Association Football

MLS has grown rapidly over the last half decade and is on the cusp of becoming a true national league. Following the contraction of Tampa and Miami early this decade, MLS has placed franchises in Houston, Salt Lake City, Seattle, Toronto, a second team in Los Angeles, Seattle, Philadelphia and next year Portland and Vancouver. This will give the league 18 teams, 16 in the US and 2 in Canada. Yet with the league approaching that magical number of 20 teams, in which pressure will grow for a pause in expansion, it is still absent in some major markets and regions of the country. How MLS manages the next round of expansion will greatly impact the efforts to make MLS a big mainstream pro sports league in the US.

Current Expansion Climate

With the success of past expansions, the addition of Beckham and the clear growth of MLS and the game in general, there is significant interest in bringing MLS to cities throughout North America. The league therefore has been able to increase the expansion fee, require set stadium plans, and has been able to play cities off each other.

As a result of this competition, expansion has become very lucrative for the league. The fee for a new franchise has grown to $40 million – a sum that basically covers all annual salaries for the entire league. Therefore there is a clear incentive for MLS owners to continue to pursue further expansion and to encourage competition for cities between each other.

However, the economic collapse of 2008 took some major cities out of the running for that current round of expansion and has created some real questions about the economic prospects of certain regions, especially the southwest, Florida, and the upper midwest that have been both badly hit by the housing bust and the recession.

In the midst of the financial collapse of 2008, MLS was conducting a selection process for two new cities. Unfortunately, the economic collapse forced some cities to drop out, but the League made a shrewd move and selected two sure things – Portland and Vancouver. These cities are not the biggest markets but they already have teams in place, soccer tradition, and existing rivalries with each other. This is as sure a thing as it gets and will make this region a soccer hot-bed. It will also make the league look really strong, as both teams will add to intensity and character of the league, not to mention that MLS can tell future investors and sponsors that it was able to expand with remarkable success in the midst of a recession.

While additional northwest expansion was a very shrewd move, it was also a bit of sacrifice. Following the addition of these two teams MLS will be at 18 teams, yet it will not be in some major markets and regions of the country.

What The League Has To Consider In Future Expansion

In expanding, the league’s first consideration has been and should continue to be whether the new franchise has a good and stable ownership group that will invest in the club and do what it takes to attract attendance. But beyond the gate receipts, the league needs to start thinking about expansion in terms of television fees. The money the league makes from selling its television rights is tiny in comparison to other professional sports.

Why TV is Important

The great site FootieBusiness explains the importance of TV ratings and revenues:

TV contracts are the financial life blood of professional sports leagues, and MLS is no different. While the League relies on multiple sources of revenue, the ultimate goal is to generate substantial rights fees from television partners.

Peter at MLS Talk notes that NFL teams receive an average of $43 million per team per season, MLB and the NBA are $14 million and the NHL about $2.5 miliion. MLS by contrast is just $600,000:

As an example of how important the TV revenues are, I present this simple scenario. Many fans have suggested raising the salary cap to $5M. With 18 teams, the differential from $2.3M to $5M means an additional $48.6M for player salaries($2.7M per team).

So what does expansion have to do with TV revenues? Rights fees are largely based on ratings and ratings are based on the popularity of the league. A lot goes into increasing the popularity of the league, but fundamentally the league has to draw interest in the major markets and in every region of the country.

Kartik points out that the loss of Miami and Tampa significantly hurt TV ratings, as two large markets turned away from the league. The leagues willingness to expand to smaller markets, Salt Lake City and Portland, while they make sense, have a certain opportunity cost. To expand its television ratings, which is crucial to increasing the profitability of the league, MLS has to do a couple of things. While it is financially advantageous for the league to promote expansion competition, the league has a basic need now to expand to a few key markets.

First, it must ensure that it has a strong presence in all major media markets. The league needs to have a truly national presence to do well in national television ratings and that means expansion must focus on filling out its presence in the major markets and regions where it is not: the south and Florida.

Second, existing teams need to begin marketing themselves regionally. It is not good enough for teams to simply draw well from their own city, for the league to take the next step, teams need to have an increasing regional presence. For instance, Columbus should not just be the team for the city of Columbus, it should be Ohio’s team. DC should be Richmond and Baltimore’s team. This is how merchandise sales expand and how ratings grow. In short, teams cannot play in every city, but they can be in every city. Therefore a focus on markets and regions should be principal considerations behind expansion.

This is the first post in a multipart series. Next up where to expand.

Filed under: Future of American soccer, MLS |