If MLS isn’t a Ponzi scheme, maybe it’s the WeWork of sports?

Forbes’ annual Major League Soccer revenue and team value analysis is out, and a couple of things are clear from it: One, MLS teams are soaring in value, with several teams being sold all or in part at prices that would value them at more than $400 million. And two, there is no good reason for these prices, as Forbes points out in classic Forbesese:

Those aren’t the sorts of prices a sports banker would arrive at given the financial performance of a typical MLS team. In fact, we estimate that, of the 23 teams that played in 2018, just six turned a profit (and half of those were just barely in the black). Altogether, the league’s teams lost more than $100 million last year. And MLS is losing even more money at the league level—as a single-entity operation, player salaries are paid through the league office—which means team owners are on the hook for a sizable capital call in addition to the red ink in their local markets.

This is the kind of financial picture — soaring team sale prices amid massive annual losses — that had me asking whether the league isn’t effectively a Ponzi scheme, where the league’s bottom line is only being kept afloat by annual infusions of new expansion fees. Forbes suggests a couple of other possibilities for what’s at work here, neither of which are too promising:

  • MLS’s national TV deals expire in 2022, and the league could be hoping to significantly increase its current $90 million annual take, which would put a dent in that $100 million–plus in yearly losses. MLS TV ratings are up, though still a tiny fraction of even the NHL, so we’ll see how that goes.
  • Ownership of an MLS team also gets you a share in Soccer United Marketing, which runs all other soccer in the U.S. (Concacaf, international friendlies, etc.), and which turns about a $125 million annual profit. That’s probably still not enough to put MLS as a whole back in the black, though, depending on how much those league-wide losses on salaries are (total MLS payroll is just under $300 million a year). And it’s certainly not enough revenue to justify $400 million team values.

So what we have here is a picture of a league where owners are overpaying for teams on the basis of (nonexistent) current profits, but are hoping that if the league loses money for enough years, eventually it’ll grow to the point where it starts making money. We’ve seen this model before, and very recently: It’s WeWork, and Uber, and every other go-big-or-go-home money-losing business that is trying to parlay losing lots of money fast into eventual profits. It’s not quite a Ponzi scheme, as there’s a light at the end of the revenue tunnel beyond just finding new suckers — except the light may only exist in the imagination of the company founders, and suckers may be needed eventually regardless.

Note that this does not mean that MLS is going to go spectacularly bankrupt or anything, though if the cable sports bubble finally bursts before 2022, the league could have a rude awakening when it goes to cash in on new TV contracts. It does mean that many of those billionaires buying up MLS franchises in hopes that eventually they’ll make enough money to justify those crazy purchase prices could be in for an unpleasant surprise; at least, unless they can find another billionaire desperate to enjoy the thrill of sports ownership to pass their teams off to in the meantime, which seems to be what passes for a business model all over the American economy these days. There’s a reason why this is currently my favorite newsletter.

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11 comments on “If MLS isn’t a Ponzi scheme, maybe it’s the WeWork of sports?

  1. you´re the best….as always, great reporting and insight. MLS and SUM and US Soccer are so pathetic and it is good to see a constant, critical, informed analysis.

  2. I wonder if, for some owners, they mentally marry the fun and prestige (if there is any) with owning an MLS team with the tax benefits of a money-losing entity that will offset gains from other investments. It’s a win-win for them, if you assume the $250M pay-to-play isn’t a bat-S&^t crazy amount to squander on such an scheme.

    Or maybe they are playing the very, very, very long game in which it will take a few generations to make MLS must-go and appointment-TV watching. They must be praying that baseball and NASCAR will continue to shed eyeballs, Tiger will finally retire, football will see more flags and concussions (or move to flag football) and the NBA will price themselves out of the common man’s reach.

    Nah. Won’t happen.

    1. It’s certainly a lower price of entry with MLS. And given that we are talking about very rich people here, it isn’t like they are selling the family silverware to fund the expansion fee (or operating losses). Maybe this is just another “New Zealand escape plan” kind of thing for them… it might or might not ever turn out to be a viable investment, but you can afford to take a flier on it as the money you are spending is surplus to you.

      Maybe MLS is just the ‘venture capitalist’ arm of the sport world?

  3. The longer I observe the life of MLS, the more I conclude that the existing arrangement is acceptable. Investors get a variety of benefits for their participation, including real estate concessions, shares in SUM, tax advantages, and access to future opportunities of various kinds. In the meantime, they hope that at some point–perhaps in 2026, the year of the North American World Cup–the facts on the ground will change and America will fall in love with their product.

  4. If you are one of the ownership groups that bought in during the “second wave” of MLS expansion (which would have been after the first wave, obviously, but also after the first wave of contraction…), the $10-40m you paid for your franchise must seem like a good investment. The 15 or so franchisees who bought in after this have paid a total of, what, $1.2-1.5bn in expansion fees total?

    We don’t get much info on how that cash was shared (or how much of it) among the original 8/10/14 ownership groups, but I think it’s safe to say that the Anschutz and Hunt families have finally recouped the $350-400m they lost over the first decade or so of MLS operation. And if you are Toronto, Seattle or a couple of other early expansion clubs, you have almost certainly recouped your expansion fee several times over by now.

    The question is whether the payments from SUM are enough to make the majority of the clubs at least break even on operations, or whether the expansion windfalls are being sunk into annual operating losses.

    I guess we find out who can’t find a chair when the (expansion) music stops. Given the locations of some of the recent expansion markets and how marginal they appear to be as MLS destinations, I do wonder if we aren’t nearing the #shoeeventhorizon for MLS clubs.

  5. I hear there’s an expansion franchise up for sale in New York. Tentative name: Brooklyn Bridge FC

  6. Only time will tell but I’m pretty happy to see soccer rise to this prominence in my lifetime. The NASL failed when I was 24—in my prime. Until MLS came along soccer people bickered and sabotaged the sport. Every single previous league failed.

    If Philip Anschutz didn’t hang in there in the early 2000’s (at one time owning 7 of the 10 teams) MLS would have joined the alphabet soup of failed attempts—quite possibly the last major attempt. The Single Entity and SUM components are actually a brilliant strategy to survive. Hopefully we can evolve into a more traditional form of the sport (relegation, FIFA Calendar) but that will take another generation to evolve. Garber has gone from baby steps to big strides without bankrupting the league—and found many Anschutz-like investors. We are light years ahead of the NBA, NFL, NHL etc. were at 23 years old.

    Of course there are detractors, do they have a better plan or just hate this one? Can they show tangible comparisons to better solutions? (for example, how did the J-League incorporate relegation?). A lot of younger people assume merely introducing pro-rel will right the ship—are there examples of this you can demonstrate? Those who don’t know history are doomed to repeat it.

    1. What saved (and continues to save) MLS is the implementation of an effectively soft cap. First through the Designated Player Rule and then Allocation money. It allows the high revenue franchises to field consistently competitive teams, rewarding fans for their loyalty. Otherwise the league would be the WNBA. MLS rewarded Seattle fans for showing up, the WNBA failed to do so for the once league attendance leading Washington Mystics. The results speak for themselves.

  7. I don’t think 400 million is the true price of the expansion teams.

    Though the actual figure is still stratospheric, MLS might be using a “public” sales figure to promote hype for the next round of sales. They then keep the actual sales figure which is arrived at via creative credits, rebates etc. secret.

    auction houses have been known to do the same technique. Thus, it is very hard to know the actual value of the product.

  8. Great reporting!

    Honestly, I think MLS teams are a buy and hold and sell market, not an annual profitmaker. The league and clubs don’t want to pay taxes on annual profits, or have profits for a union in a CBA bargaining year to point to (or local cities that are paying for stadiums in part).

    1. Is there a difference between “buy and hold and sell market with no annual profits” and “tulip frenzy”?

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