The Profitability Point Thread

MLS will be a moneymaker when the business guys schmoozing clients in the expensive seats don't know the difference between an offside trap and a corner kick, the way those same guys now don't know the difference between a strong safety and an intentional safety when they're schmoozing clients in a skybox at an NFL game.

 

Sigged!

Sachin

 

I hate to be a contrarian, but that ain't right. Sure, the NFL is totally an eyeball sport. But baseball is primarily a fanny sport, as is hockey. Basketball, I'm not sure which category it fits in, probably half in each.

Soccer can do quite well if teams can control their stadia, and attendance can continue rising. It would be nice if the TV deal wasn't a timebuy, or, at least, was a timebuy that made the league money. (I think the World Cup was a timebuy that made SUM money.)

 

I may be way way off on this, but I'll give it a shot anyway. From what I remember of the articles that I read about the profitability of the HDC, not only did the Galaxy turn a profit, but they turned a profit there AFTER THEY PAID THEIR SHARE OF LEAGUE LOSSES. Now, I put that in caps because it's an important point to remember. That seems to mean to me that they were pretty solidly in the profit margin if they didn't have to help account for other teams who were biting it ........... most notably the Metros and to some degree United. And United now, with Adu, is probably nearing the break even point because of all of the tshirts and fannies that he is putting in the seats. With new arenas in Chicago, Dallas, and NY, those cities have a chance to do what the Galaxy did, and that's to end up around the break even point right from the get-go. Also, with the attention that Chivas will bring, they are clearly going to turn a profit right from jump street. That's why it's my opinion that the league will become profitable as soon as that 3rd stadium is built (1st in Dallas, 2nd in Chicago) in NY and is being played in. Every team doesn't need to be in the black for the league to be in the black, and I think that the 2 LA teams, NY team, Chicago, Columbus and Dallas having their own stadia will be enough to have the league right there at the cusp.

 

IIRC, NBA basketball got around half of the salary cap numbers from the national TV money. The salary cap ballooned along with the TV money. Right now, both are holding level.

What's being left out is the local TV deals. Some teams make a killing off them. In the NHL, Boston, NY Rangers, Toronto and Montreal fund their big payrolls this way. however, I don't see MLS taking advantage of this anytime soon, however.

Returning back to soccer, looking at Manchester United's own numbers, 'media' revenues are about third of their revenues, with a significant decrease expected next year due to a smaller TV deal.

The real lesson here? Making money in sports goes beyond tickets and national TV deals. For example, there is vertical integration (ala Knicks, Rangers, MSG and Cablevision), and branding/merchandizing to 'turn fans into customers' (Yankees, Manchester United, Real Madrid).

 

The bad news is that as this happens, MLS can begin charging more for tickets.

 

Here are some points:

1) MLS nor any other sports team/league not publicly traded is not obligated to release financial details of their operations. When the league says "we lost X amount of dollars" basically their word is all we have.

2) Most sports leagues/teams are averse to showing large profits because most sports leagues/teams have a contentious relationship with their respective players, meaning that if the league/team came out claiming huge financial windfalls, the players could go to the media with gripes about their fair share.

3) According to the court case (thanks to www.kenn.com for the details) MLS players from 1996 to 1998 received approximately 28% of league wide revenues. (NBA, NFL and MLB are all up above 50%).

4) Sports leagues/teams will often hide revenues in same party transactions of one sort or another. An example might be if Hunt charged excessively high rent to the Wizards, Kraft to the Revs or AEG to the Galaxy. It matters not how much rent is charged since the money is simply being moved from the left pocket to the right pocket. So there are a ton of ways to siphon of revenues one would reasonably consider generated by MLS (for example any revenue generated by AEG from Home Depot center are at least partially due to the Galaxy, whether the Gals ever see the money or not, because if there's no Galaxy, there's no Home Depot Center).

5) Another way to depress possible profits is counting interest payments against your balance sheet. One might argue "what's wrong with that." Well there are two main issues. First, usually these interest payments are made from debt incurred, not in the operation of the club, but rather in the acquisition of the club or in a stadium or something like that. Few sports teams borrow heavily to pay day to day costs and those that do aren't long for this world. The second issue is that when a guy like Phil Anschutz needs to "borrow" money to buy something, it's not like he walks down to the local Harris Bank and asks to see a loan officer. Anschutz has the money available to fund most anything he wants, so if Anschutz run MLS teams have borrowed money, it's most likely from Anschutz. So interest payments made on this loan would be money flowing from Anschutz's left pocket and into his right.

6) Yet another way to depress profits is the brilliant {searches for an inoffensive synonym for "con" or "scheme" or "racket"} business strategy of Bill Veeck. Business have a tax break for depreciation of assets. What this means is that if you buy a manufacturing company, generally what comes with it are factories with production eqipment and such. Since over time the equipment that was included in the sale of the business (and therefore in the purchase price) will break down and need to be replaced. Businesses are allowed to deduct this depreciation of assets from the original purchase price of the business as a loss. How they choose to benefit from this loss claims differs from business to business, but somewhere they'll receive a tax break. Where does Veeck come in? Well back in the 50s, Veeck argued that when you buy a baseball team, the majority of the value of that team is contained in its players. Since, Veeck argued, these players will eventually age and have to be replaced, they too should count as depreciate assets and he should be able to deduct the loss from his taxes. For some ungodly reason the gov't bought this line of reasoning and to this day (with a few moedrations) baseball teams (and I assume other sports teams) can deduct up to 50% total of the purchase price of the club within 5 years of purchase.

How does this affect profits? First, the money saved in taxes doesn't show up anywhere on the team's books. Second and even more brazenly, the "loss" is usually claimed in public statements as a real loss just like it was caused by actual costs rather than a theoretical cost that most econmists think is a load of manure (From Baseball and Billions by Andrew Zimbalist: "When asked to comment on whether he thought his loophole was fair, Veeck replied: 'Look, we play the 'Star-Spangled Banner' before every game. You want us to pay income taxes too?'"). So those $250 million losses MLS claimed almost certainly had a fair amount of this stuff within it.

7) The salary cap has not been raised one cent since 1996, though several ways around the cap have appeared since then.

8) Sports teams/leagues generally make most of their money through the increase in franchise values from when they purchased the club. The original MLS folks bought in for $5 million a piece (though just how much total was invested may be a different story). Vergara reportedly paid $10 million for an expansion club (and another $15 million for the use of HDC, money that may never appear on MLS' books), and what Checketts and Kroenke paid within the last year has not been released. It doesn't appear the value of an MLS franchise has gone down, but there's alot of room for specualtion about how much it has gone up if at all.

 

Not necessarily new ones. They sold an existing franchise to Kroenke.

The idea is that profitability (in the sense we think of it) comes in the increase of the value of a franchise you previously bought. Or as Veeck put it, "you don't make money running a baseball team, you make money selling a baseball team." If Joe Doakes buys the Homestead Grays for $100 million, runs them for five years and loses $2 million a year, then sells them for $120 million, he can claim that he lost $10 million while running the Grays, but in actuality he made $10 million.

I doubt highly there's a plan in place to make money in MLS via pocketing yearly surplusses in operating cash. I'd assume the plan is to run MLS at close to break even, and use restricted access as a means to eventually increase franchise value.

 

Yet another motivation for vertical integration. Single entity, indeed. But the enterprise of top flight soccer in the US is quite a bit more than just MLS. I wonder what an org chart of that would look like?

Didn't Berlusconi propose fiddling with depreciation rules only to be slapped down by the EU as a subsidy? IIRC, if he passed his new accounting rules, Italian clubs would have stood to save tens of millions of dollars. While I'm not sure if the Italian depreciation scheme applied to players, it does illustrate the impact your point.


I guess the only way to figure out the success of MLS is to look at cash flow. Since MLS is privately held, hard numbers are hard to come by. However, I doubt MLS is hemorrhaging cash. Otherwise, why would anyone invest in an expansion franchise?

 

That would be my guess too.

MLS is infinitely better capitalized than the NASL ever was and having lots of money at your disposal is a great way to save money in such a business. In the NASL the lack of available capital was one of the motivations behind the ultimately disastrous decision to award a whole crapload of expansion franchises in 2 years so as to collect the expansion fees. Economics 101 will tell us what a sudden glut of available teams will do to the franchise values of existing teams (why buy the Earthquakes when you can just get a whole brand new team instead in the city of your choice). Then when a year later a handful of those teams close up shop, the very public failure of fellow franchises in your league has an even greater negative effect on your franchise value.

I think, and AEG and SUM's various efforts are a good example, for now one of the league's selling points is not MLS as a great solo business venture, but rather MLS as a great addition to an existing portfolio of business interests in that it allows for large amounts of tie-ins to your existing ventures and also has the long term potential to be a nice earner for you.

Obviously the pitch to Vergara was different but of course Vergara is a rather unique scenario.

So I think the safest conclusion is that MLS isn't making anybody much money (except in an indirect way through SUM and AEG maybe) but it's doubtful any people are losing much either. It's a cheap lottery ticket.

 

Not sure exactly how this fits into this conversation, but what about the SUM/MLS split? Aren't all of the national tv losses in the SUM half, and not the MLS half? Are Kroenke, Vergara, and Checkett's groups all members of SUM? If not, you'd think that they'd be in decent shape now, and even better shape when the Burn, Metros, and Fire are all in SSS.

 

It's in whatever half MLS wants it to be. Even if SUM buys the time from ESPN, a simple paper transaction from MLS to SUM transfers the costs onto the league.

I believe that Major League Soccer L.L.C. is the main entity in control of SUM, but I'm willing to be corrected on that count. I know it's at least Anschutz, Hunt and Kraft backing it, and Garber running it. The reality is that as long as SUM is controlled in total by parties all involved with MLS, it is very easy to shift revenues and expenses back and forth as desired, without any real money changing hands. Even if Vergara et al aren't involved with SUM, after the revenue and costs are distributed amongst the investors, the actual paper transactions can be accounted for in any number of ways, some improving SUM's bottom line, and other's improving MLS' bottom line. At the individual ownership level, this process then repeats itself as Anschutz (and the others) reconcile the transactions of his MLS holdings with his other entities.

By the way, this is all 100% legal and a perfectly legitimate way for a private entity to run things. If you were in their shoes, you'd do the same thing. Organizing business transactions in a way that benefits you as much as possible is what accountants get paid for.