Peter Wilt is worth listening to: he was the first President and General Manager of the Chicago Fire and has made subsequent attempts to bring MLS franchises to the Mid West. He understands the MLS model and, I would guess, has faith in it. But he also understands business.
He tweeted out the following comments on my piece:
1. “While the revenue, expense & loss estimates are interesting & likely not grossly wrong, I believe he misses on some key assumptions.”
2. “He assumes that MLS owners will always be different than owners in the rest of the world who are willing to accept operating losses.”
3. “Doesn’t address fact that NHL, NBA & MLB values continue to appreciate even tho a majority of their teams operate at large loss annually”
4. “Doesn’t accept or address fact that supply of interested MLS investors (foreign & domestic) will likely outstrip available teams to own especially when expansion stops which will force the value of existing teams up regardless of operating profit.”
5. “That increase in franchise value has always outpaced operating losses in other US sports and I believe will do the same for the foreseeable future in MLS.”
Point 2 is interesting. I don’t necessarily think Americans are different from everybody else- I think there may well be owners prepared to accept losses without significant capital appreciation in the way that owners often do in the rest of the football world. Which is why I said that MLS will collapse if owners require profitability. If they do not, then many of them are rich enough to bear the losses for an extended period of time.
But then he argues that there may be significant capital appreciation to offset the losses – back to the profit maximizing model of ownership. I have two issues with this:
- The other major leagues are not a good basis for comparison in my view- they are not operating in highly competitive global markets for talent. In any case, economists such as Roger Noll, Rodney Fort and Andy Zimbalist have long argued that the claimed losses are to some extent illusory. I don’t think the MLS losses are illusory.
- It may be that some franchises will generate capital gains (the Sounders would probably sell for a healthy profit right now), but that is also true in the rest of the world. Investors who bought shares in the Manchester United IPO in 1991 made a fortune. But that was exceptional. That’s why I quoted the evidence on stock market returns of football clubs- they have in general been woeful.
Regarding your point that other major leagues “are not operating in highly competitive global markets for talent”: Couldn’t we also say that these other major leagues don’t have access to a global supply of players comparable to the global supply of soccer players? Seems like you’re choosing to focus on demand while ignoring the supply. NBA pays the highest average salary on the planet, after all. MLB isn’t far behind. If those leagues weren’t operating in highly competitive labor markets, we’d expect to see lower wages.
Which is to say: I don’t think you can argue that MLS faces a more competitive labor market than the other major sports leagues. In fact, I’d argue that soccer labor markets are much less competitive.
Very interesting stats that market returns of football clubs have been historically poor. I see 3 reasons why we are in a new regime and that will change:
1 ) an ever increasing demand for the product
2) better cost management
3) revenue sharing
1) Here is a piece of stats I found remarkable. The UEFA Champions League Final had the same global viewership as the Super Bowl as recently as 2009. Since then SB viewership has remained roughly constant while the CL Final’s viewership is up ~60%. As popular as we think European soccer is already, it is still growing by leaps and bounds and, in terms of penetrating markets like China and India, it has barely scratched the surface. There is still much room for growth.
2) Financial Fair Play introduced a form of salary cap for clubs that will significantly rein in expenses. FFP might actually put smaller teams at a competitive disadvantage but there is no doubt will improve their “earnings.”
3) Not sure how every league does TV rights but La Liga looks finally set to negotiate its TV deals as a single entity, which will be a huge boost to smaller teams. That’s been the case with the EPL for a while and I expect it to become the norm everywhere.
What caused the dramatic rise in valuations for NFL teams over the past 20 years was arguably a combination of rising domestic viewership, the existence of a salary cap and revenue sharing. In this respect European soccer leagues are becoming NFL-like.
The one big overhang in European soccer that warrants discounted valuations other things constant, is, I think, the prospect of relegation. Relegation offers a potential for wealth destruction that an NFL investor does not face. It works the other way around too, of courses -one can buy a lower division team cheaply and make a fortune if the team is promoted.
James, great points.
part of why we need more $$ spent for salaries for soccer in the MLS and the US pyramid is the quality of the academy system. Spending $1m a year per team is absurd. You cant have a even a second division in europe with $25m a year in league academy spending. Its at the same level as English 4th division.
If TV rights are going to get to $200-400m a year in the set of contracts, they need to keep selling teams and have a way for promotion from USL to MLS and when a team bombs financially they can send it down to USL etc.. new merged MLS second division.