Major League Soccer is a unique league in the sense that it combines an popular global game with American sports features. Although the history of the league is rather short, it has a storied history with rapid league expansion. Like many American leagues and European soccer leagues, MLS is dominated by a handful of teams. Although there is competitive imbalance in this regard, the league seeks to increase competitive balance through various scheduling techniques. The league also employs a unique structure as a “single-entity” league with investor-operators who share many forms of revenues rather than true owners. This structure has been subject to criticism of being a Ponzi-scheme. Like many American sports leagues, and unlike European soccer leagues, MLS employs a salary cap, although exceptions to the salary cap are made via the introduction of the Designated Player Rule. The discussed aspects of the league including ownership structure, wages, and expansion are among hotly debated topics for the league going forward. Major League Soccer seeks to evolve and find success before the 2026 World Cup in the United States.
Competition Analysis of Major League Soccer
After the end of 1984, the United States was left without a domestic professional soccer league. This would be the case until 1996, Major League Soccer’s first season. After record audiences and TV ratings in the 1994 World Cup in the United States, this produced confidence to launch the brand new soccer league (Sports Business Journal, 2015). The initial launch of MLS came with a three year television rights deal for ESPN and ABC Sports. Seven teams were part of the initial season, located primarily in east coast markets, with the exception of San Jose and Los Angeles. (Pyne, 2017).
Historically Dominated by a Small Number of Clubs
In the twenty-two completed MLS seasons, team record data suggests the league has been dominated by a handful of clubs. There are two major trophies in the league – the MLS Cup and the Supporters’ Shield. The MLS Cup is determined by an end-of-year tournament, while the Supporters’ Shield is determined by the team with the best record at the end of the season (similar to a European soccer title). The MLS Cup has been won thirteen different teams, and roughly 70% of all MLS Cups have been won by six clubs (see Figure 1). The Los Angeles Galaxy and D.C. United are the only clubs with more than two MLS wins. (This sign of competitive imbalance may be a product of Los Angeles and D.C. being among the original clubs in MLS’s debut season while also historically having some of the most notable European talent. The case is the same for the Supporters’ Shield. It has been won by twelve different clubs but 70% of Supporters’ Shields are held by five clubs (Figure 2). Just like the MLS Cup, D.C. United and Los Angeles Galaxy both hold four Supporters’ Shield titles, more than any other team (Trophies by MLS club, 2018).
MLS Scheduling
Season scheduling is a coordinated effort between the league, teams, and TV partners. A 2016 interview conducted by MLSSoccer.com and Arielle Castillo with MLS Vice President of Club Services, Brad Pursel gave insight to the process. According to Pursel, there are two main goals when building a season schedule. The first is to put together a schedule that is best in terms of competitiveness for the teams. The second objective is achieving this first objective while maximizing national TV ratings. Both of these goals support economic theory as these goals imply maximizing revenue through TV ratings and game attendance induced by competitiveness. Pursel also notes that some of this process is manual, particularly when choosing opening day games, national TV games, and rivalry week games. However, for many other games, MLS utilizes a proprietary scheduling software that seeks to maximize competitiveness and TV ratings.
The seasons scheduling process also takes the availability of substitutes into account. The MLS season overlaps with MLB, NBA, NFL, and college sports. While it is totally impossible to avoid scheduling a home game while another local team from another league is playing, Pursel says the MLS seeks to avoid scheduling a home game for an MLS team when a there is a intriguing game that another local team is playing (rivalry games). The sport of soccer also has substitutes to MLS itself, as international competitions like the World Cup and the Gold Cup (where many MLS players participate) take place during the MLS regular season. MLS remedies this by taking a two-week break during the group stages of these competitions so players can play in these international competitions and so MLS does not have to compete for fan interest during these times. Other strategic considerations, according to Purcel, include scheduling around the CONCACAF Champions League, which takes place throughout the MLS season.
League Structure
The MLS deviates from other American professional sports leagues (and European soccer leagues) when it comes to league structure. Other American sports leagues are organized as a legal cartel with a number of owners but rather a single entity, organized as an legal liability corporation, where club owners own a financial stake in the league and are given the operating rights to the club they “own”. This type of league is known as an “Investor-Operator” model (Kransy, 2017). Given the investor-operator model, when a new team joins the league, the team owner is effectively becoming a new partner of the league.
Given this ownership structure, the revenues generated belong to the league rather than the team. However, teams are entitled certain revenues including broadcasting rights, merchandise sold in-stadium, parking, and local sponsors. Other revenues have a portion sent on to the league. These revenues include 30% of ticket sales, 25%-44% of player transfer fees. Other revenues are completely taken by MLS. These revenues include league level sponsorships, national TV rights, and online merchandise sales. (Kransy, 2017). For costs, the primary expense paid by the league are player salaries. The investor-operators bear the costs of stadium expenses, youth academies, administrative office expenses. (Illyas, 2017). An analysis from Soccernomics suggests the MLS bears total costs of $372 million is 2016, with total revenues of $233 million (Szymanski, 2016). This suggests a loss of $139 million. These losses may be a result of MLS’s aggressive growth strategy, with over twelve franchises entering the league in the past fifteen years.
MLS has taken criticism for having a “Ponzi-scheme like” model. A Ponzi scheme by definition is a model where profits are generated for original investors by adding new investors. Media outlets such as Deadspin and Bloomberg have published pieces exploring this association. A 2017 Deadspin article by Neil deMause claims that MLS has Ponzi-scheme characteristics. Deadspin questions the motivations for a league to rapidly grow while attendance and TV viewership is not rapidly growing. The primary basis for this Ponzi-scheme argument lies in the fact of a $150 million entry fee new teams must pay to join the league. Given that revenue is shared, the oldest teams in the league have reaped the benefits in hundreds of millions of team entry fees. With league revenue yet to top $1 billion, a $150 million entry fee can prop up the bottom line of the MLS. This structure gives owners and the league to expand as rapidly as possible, which seems to have been the case in the past decade.
MLS Labor Market
The latest collective bargaining agreement between the league and players’ union was signed in 2015, and runs through the 2020 season. While MLS, does not have true free agency, a limited form of free agency exists. Players who have their contract expired can become a free agent, but are limited to negotiating to teams in the league only if they are 28 years of age or older and have played in MLS for at least eight seasons. (Draper, 2015). Minimum salaries exist in MLS, but are not the massive minimum salaries seen in other domestic leagues. $60,000 is the minimum salary for the league. Although this number is low, before the 2015 CBA, the minimum salary was even lower at $37,000. This minimum salary is a binding price floor in the MLS labor market. According to Deadspin, two out of every five players experienced a salary increase after the minimum salary raise in 2015. The league also sees a salary-cap of $3.5 million. While salary caps are common in American sports, this cap deviates from European soccer, where salary caps largely do not exist.
One interesting aspect of the MLS labor market is the concept of designated players. In the early years of MLS (and to some extent today), there was a heavy reliance on older players from European leagues to play in MLS in the late stages of their careers. This trend has given the MLS the nickname of the “retirement league” as European stars are able to finish their careers while still bearing large salaries. Among the earliest European stars to join MLS include Thierry Henry and David Beckham. David Beckham’s signing is notable as it created the “Designated Player Rule”, nicknamed the “Beckham Rule” (Jenson, 2017). The rule essentially creates an exception to salary caps and player salary maximums by eliminating this rule in certain cases. The original rule allowed clubs to sign one player with salary above the league maximum of $400,000. The terms of this rule included a $250,000 luxury tax to be paid to the league, with the club bearing the entire expense of the players salary (Jackson, 2017).
Ten years later, the designated player rule has evolved significantly. According to the official 2018 MLS Roster and Rules Regulations, teams may have up to three players whose salary exceeds the maximum. Further, MLS introduced a flavor of the rule called the “Young Designated Player Rule”. These are two additional designated players a club may have, provided they are under 23 years old.
In addition to the Designated Player Rule, MLS employs a ranking mechanism called a “allocation process”. According to the MLS Roster Rules, this list is a mechanism to show which teams have first priority to potential designated players (U.S. National Team and former MLS players who played abroad). The allocation ranking is set by taking the reserve order of the prior MLS season standings, adjusted for playoff performance.
The result of the Designated Player Rule has resulted in attracting world-class players to MLS. As of 2018, there are fifty four designated players in MLS, which account for $105 million in salaries. The highest paid player is Sebastian Giovinco, a Italian national team player, who has a 2018 salary of roughly $7.1 million. Figure 3 shows the 2018 top 35 (by 2018 salary) designated players, according to data from Statista.
Challenges and the Future of MLS
Debate surrounds the best path forward for MLS. Despite the debate, MLS commissioner has been vocal in the goals MLS has set for the future. Topical issues in the current state of the league include growing TV ratings to increase revenues, relocation of some teams (Columbus) to maximize revenues, and expansion plans. MLS is under pressure to deliver impressive improvements for the league as the 2026 World Cup will take place in the U.S. This includes investment in youth development as many believe the success of an international team in based on the success of youth academies of the international team’s domestic league (Parker, 2018).