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You Get What You Pay For

It is that time of year when season ticket holders are eagerly awaiting to receive their tickets and scarves in the mail. There is a great deal of time and money spent off the field and behind the scenes to get you into those seats. Nonetheless, it is the product on the field that we are concerned with the most.

The quality of play in Major League Soccer is in constant question.  Defenders point to the investments in youth academies, faculties, and bringing on high caliber players from better leagues. Despite off the field investments and opening the check book for a few select players, the salary cap and Designated Player rules limit how much of what you spend on tickets and merchandise is seen on the field. From the available information on individual club revenue and player salaries, it is evident MLS clubs are not adequately investing in players, even with the high profile arrivals.

A study in the American Economist by John Twomey and James Monks, entitled “Monopsony and Salary Suppression: Case of Major League Soccer in the United States”, demonstrated how the league’s single-entity significantly under invests in their players compared to top European football leagues or domestic professional sport leagues. Using the data published by Forbes in 2007 and the player salaries figures from Major League Soccer Players Union (MLSPU) in 2007, they found that the guaranteed compensation for players is only 24.86% of club revenue. That does not include any revenue the league itself obtains. Compare that 24.86% of revenue to the other North American leagues in 2007: MLB 52%, NHL 55-57%, NBA 57% and the NFL 59.5%. Against other top flight soccer leagues salary as a percent of revenue is even worse.

A few months ago, Forbes provided an update of MLS club values and revenue. The single-entity system means MLS owns all the player contracts and clubs. Investors own stakes in the league and “operate” the clubs. Below we applied the same methodology: total guaranteed compensation of each club based on the MLSPU Surveys through 10/1/12 compared to the revenue figures from each club reported by Chris Smith in Forbes magazine.

 

MLS – Player Compensation as Percentage of Club Revenue
Club Compensation* Compensation ($M) Revenue** ($M) % of Revenue
CHI $4,145,876.33 4.1 24.5 16.92%
CHV $3,572,341.63 3.6 15 23.82%
CLB $3,717,509.00 3.7 18.6 19.99%
COL $3,381,885.75 3.4 18.1 18.68%
DAL $5,286,674.04 5.3 24.2 21.85%
DC $4,050,726.99 4.1 17.7 22.89%
HOU $3,294,091.91 3.3 32.6 10.10%
KC $3,226,599.37 3.2 27.7 11.65%
LA $12,718,531.45 12.7 44 28.91%
MTL $4,751,369.58 4.8 26.2 18.13%
NE $2,639,981.42 2.6 17.1 15.44%
NY $16,728,107.80 16.7 28.1 59.53%
PHI $3,356,310.25 3.4 21.4 15.68%
POR $4,505,210.67 4.5 39.1 11.52%
RSL $3,581,445.29 3.6 23 15.57%
SEA $4,224,310.65 4.2 48 8.80%
SJ $3,174,895.53 3.2 15 21.17%
TFC $7,446,623.67 7.4 30.9 24.10%
VAN $5,216,754.95 5.2 23 22.68%
League Total 99.0 494.2 20.39%
*Compensation from MLSPU Surveys  through October 1, 2012
**FORBES estimates; revenue and operating income is for 2012 season

The total salary as a percentage of revenue from 2007 to 2012 decreased from 24.86% to 20.39% (nearly 20%). If you remove the Seattle Sounders which utilized only 8.8% of revenue for compensation the total is 21.03%, still less than 2007. The figures from 2012 do not include the transfer fees when discussing salary or revenue. In turn, this excludes the transfer fee of $1.5 million for Tim Cahill, or the $2.7 million transfer fee from Stoke City for Geoff Cameron.

The collective bargaining agreement between MLSPU and MLS in 2010 had a built-in 5% annual increase to the salary cap. Since the CBA does not directly connect revenue to the salary cap, the league’s growth in revenue is outpacing wage growth. The club’s salary budget for players 1-20 on the roster in 2012 was $2.81 million. The clubs’ salary cap imposed by the league is only 4% greater than the transfer fee Stoke City paid for Cameron the same year. Even with the new crop of DPs arriving this off-season, the salary to revenue ratio is likely to be nearly half of other domestic sports leagues and the world’s top soccer leagues.

The trend for all North American sports leagues over the same period was to reduce the salary to total revenue percentage: NHL and NBA dropped to near 50%, with the NFL decreasing nearly 13 percentage points to 47%-48.5%.  The Deloitte Sports Business Group’s Annual Review of Football Finance 2009 was used in the Twomey and Monks study, there is also a 2013 edition.

Based on revenue totals and wages from 2011/2012:

Major European Leagues vs MLS - Salary as Percent of Rev

The best leagues in the world are putting at least 51% of revenue into their product. From the 2007 report, the Japanese 22-year-old top division, J-league, spent approximately 46.9% of revenue on salary.  MLS is entering its 19th season.

In his 2013 preseason press conference, Commissioner Don Garber said the goal is to make the league among the top leagues by 2022.  Only utilizing 20.39% of club revenue to directly fund players’ salary is counterproductive to the goal of improving the quality on the field.  If the salary cap was increased to a larger percentage of total revenue, excluding revenue from Soccer United Marketing (SUM), there would be a substantial increase in the quality of players attracted to the league.  At 45% of Forbes’ projected 2012 total club revenue, the salary per team would be $11.7 million. Only two clubs surpassed the sum, New York Red Bulls ($16.7 million) and LA Galaxy ($12.7 million).

Increasing the minimum ($46,500) and median ($89,750) salaries would increase the supply of better players, and those that do not survive can go to a lower division to develop. Quality youth players will remain in the system rather than go into the college system or abroad. The foreign player pool will improve due to the desire for better wages. The rising tide will raise all boats.

There is room for MLS to improve their player pool. MLS is choosing to hold back. The argument is owners have already invested millions and have had years of operating in the red. The reality is those are all sunk costs. The owners’ wrote it off as a loss in those years and moved on just like many other businesses in the real world.

MLS is not a unique snowflake that does not exist anywhere else in the world. The principles that govern other leagues apply to this league. Fans that support the league should get what they pay for, not merely a $6 show with a $30 price tag.




There are 5 comments

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  1. Matt

    Great stuff Jay. I agree that MLS underpays most of its players. One idea I had heard put forth for English soccer in particular was to cap salaries at 60% of a team’s commercial revenue. What are your thoughts on that system, and do you think that switching MLS from a “soft” salary budget to a 60% cap would result in a marked increase in spending to improve the on the field product?

    • rescindedred

      I used 45% of revenue as a conservative figure. There are factors such as higher travel cost due to distance not experienced in many other countries. I think league will stay as close as possible to what is done in North American sports league. The owners are more familiar with the NFL model than the EPL system, remember Don Garber worked for the NFL, and the Krafts and Hunts are prominent in both leagues.

    • Dan D.

      I like your “soft” cap. Nothing in MLS is clear. Not really a hard cap, not really a soft cap. I do believe though, that a cap linked to commercial revenue would be an interesting proposal. Question: what would happen to clubs that are new to the league, or that have very low commercial revenue, too low to field a proper team?

      • Matt

        I kind of get the feeling that most of the clubs that join MLS will be in pretty decent shape by the time they start play. Allowing expansion teams to count the TV income they haven’t received yet towards their commercial revenue for salary purposes seems like an easy solution. Otherwise I would prefer to see a grace period where they are given time to get salaries to that 60% or whatever percentage is decided on. I think UEFA is doing something similar with FPP, where as long as clubs are making progress towards that goal, they can avoid sanctions.

        Come to think of it, being able to see salary data for the NASL and USL-Pro clubs would be kind of interesting.

  2. JR

    i still say you simply can’t compare these things in this way. on the domestic side, MLS isn’t bringing in nearly the amount of money that the NBA, NFL, NHL and MLB is bringing in. if they were bringing in more, you can guarantee that they’d spend more on players. if MLS spent 50%+ just on players, the teams and subsequently the league would not make any money and would there’s crash the league before it got anywhere.

    as far as comparing MLS to European leagues, it’s not really fair either. again, MLS doesn’t bring in as much money as those other leagues. also most of those leagues are top heavy when it comes to spending. we could easily argue that for instance La Liga’s numbers are different if you remove Barca and RM from the equation. also we all know that European teams have very serious debt problems. especially the smaller teams who are trying desperately to keep up with the super clubs.

    the reality that on a club by club basis there probably won’t be any individual clubs in the United States who could regularly hang with the likes of the world beaters like Barca, RM and Bayern. but on a league by league basis, we will be very competitive. the salary cap while currently painful, is a necessary. it will grow over time as MLS becomes as popular on TV as it is in the stadiums.


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