union. All companies put on the ‘poor show’ in such negotiations. MLS, because of it’s linkage with SUM can hide a good bit of revenues and profits there. If you want to understand MLS’s business model you have to study SUM, not MLS.
Sure, my colleague Mark Rosentraub (he’s in the office next door) works on these issues. This will certainly add some value for some franchises, but not all.
I know of a third party report with significant data and details on MLS finances. It’s the cost-benefit study commissioned by the District of Colombia for the new DC United stadium. There you will find more reliable data then what I see here.
In particular, MLS reported an average paid attendance of 16159 in 2013. That’s about 87% of the total attendance.
Stefan, thanks for your research, analysis and insight on this issue. It is very fascinating to get a slight peek behind the MLS curtain.I feel like you approached with skepticism and honesty.
Allow me to refer you to one of Aswath Damodaran’s many excellent books on corporate valuation (although, it seems, in your case it might make sense to start with a simpler primer first).
To refer to MLS as a “pyramid scheme” is not only highly offensive, it is also profoundly ignorant. Many businesses, both public and private, go through a revenue growth phase where they do multiple rounds of equity financing all the while generating a loss. A number of multinational corporations that are now household names have gone through this process at one time or another. MLS taking in expansion teams and fees is a similar, if not perfectly analogous, exercise. It is a venerable and time-tested tradition in corporate America. But from your piece one would think it’s something extraordinary, illogical, and immoral.
The “pyramid scheme” label as applied to a business is warranted if a a business keeps on raising addition financing either with fraudulent intent i.e. there was no underlying business to begin with or, if I have to accept a softer definition, when there is an actual business, but the business is so hopelessly broken that there is no chance (despite the owner’s good intentions) of the new investors ever getting paid. Since you are not (as far as I can tell) calling MLS’s owners and executives crooks, I assume your point is of the latter kind.
“So one wonders what the owners of the expansion franchises think they are buying into” you ask. The answer is simple: they are buying a claim on the stream of FUTURE cash flows that will be derived from an ownership of an MLS team. That’s what valuing a business is – finding the net present value of the FUTURE cash flows associated with that business (there – no need to spend $64.85 on Damodaran any more). First you need to decide on an appropriate valuation horizon. I have no idea what your valuation horizon is but your article seems to imply it’s the duration of the current TV contract i.e. 7 years. Why so short? 7 years is absolutely no use in this case.
Secondly – and that’s where you completely drop the ball – you need cash flow estimates. We can all tell you are extremely bearish on the financial prospects of MLS but what specific cash flow estimates you are basing that bearishness on (and how you arrive at those estimates) you don’t tell us. You don’t tell us even in the most general terms what you are bearish on MLS’s future (again, future being the operative word).
For example, what are your projections for TV revenues in year 8? TV revenues are a function of 1) amount of viewership and 2) the price advertisers pay for viewership. MLS viewership so far this year is up ~16% on ESPN and ~40% on Fox compared to NBCSN last year. That’s with MLS competing against March Madness, NHL playoffs and NBA playoffs, the conclusion of which, should conceivably help ratings. If current viewership growth rates sustain themselves over the next 8-10 years, we will be looking at a very respectable viewership number. Or maybe viewership will grow exponentially? Why not? The millennial will be maturing, immigration from soccer-loving countries will be increasing, and the overall popularity of soccer will be rising for a whole host of additional reasons (NFL and NHL concussion crises, people waking up to how boring baseball is etc, etc). Or maybe the viewership will stagnate but the price of sports viewership will explode higher? And where are your projected attendances numbers? What levels will game tickets be trading at? Are you certain the Seattle Sounders will not be selling out Century Field 10 years from now? Are you sure that say a Messi-featuring LA Galaxy wont be playing at a sold-out Rose Bowl charging $250 a ticket?
As you can probably tell, I am extremely bullish on this league. I think MLS teams are not only the cheapest sports assets, they are among the cheapest of any assets. But I could be totally wrong in my forecasts and you could be totally right in your apocalyptic predictions. That is not the point. The point is you make offensive claims, and reach brazen conclusions without disclosing a set of credible starting assumptions and then applying a rigorous, forward-looking methodology to arrive at those conclusions. The accounting segment of your piece was informative and enjoyable to read. The rest felt more like a blurb by a tabloid reporter rather than an article by a respected author and an academic.
SInce you lecture others on doing their research properly, shouldn’t you do your own? You can easily find my CV on line (23 years as a professor of economics in business schools – you must be aware that business school economists have to teach valuation techniques), read any of my books/articles to see the research I have conducted on soccer markets, and read my previous blogs (on this site) which explain in detail why I am pessimistic about the profit potential of MLS. That would be more credible that a few cheap shots.
As I explain in the blog, to reach the stated goal of being a top league in 2022 they would have to be spending at least $750 million in player salaries, given that there is a global market for talent, which is around 5 times the current level. With broadcast deal fixed until 2023 and stadiums already close to full, what would be the credible assumptions about revenue that could generate a positive cashflow?
The demand in the USA/Canada marketplace for the sport is driving the MLS franchise valuations, not MLS’s business model.
That demand has been created far more be changing demographics over the past 25 years than anything that MLS has done. Yes, MLS has reaped the benefits, but the real reason MLS has survived to date, has far more to do with the IRS Tax Code than its business model, which has been entirely structured and managed to take advantage of the Code.
Nor do we know how the so-called franchise fees are being paid. Lump sum payments to the league is the media-based assumption, but the likelihood is that a stadium requirement of USD 200-300MM for a 20,000 to 30,000 seat stadium (assuming USD 10,000 a seat), means that the ticket to enter MLS in a city like LA or New York is nearly a USD 500MM investment. Given those cash requirements, even if leverage is involved, would certainly justify installment payments to the league (and presumably in turn pro rata to the existing owner-operators) of the franchise fee.
Sheik Mansour is rumored to have paid USD 250MM or thereabouts for Manchester City (including the stadium and all other real estate assets, youth programs, etc., not to mention the estimated USD 1 billion or more since then to upgrade the grounds and team personnel).
If we keep our focus on the franchise fee and the stadium requirement in New York City, that would mean his NYCFC would be well beyond twice the price paid for Man City in what is arguably the best league in the world.
The EPL’s current TV contract is 26x (USD 2.6 billion/year) greater than MLS’s new TV contract.
However you slice and dice MLS, the numbers do not lie. And the case Professor Szymanski makes isn’t refuted by Damodaran, it is reinforced.
From a european perspective it seems to me that the basic MLS strategy is completely wrong (and I’m already ignoring relegation/promotion which I’m pretty sure would mean hundreds of clubs popping up, making the sport much more organic and evenly divided across the country).
1. Focus on old(er) foreign players. This is everything but long term thinking (Kaka, Gerrard, etc will definitely NOT be in the MLS in 2022). Also, Eusébio, Pelé, Beckenbauer etc. No one in the MLS noticed that this strategy failed miserably both on and off the pitch!?
2. 20 teams = 20 mediocre managers (not a single one with experience in top european clubs). So you’re pumping hundreds of millions into a league and you completely ignore the leader of the team, the one responsible for the game quality and the development of the players the fans pay to watch? What’s the logic behind that? In mid level teams all over Europe you have very competent managers (between 0.5 and 1 million a year to lure them) that would could serve as role models for the new generation of americans managers. Mourinho spent years learning under Robson and Van Gaal. What are the assistant managers of Sigi Schmid learning? In the Premier League currently: 1º Portuguese. 2º French 3º Dutch. 4º Chilean (8 out of 20 in total, in a country that breathes football). If your local managers are no good, then you must go abroad in order to raise the level of the team and players. It’s pretty straighforward (just think of the impact a Bielsa could have). Basically get designated managers instead of players, because they can help the clup grow for 5, 10, 20 years by creating a top level structure around them (think Guardiola/Wenger/Klopp/Ferguson/Lucescu/Jorge Jesus).
3. Only 1 million per team for the academies? Again, they’re completely missing the point. Manchester City, which has unlimited funds for wages and transfers, spent a massive amount of money on their academy (around 200 million dollars I think). Now that’s long term planning. It should be mandatory for each MLS team to have a BIG academy (instead of 100 million charge 70 plus the academy). They’d also be wise to hire the technical directors in Europe so has to soak up the knowledge (Man. City went straight to Barcelona). MLS even has a structural advantage in this area because the average player level is so low that means it would be very easy to give lots of playing time to the 17/18 year olds that show real talent (something very difficult in the Premier League).
So it seems to me that, like the article states, MLS is very, very far from ever being financially sustainable, in the short term because of the 100 million plus deficit but in the long term because it’s not even aiming in the right direction. It’s a football league that seems to be completely ignoring their product: football (players + managers)! What is said about the marketing/sales machine is the perfect illustration of that.
MLS has long practiced Orwellian doublespeak.
Doublespeak #1: MLS is a single entity. Not true. MLS, the league, is a Delaware LLC that occupies the expense side of the league’s balance sheet. SUM, also a Delaware LLC (25% owned by Providence Equity) occupies and is responsible for the revenue side of the league’s balance sheet. The question no one has asked is what is driving the business model’s structure? The answer is the IRS Code. Losses at the league level (a separate legal entity) can be upstreamed to the owner-operators as tax loss carry forwards. The revenues SUM generates for the owners (75%) can be handled (1) by the same upstreaming pass-through mechanism allowed by LLC’s and the tax code (allowing owners the choice of how to handle it independently and depending on each owner’s peculiar set of circumstances) or (2) the revenues can be re-invested in MLS operations and programs. All revenues at the league level are generated by SUM. The greater than USD 100MM in losses that Garber publicly announced includes SUM. This is not news. Taking into consideration league and club expenses and CAPEX for stadia infrastructure league-wide since league inception, clearly establishes that MLS has lost money 19 straight years.
Doublespeak #2: MLS wants to be one of the great football (soccer) leagues in the world by 2022.
Here are the facts:
Fact #1: Real Madrid, a club that is owned by its fans, generated more revenue in 2013-14 (USD 750MM in converting the Euro to the USD), than all four of leagues (MLS, NWSL, NASL and USL Pro) and their clubs combined in the USA/Canada across Divisions I, II and III.
Fact #2: The German and the English second divisions each outdrew MLS in attendance and in total revenue.
Fact #3: The Dutch league (population: 17MM) had more revenue in 2013-14 than MLS (including SUM) in the USA/Canada (population: 352MM).
Source: Deloitte FML 2013-14.
Fact #4: MLS’s new TV contract is in fact a reinforcement of the status quo for almost the next decade. USD 90MM will generate at best 60MM for the MLS owners (25% to Providence Equity, at least 10% to USMNT). With league expansion at its announced maximum (Minnesota and Beckham bring it to 24), Garber’s one-off revenue generating exploits of selling franchises will be over. What percentage Garber receives as a contractual incentive for each new franchise has not been disclosed, but it is clear that Garber will be nowhere around when 2022 arrives.
Using the global revenue standards of the English Premier League (EPL) and the Bundesliga (in the latter by the way, 16 of 18 first division clubs are fanned owned and controlled), MLS is in fact, a first division league in name only.
The absolute mystery about so many of the comments above, is why are people so incensed and supportive of what is clearly a mediocre product.
The NFL, the NBA, Major League Baseball and the NHL represent the global standard of sports excellence in their respective verticals.
Why not for football (soccer)?
If MLS was treated as any other business in any other industry vertical, the league’s performance and the management team responsible for that performance, would have been summarily dismissed long ago. The league and its clubs would have been restructured and rebranded. It doesn’t take 20 years to get a business model right.
There is another agenda here.
MLS is in fact, a lid on the pressure cooker of demand for this sport in USA/Canada, and is a strategically positioned blockage mechanism for any substitute that embraces the global standard of excellence.
Having a world-class football league in the USA/Canada, is exactly what MLS is positioned to avoid.
Suppose the owners are indeed in this for the money and nothing else. A prediction for a collapse still seems wildly fanciful.
Assume your numbers are correct and league is losing 100mm a year. That’s 5mm per team. It’s nothing. It’s an amount that can be easily bridged by improvements in areas you rightfully identified as problematic right now. Here’s some of the things that can be significantly improved:
1) Reduced number of giveaway tickets (shockingly high number right now!)
2) improved attendance for low attendance teams like chicago, dallas, columbus, denver, new england.
3) reduction in the number of no shows (higher revenues from parking and concessions)
4) an increase in ticket prices for teams with sellout attendances like Portland and Kansas City
5) increased jersey sales, additional local sponsorship deals.
There is also absolutely room to increase the number of games played in a season down the road, which will decrease average attendance but increase overall revenues.
Are meaningful improvements likely to happen in all these areas? Yes – all the macro trends point to a further growth of the sport in the US which will inevitably translate into an increased interest in the league on the local level, even with the current highly uncompetitive salary cap. (You seem dismissive of this argument although it’s not particularly clear why).
TV revenue is locked in until 2023 so no near term room for growth there but I would be very interested to see what viewership we get out of the UK, Europe and South America this summer once their domestic seasons end. I suspect there will be interest and foreign TV rights will be a good source of revenue for this league down the road.
This league can be uncompetitive by global standards, not widely watched on TV in the US, but still popular locally and profitable too.
Thank you Mr. Szymanski for a very interesting article. However, I don’t believe that MLS is
expanding to secure revenue but to try to create a bigger TV footprint for a larger future contract just like the NHL is refusing to relocate their tepid sunbelt franchises to fanatical supporting centers in Canada where TV revenue is at it’s max. I believe the the goal of the league is to try to get their Forbes valuations closer to that of their larger counterparts, so what is a few million losses for a
potential hundreds of millions of dollars gain?
I think the weakness in this analysis is that it implicitly assumes a short-term, partial equilibrium model of the US soccer market. But it’s clear that what MLS is really engaged in is a long-term effort to increase demand for live and televised soccer in the US market (hence the large marketing budget mentioned above). The author assumes that demand will respond only (or mostly) to investments in player quality–in other words, that MLS can only become more popular by spending more on players and thereby improving the quality of the game. The MLS seems to be making a different bet, one that assumes the US soccer market is fundamentally different. Unlike in Europe, where soccer is already ubiquitous and it’s hard to increase demand for it (i.e. “how to get more people in the UK to watch soccer?”), MLS is betting that there’s a potential or latent demand for soccer that they can draw out over a longer period of time. It’s about creating a “soccer culture” where none currently exists. In this view, it doesn’t hurt MLS that superior products like Premier League and La Liga matches are easily accessible in the US, it actually helps. It’s not about whether the marginal viewer is watching Barcelona versus watching Columbus Crew, it’s about whether the marginal viewer is watching soccer versus watching baseball (or golf, or something else). The various soccer products are complements, not substitutes.
What we really need to assess MLS’s prospects are not single-year budget analyses, but long-term growth rates for soccer attendance and viewership. That’s what I think MLS is banking on, anyway.
You’re right, I think that to be successful in the US MLS will have to be seen as competitive with major leagues in the rest of the world. But it’s also true that MLS has attracted a large following at the games without the this- because there’s more to it than quality of play alone. The problem is that this is not working in the TV markets- MLS has a niche but it wants to break out of it.
As far as complementarity and substitutability, I think it’s a stretch to argue that a game of baseball on TV (MLB) is a substitute for MLS on TV, while an EPL soccer game on TV is not.
I do think that at the highest level sports are to some degree substitutes (people think of them primarily as baseball people, or football people, or soccer people) and while they may watch several sports, they tend to have loyalty to one. Which supports your argument.
But I also think that people are often time constrained, and if they’re a soccer fan and have time to watch one game over the weekend they have to choose – MLS or EPL, or LigaMX, or whatever.
But it’s an interesting question about how consumer behaviour works in sports.
I came to this article late, i really think this is great analysis. The product is key, in every industry. If the product is weak and $150m a year for a football league of 20 teams is weak. It should be 50% higher today and going up $1-2m per team per year going forward.
If you look at the model of talent/salaries its 5-10x less then the best leagues. If the MLS wants to be a top league by 2022 or 2032 there should be a measurable plan on how to move the team budgets for salaries move from $5-10m a year per team up 1m a year over the next 10 years so their quality of talent can be closer to top leagues.
The TV deals, sponsorships for MLS are just a basic foundation of the revenue streams ($10m a team) the league office should have a much smaller footprint not $20-30m a year it should be putting another million into salaries. They should pool the marketing, ops, mgmt etc.. at a team level so they can get another $1m a team in salaries.
MLS can do all the deals its wants but if isnt spending $500m a year when it has 24 teams on TALENT then its quality will always we weak and the TV deals will never be there.
with FOX, BEIN, NBC showing the top 5 leagues in europe every week on the real schedule MLS will never compete, its a free market and everybody knows if they want to watch the BEST TALENT you watch those leagues until you have some of that talent in MLS (10 players per team that are tier 2 european quality) and the rest tier 3, the rating will always be weak and the TV deals will be avg at best.
The test is how many none USMNT player jerseys do you see on kids, adults walking around vs. top 50 teams in europe? If you cant get us to wear a jersey of an MLS team how are we going to watch it on TV.
The $7 million loss per franchise estimate using these rough numbers may not be that bad of a figure. For big city teams some posters here talk about merchandise sales and such but I believe that even the smallest club has at least one non-MLS game big event in the summer that pulls in millions in revenue.
For example, Columbus has the annual Rock on the Range music festival. Attendance is now over 100,000 with tickets around $50-$60 per day. Let’s low ball again and say $50 times 100,000 people and we get $5 million. Again, this is ignoring things like parking (typically around $15 at Mapfre Stadium for Crew games), concessions, etc, and how revenues are shared but the profit from the event should be in the seven figures.
Just this summer I paid $58 for each ticket to see LA Galaxy vs. Barcelona at the Rose Bowl (stadium not owned by the Galaxy) along with 93,225 other people, some of which paid less most of which paid more. If we calculate a low ball estimate using my ticket price, that’s $5.4 million in revenue. Of course this is just ticket revenue and the Galaxy has to share some of that with the Rose Bowl but I think it’s a safe assumption to say that the profit made here is likely in the seven figures. However, these ticket purchases do come with a free ticket to a Galaxy game, which adds to your ticket giveaways.
Accounting for these big events should significantly push the losses towards the break even point for all teams, not just the big ones. So although I would not be comfortable claiming that most teams aren’t losing money (you’re probably right — they are) it may not be as bad as an average $7 million a team. As an avid MLS fan, I certainly hope not!