#8 MLS in the Spotlight: MP&Silva and Adidas with Big Bets on Soccer in the United States (Part
The Major League Soccer und US Soccer in general have experienced a flurry of news on a numerous of fronts over recent weeks:
MLS All-Star Game vs. Real Madrid in Chicago in front of 60,000 spectators at Soldier Field;
MLS's ambitious expansion course saw winners (Sacramento, Cincinnati, Detroit, Nashville) and losers (San Diego, Charlotte, Tampa Bay) among the cities that contend to get an expansion franchise awarded until 2022;
However, I want to focus on two stories that broke shortly before and after the league convened in Chicago from July 29 to August 2, 2017 for their annual festivities and owners’ back-room meetings: the alleged bid of Miami FC owner Riccardo Silva for Major League Soccer's global broadcasting rights starting in 2023 and the big bet of Adidas on the future of soccer in the United States by extending its kit sponsorship of the MLS for seven more years.
Those of you who have read my blogs before will have already noticed that I decided to write in English this time around. Most of my pieces (independent from topic) will remain in German; however, occasionally I will throw in a blog in English going forward. That being said, let's start with the first part of this two-part blog “MLS in the Spotlight.” The second part about the Adidas kit sponsorship and a quick outlook on the current state of the MLS is going to follow within the next days.
Ricardo Silva's Bid for the MLS Global Broadcasting Rights
On July 27th, the news broke that the MLS reportedly had rejected an (at first glance) unbelievably lucrative bid by Ricardo Silva's London-based sports agency MP&Silva. The deal allegedly would have netted the MLS USD 4 billion over ten years - starting after the expiration of its current broadcasting deal with ESPN, Fox Sports (English-speaking broadcasting rights), and Univision (Spanish-speaking broadcasting rights) in 2023. However, that long outlook into the future was not the only unusual point in this potential but unexpected major money windfall for the MLS franchises. First, let us look at the reported parameters of the bid:
Just three years ago, closing a new deal with its current broadcasting partners has been widely cherished by many parties involved on the MLS's side. Increasing the annual revenue generated from its domestic broadcasting rights from USD 27.9 million per season to USD 90 million has been a major boost for the league's ambitions and a major leap of faith by the networks. (ESPN President John Skipper: "It's a futures deal.") In contrast to many European soccer leagues, the value of media rights has remained almost flat and dwarfish for the MLS until the latest deal. Indeed, the league cannot even match the rights fee that the English Premier League can demand in its domestic US market: The EPL pockets c. USD 167m annually from NBC until the 2022-2023 season - almost doubling MLS’s “big” contract extension in 2015 - as well as its average TV audience in its home market (276.698 vs 514.000 per game). Also at the time of the deal in spring of 2015, MLS commissioner Don Garber doubled down on his pretty aggressive expansion plan beyond 24 teams and ambitious goals for the league. ("We want to become a league of choice.")
However, the MLS has been a loss-making operation since its inception in 1994 despite its recent hype: On a combined basis, MLS franchises still amount a loss of approx. USD 100m per year. Given its Designated Player Rule (or "Beckham-Rule") to attract high-profile players from overseas, the MLS does not really benefit from its salary cap, where only a certain amount of league-wide revenue can go to the players through salaries - effectively to control costs like other major sports in US (e.g. NBA, NFL, NHL). This observation was picked up by Shad Khan, the owner of the NFL's Jacksonville Jaguars and Premier League’s Fulham FC, who recently appeared on the Forbes Sports Money Podcast with Mike Ozanian. He fittingly described the difference between his two owned entities as follows: "The more money soccer clubs generate, the more losses they make - the traditional soccer disease." Thus, the MLS certainly could use some major monetary windfall since it still stands on financially fragile footing and is backed by private investors who expect some financial return on their investment at some point in the future.
Some weeks ago, I already wrote in my Quick Hits about the MLS and its future outlook: In a nutshell, my conclusion was that the league has a time horizon of approximately 3 - 5 years to really break through: becoming financially viable and expanding its appeal for the North American society beyond the Hispanic millennial. During that period of time the league could use the expansion fees of USD 150 - 200 million for every newly awarded franchise as a "lifeline" for its business. Given that the MLS intends to grow the league to 28 teams by 2022, or more realistically by 2024, twelve cities backed by private investment groups are officially vying for the five (or four - depending on whatever David Beckham does with his option for an expansion team in exchange for a mere USD 25m expansion fee and his signing with LA Galaxy in 2007) remaining spots. Therefore, significant new money can be expected to flow into the owner’s pockets. (Founded in 2014, Los Angeles Football Club is the only franchise scheduled to join the MLS for the 2018 season - already equipping its roster with “the most skilled Mexican player on the planet,”, an established coach and globally operating corporate partners.) These funds can be expected to satisfy the investors’ expectations for financial returns in the short term. Still, the league could use any additional funds and the reported bid by Ricardo Silva would at least align perfectly timing-wise starting at the end of the expansion process. Then, why has it simply been no option for the MLS to consider?
I want to tackle quickly some potential problems with the bid that have been discussed in the US media or that came to my mind - providing a European perspective:
Exclusive Negotiating Period: As the original rights holder (i.e. MLS), it is common in today’s marketing and sponsorship environment to grant its business partners (i.e. ESPN, Fox Sports & Univision) a certain period towards the end of the current contract where they try to hash out a new deal - without seeking any offers or interest from third parties. It has widely been reported that such right had been granted to its current TV networks. Thus, the MLS is not even allowed to enter any (in-)formal negotiations with MP&Silva. In fact, it is said that even the current contract partners are not allowed to discuss any extension until later in the deal. These circumstances certainly do not prevent any future deal between MP&Silva and the MLS, but is certainly a valid concern at this point in time.
System of Promotion & Relegation: Let us tackle the elephant in the room: Although being firmly established in soccer (and almost any other team sports) in Europe, the concept of promotion and relegation is completely unknown in North America. MP&Silva has its background in European soccer after having made its first major move in the sports rights industry in 2004 - the acquisition of the global rights distribution of selected Italian Serie A soccer teams. Acquiring and afterwards sublicensing international media rights of European soccer leagues had quickly become its core business, before branching out with this business model of acquiring international instead of domestic media rights to other sports such as tennis, Formula 1, and even the NFL. Thus, Ricardo Silva certainly thinks that promotion and relegation could provide the MLS with a major boost as he has seen it almost everywhere outside of United States. However, the MLS is a traditional closed-league system like it is widely known in North America. Demanded by the FIFA in exchange for getting awarded the World Cup 1994, the MLS was founded in 1994 as the highest, and first as professionally classified and nation-wide soccer league in the United States. Ever since, the MLS has been pretty much disconnected from any other soccer league in the US: In fact, the franchise owner each have a stake in the league itself instead of their respective teams like in the NBA or NFL. Thus, any change in the composition of the league would require change in ownership of the league - depending on who joins and must leave the league. Ever since the recent expansion of the league, we also know how expensive it is to join that exclusive club of MLS owners - at least USD 150 million going forward. Completing such transactions multiples times at the end of any season is just not fathomable.
The issue of the ownership being tied to the league instead of franchises is just one of numerous issues with Silva’s demand of promotion and relegation: (a) The draft-system pretty much requires a closed-league system - I could not come up with a practical solution on top of my head without revolutionizing the entire college system.(b) Cultural differences also come into play when dealing with relegation (and promotion): North American franchises are built at the drawing board: Instead of the organic creation of association as often seen in the history of European sports teams, they are literally awarded to metropolitan areas based on in-depth assessments of factors such as market size, playing venues as well as the (monetary) commitment by private investment groups and local communities. Given that the MLS is a particularly extreme case of this approach, fan loyalty as well as the lack of local fandom and team association is still an issue for the league. Given which devastating implications the relegation even has in countries such England and Germany for revenue and attendance figures, investors as well as fans certainly could quickly loose interest and move on to the next team in a league in which there do not exist many historical grass-roots in the first place.
The MLS is still a (loss-making) “start-up” compared to European soccer league. The closed-league system at least provides the private investors (i.e. franchise owners) with some incentive to maximize their up-front investments given the security and certainty of not being relegated to a lower division in their joined pursuit to establish the league as a viable player in the international soccer landscape. Right now, the MLS is in the midst of the challenge of expanding its national footprint throughout the country while maintaining its quality of play - which is already below-average in international comparison. Any inflow of second tier teams from the already economically struggling Northern American Soccer League (NASL) or United Soccer League (USL), which both are officially classified as “Division II” for the current season by the US Soccer Federation, would further dilute MLS’s product. Additionally, the risk for current MLS franchises to be relegated would make the owner’s current financial investments, the loss-making team’s mind-blowing valuations, and the skyrocketing expansion seem even more delusional. The elephant in the room certainly would prove to be a problem.
Recipients of Broadcasting Revenue: An underreported issue in my opinion is the fact that the MLS currently has to share the USD 90 million p.a. it gets from the TV networks. Since the rights package also includes game from both the men’s and women’s national team, who constantly draw almost four-times as many eyeballs as the MLS to their average game, the national soccer federation USSF reportedly receives about USD 40 million per year. The contractual agreements between the MLS and the USSF certainly could come into play while negotiating any extension for the current broadcasting deal. Question that instantly arise: How important have the (far fewer) national teams’ games been for driving the recent hike in rights fees? Is the MLS actually able to unilaterally decide about their future broadcasting partners? Nevertheless, I would not consider those issues as unresolvable on the way to a extremely lucrative rights deal for the MLS on a stand-alone basis.
Ownership in adjacent assets such as Soccer United Marketing (SUM): The ownership stake of the franchise owners in the MLS instead of their respective teams has wide-ranging implications beyond the above described issues. The corporate structure of the MLS includes many additional assets. The most valuable might be Soccer United Marketing LLC (SUM: Founded in 2002 by the MLS and proportionally owned by the franchises, this league-own sports agency offers a comprehensive service portfolio in the area of marketing, media and personality rights. On the one hand, this profitable business is the official and exclusive partner for everything concerning sponsoring, advertising, and licensing. On the other hand, it has grown its business far beyond the MLS and has emerged as the dominating marketing agency in North and South American soccer with big clients including the continents’ soccer federations CONCACAF und CONMEBOL. How valuable such league-own division can become has just recently been evidenced by the blockbuster sale of a majority stake in BAMTech to the Walt Disney Company valuing the subsidiary of MLB Advanced Media at USD 3.75bn - or USD 125m per franchise owner. In September 2011, MLS sold 25% of its subsidiary to the Private Equity firm Providence Equity Partners - valuing the business at USD 600m. (MLS just bought back the sold stake in SUM while the PE firm reportedly “tripled its initial investment” based on its financing structure.) I assume that any the entrant among the franchise owners would also receive a proportional stake in SUM conservatively valued at approx. USD 50m - certainly relativizing the enormous expansion fee for entering the exclusive club of riches.
I am not saying that SUM is as valuable as BAMTech, but a preceding separation (read: sale) of the division would certainly simplify any discussion about the implementation of a promotion and relegation system in the MLS.
Personal Seat Licensing (PSL): Given the huge public funding through taxpayer subsidies, stadium financing has become a much-discussed topic in the United States. (#MinnesotaVikings #LasVegasRaiders #DCUnited) As of now, industry standard pretty much means that public money accounts for nearly half of any projected costs of new sports venues. The biggest bargaining chip for franchises is the threat of relocation, which does not exist In European soccer. There, subsidies by communities (if any) are mostly limited to property grants or discounts for the venue side and PSLs are largely unknown. However, the creativity for stadium financing means in the US does not there: Another issue that I heard mentioned as a potential obstacle for an relegation and promotion system is the wide-spread use of so-called seat licenses. This are “paid licenses that entitles the holder to the right to buy season tickets for a certain seat in a stadium [independent of competition or league]. This holder can sell the seat license to someone else if they no longer wish to purchase season tickets.” At first glance, I assumed that such license is pretty similar to luxury boxes like in any stadium and I did not understand the issue. However, such PSÖ are largely sold at a fixed price before construction as a financing vehicle for the newly built stadium. A relegation to a lower division would certainly diminish the value of the right to purchase a season ticket. Therefore such mechanism is largely unknown in Europe and only used in competitions without the risk of relegation (e.g. NFL, NBA, MLB, Nascar). An often-cited exception in Europe is the The All England Club, which organizes amongst others the Wimbledon Tournament in London - but still no risk of relegation.) Nevertheless, I think there are many other potential obstacles to overcome before already sold PSLs become an issue.
The Bottom Line: An attention-grabbing Offer that actually is not as Big as Anyone Thinks?
In the end, I have two take-aways with regard to the alleged USD 4 billion bid by Riccardo Silva’s MP&Silva:
Take-Away #1 I certainly can imagine that Silva’s intention were others than entering serious negotiations with the MLS - at least not for its global broadcasting rights. As the experienced businessman who he is, he had to know beforehand that there was little chance for any serious talks - both because of his demands as well as the time until the current deals eventually end. Also, the acquisition of domestic media rights would be a novelty for the London-based agency as its core business and expertise has been the reselling of acquired international rights to distributors such as television and digital companies with a markup. The latest evidence has been the sale of a massive sports rights package including the FA Cup, Scottish Premiership, Ligue 1, and Serie A for the Chinese market to internet giant Tencent. Given that MP&Silva usually positions itself as intermediary, it would probably seek to resell the acquired domestic MLS media rights - making it pretty likely that they would end up with some of the current rights distributors ESPN, Fox Sports, or Univision. In this regards, MLS officials have had a clear opinion: “It is also important to note that since its inception, MLS, like the other North American leagues, has dealt directly with its domestic broadcast partners, rather than through agents or brokers,” stated Dan Courtemanche, MLS EVP of Communications. Nevertheless, it was an attention-grabbing move by Silva and he got back into the minds of MLS officials - maybe facilitating future business for MP&Silva: Once international media rights become more valuable with increasing quality of the MLS, the agency would certainly welcome the opportunity to partner again with the MLS and marketing the rights globally - a mandate which they lost in 2014 to IMG. It was only after that loss of international rights to IMG, that Silva went in big on the NASL and launched Miami FC together with Italian soccer icon Palo Maldini in 2015.
Though the MLS is distributed in more than 170 countries and territories around the world, the main objective of international TV deals today is global exposure rather than revenue generation.
Take-Away #2 Once the story about the potential bid by MP&Silva broke, the news headlines were dominated by the USD 400m which the MLS would pocket on an annual basis over ten years. But would that actually be a good deal for the MLS? In fact, the MLS stands in no comparison to other major sports leagues in the national landscape in terms of annual revenue from (only domestic) media rights: NFL (USD 7.3m), NBA (USD 2.6m), and MLB (USD 0.8m) - and these leagues can still count on enormously lucrative overseas deals. Therefore, let us focus on its international peers in soccer:
Even at this point in time, an average annual value of EUR 350m seems meager compared to European soccer leagues - and despite huge outcry on the side of television networks, there is no stabilization or plateauing of those rights fees increases in sight. For example: Both Sky UK and BT Sports executive, whose companies compete fiercely on the English market, have called for the rights fees explosion and bidding wars to stop after their last deal for the media rights for the Premier League. Since then, their ongoing feud resulted in rights fees for The Football League and UEFA Champions League skyrocketing by more than 100% and 30%, respectively. Against this backdrop, someone could argue that MP&Silva would actually get a pretty good deal as long as the MLS gets anywhere close to realizing its ambitious plans: Paying USD400m annually in 2030 for the global media rights for a Top-5 soccer league with 28-teams in a media market like the United States that more than triples the size of runner-up Japan seems lucrative to me. There would be some financial certainty for the MLS, but being locked-in into a 10-year rights contract, which by law are not allowed in Europe (max. duration varies between two and four years depending on jurisdiction), could prevent the league from the continuing rise in rights fees in the long-term.
I will be back within a few days - tackling the Adidas’ big bet on the MLS and my take on the general outlook for the MLS over the next years. Till then, I would be happy about any feedback and discussion, whether directly at email@example.com or in the comment section on the homepage.