A Road Less Traveled — The MLS Business Model

America is known as the land of opportunity.  These days, that translates into the place to go if you want to make a fast buck.  Need some benjamins in a hurry?  Just pose nude for a magazine, release a private celebrity sex tape or, if you’re a star athlete, renegotiate your contract.

It works in any field.  Bankers collect big bonuses for losing millions in the market.  Pharmaceuticals put fear in the hearts of citizens and protect their profits, by playing up death panels.  Businessmen drill in the Gulf, cutting corners on safety, to milk those last precious barrels of crude at $75 per.  All it takes is complete indifference to the future.

Sing along with (outgoing) BP CEO Tony Hayward:

httpv://www.youtube.com/watch?v=a3jdHtpIuNM&feature=related

Of course, politicians are the grand masters of the quick score.  Bush and Cheney got elected to do two things.  One, to start a war on terror where there weren’t any terrorists (at the time) but plenty of oil and infrastructure contracts to be had.  And two, to de-regulate every major American industry so that their supporters on the home front wouldn’t feel left out of all the exploitation.  They took the money, ran and left the future to take care of itself.  Friedrich Hayek must be turning over in his grave.

The pursuit of the American Dream has been transformed into the mother of all buffalo massacres.  Nowadays, instead of Wild Bill Hickoks and Buffalo Bill Codys on the Great Plains, the hunters are lobbyists roaming the halls of Congress, shooting down their helpless prey using AK-47′s loaded with special interest.  Free enterprise has become political bloodsport; shoot first and dodge questions later.

All of which makes the slow marked progress of Major League Soccer even more stunning.

Garber has brought financial prudence, patience and long range thinking to MLS

Since taking the helm in 1998, current commissioner, Don Garber, has run a tight ship financially and charted a maverick course through the rough seas of the American sports market. Whereas the big fish (the NFL, NBA, NHL and Major League Baseball) all consist of a group of individual clubs, which have agreed to compete against one another both in and outside the athletic arena and each be responsible for their own debts, the minnow that is MLS was set up as a single entity, with the league controlling player movement and the owners sharing equally in the league’s profit, or, as it has been for the most part, loss.

When you consider the ever more frantic feeding frenzy, ongoing in the transfer market of the usually more socially democratic and mildly capitalistic Europe, the irony of MLS’ steady growth is all the more striking.  In the greatest free enterprise market in the world, America, where politically speaking, socialism is a four letter word, Garbey’s business model has been alternatively condemned and derided by the establishment.  But it has worked.

While global sporting giants like Manchester City, Real Madrid and baseball’s New York Yankees spend hundreds of millions annually on player wages, inflating the market and causing critics like Michel Platini to call for tougher financial regulations, MLS is often criticised for not spending enough.  The league is now in its fifteenth season and the maximum any player can earn, against the salary cap, is less than the minimum yearly pay packet (approx. $400,000) for a bench warmer in any of the big four American sports.   The minimum wage in MLS is $40,000 per year, or £25,500 sterling.  Try living on that in New York or LA!

That sweat market environment is changing though, if too gradually for some.  MLS has, under Garber, been deliberate in its growth.

As at its conception in 1993, timed to take advantage of the fascination of the first World Cup held in the US, the league’s fortunes have always been tied to FIFA’s biggest competition.  League play began in 1996 and the original ten teams were quickly increased to twelve.  In 1998, however, the US debacle in France, where the men’s national team finished dead last, out of thirty-two countries, dampened the initial enthusiasm for the game that the ’94 Cup had inspired.  That ennui, coupled with overly aggressive optimism and spending had put the second coming of soccer to the Land of the Free well down the same dangerous path on which its predecessor, the NASL, had found its ruin.

Lamar Hunt founded the Columbus Crew, Kansas City Wizards and Dallas Burn, later renamed FC Dallas

America's oldest domestic soccer competition, the US Open Cup, was also renamed in his honour

Upon assuming office, Garber tightened the purse strings and tempered the ambitions of his investors.  He contracted the league back down to ten clubs and then, somehow managed to convince three American billionaires, all with a passion for the beautiful game, to invest heavily and endure a steady but controlled succession of losses, waiting patiently for a payoff that may never arrive.

In fact, one of those men, Lamar Hunt, passed away six months after the 2006 World Cup in Germany.  His son, Clark, has since assumed control of his sporting empire.

As shareholders in the league, all three men invested heavily in multiple franchises.  A cornerstone of Garber’s plan for MLS was that every club be housed in their own soccer specific stadium, rather than be a second class citizen in an NFL or NCAA football stadium.   The wealth of Hunt, Philip Anschutz and Robert Kraft have been the foundation on which that tenet has been implemented.

Hunt led the way, building Crew Stadium, to house his first MLS club, in Columbus, Ohio.  He would also found the Kansas City Wizards and then his hometown club of FC Dallas (originally called the Dallas Burn), where, before his death he began the planning and financing for what would later become Pizza Hut Park.

Phillip Anschutz, concert and film producer, arena mogul

Anschutz, who is the force behind AEG, the world’s second largest concert promoter and developer of such arenas as the Staples Center in LA, the Manchester Evening News Arena and the O2 venues in London and Berlin, invested in MLS’ biggest markets, founding the New York/New Jersey Metro Stars, the LA Galaxy and the now Houston Dynamo, who were originally the San Jose Earthquakes.  He has since sold off the Metro Stars to the Red Bull energy drink conglomerate (for a tidy $100m) but still maintains a fifty percent interest in the Dynamo and small holdings in the reborn Earthquakes, the Chicago Fire and Kansas City Wizards.  Anschutz built the 28,000 seat Home Depot Centre, replete with luxury boxes, for the Galaxy and the league, as noted elsewhere, quickly found a second tenant to share the comfy digs, granting an MLS expansion franchise to Mexican giants, Chivas of Guadalajara.

Kraft, who bought his NFL club from a shaving magnate, wasn't about to have his financial throat cut by the likes of Roman Abramovich or Sheik Mansour

Bob Kraft has been the most conservative of the trio, focusing his attentions on the club he founded, the New England Revolution.  Also the owner of the NFL’s dynastic Super Bowl champion NE Patriots, Kraft made it his first priority to build the new Gillette Stadium for the much larger grid-iron club.  His dual ownership, however has eased the financial hardship on the Revs, as their lease expense is almost non-existent.  Plans are underway to provide manager Steve Nicoll’s side with a sparkling new park.

To further illustrate the gulf between the MLS model and the traditional method of doing business, on either side of the pond, it should be remembered that Kraft is the man who turned down the opportunity to purchase fellow American George Gillette’s half of Liverpool FC.  The competitive but prudent tycoon was not interested in the out of control spending, in a down market, that had sucked in Gillette and his partner Tom Hicks, to the tune of £700m of debt, and made them pariahs on Merseyside.

“I don’t want to be in a situation where someone is spending £100 million more than I am on the payroll. I love the game of football (soccer) but I like competing when it’s fair. It doesn’t make economic sense when people are just throwing money at it.”  Robert Kraft, answering the British press queries regarding his reluctance to invest at Anfield.

The importance of the stadium project cannot be overstated enough, as evidenced by the struggles of the Red Bulls last season, languishing in the cavernous Meadowlands complex owned by the NFL’s NY Giants.  Now in the comfortable and revenue enhancing confines of Red Bull Arena, the club’s fortunes, both figuratively and literally have soared and they have signed former Arsenal captain Thierry Henry, who has quickly become the newest Prince of the City, and are rumoured to be on the verge of signing Rafa Marquez, the former Marseille and Barcelona defender and Mexico World Cup captain.  The echoes of an empty Giants’ Stadium have been replaced by the thunderous drums of the Red Bull ultras.

Those two signings, which follow on from the Galaxy’s massive David Beckham deal and the Seattle Sounders’ bringing another old Gunner, Freddie Ljundberg, to the Pacific Northwest, are proof that Commissioner Garber’s ultra conservatism was merely an opening gambit and not a policy written in stone.

In 2002, the USMNT returned from South Korea and Japan, having beaten Portugal and Mexico and converted the flagging enthusiasm of Sam’s Army into flag waving fervor.  On the heels of the success, MLS announced that it would focus its efforts solely on developing American talent.  That, naturally, kept the wage bill down but it also saw a bevy of stars, such as Tim Howard, Brian McBride, Clint Dempsey and current US talisman Landon Donovan, cut their teeth in the fledging league and then cross the Atlantic to test themselves at the highest levels.  Soon, many of the bigger stars were being followed by lesser lights, who could make more money in leagues comparable to MLS, in places like Scandinavia, Belgium and the Netherlands.

When 2006 rolled around, the scattered American players couldn’t come together as a unit, and crashed out of the group stage of the World Cup in Germany.  Garber and MLS executives, like former player and then Galaxy general manager, Alexei Lalas, realised that their best talent was plucked away, just as it ripened, and that if the league didn’t take proper steps to improve, MLS would die on the vine.

It was time to strike back and import affordable young talent from overseas, themselves.  To do that, however, they would need an established European star, to lead the way, and also put fans in the seats to generate the dollars that would be needed to sign both youthful foreign and maturing American talent.

What's in a name? $250 million if you're David Beckham.

Thus, the Beckham experiment.  We all know how that turned out.  A struggling Becks, banished to Fabio Capello’s doghouse in Madrid signed a $250m mega-contract, was injured early in his first MLS season and then, once again in Capello’s good graces, spent major portions of two seasons back in Europe trying to make the England squad for South Africa, only to tear his achilles tendon when all seem secured.

Before Beckham was signed, the Galaxy were one of only three MLS clubs that had begun to turn a profit.  Of course, being on the hook for $6.5m per annum to one player, once again had the accountants reaching for the pen with the red ink.  After all the money that Anschutz had already pumped into the league, it’s amazing that Garber was able to sell him on going back to the well one more time, with an especially big bucket, just when he was beginning to draw a return.

Still, as far as MLS was concerned, the experiment was a success.  Whether or not Becks was in LA, playing and healthy, and it was mostly not, his name brought attention to the league.  As a side benefit, his laissez-faire attitude, at the end of his first season in California, lit a competitive fire under Landon Donovan that translated into a searing performance for the American star, in South Africa.

In order to sign Beckham and other stars, the league had to soften what had been the hardest salary cap in sports, yet still maintain their financial discipline.  The dilemma was just how keep that balance.  MLS looked to the NFL, NBA, NHL and MLB for ideas.  When they did they found something interesting.

Grid-iron football, basketball and hockey all had their own strict wage limitations, with little room for compromise.  The effect was that each league had a semblance of parity, wherein, over the last decade, several different teams had been crowned champion of each competition.  The idea was to give the smaller markets a competitive chance.  The problem was that when the bigger clubs weren’t in the finals, the national TV ratings suffered greatly.

Alex Rodriguez, Baseball's version of the unpopular $250m man. Why is it that, in a country where everyone dreams of striking it rich, they rip you a new one when you do?

Baseball, however, doesn’t really have salary restrictions.  Theirs are more like recommendations and when a club exceeds the recommended maximum, they are taxed a significant amount, which is then redistributed to the clubs who keep their salaries within the guidelines.   In this manner, a club like the Yankees, with its $200m annual salary budget, subsidises the rest of the league for the right to outbid them for the best players.  The other NY club, the Mets, as well as the Chicago and LA clubs, the Cubs, White Sox, Angels and Dodgers all followed suit but to a lesser extent and with mixed results.  Good management and an eye for talent were still important factors in translating dollars spent into championships won.  However, big market clubs, especially the Bronx Bombers, were consistently in the playoff picture and, therefore, generating ratings and advertising dollars for baseball as a whole.

MLS decided to borrow from baseball’s luxury tax concept and created the Designated Player Rule.  Any team, with the cash on hand anyway, could sign a player for significantly more than the salary cap maximum (Beckham draws approximately thirteen times the max and Donovan five), with only $335000 counting towards their limit.  As of this writing, the amount of players one club could sign using the DPR has increased, first from one to two, and now, this season, to three.  The catch is that if you sign a third big name, as the Red Bull are so imminently poised, you must pay the league $250,000, which will be given equally to those clubs who do not utilise their 3rd DPR.

With Donovan and Beckham in Los Angeles and Henry, Juan Pablo Angel and, expectedly, Marquez in New York, MLS has set the stage for the next step in the league’s evolution.  In the days of NASL, when the NY Cosmos had Pele, Carlos Alberto, Franz Beckenbauer and Giorgio Chinaglia, the majority of the talent in the league was concentrated in one market.  With the DPR supplementing a strong financial base, MLS now has clubs with star power on both coasts and in the nation’s two largest television markets.  As well, there are clubs in Columbus, Seattle, New England and Houston which have been consistently competitive on more conservative budgets.

At the moment, the Galaxy and Red Bull are a poor man’s Real Madrid and Barcelona. MLS’ hope is that their rivalry evolves to define the league.  Still, as the league progresses towards the next mile marker, the 2014 World Cup in Brazil, other clubs are already signing their own Designated Players.

The aging and disgruntled pretty boy, Ljundberg is leaving the Sounders and they have brought in Blaise n’Kufo, a Swiss Emile Heskey, if you will, and the talented young Uruguayan, Alvaro Fernandez.  The Chicago Fire have inked Mexican Nery Castillo, Toronto FC has added the veteran playmaker, Mista, and DC United have swooped for former Red Star Begrade maestro, Branko Boskovic.  None of these are what you would call household names but all bring a measure of talent and good work rates to their clubs.  Unlike Beckham, whose MLS playing future looks even bleaker, each of these hired guns should deliver the goods on the pitch more-so than in print.

MLS now realises that becoming a world class league means keeping your own world class talent

At the same time, the league is taking a hard stance on the sale of its marquee star, Donovan.  David Moyes of Everton, today, revealed that the Toffees have scuppered their hopes of reuniting the American with his newfound fans at Goodison Park, after Garber declined an offer of £11 million for his services.  Roberto Mancini, at cash happy Man City, is also enamoured of the Galaxy forward but already has no idea what to do with over a dozen millionaires who won’t be eligible to play in the Premier League this season but will still be owed a pay check.

Over the next four years, look for every MLS side to recruit at least one DP and for the league salary cap to increase to the point where the rest of the squad’s earnings will be in shouting distance of the elite players.  Just don’t expect the league to open the flood gates. It isn’t like the dam is holding back a tidal wave of the green stuff, after all.  There is still no major television contract. The biggest league venues seat between 25 and 30,000.  Anschutz’ sacrifice is likely to be his last.  It is time for the league to make or break.

Next year will be the sixteenth season for MLS.  The next four years are its adolescence.  It will no longer be coddled or looked upon as the precocious baby of the American sporting family.  It is time for it to truly take on responsibility for its own success and failings.  In 2014, it will be twenty years old.  MLS and US soccer will have to emerge from the World Cup in Brazil a fully grown adult, capable of making its own way in the sporting world.