MLS Profits in Light of Ownerships’ Claims, Portland’s Filing

Thanks to Dave Clark at SounderAtHeart, we have a better idea if MLS owners are actually losing money, a key part of a recent public relations effort (see Leiweke and Wolf) to take the labor debate to the fans.

The idea that MLS is losing money is one of the key (if not the only) ideas that have some MLS fans on the owners’ side (though as we found out here, there aren’t as many as the most vocal commenters might have you believe).

As Tim Leiweke told the Los Angeles Times yesterday, “There are only a couple of [MLS] teams that will make money this year.”

Such claims, as well as claims about free agency inherently increasing labor costs, deserve discussion, criticism.

According to Clark, who took information from a Portland Timbers’ public disclosure to update the 2007 Forbes study, we can be confident two teams made money (Seattle, Toronto). There are five other clubs who are within his margin for error (Real Salt Lake, FC Dallas, San Jose, Los Angeles, Houston).

There are a couple of caveats to Dave’s work. First, as he readily admits, it’s based off of incomplete information. The Portland disclosure was detailed but not the bottom line, and his work is dependent on it.

Second, the numbers don’t count the money clubs get from Soccer United Marketing. Dave points out that they are technically separate entities. In the interest of not confounding the data, he keeps the SUM disbursement out. If the $1.6 million was included, Chivas USA and New England may have also made money last year.

Finally, the numbers do not include disbursements from expansion fees. Seattle paid $30 million to come into the league. Each team in the league should have received $2 million from it. Merritt Paulson has said that the Portland fee was $40 million. Perhaps that fee and not Seattle’s should be counted on last year’s books.

Regardless, things look much better for MLS clubs if you consider these fees. With them and the SUM number, the potentially profitable clubs expands to include Colorado and Kansas City – 11 of the 15 clubs that played last season.

This is also within the context of an economic downturn, the premise of Dave’s column. If you buy into that premise, the 2009 numbers could be considered near the bottom of the range of outcomes for an otherwise growing league.

Dave’s work is not exhaustive, and the viability of including SUM and expansion fee revenues may not be strong. However, thanks to the Portland release, Dave’s legwork, and the foundation provided by the 2007 Forbes research, blind trust of the owner’s claims may be more naive than we had previously thought.

There are a few other concepts that need to be further explored.

Through the years I have been very skeptical of owners in professional sports claiming they’re losing money, particularly in the context of labor negotiations or bargaining for public stadia. There has always been a disturbing lack of transparency. Owners are not required to open their books – I don’t begrudge them for that. But when asking for public financing or posturing for fan support, there is a need to be transparent , if for no other reason than to establish trust.

Particularly in baseball and football, we’ve hear numerous “this market is not viable unless” arguments made as stadium initiatives approach ballots. It’s all part of the game. You can’t fault owners for doing what’s best for their business. However, we need to keep these motivations and the tricky world of corporate accounting in mind.

Until the owners can be more transparent, their claims of losses deserve a more critical discussion.

In the bigger picture, this profit argument has become a bit of a red herring. Sports franchises are as much about accruing equity as they are turning a profit. Two years ago, the Los Angeles Galaxy were valued by Forbes at $100 million, but a snap shot of a single-season’s balance sheet would make it seem the club is a bad investment. Yet, were AEG to sell the Galaxy at the end of 2008, they would have received a huge windfall. How do you reconcile that profitability except to see single-season balance sheets inadequately describing the viability of franchise ownership?

Like the SUM and expansion fee monies, the accrual of equity has to be mentioned in this conversation.

In the short team, it is in a franchise’s best interest to take losses in order to accrue this equity, or increase the franchise’s value. If you look at a single season’s ledger, you miss this effect. Daniel Snyder, owner of the Washington Redskins, bought the team in 1999 for an estimated $800 million. It is now worth $1.1 billion. FedEx Field had a lot to do with that, just as Home Depot Center has a lot to do with Los Angeles being MLS’s most valuable franchise.

These benefits matter, particularly when an ownership group seeks to borrow against the club to get financing for stadia and other infrastructure improvements.

Even if we cease looking deeper into these losses, there seem to be very few people asking why some teams are making money and some are not. Between two and 11 teams (depending on which numbers you want to look at, above) are close to or exceeding break even. Yet all franchises are playing by the same rules. How have some been able to make their situations work while others have not? It is possible that there are just some bad markets, inviable teams, or maybe some management groups that are not doing enough to compete (be it at the turnstile or in the points column)?

There is another, more esoteric debate: A sports teams even designed to make money? Are they possibly turning into the toys of the Mark Cubans, Paul Allens … Roman Abramovichs of the world? And if so, what does profitability matter if there are people willing to pay the price of ownership? All those owners do is threaten the owners who, for whatever reason, are not capable of similar levels of support.

Were the players asking for substantial increases in wages, we could perhaps overlook all the confusion regarding losses and profitability. But the players and owners had agreed to a 17.4 percent increase in the salary cap. Increased expenditures on wages was not the issue, no matter how much the owners now want to make the players out to be so off-base.

Owners have been intimating that free agency will increase costs. Common sense tells you that’s a difficult argument to make, given a salary cap. It will change how rosters are managed, and it might drive more mid-level talent to the NASL or Europe. But it won’t increase costs.

As part of their public face for this battle, Major League Soccer seems to be confounding increased costs with free agency in an attempt to keep control of the players. They want to be able to have the control to say “Well, Landon, we have this two year option we can exercise, or you can sign this longer contract and make more money. Either way, we have you.”

They want to be able to tell players, “Well, you can play at the first level of soccer in this country, but since you can only can only play for this team, you’ll have to take what their budget allows.”

They don’t want a player saying “but these other teams have money, so why can’t I go there.”

As teams compete with each other for player services, the price for that single player will increase, but overall costs won’t, thanks to the salary cap.

If the owner’s suggestion is true and free agency will send costs out-of-control, why bother with other cost-control measures like a salary cap?

It’s a hole in the owner’s public stance, a public stance that seems short on answers and transparency. Until the owners can reconcile some of these issues, it would be too trusting to believe their public face.

This is not to say the owners are misleading the fans, but just because they say something – be it about profits or the effects of free agency – does not mean its true.

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