Major League Soccer (MLS) and its rather sui generis business relationship with the rest of the football world has often been described as “trying to fit a square peg in a round hole”. Nevertheless, there is a method and a reason behind the off-kilter peculiarity of its business model and mode of operation. One only needs to look back at the history and the various developmental iterations of professional football here in the United States to realize why MLS chose the path it did.
History will show that the MLS’s predecessor league, the NASL,1 set the foundational milepost and acted as the forerunner for whatever success U.S. soccer has experienced since the World Cup of 1994. While the NASL, as a league, was fatally flawed and ultimately doomed, over its 17 years of existence, it managed to provide a roadmap of what can and cannot be successful in terms of how U.S. soccer navigates the hypercompetitive sports market here in the United States.
I. HISTORY OF THE NASL
Buoyed by England’s success in the 1966 World Cup, the NASL began operating in 1968 with a league consisting of 17 clubs. Unlike many other leagues around the world, the NASL was a “closed” league with the same clubs competing against each other year in and year out. The reality, at the time, was that there were not enough homegrown players and clubs available to create a second division. Therefore, the typical promotion and relegation system used around the world was not possible. Moreover, fan interest in the newly formed NASL was initially nonexistent, so the league swayed from the traditional FIFA Laws of the Game and adopted various “gimmick” rules2 aimed at increasing the NASL’s popularity. Needless to say, the NASL became a “laughing-stock” among those in the soccer world as it was perceived that these non-traditional rules made a mockery of the “King of Sports”.3
Furthermore, the NASL endeavored to establish and solidify its foothold in the U.S. sports market by importing many superstar players from around the globe to help promote its league. These luminaries included the likes of Giorgio Chinaglia, Johann Cruyff, Johan Neeskens, Gerd Müller, George Best, Rodney Marsh, Franz Beckenbauer, Carlos Alberto and culminated with the arrival of the ultimate mega-star, Pele, in 1975. Earning an astronomical (for that time) $1.4 million per year, Pele was able to propel the league’s popularity to a point where attendances of over 70,000 for a fixture were fairly commonplace. With its apparent success firmly established, the NASL ventured an expansion in 1978 by adding an additional 6 clubs to its fold. Unfortunately, by the early 1980s, it became quite apparent that the NASL had bit off more than it could chew. Beleaguered by: (i) an economic recession which saw unemployment rates reach 10.8%;4 (ii) the excess spending of the late 1970s; (iii) the retirement of Pele, and many of its international superstars; and (iv) an acrimonious dispute with its players’ union, the NASL, and many of its clubs, began to operate at a significant deficit. Despite these operating losses, many club owners continued to spend close to 70% of their annual budget on player salaries. To provide some context and contrast, in 1980 the NFL5 spent an average of 40% of each team’s budget on player salaries.
As with any edifice that lacks the proper structure and foundation, the business model of the NASL became unsustainable in due course. By 1982, seven clubs folded after their respective owners failed to find buyers. Eventually, by 1985, the league suspended its operations when only two of its clubs agreed to play the 1985-1986 season. Despite its many fatal shortcomings that lead to its demise, a retrospective look at the NASL should elicit an acknowledgement that, at the very least, it represented a cornerstone and a catalyst for soccer growth in the U.S. The NASL should not be looked upon as a failure considering that at its inception, an estimated 100,000 people were playing soccer in the U.S. and by the end of the NASL era that figure had risen to over four million.
II. FORMATION OF THE MLS
By the late 1980s, FIFA had embarked on a campaign to resuscitate interest in the game of soccer within the U.S. sports market. In line with that objective, FIFA awarded the 1994 World Cup to the United States with the condition that the U.S. Soccer Federation create and sanction a domestic professional soccer league in the U.S. This condition spawned the birth of the MLS, which was formed in 1993 and began operating in 1996. Having learned from the mistakes and excesses of the NASL, the founding owners of the MLS embarked on forming and structuring a league that would adhere to a business model grounded in conservative expenditure, incremental growth, and long-term sustainability. Very early on, it was agreed that the MLS would be developed based upon two seminal constructs: First, “single-entity” league ownership, and second, the eventual development of soccer-specific stadiums for each and every MLS club. Eight MLS owners initially committed a total of $50 million to start league operations as a single limited liability company (formally known as Major League Soccer, L.L.C.). Unlike most other sport organizations in the world whereas each team is owned by separate individuals or entities, Major League Soccer, L.L.C., as a league, centrally and collectively owns each of its 20 clubs. Investors, also known as “club-operators”, are stakeholders of Major League Soccer, L.L.C. and each such “club-operator” has the right and responsibility of managing the day-today operations of its respective club. Put another way, under the initial ownership structure of the MLS, an individual owner/investor could not legally own an individual club. Rather, he or she could only: (i) invest in Major League Soccer, L.L.C., (ii) operate an individual club as a “club-operator” of Major League Soccer, L.L.C., and (iii) maintain a seat on the Board of Governors of Major League Soccer, L.L.C. Additionally, while “club-operators” do effectively maintain a certain level of influence over the composition of their respective clubs, a player’s transfer and contract is negotiated and signed with the MLS itself and, at least in theory, the MLS retains control over where that player ends up playing.
III. HOW DOES THE MLS DO BUSINESS?
(a) MLS Season and Playoffs
As previously mentioned, the MLS currently has 20 clubs, with each playing 34 regular season games. The MLS regular season starts in March and runs to October of each year, after which a 12-club (top six clubs from each of the Eastern and Western Conference) postseason elimination tournament is held. The final two clubs play in the championship game known as the MLS Cup. The winner of the MLS Cup, together with the club that has the best regular season record,6 is awarded a berth to the CONCACAF Champions League.7 Similar to many other leagues in the world, MLS clubs also compete in an annual “cup” competition similar to the FA Cup in England and the Copa del Rey in Spain. This annual knock-out competition is open to the lower division clubs of U.S. soccer. The winner of this knock-out tournament is presented with the Lamar Hunt U.S. Open Cup and is also awarded a berth to the CONCACAF Champions League.
(b) Player Transfers
Each MLS club’s roster is comprised of a total of 28 players, of which 18 can be selected for each game-day. A further breakdown of each club’s roster requires that up to 20 players (from the total of 28) comprise what is called the “Senior Roster”. As a general matter and subject to certain exceptions, the salaries of players occupying spots on this “Senior Roster” count against a “Salary Cap”. A “Salary Cap” is a prevalent wage-management mechanism utilized by most U.S. sports leagues, yet immeasurably unfamiliar to many in the rest of the sports world. Before engaging in a more comprehensive discussion of the Salary Cap, it should be briefly pointed out that the MLS imposes two transfer windows on its clubs. The first and “primary” transfer window runs from February 18th to May 11th of each year, and the “secondary” transfer window runs from July 4th to August 3rd of each year. A player’s registration/transfer certificate may be requested by an MLS club from a “foreign” club only during the two foregoing transfer windows. Of course, a player may be transferred or loaned from an MLS club to a non-MLS club at any time provided that the non-MLS club’s Federation transfer window is still open.
(c) Salary Cap Rules (and exceptions)
As alluded to above, a Salary Cap is a form of player wage control that is put in place with the inherent purpose of controlling the amount of money a club can spend on its players. The objective of any Salary Cap system is to provide a degree of “cost control and cost certainty”, but also to create and ensure financial and competitive parity among clubs--regardless whether a club is wealthy or plays in a large market. Most, if not all, major sports leagues in the U.S. have adopted a form of a Salary Cap, including the MLS. Going into the 2017 season, the Salary Cap for each MLS club is expected to rise to approximately $4 million per club. Now, as with any general rule, there are exceptions---and it is abundantly clear that the MLS has its fair share of Salary Cap exceptions and idiosyncrasies.
(i) Designated Player Rule.
Very early on, it was foreseen by its founders that the MLS would reach a point in its development where it would need the marketing star power of high-profile international stars. In order to compete for the services of these high-priced talents, while simultaneously preserving the “cost control and cost certainty” provided by the Salary Cap, the MLS crafted and adopted a creative exception to the Salary Cap known as the Designated Player Rule. The Designated Player Rule, aptly nicknamed the “David Beckham” rule, was put in place in 2007 in anticipation of David Beckham’s $250 million deal with the Los Angeles Galaxy. In its current iteration, the rule affords each club the opportunity to sign two players whose wages exceed what is known as the “Maximum Budget Charge.”8 In other words, a club can sign a player for any amount of money, and that player’s wages will only count for the predetermined Maximum Budget Charge against the Salary Cap. Using the 2016 MLS season as an example, a player could sign for, let’s say, $5,000,000, and he would only count for $457,5009 against the Salary Cap. In addition to the two (2) Designated Players, a club can sign a third Designated Player by paying the MLS the amount of $150,000.10
(ii) General Allocation Money.
As if the rules were not already confusing enough, the MLS has introduced some additional imaginative approaches for which a club can “buy-down” the cost that a specific player would count against its Salary Cap. One such tool is known as “General Allocation Money”. This money11 is given to each club each season and can be used, among other things, to sign, re-sign, off-set (i.e., transfer fees or loan fees), and “buy-down” the cost a player would have against the Salary Cap. Specifically, General Allocation Money can be used to: (i) reduce the amount of the Maximum Budget Charge a Designated Player counts against the Salary Cap down to a minimum of $150,000; (ii) convert the salary of a player who would otherwise be considered a Designated Player to a non-Designated Player; and (iii) even trade the General Allocation Money to another club for a player or a draft pick.12
(iii) Targeted Allocation Money.
Starting in 2015, the MLS introduced a new financial concept for its clubs known as “Targeted Allocation Money’. For the upcoming 2017 season, each club will receive $1.2 million of Targeted Allocation Money. Much like with General Allocation Money, Targeted Allocation Money can be used to convert the salary of a player who would otherwise be considered a Designated Player to a non-Designated Player13 or traded to another club. That, however, is where the similar uses end. Unlike General Allocation Money, Targeted Allocation Money can only be used to “buy-down” the Salary Cap charge of players whose salary exceeds the Maximum Budget Charge (i.e., expected to be $480,625.00 for the upcoming 2017 season) but is less than $1 million for that season. Furthermore, General Allocation Money and Targeted Allocation Money cannot be combined for the same player.
(d) MLS SuperDraft
Unlike almost all other soccer leagues in the world, but nonetheless comparable to the other four (4) U.S. major sports leagues,14 the MLS has implemented a four-round player selection draft process solely for U.S. based college/university soccer players. The draft order is determined by a particular club’s in-season performance, with the last place club granted the first selection. This process is yet another player acquisition mechanism unique to the MLS. Its primary purpose is to efficiently integrate young U.S. college-based soccer talent into the MLS, while simultaneously establishing competitive parity among MLS clubs.
(e) Revenue Sharing
Again, much like the other four U.S. major sports leagues in the U.S., the MLS advocates and adheres to a parity-centric business and competition model. As touched upon earlier in greater detail, by designing a league that: (i) uses a “reverse-order” player draft, (ii) centrally regulates player transfers; and (iii) imposes a Salary Cap, the MLS ostensibly attempts to encourage competitive and exciting games among all its clubs from top to bottom. The purpose of all this, at least in theory, is to spur an increase in fan interest, an increase in attendance, and an increase in television ratings--all resulting in higher profits. Another tool designed to foster financial and competitive parity among MLS clubs is through a business model known as “revenue sharing”. As a general concept - and subject, of course, to certain variations - “revenue sharing” is a centrally-planned distribution model in which each club shares equally in the league’s revenues and costs. In the case of the MLS, certain revenue streams are shared equally among each club, while other revenue streams are either partially shared or kept by the clubs for themselves. The bulk of the MLS’s revenue is derived from its national eight-year, $90 million per year media rights deal with ESPN, Fox Sports, and Univision.15 The revenue derived from the foregoing national media rights deal is distributed equally among all clubs. Additionally, league wide licensing fees and expansion fees16 are also shared equally among all clubs. That said, however, each club also has its own media rights agreements with local regional sports networks for the broadcasts of games not carried under the national media rights deal. The revenue derived from these local media rights deals, along with the revenue derived from local sponsorships, on-site merchandising sales, jersey sponsorships, stadium naming-rights deals, game-day concessions and game-day parking, are all kept by each individual club. Lastly, revenue from ticket sales is split on a 70/30 basis, with the home club keeping 70% of the ticket revenue and the away club keeping 30%.
(f) Major League Soccer Players Union—The Collective Bargaining Agreement
I think it is quite fair to say that players’ unions in the U.S. sit as some of the last strong collective bargaining coalitions for professional athletes. For varying reasons, European players’ unions do not carry the same weight and bargaining power as their U.S counterparts.17 In February of 2015, the MLS and the Major League Soccer Players Union came to a five year Collective Bargaining Agreement. Typically, in U.S. sports, collective bargaining negotiations define the overall relationship between leagues and their players and outline the agreed upon terms and conditions for issues pertaining to compensation (e.g., Salary Cap), player obligations (e.g. fitness and training, promotional appearances, charitable appearances, etc.), medical examinations and fitness tests—and disputes arising therefrom - , drug testing,18 and the participation in non-soccer or non-sanctioned hazardous activities, etc.
As we march past the second decade of MLS soccer, it appears that the league is on good footing. The initial conservative business model has established a foundation for future growth. As the league moved into its first decade, and then its second decade, the MLS began to experience a paradigm shift in its approach to doing business. As such, it only stands to reason that as the MLS continues to mature, a further evolution in its business model can be expected, ultimately making the contents of this article outdated as the MLS reaches its third decade of existence.
* I would like to thank Chris Fox, a junior at Tulane University, for all his hard work in providing the appropriate research for this article.
1 North American Soccer League
2 Such rules included the inclusion of an “off-sides” line and the removal of the center line (a rule designed to eliminate the off-side trap), a game clock that counted down to zero, sudden death overtime, a bonus points system and a shootout tie breaker to ensure no game finished in a draw.
3 Moniker given to soccer (football, as it is called in the rest of the world).
4 The highest level of unemployment since World War II.
5 National Football League.
6 The club with the best regular season record is awarded the Supporters’ Shield.
7 Generally, the United States receives 4 berths to the CONCACAF Champions League. Canada receives only one berth. In order for a Canadian club to be eligible to play in the CONCACAF Champions League, it must win the Voyageurs Cup of the Canadian Championship. Currently, there are three (3) Canadian MLS clubs that are eligible to compete for the Voyageurs Cup and the Canadian berth to the CONCACAF Champions League.
8 For 2016, the “Maximum Budget Charge” was $457,500. It is a number that equals 12.5% of the current year’s Salary Cap (i.e., For 2016--12.5% of $3,660,000= $457,500.00).
9 If the Designated Player is signed during the “secondary” Transfer Window, that player would only count for $228,750 against the Salary Cap. Additionally, a Designated Player that is 20 years old or younger only counts for $150,000 against the Salary Cap, and a Designated Player that is between the ages of 21-23, only counts for $200,000 against the Salary Cap.
10 This amount is evenly distributed as “General Allocation Money” among the clubs that have 2 or fewer Designated Players.
11 For 2017, each MLS club is expected to receive $200,000 of General Allocation Money. Additional General Allocation Money can also be given to a club who qualifies for the CONCACAF Champions League, misses the MLS playoffs the previous year, has transferred a player to a foreign club, etc.
12 A more detailed understanding of the use of General Allocation Money can be found here.
13 The caveat here is that if a club converts a Designated Player into a non-Designated player through the use of Targeted Allocation Money, it must then acquire and/or sign a replacement Designated Player of equal or greater investment value.
14 Major League Baseball, National Basketball Association, National Football League and National Hockey League.
15 This media rights deal also includes the U.S. Soccer Federation and the rights to broadcast the U.S. Men’s National Team. As such, under this agreement, a portion of the media rights revenue is paid to the U.S. Soccer Federation and not the MLS.
16 An “expansion fee” is the fee paid to the MLS by the ownership group of a new club for the right to gain admission and compete in the MLS. This “expansion fee” is equally shared among the other MLS clubs.
17 A more comprehensive discussion of this issue is the topic of another article. That said, and put as succinctly as possible, one of the reasons may have to do with the numerous domestic leagues (especially in Europe) and the rather free, frequent and effortless movement of players among these leagues.
18 Of course, it should be pointed out that any drug testing protocol agreed to by the MLS and the Major League Soccer Players Union must comply in all respects to FIFA regulations on the issue.