How MLS makes money for its owners

I'm sure you've heard that Major League Soccer struggles to make a profit. We’ve been told that, outside a handful of really successful teams like the LA Galaxy and the Seattle Sounders, most of the league is not in the black. We’ve heard the TV revenue isn't large enough and the kit and stadium sponsorships are just good enough to keep the teams going. Indeed, here's an excerpt from the Wall Street Journal from earlier this year that says exactly that:

But, here's there's a weird flip side to this: MLS keeps adding teams. And each time it does, the fee for one of those expansion teams goes up. Ten years ago, Toronto FC came into the league for a fee of $10 million. Now, we are talking about a competition between 12 cities for the next two spots at a cost of $150 million. What's going on? Why is there so much interest when they aren't making money?

Well, the answer is quite simple: they are making money. They’re making lots of money, but the way that the account books are set up, you won't actually be able to see that. The league manages to make a little money through the league, but the bulk comes through managing American soccer media rights. I'll get to explaining that in a bit, but first, we need a break down of how MLS is structured.

All for one, profits for all

If you've been paying attention to MLS for any extended amount of time, I'm sure you've at least heard of single entity. For those unfamiliar, single entity means that all the club owners are really partners in the league, not competitors. When a new owner (or ownership group) comes in, pays the fee, and gets a club, what they are really doing is becoming a partner in the league and, as an owner, getting authorization to run a team that is owned by the league. Because these clubs are owned by MLS, all the revenue belongs to the league, not to the individual clubs. Because of this, whenever a team makes money, be it through local TV and radio rights, kit and stadium sponsorships, ticket sales, or player sales, the club gets a cut (with the size depending on context of the sale) and the rest of the money goes into the league's bank account. That money ends up being redistributed out to all the clubs in the league, covering the players' salaries (minus the above-cap amount of Designated Player Salaries), cost of travel, referee fees, administrative costs, and all other expenses. Profits for the league are also redistributed, but to the owners. Those owners have the option to reinvest it, perhaps into one of those new and shiny stadiums, a flashy DP, or improvements for the academy system.

With the single entity model, incoming owners are essentially buying stock into this private company. That's a big reason why the belief that MLS is a pyramid scheme subsisting on these huge expansion fees are off base. The new guys are paying money to buy a share of the action off of the existing investors who, in turn, now have to share their profits with another person.

So, how do these owners make money, and why are the books red for so many of these teams? Let's start with the second question. It looks like a lot of MLS clubs aren't making a profit because the extra money is being reinvested into the team and the league as a whole, as I mentioned earlier. The league introduced a new way to sign really good players whose salaries are above the league's cap but under $1,000,000, starting caliber players who aren’t quite on the DP level. Teams have doubled down on Homegrown Players and are doing a lot to keep promising players from leaving for Europe with relatively strong salaries. There are also accounting methods that can be used to nudge the numbers to make them look worse in order to get better deals when negotiating player salaries (and trying to get public financing for stadiums... more on that another time.) If you shift real money into Allocation Money, then it can maybe be rewritten as a business expense, or perhaps buying a ton of team merchandise to sell later, etc.

Teams are able to make money though a variety of sponsorships and selling naming rights, among other things. Indeed, MLS signed a new deal with Adidas to extend the kit rights until 2024 in a deal worth $700 million over the life of the contract, a massive increase from the last agreement between the two. But this isn't where the allure for investors is in the league. I would actually expect the Adidas money to be reinvested into the league. No, the owners make their money through stadium deals and through raising valuations. Unlike almost everything else that teams spend money on, stadiums are physical pieces of property. They are a piece of infrastructure and, unlike players' contracts and transfer fees, they represent a chance to accrue value over the long run. And, if you sell the club, you almost certainly get the money back with profit (especially if that stadium is built with some public money). If you add up the current costs of the expansion fees and stadium construction, they happen to align quite well with the Forbes estimates for MLS' club valuations. For owners that invested 10 years ago, they've seen a pretty nice growth in the value of their assets. But even this pales in comparison to the real money maker for these owners: media rights.

Soccer United Marketing (SUM)

Soccer United Marketing (SUM) is the real spring of oil in this whole equation. When investors are staring mouths agape at MLS, they are really looking at SUM, the company that handles the media rights for American soccer. SUM sells off the rights it has for MLS to interested broadcasters all over the world. That money goes to the league owners, who just so happen to be the principle investors of the company. When new owners come into MLS, they are buying into SUM, as well. In this way, SUM is not so different to the setups for Liga MX and the Premier League. In those models, the league controls all the revenue from broadcasts of their games and leaving out the Football Associations who are interested in distributing that money to the lower leagues and the national team. But SUM does a bit more than those other leagues. SUM handles all the television rights for not just MLS but all soccer in America. That means if a soccer game happens and is broadcast on national television in the United States, SUM gets a cut. All those friendlies featuring touring European clubs that happen every summer? MLS owners get a cut of that. Whenever Mexico plays a friendly in America, SUM gets a cut of that. Whenever the United States hosts the Gold Cup, SUM gets a piece of that action. SUM also has broadcasting rights for the national teams. Every time the USMNT, USWNT, or one of the youth teams has a game on TV, these MLS owners split the pot. World Cup qualifiers? SUM collects a check. This is way greater than the money MLS puts in. Essentially, SUM and its investors benefit from the entirety of American soccer, which makes the investment into MLS appealing. Of course, soccer is a rapidly growing sport in this country, with a growing appetite at essentially all levels. Case in point, SUM was valued between $500 and $600 million in 2011. This year, the valuation for the company was revealed when the MLS investors bought a portion of the company back from the investing group Providence, sitting in at over 2 billion, a massive and dramatic increase in just 6 years.

When we talk about MLS, lower division club, and/or the race for expansion, we should keep this stuff in mind. It's relevant and it affects what goes on in our sport. The people actually in charge of these things aren't in this just for the sport. It's a business...and money talks.