The Economics of Major League Soccer

Another MLS season is nearly upon us, and the front office folks in New York are likely looking for a repeat performance, or better, from the 2016 season — the league, once again, set a new attendance record.

Major League Soccer continues to garner more international attention, has begun to attract a growing number of globally-recognizable stars, however, entering its 21st season, commissioner Don Garber says MLS is still in “investment mode.”

The financial statements of MLS franchises are not made public, but despite the reported losses, the race to jump on the MLS train has grown more competitive than ever. Atlanta and Minnesota will be 2017’s expansion teams, each paid a franchise fee of around $100 million, according to league president and deputy commissioner Mark Abbott. Last August, Abbott said fees for future expansion teams could reach as high as $200 million.

Back when Toronto FC expanded in 2007, the fee was a mere $10 million.

Major League Soccer was conceived in 1996, its inaugural season featured the league’s 10 founding franchises. Back then, every team rented space in a stadium that was not designed for soccer. The Columbus Crew were the first MLS team to build a soccer-specific stadium, also the first in the U.S., in 1999.

In 2016, 13 of 20 teams played their home games in soccer-specific stadiums. The figure is set to further increase when Orlando FC move to their freshly-minted stadium this year.

The average attendance of an MLS game last season was 21,692 per game, shattering the previous record and registering figures comparable to Italy’s Serie A and France’s Ligue 1.

Installation of soccer-specific stadiums, the league’s continued expansion in key markets and improving standards on the field of play have undoubtedly contributed to the match day attendances. The role of expansion teams in driving-up attendance figures can be demonstrated by the fact that none of the top three teams by average attendance (Seattle, Orlando City and NYCFC) are founding members of MLS.

In fact, the Seattle Sounders, who just captured the team’s first championship, frequently draw 42,000 supporters to their home games. The Sounders have sat atop the MLS attendance charts every season since they joined the league in 2009.

Broadcast rights in Major League Soccer differ from that of the Premier League. The American league sells its national broadcasting rights together with those of the U.S. Soccer Federation and, in addition, franchises are allowed to license their broadcasting rights in their regional markets. At the national level, this strategy arguably drives up the value of the package as ratings have confirmed that, while they prefer foreign competitions, Americans do unite to watch their national team.

The last deal that was agreed to was good for eight years, it was signed in 2015. The deal is signed by three separate broadcasters —Fox, ESPN and Univision — and is worth a reported $90 million per year. When compared to European competitions, this figure is only marginally above that of the reported domestic broadcasting deal of the Dutch Eredivisie.

Aware of the strong competition they face from rivals Liga MX and the Premier League, MLS is pursuing a strategy to increase spectator attention, creating fan habits and initiatives such as “Decision Day,” and “Rivalry Week.” These all provide the league with extra commercial opportunities.

Despite their lower viewership figures, MLS’ ability to engage the nation’s youth and diverse sports fan base have presented the league as a handsome client for commercial partners. For example, MLS signed an eight-year deal with Adidas which made the German company the official kit supplier, league-wide. Additionally, MLS, like other major North American sporting leagues, have established geographical limits which dictate where franchises can market themselves.

Other elements of North American sports can be felt in America’s version of the world’s game, specifically, the salary cap.

MLS has an ethos of supporting financial stability, and at least for now, the league is achieving this goal by operating a closed league where there is not threat of relegation, and a salary cap that encourages efficient cost management.

Aside from the $3.6 million salary cap MLS teams were forced to maintain in 2016, teams were also allowed to sign three “Designated Players,” or, “DPs,” that do not count against the salary cap.

Toronto FC, last season’s MLS Cup runner-up, carried the highest payroll in the league. The Canadian team spent five times more on players’ salaries and bonuses than FC Dallas, who had the league’s lowest payroll in 2016. This is a smaller margin in difference in personnel costs between Premier League clubs, during the 2014-15 campaign Chelsea spent 7.4 times more than Burnley.

But in MLS, distribution of player salary reveals a very large disparity.

The league’s 20 highest-paid players, or five percent of all MLS players, earned 43 percent of the combined payroll of all teams. This was no better illustrated in 2016 than with Kaka’s contract, which carried a higher annual salary than the total payrolls of 14 of 20 MLS franchises.

As Major League Soccer continues to expand more franchises, the focus from the international community — fans and players — will naturally continue to grow. Domestically, MLS’ upward trend in average attendance only fosters stronger growth. But while the league’s structure is attractive to perspective franchisees, that same structure also limits the league’s ability to attract the top players required to continue raising the quality of play.

MLS’ longterm growth plans are a pretty easy guess: attract world-class players earlier in their careers and develop quality domestic talent that can compete at the international level.

The presence of such players as Sebastian Giovinco, Giovani Dos Santos and Nicolás Lodeiro, and the league’s partnership with the United Soccer League are just the sort of proactive steps MLS should be taking in these efforts.