Friday, April 24, 2015

Is the MLS Sustainable?

Stefan Szymanski, professor at the University of Michigan and author of the forthcoming book Money & Soccer, has written a post questioning the sustainability of the business model of Major League Soccer, The post has attracted considerable discussion and debate, as it cuts right to the issue of the long-term prospects for professional soccer in the United States.

Let's cut to Szymanski's bottom line -- after reviewing data and estimates for MLS revenues and expenditures he concludes for 2014:
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.
He then surmises that this loss-making situation does not appear likely to change anytime soon, with its impacts softened only by the entrance fees paid to the league for new teams. The bottom line?
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.
His last statement is a conditional, predicated on the desire for owners to make profits. If owners don't care about profits, then of course, Szymanksi is not predicting collapse.

There have been two types of critiques of Szymanski's argument. One is that his numbers are wrong, and MLS is not in fact a "loss-making enterprise." For instance, @kevinmacauley writes at SBNation:
The basic argument of "Giant costs - smaller revenues = big loss, therefore collapse is imminent" only makes sense when you've actually accounted for all revenues. Szymanski hardly got started on that. When someone makes this argument while actually accounting for all revenues, maybe their argument and prediction will be taken seriously.
On his blog Szymanski responded to a similar criticism:
Well, until MLS decides to reveal the books to us we are both speculating. 
A second type of critique focuses on the longer-term prospects of the MLS. Here is an example:
This was always going to be a long term effort with return on investment delayed much longer than your typical stock market play. From an individual team standpoint, losing $5 million dollars per year, 1/20 of that $100 million, the loss is not all that significant when you factor in what these teams, or the league, could be worth 10 years down the road. A $5 million dollar loss per year is peanuts to some of the richest men in sports. Also, TV revenue tripling in 10 years isn’t a bullish thought. The numbers are so low now that it wouldn’t take much to accomplish that. This would more than cover the current losses and that’s before we factor in advertising, sponsorship and other sources of revenue that would naturally increase as well.

If MLS has done anything well, its certainly been the strictness of their cost control. A slow and steady approach has led to an extremely successful league at the ticket window. Once that transfers to television, the sky is the limit.
Arguments about future revenue growth reflect hopes and dreams as much as dollars and cents. The sky may indeed be the limit, and if a profit is to be made then Szymanski's conditional is off in any case. Those critiquing his argument in this manner can just ignore it, and watch the revenues grow year by year.

Here I'll offer a third perspective. Whether MLS is sustainable or not is probably the wrong question. If it is not sustainable, it will collapse -- that is a truism. But if it is sustainable, any realistic assessment of its future would be hard pressed to conclude that it is as "minor league soccer" or, as Simon Kuper recently quipped, as an "elephant's graveyard."

It is just hard to overcome the financial mathematics. Last fall at Sporting Intelligence, I wrote about the staggering wage bill gap between the MLS and the EPL:
On the 2014 [MLS] salary list are 572 players earning total wages of just over $129.5 million. This sounds like a lot of money, and it is. But in comparison to the Premier League, for example, it is small potatoes. The MLS total includes 21 clubs (for 2014 it includes Chivas USA, since folded, and partial squads for NY City FC and Orlando City FC, both being formed). Yet their total wage bills combined equals about the same as the wage bill for Queens Park Rangers ($126 million) in 2012-13, the most recent year’s data available.

In 2012-13, six Premier League clubs each had wages bills well in excess of the entire MLS, with Manchester City topping the list at $376 million (for all club staff). The wage bills for the top 20 clubs in England were almost $2.9 billion combined. For the bottom 20 payers across the Premier League and the Championship it was about $750 million.
The total payroll of the MLS is about 1/15 that of the NHL (data from my new book). Right now the MLS is to global soccer what the Russian professional hockey league is to the NHL -- interesting domestically, but not a threat to the world's top league in any way.

Perhaps there is a way to make MLS more major. Along these lines, Szymanski has previously made an interesting suggestion:
I think the only way around this conundrum is for MLS to become a minor league for Europe and for European teams to buy up MLS franchises. European teams already employ the talent that would make MLS attractive and the big clubs have more talent than they put on the field. Manchester City’s acquisition of the new New York City FC franchise is surely a logical step. Of course, European teams could just loan players to MLS in the same way that they do in Europe, but then there’s the worry that the borrower will not take good care of the asset.
This might be branded as a 2nd-tier Champion's League of sorts, as the clubs with the assets to invest in a minor league farm team would likely overlap significantly with regular Champion's League squads. Such a strategy would also have the advantage of not denying the MLS status as a minor league, but instead, exploiting that fact as a feature.

All this aside, it is great to see Americans debating the MLS, its status and its future. However, in terms of development of soccer talent in the US, I think there are larger issues elsewhere -- like the NCAA, but that will have to await a future post.

1 comment:

  1. Interesting post. I do wonder though whether Americans will ever embrace any league that features anything less than highest tier talent. It seems the minor league idea can be self-defeating. Watching young talent develop can be fun but never as fun as the Champions League or the Manchester derby. In the Dutch Eredivisie Vitesse is a prime example of the danger of the minor league approach. There is a paradoxical thing going on where the fans enjoy Chelsea's talented youth players, as they often shine in the defensively weak Eredivisie, but at the same time Vitesse's subservient status vis-a-vis Chelsea creates frustration and cynicism with the fans. Of importance here is what makes Vitesse different from the traditional Dutch top 3. Ajax fans, for instance, also come to watch young talent develop, but they know that if a truly great player breaks through, Ajax will benefit through a transfer fee. They also know that such a player usually spends three seasons at the club before moving on. Vitesse fans, on the other hand, simply know that Chelsea players can potentially make it big, but there is no further connection with the club if they do. Fans can only hope that next years batch of Jose Mourinho rejects will work towards a respectable position in the league table. Qualifying for European football becomes a meaningless thing here; with almost no-carry-over from year to year why even think about next season?
    Some rambling thoughts, but relevant to the MLS discussion I feel.