At halftime of July's 2013 MLS All-Star Game, commissioner Don Garber joined the broadcast crew to announce to a national audience that Major League Soccer planned to expand to 24 teams by 2020. That idea would have seemed preposterous ten years ago, when the league was hemorrhaging cash by the millions and two teams had recently been contracted. Yet these days, those plans for MLS to become the world's biggest soccer league seem conservative. In fact, considering the financial success of the league over the last five years, 24 teams might not be enough.
There's certainly no lack of demand for the proposed expansion teams. Two new franchises in Orlando and New York City are already expected to join in 2015, bringing the league up to 21 teams. Former LA Galaxy striker David Beckham is exploring expansion opportunities in Miami, while Atlanta, Minneapolis and Sacramento suburb Elk Grove are just a few cities that appear intent on claiming an MLS team in the coming years.
That demand should be little surprise given the league's recent success. In 2011, average MLS attendance hit 17,872 to surpass both the NBA and NHL, and it has since increased to 18,611 fans per game. More impressively, the average franchise is now worth $103 million, up more than 175% over the last five years. With five planned expansion teams and a new league TV deal on the way, there's no reason to believe that growth is slowing anytime soon.
FORBES hasn't compiled MLS valuations since 2008. The league had just 14 teams that season, with the Seattle Sounders joining the following year on an expansion fee of $30 million. The average MLS team was worth $37 million and losing money. The LA Galaxy, the league's most valuable asset, had an enterprise value of $100 million.
And today? Ten of the league's 19 teams are making a profit (in terms of earnings before interest, taxes, depreciation and amortization). The Sounders are now the league's most valuable franchise at $175 million, a massive 483% increase over its 2009 sale price. And in May of 2013 a new ownership group paid $100 million just as an expansion fee to start a team in New York City.
How did MLS grow so big, so fast? MLS president Mark Abbott cites a host of league investments, particularly those targeted at improving the league's level of competition. In terms of on-field product, Abbott points not only toward the premium salaries paid to designated players like Thierry Henry and Robbie Keane, but also to America's developmental programs that have produced homegrown stars like Clint Dempsey and Landon Donovan.
Operating Income ($M)1
New York Red Bulls
Sporting Kansas City
New England Revolution
Real Salt Lake
San Jose Earthquakes
FORBES estimates; revenue and operating income is for 2012 season 1 Earnings before interest, taxes, depreciation and amortization
The recent growth has been tremendous, but getting there wasn't easy. The league had ten teams for its inaugural season in 1996, with original teams selling for $5 million each. But a brief honeymoon period was followed by plummeting attendance. Two new teams, in Chicago and Miami, would join two years later, but the expansion failed to solve financial woes. MLS reportedly lost $250 million in its first five years and in 2002 was forced to contract the Miami expansion and the charter franchise in Tampa Bay.
But later that year the United States would make a surprisingly deep run in the FIFA World Cup, leading to a surge in soccer's stateside popularity and a wave for MLS to ride forward. MLS teams, following the Columbus Crew's lead, soon began building soccer-specific stadiums, which had been foreign to the league before Crew Stadium was built in 1999. The new venues not only enhanced the gameday experience for fans, but they also granted teams full operating control of the stadiums and greater shares of stadium revenue.
And as Abbott notes, those stadiums are now being filled with the young sports fans who became hooked on soccer during the 2002 World Cup. "That fan base has grown up with the sport," says Abbot, and they are now coming to an age where they are able to go to games and buy jerseys and beers with their own money.
Increased popularity helped MLS sign an eight-year, $64 million TV deal with ESPN in 2006, which provided the league's first media rights fee, and by 2007 MLS was successful enough to attract English superstar David Beckham, arguably the most popular soccer player in the world. Beckham didn't come cheap - he received a $6.5 million base salary plus a cut of LA Galaxy revenues - but the designated player rule that was formed to facilitate his entry has since helped MLS add other global superstars like Thierry Henry and Robbie Keane. As of 2013, nine MLS players make more than $1 million per year.
That's a long way to come, and the lights are about to get brighter. MLS' current TV deals with ESPN, NBC and Univision, worth a combined $30 million annually, are up at the end of next season. Negotiations for new deals are currently underway. Previous reports have pegged the league's goal at double its current rights fees, but with networks clawing for live telecasts MLS should easily be able to exceed that.
And when it does, the league's teams will enjoy an instant windfall. Team owners, after all, are actually investors in MLS' single-entity structure. In other words, the MLS teams are all part of a single company, with team "owners" actually controlling each franchise's operating rights. League TV revenue, for instance, is funneled through Soccer United Marketing (SUM), the media and marketing arm of MLS, which then pays out dividends to the investors. SUM is the first key investment that Abbott points to when asked how the league has grown so big, so fast, and a recent outside investment proves his point.
Providence Equity Partners, a private equity firm founded by billionaire Jonathan Nelson, reportedly bought 25% of SUM in 2011 for around $150 million. The investment provided the league some cash and, considering Providence's $29 billion or so in assets, a bit of financial security. But more importantly, that investment by Providence, which is also an investor in MLS' Spanish broadcast partner Univision, signals just how strong the league's business has become.
Yet as important as central revenue may be, it doesn't come anywhere close to what teams have to do on their own to succeed. In fact, of the $26 million the typical team generated in revenue in 2012, we estimate that over 90% came from in-stadium revenue streams like tickets, sponsorships, luxury seating and non-MLS events.
At home, MLS teams rely on attendance and sponsorships to drive revenue. For leading teams like the Sounders and their rivals in Portland - the Timbers rank third at $141 million - frenzied fans make doing business easy. Seattle dwarfs the league in attendance, attracting over 44,000 fans per game on average; Portland ranks third at nearly 21,000 fans per game. That fan support is key because MLS teams are particularly reliant on revenue at the gate and from sponsors; soccer's continuous action makes it difficult to sell merchandise and concessions during games.
Raucous Timbers fans celebrate a playoff victory over the rival Seattle Sounders.
And while revenue is surging, expenses like player costs are heavily controlled. Whereas a typical NBA or MLB team might sink tens of millions of dollars into payroll expenses each season, MLS' single-entity structure ensures player costs are minimized. Each player's contract is signed with and paid by MLS. Though capital calls made by the teams provide some of the funding, a $3 million salary cap ensures teams won't bleed dry from player contracts. The only exceptions are designated players, whose salaries can exceed cap restrictions, with the extra money landing on the team's books. For most teams, designated player costs are minimal or nonexistant.
The new wave of soccer-specific stadiums have increased operations costs, but those are often easily covered with revenues generated from stadium naming rights deals and non-MLS events that teams operate. Some teams, like the Galaxy, Red Bulls and Crew, own their stadiums outright, meaning minimal, if any, debt and annual rent payments to local government. Other teams, like Sporting Kansas City and the Chicago Fire, were able to land stadium financing deals that were entirely funded with public money.
Of course, not every team has a great stadium situation. DC United and the Vancouver Whitecaps both play in government-owned buildings, which limits their ability to leverage the venues for non-MLS events. The San Jose Earthquakes play in Santa Clara University's Buck Shaw Stadium, which is far from ideal considering the stadium limits sponsorship opportunities and lacks any sort of luxury suite option. (Fortunately for the Quakes, the team will soon be moving into a new, privately financed stadium in San Jose for the 2015 season. Luxury seating options there are already sold out.)
And though the league's TV contracts are expected to explode in value, MLS has a serious problem regarding its TV ratings. Namely, they have lagged badly. This year, viewership of ESPN's regular-season telecasts was down 29% to an average 220,000 per game, while NBC's MLS audience fell 8% to 112,000 per game, ranking MLS beneath the WNBA in TV ratings. A new TV deal may grant the league a set broadcast window or consolidate telecasts to a single network, making TV viewership an easier task for fans, but a dearth of eyeballs watching from home could pose serious issues for a league hoping to expand to 24 teams.
But there's no denying that MLS is barreling forward and showing few causes for concern. Given the success, will MLS finally move away from the single-entity structure that makes it unique? No way.
Abbott argues that the current structure is largely responsible for the league's success, and that other sports leagues are effectively single-entity groups as well. Says Abbott, "the reality is that club owners [in any sport] are business partners. You're competitors on the field, but business partners off of it." That's not to say that MLS won't make significant changes down the line, but Abbott says that those decisions will be made within the current structure.
That structure has certainly been a sound one thus far, so a not-broke, don't-fix-it strategy makes plenty of sense. As for maintaining the current pace, Abbott naturally points to the upcoming TV deals and player development programs. He also, in a contrast to the league's big expansion plans, says that there's a focus on strengthening the league's position within its current local markets.
And Major League Soccer's favorite spark plug, the FIFA World Cup, is right around the corner. The roster will not only include Dempsey and Donovan, two of the biggest names in MLS, but also other MLS stars like Eddie Johnson, Graham Zusi and Omar Gonzalez. With the United States ranked 13th in FIFA's world ranks and poised to make some noise in Brazil, Major League Soccer's next leap forward may start before the current one even lands.
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