Landon Hemsley (SMBA ’15) looks at David Beckham’s attempt to own an expansion soccer franchise in MLS in this 5 part series. This section is Part 2. Be sure to continue to read through all five parts: Part 1, Part 3, Part 4, Part 5.
David Beckham came to Major League Soccer with a long-term mindset. He didn’t just milk the league for all he could. He milked the league for all he could and then built an option into his deal to buy an expansion club at the bargain basement price of $25 million. Since then, expansion fees in MLS have soared above $100 million.
Yet, since Beckham officially executed that clause of his contract earlier this year, no franchise has officially been awarded. In other words, Beckham has spent the money to board the MLS steamship, but the chief of the boat isn’t letting him aboard yet.
Why not? Could it be that there’s something in the Miami market that Major League Soccer simply will not abide as it evaluates expansion plans? If there is something, what could it be?
Part one of this series examined whether or not Major League Soccer is even be in a position to entertain Beckham’s ideas of expansion into Miami, concluding that the League is in a very good position for growth. In part two, we examine the four criteria MLS uses when evaluating expansion markets in an effort to examine why Beckham’s Miami miracle still hasn’t gotten off the ground.
MLS requirements for expansion
The leadership of Major League Soccer has not been shy in dictating what it will take in order to secure an expansion franchise. It’s quite simple. MLS senior vice president for marketing and communications Dan Courtemanche summarized it best. In order to obtain an MLS expansion franchise, a market must have 1) an ownership group, 2) a stadium, 3) a strong market and 4) a strong fan base.
What kind of businessman invests in Major League Soccer?
Because there are no true “owners” in Major League Soccer, only investor-operators, a market must have someone willing to invest in soccer as a sport and MLS as an enterprise for a specific geographic region. This individual must be wealthy to afford the ever-more-expensive expansion fee. This individual or group must also be willing to surrender some of his competitive spirit.
MLS lost $350 million through 2001 and faced painful contraction in 2002. The turning point for the league was in 2007 when Maple Leaf Sports and Entertainment invested in MLS and founded Toronto FC. That move drew the attention of a number of capable investors that have since gone on to purchase both existing franchises and expansion franchises for the league. These men – NYCFC’s Ferran Soriano, Seattle’s Adrian Hanauer, Portland’s Merritt Paulson, Kansas City’s Cliff Illig and Rob Heineman, and Salt Lake City’s Dave Checketts and Dell Loy Hansen, among others – have provided the league with the financial resources it needed to stabilize itself and eventually grow.
In the 2013 State of the League address, MLS Commissioner Don Garber said, “During the course of these 18 years — it hasn’t been easy. Frankly it’s been pretty tough, but our owners have proven to be wise, our owners have proven to be ambitious, they’ve proven to be fair, they’ve proven to be visionary, and they’ve proven to show massive financial commitments to growing the game at all levels.”
Given the risk MLS’s initial investors took when the league was founded and the significant losses those investors suffered in the early years, any potential investor-operator must believe in both the American game of soccer and in the league as a business. He must also be wealthy enough to take sustained losses at the order of millions of dollars per year.
The rise of the soccer-specific stadium
It was once common practice for Major League Soccer teams to play in American football venues. Some teams still play in such venues, such as the New England Revolution and the Seattle Sounders. But compared to the league’s early days, a majority of teams now play in their own soccer-specific venues. Lamar Hunt, who at the time ran multiple franchises, built the first such stadium on his own dime for the Columbus Crew franchise. Since then,12 more teams have built and moved into their own soccer-specific stadiums, some funded with private dollars, some funded publicly.
Stadiums need funding in order for construction to begin. Hunt built Crew Stadium for $28.5 million, but stadiums are much more expensive today. Garber has said stadiums must be located downtown and provide value for the team that will play in it, for the community in which it will be built, and for the fans that will come support the team.
It’s difficult to understate the importance of having a clear path to stadium construction and ownership. Garber was forceful in the 2013 State of the League address: “It starts with an owner and it ends with a downtown stadium.” Wherever David Beckham takes his franchise, he must have a plan for a soccer-specific stadium and a group of public or private investors that is willing to foot the bill in order to build a new stadium.
How media markets factor into an expansion decision
When MLS selected the markets in which the first franchises would be located, it selected local and regional centers of population, but not necessarily the largest television markets. The first 10 MLS franchises were located in San Jose, Los Angeles, Denver, Columbus, Dallas, Kansas City, Boston, New York, Tampa Bay and Washington D.C. Chicago, the third-largest television market in the nation, did not get a team until two years after MLS play began. Size of television market is obviously important to MLS, but it is not clear how important. What is clear is that size wasn’t everything at the start.
Larger cities tend to have more entertainment options for consumers to explore. For example, Los Angeles: the second largest market in the nation and home to the L.A. Galaxy and Chivas USA. Los Angeles has 5.67 million television homes, which gives the two local clubs considerable local potential. In the L.A. market, however, the two MLS clubs must compete with the L.A. Lakers, the L.A. Clippers, the L.A. Dodgers, the L.A. Kings, two Pac-12 collegiate athletics programs, and dozens of miles of beautiful beaches with warm temperatures year-round. If we consider Orange County part of the L.A. media market, we can include the Anaheim Ducks, the L.A. Angels of Anaheim, and Disney’s massive theme park entertainment business as organizations against which MLS must compete. The fact that Chivas USA is shutting down at the end of this season should be evidence enough that living in a large market isn’t always the ideal. Sure, large markets offer millions more potential fans. But failure to realize that potential is synonymous with catastrophe.
Smaller cities, by comparison, have fewer potential fans. They may not, however, have as many competing entertainment options. Take Portland, for example. Portland is the 22nd market in America, clearly much smaller than New York or Los Angeles. But besides the Portland Timbers, residents of Portland and the surrounding suburbs only have the NBA’s Portland Trail Blazers as a major, direct competing sports/entertainment property, and even then, the NBA season and MLS season only overlap for four months of the year. The takeaway: small markets can deliver MLS a passionate fan base with pent-up demand, but the size of the fan base will always be limited by the smaller size of the marketplace.
Clearly the ideal in all of this is to find a “sweet spot.” A prospective owner like Beckham should select the largest market available for which there are the fewest competing options for entertainment. Doing so will allow him to maximize any television and media rights agreement fees while minimizing competitive pressures that will detract from ticket and advertising revenues. If such a market doesn’t exist, it’s better to err on the side of size and select the market with the highest ceiling, i.e. the largest media market.
Passionate fans as a criterion for MLS expansion
For the first time since Luker on Trends and ESPN began tracking the sports consumption preferences of 12- to 17-year-old American youths in 1994, MLS has caught up with a major professional sports league in a marker of popularity. Both Major League Baseball and MLS can claim 18 percent of youths as avid fans.
Thirty-four percent of MLS’s fans are Hispanic and 24 percent are aged 18-24. MLS fans also are young, digital, mobile and tech-savvy; Nielsen estimates that 76 percent of MLS fans own and use a smartphone and that MLS fans watch twice as much mobile video than the average smartphone user. Thus, markets that have a large Hispanic population and a lower average age should be more attractive to MLS and potential owners.
Are fans really that important? To a point, yes. An owner should want to enter a market where the quick development of a passionate fan base is foreseeable. Gate receipts are important. But because MLS operates as a single-entity, gate receipts are less important than sponsorships and media rights deals. If a supporters group already exists in a market prior to a new franchise’s arrival, this would serve as an advantage for MLS to begin operations in that market, but it by no means is required. Soccer culture can be grown. For example, Salt Lake City had absolutely no professional soccer history prior to MLS’s entrance into the Utah market. What Salt Lake City did have was prominent local Dave Checketts and a pathway to a soccer-specific stadium. Another example, Kansas City’s franchise, the Kansas City Wizards, was languishing until it rebranded as Sporting KC and built a new soccer-specific stadium downtown. Now it refers to itself as the “Soccer Capital of America.”
What this means for David Beckham’s potential expansion franchise
David Beckham clearly has his heart set on Miami; he wants to put his team there. As he has gone through the process of brokering a deal to get a stadium in place and arranging other owners to partner with him, however, he certainly has faced many roadblocks, challenges and difficulties. If David Beckham intends to establish a firm foothold in Major League Soccer and get the full force of the league’s ownership on his side, it may not be a terrible idea to see what other markets have to offer. As long as there are potential co-owners, a stadium, a television market and fans, Beckham would be well on his way much more quickly, even if other places are a bit less sexy.
But what other markets could possibly be more appealing than Miami, and how to they stack up against South Beach? Those are the questions that will be answered in parts three and four of this series.