RSL Cup blog taking a long much needed break

I've been a fan of Real Salt Lake since it joined MLS and took to the field in 2005, and I've been a fan of MLS since it began in 1996.

However, over the past couple of years, and especially the last several months, I've began to see the ugly underbelly of this sport. Most likely it has always been there and I was just too naïve to see it, but I cannot not see it anymore.

I'm taking a much needed break from the sport of soccer. I may or may not be back. I may or may not update this blog, I don't know. It would be a shame since I've had it up and running for almost 10 years, but the fun I once had just isn't there any more.

Hopefully you fare better.

Monday, March 13, 2017

What is the MLS Business Model?

(by Stefan Szymanski

“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:
  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. Player sales. Far from buying in talent, MLS is a trading organization that according to 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:
  1. 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
  2. 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.
  3. 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.
  4. 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.


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