Business Lessons Learned from MLS By Jonathan Harris

Viewing sporting competitions is an integral and cherished aspect of our global society. Of all the sports that are viewed by people around the world, none is treasured more than soccer—affectionately known as the beautiful game.

Major League Soccer (MLS) is the top-tier professional soccer league in the United States and Canada. Many Americans are becoming more interested in MLS due, in part, to the 2014 FIFA World Cup. Consequently, media outlets are reporting the activities of MLS with increased frequency. Many of these reports highlight the financial woes experienced by the league in past years.

Regardless of your personal preference for soccer, powerful business lessons can be learned by analyzing the financials of MLS. By treating MLS as an example of a start-up company, I will (1) show the efforts of MLS to turn a profit, (2) evaluate the impact of cost minimization on MLS, and (3) identify a correlation between MLS’s improved financial practices and the league’s recent expansion.

Recovering From the Red

Consider the case of MLS as a start-up company when compared to the extremely popular, well-established European leagues. Most start-up

companies begin with a significant amount of debt. MLS is no exception.

Ever since its inaugural season in 1995, MLS has struggled with annual operation losses. For example, in its first five years, MLS reportedly lost $250 million (Smith 2013). These losses can be attributed to MLS’s struggle in three critical categories—categories common to all start-up companies:

1. Human Capital—quality of players.

2. Infrastructure—soccer specific stadiums.

3. External financing—lucrative expansion fees and TV deals.

The efforts of MLS to improve in regards to human capital have sparked a dramatic financial recovery.

Keeping Costs in Check

Cost minimization is arguably the most important business practice that separates successful start-ups from failures. MLS is leveraging cost minimization in an interesting and unique way. MLS uses what is known as a single-entity structure. This structure defines each MLS team as a franchise of the league or “parent company”. Consequently, MLS has the power to set all player salaries as

“In its first five years, MLS reportedly lost $250 million”

it sees fit. The result is an average player salary of just $80 thousand (Twomey and Monks 2011).

Although this idea seems obscure on the surface, it is saving MLS from financial ruin. By minimizing team expenses on player salaries, MLS is avoiding repeating the failure of the North American Soccer League (NASL). The NASL was America’s first attempt at a professional soccer league. It went bankrupt after 17 years because teams were hemorrhaging an excessive amount of cash on player salaries (Bissonnette 2014). Thus, MLS’s focus on containing costs by minimizing player salaries has helped it avoid the disaster of the NASL’s financial downfall.

Opportunity Knocks

Arguably, MLS’s explosion of growth can be attributed to the creation of the designated player rule. This rule allows teams to have three designated players on their payroll with only a small fraction of the player’s salaries counted toward the salary cap. MLS’s first designated player was David Beckham.

For those who are unfamiliar with the name, compare bringing David Beckham to MLS to hiring Warren Buffett, Donald Trump, or even Mitt Romney as your start-up company’s

CEO. David Beckham is perhaps the most famous soccer player to play the

game in recent years by many measures. He is so beloved in England that he was awarded the Order of the British Empire for services to football (Vincent, Hill, and Lee 2009).

David Beckham’s arrival to MLS in 2007 caused ticket sales to soar for his team, the Los Angeles Galaxy. The Galaxy is now the most winningest team and is worth $175 million (Lawson, Sheehan, and Stephenson 2008). Even after Beckham’s retirement in 2012, the Galaxy have experienced much success due to their financial flexibility.

By moving to the designated player rule, MLS is still containing costs while also acquiring incredible soccer talent. The improved competition of the league is bringing about an explosion of growth. Where MLS only had 14 teams in 2005, the league is entering its twentieth season in 2015 with 20 teams (Bissonnette 2014). This growth is consistent with business principles—namely, that a well-timed investment in human capital has long-run financial gains.

An Optimistic Future

Although MLS is not currently making a profit, evidence of the league’s progress can be found in the rising average value of MLS teams. In 2013, the average value was $103 million—a dramatic increase over 2008’s average of $37 million (Smith 2013).

Recently, MLS Commissioner Don Garber announced plans of fielding 24 teams by 2020, thus making MLS the

“Perhaps the day will come when MLS surpasses European leagues in terms of financial success”

largest soccer league in the world (Smith 2013). What would have been unthinkable just a decade ago has become a reality. Clearly, we see the powerful effect of applying common business practices on MLS’s financial success. Where all teams were once playing soccer in American football stadiums, most now play in soccer specific stadiums. Where once the cost to create a team in MLS was only $5 million, now it is $100 million. Where once no TV deals between major broadcasting stations and MLS existed, new deals are being signed that raise $90 million per year for MLS (Bissonnette 2014).

Perhaps the day will come when MLS surpasses European leagues in terms of financial success. More certain is that professional soccer is here to stay in the United States. Its presence will have a rich impact on our culture and way of life—all thanks to a small start-up company’s dedication to reliable business practices.

Works Cited

Bissonnette, Zach. "A Sports League That's Unprofitable—but Hopeful." CNBC. December 5, 2014. Accessed March 2, 2015.

Lawson, Robert A., Kathleen Sheehan, and E. F. Stephenson. 2008. "Vend it Like Beckham: David Beckham's Effect on MLS Ticket Sales*." International Journal of Sport Finance 3 (4): 189-195.

Smith, Chris. "Major League Soccer's Most Valuable Teams." Forbes. November 20, 2013. Accessed March 2, 2015.

Twomey, John and James Monks. 2011. "Monopsony and Salary Suppression: The Case of Major League Soccer in the United States." American Economist 56 (1): 20-28.

Vincent, John, John S. Hill, and Jason W. Lee. 2009. "The Multiple Brand Personalities of David

Beckham: A Case Study of the Beckham Brand." Sport Marketing Quarterly 18 (3): 173-180.

“Perhaps the day will come when MLS surpasses European leagues in terms of financial success”