By Paul Kennedy
For those of us who have covered soccer going all the way back to the days of the original NASL, the report Forbes published Wednesday on MLS club valuations is stunning.
Pro soccer, once deemed a wasteland, is booming.
Go back 30 years, 20 years, 15 years, 10 years, even five years -- the year of the previous Forbes' report on MLS -- and the idea of pro soccer being a solid investment was a pipe dream.
Thirty years ago? The NASL was on the verge of collapse.
Twenty years ago? Work on MLS had begun. But it was slow going. Very slow going. As in it would take another three years to get the league off the ground.
Fifteen years ago? The sale of the LA Galaxy by Marc Rapaport's LA Soccer Partners to AEG for $26 million was announced at MLS Cup 1998, prompting the biggest toast in the history of soccer. The Galaxy owners were getting out and they were the first investors ever to make money on American soccer.
Ten years ago? Instead of moving forward, MLS had fallen backward, going from 12 to 10 teams and hanging on with the support of only three owners.
Five years ago, the Seattle Sounders had not even begun play in MLS. That's how long ago Forbes published its previous report on MLS.
And MLS had only 14 teams in 2008. It just announced its 21st team, Orlando City SC, on Tuesday, and should announce its 22nd team, Team Beckham in Miami, by the end of the year.
Here are a few takeways:
MLS must have had a winner if giant sports and entertainment companies like AEG and Red Bull had gotten in on the proverbial ground floor.
Much was made of the so-called $250 million the Galaxy was paying David Beckham, but that was money well spent if you believe Forbes figures: operating revenues of $7.8 million in 2012 -- fourth in MLS behind only Seattle, Portland and Houston -- and an increased valuation of $70 million in five years from $100 million in 2008 to $170 million in 2013.
According to Forbes, the Red Bulls were MLS's least profitable with losses of $6.3 million in 2012, but their value has more than tripled over the last five years from $33 million to $114 million. A chunk of that comes from the construction of Red Bull Arena. But Red Bull -- yes, it's in the business of selling sports and entertainment as much as it's in the business of selling energy drinks -- could sell its MLS club tomorrow and more than make up for the annual losses on the Red Bulls.
It takes $100 million-plus to sit at the MLS table these days.
In 2008, the Galaxy was the only MLS team valued at $100 million or more. Now, it is one of eight teams valued at $100 million or more. The average MLS team was worth $37 million in 2008. It's now worth $103 million, up 178 percent. Nine clubs made money in 2012 compared to just three in 2007.
Earlier this year, Forbes reported the Hunt Sports Group sold the Columbus Crew and Crew Stadium to Anthony Precourtfor $68 million. That would be considered a bargain price for an MLS club as Columbus is a mid-sized market and Crew Stadium is MLS's oldest and least expensive soccer-specific stadium.
The Orlando Sentinel reported the expansion fee for Orlando City was $70 million -- and that doesn't include the cost of the stadium being built in downtown Orlando.
By pro sports standards, the revenues of MLS clubs are modest: an average of $26 million. Which means they must keep costs -- translation: player salaries -- down to make money.
Up until now, MLS has managed to do that thanks to various mechanisms: league approval of all contracts, a salary cap and limited free agency, not just the single-entity structure. It also helps that soccer has an open labor market -- ie., there is a seemingly infinite supply of talent on the international market MLS can import for the same or less money than it currently pays its players.
For better or worse, MLS is the envy of leagues in other sports or soccer leagues around the world as it has contained labor costs, but that will get increasingly difficult.
First of all, the current collective bargaining agreement expires at the end next year. Secondly, MLS's new owners are on the whole more willing to invest in player talent than its original owners and there are more means to do so than in the past (multiple DPs, financial incentives from the league with its Providence Equity Partners money).
The good news is that many clubs have built their own stadiums and are selling out. The bad news is that they are selling out.
The revenues that clubs generate come almost entirely from in-stadium revenue streams, which begs the question, where will future growth come from? Most of the soccer-specific stadiums are small facilities with not a lot of room for expansion.
The first thing, of course, will be to make sure those sellouts are real sellouts. All those empty seats you see at games are lost opportunities to make extra revenues with the sale of food and beverage and merchandising. And all those empty seats deflate the price at which clubs can sell tickets -- or ticket holders can re-sell them.
(In the excellent Hollywood Reporter profile of Seattle Sounders majority owner Joe Roth, he found no more proof of the club's mega-success than in surveying the crowd outside CenturyLink Field on game day: "Scalpers. This does my heart good.")
That MLS clubs rely heavily on in-stadium revenue streams is because MLS's television revenue is so modest.
If you want to know why the average player salaries at big European clubs match the entire salary budgets of many MLS clubs, you just need to see the discrepancy in broadcast revenues.
The current deal with MLS's broadcast partners -- ESPN, NBC and Univision -- expires at the end next season. The bad news is that, according to published reports, MLS ratings were down this year on ESPN/ESPN2 (29 percent to an average of 220,000 viewers per game) and NBCSN (8 percent to 112,000 per game).
The good news is that networks have such an appetite for live programming, and there's so little live programming available to buy, MLS should still see a healthy increase in its television revenue.
Finally -- and this is worth underscoring -- the growth MLS has achieved over the last five years is all the more remarkable when you consider it followed the greatest financial collapse of our lifetime.
For years, pro soccer was dubbed the next big thing only to fall flat on its face. In the aftermath of the 2008 financial collapse, proponents of MLS cautioned that it was only a matter of time -- in this case, the economic recovery -- before pro soccer took off.
Most economists will agree we're still waiting for the economic recovery. But MLS is booming.
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