Landon Hemsley (SMBA ’15) looks at David Beckham’s attempt to own an expansion soccer franchise in MLS in this 5 part series. This is Part 1. Be sure to continue reading through all five parts: Part 2, Part 3, Part 4, Part 5.
It has been months since David Beckham’s intentions regarding a Miami MLS franchise have made headlines, and the last time they did, they weren’t good for the soccer icon.
In June, Miami’s mayor vetoed Beckham’s proposals for a stadium on the Miami waterfront, leaving Beckham on the losing end in the battle to bring the best soccer America has to offer to arguably the sexiest city in America. The denial was the second in less than a year; a previous site in the PortMiami area was formally shot down by Miami-Dade county in May.
The fact that multiple layers of government in South Florida are not really helping Beckham arrange his stadium so that he can bring an MLS franchise to the city is something of a new trend in Miami, but certainly should come as no surprise. Previously, the Marlins raked the city over the coals for free land and hundreds of millions, if not billions, of dollars for a stadium that turned the general public off to the team so severely that attendance figures plummeted.
Now Beckham faces a choice: take his talents away from South Beach, or stick it out and find a stadium site that could only be classified as “less than ideal.”
Beckham, of course, was given the right to purchase an MLS franchise for $25 million as part of his original player contract with the L.A. Galaxy, but he has obviously endured considerable difficulty in meeting the criteria MLS has mandated in order to officially announce an expansion franchise in Miami.
Could it be that the challenges Miami faces are such that Beckham might be obligated to leave the Miami market and seek to place a franchise elsewhere? How has Major League Soccer grown to the point where expansion is even a possibility? What determines where MLS franchises end up? Where else could Beckham take his franchise? And how do the most recently announced MLS expansion franchises affect future plans?
This in-depth series on Major League Soccer expansion will examine all these points, beginning with the question: How has major league soccer grown to the point where expansion is within the realm of possibility?
MLS EXPANSION MANTRA: Keeping labor costs low and steadily improving revenues
Major League Soccer, LLC, was formed in 1995 as a single, centrally controlled entity. This structure has since come to be known as a “single-entity structure.” Many of the newest professional sports leagues in the United States are now built on this structure, but MLS was the first. Other notable leagues that have given this model a shot are the now-defunct XFL and the WNBA, though the WNBA has since shifted away from a single-entity structure.
In a single-entity structure, the league owns every team in the league. Let’s go over that point again, because it’s important. MLS owns every team. So-called “owners” don’t really own the clubs they operate. Rather, a group of investors, aka “the owners” has given money to the league, and in turn, the league has granted them the right to operate one or more franchises and reap a percentage of the profits of all franchises.
At the time, this structure was revolutionary. No one had done it before, and no one has done it quite as successfully since. Single-entity structure solved the problems of lack of centralized control and wide financial disparities among competing clubs that ultimately doomed the last major soccer league in North America, the NASL.
By eliminating the element of competition among owners, the league made it possible to control the salaries of their players. Because of this structure, owners are forced to seek not only their own financial best interests, but the interests of their competitors as well. Rather than one owner privately bankrolling a team of European and Brazilian superstars (re: New York Cosmos), the owners intentionally distributed the stars they could afford onto different teams throughout the league in order to increase competitive balance.
The bottom line? Low salary costs plus parity equals one competitive, compelling, growing and ultimately successful league.
Since the league’s founding, it has instituted rules that allow the “owners” more flexibility. Enter David Beckham. The institution of the “Beckham rule,” a rule created specifically to allow MLS club LA Galaxy to bring Beckham to America, permits owners to pay up to three “designated players” beyond the league salary cap at his own expense. The rule has effectively has moved the league away from a strict single-entity structure to a more flexible one.
The rule allows MLS investors to engage in more entrepreneurial behaviors to improve their teams and win championships. For example, Toronto FC’s acquisitions of Gilberto, Michael Bradley and the now-disenchanted Jermaine Defoe ballooned the Canadian franchise’s payroll, but MLS is only responsible for those salaries up to a point. Maple Leaf Sports and Entertainment, the franchise’s owner, must meet the rest of the player salary liability on its own.
Who are the losers in this game? The players. In every other premier sports league, owners are forced to financially compete for a player’s services, which allows market forces to operate. As demand increases for a player’s services, the average player salary also increases, but because MLS is the only payer for player talent on the market, it is able to effectively set player prices. The league’s message: if players don’t like it, they can try for Europe.
In reality, the designated player rules have created a league of “haves” and “have-nots;” only 12 players make more than $1 million per year in MLS, and everyone else doesn’t come close. For example, Seattle Sounders forward Clint Dempsey will make $6.695 million in 2014, which is more than the entire payroll of 15 of MLS’s 19 clubs.
The players didn’t accept this structure without a fight. In fact, they took MLS to court, challenging that by adopting the single-entity structure, MLS had created a monopoly and violated Anti-trust law, but the players lost their suit, and MLS was allowed to continue to operate as a single entity and monopsony.
It should be clear that its unique structure keeps Major League Soccer’s operating costs much smaller than those of other leagues. But costs only represent one half of the profitability equation. Revenues, the other half, grew very, very slowly for the first decade of the league’s existence. Only recently has MLS begun to bring in real money.
The league and its investors lost a considerable amount during the first eight years. The league had lost $350 million by the end of 2001. Revenues were so bad that MLS decided to shut two franchises down. The decision to remove the Miami Fusion and Tampa Bay Mutiny franchises was, in part, meant to put the league on more solid financial footing.
By the end of the 2013 season, MLS had completely changed its stars. The league had expanded to 19 teams, had two more expansion franchises (Orlando City and New York City FC) on track to begin play in 2015. Another expansion franchise was announced in Atlanta earlier this year.
Operating profit is a figure that examines profits before interest and taxes. Ten of the 19 clubs in 2012 had a positive operating profit. The average operating profit was approximately $1.79 million, and half of all MLS clubs in 2012 made an operating profit of at least $600,000. The extreme outlier in 2012 was Seattle; the Sounders made an operating profit of $18.2 million and by far were considered the most valuable MLS franchise. The least profitable was league-operated-and-soon-to-be-shut-down Chivas USA, which reportedly lost $5.5 million. But because these figures don’t represent the effects of interest or taxes, it’s likely that MLS investor-owners in the red were likely able to avoid a good portion of their financial losses by claiming tax relief.
Tax relief? Yes. Sports leagues have long been able to appear as losing enterprises, when in reality, a huge portion of their reported expenses involve no cash. Owners of professional sports leagues are allowed by the IRS to treat their players as depreciable assets, which means they can count a portion of annual payroll as a tax-deductible expense and thereby shield some of their revenues from the government. When an owner claims destitution and poverty, be suspicious.
Other indicators can give us hints as to how well MLS is doing financially. The league’s $28 million per year television rights contract will increase to a healthy $90 million despite declining viewership. According to the MLS Players’ Union, total guaranteed player compensation in 2013 was $95.1 million in 2013 and is slated to increase to $115.35 million in 2014, a 21 percent increase. Remember how MLS’s legal structure was specifically designed to depress player salaries? Because player costs are rising and because the league is built to manage ballooning labor costs, it can be deduced league revenues are also rising comparably.
It’s safe to conclude that Major League Soccer is in a strong financial position to actively pursue its expansion goals: establishing 24 operating teams by 2020, and David Beckham’s new club, wherever it lands, is expected to be one of those 24.