Futbol, Excellence and Mediocrity I

Below the radar screen of mainstream media, there is a debate raging in the futbol (soccer) world in the USA (and Canada). At the center of the debate are U.S. Soccer (FIFA's representative in the United States) and Major League Soccer (MLS).

U.S. Soccer is responsible, among other things, for sanctioning professional futbol leagues. MLS, as the designated first division men's league, is the standard bearer for the professional game in the USA and Canada. MLS is also the symbol we hold out to the world and the yardstick of our progress.

Even so, after 20 years when we ask, what does MLS stand for? -- we are forced to respond -- mediocrity.

There is a global standard of excellence for futbol and MLS simply does not measure up.

That global standard of futbol excellence at the league level can be found in the English Premier League (EPL) and the German Bundesliga. At the club level, it is Real Madrid, Barcelona, Bayern Munich, Paris St. Germain, Manchester United, Manchester City, Liverpool, Chelsea, etc.

These leagues and clubs have their detractors, but in terms of revenue generation, attendance and setting the global standard of excellence, both on the field and off, they have no peer.

The four dominant sports leagues in the USA and Canada (the so-called Big 4), the NFL, Major League Baseball (MLB), the NBA and the NHL, represent respectively, for each of those sports, the global standard of excellence.

Measured against domestic standards of excellence, using the Big 4 as benchmarks, or measured against international standards of excellence with the EPL and the Bundesliga, MLS comes up woefully short.

In fact, since 1968, and the founding of the first North American Soccer League (NASL), no league, men or women, has been able to unlock the conundrum of the revenue generating potential for futbol in North America.

MLS has had 20 straight years of losses. In 2014, MLS's losses were in excess of USD 100 million. 2015's losses at the same magnitude or more, will be a repeat of a two decades long vicious cycle.

There are four professional futbol leagues in the USA and Canada: MLS, NWSL, NASL and USL Pro. Those four leagues, which operate independently (with no relegation) represent 64 teams for the 2015 season.

After MLS's 20 years in business (2015 is the 20th year), one fact tells a sad story: Real Madrid, which according to Forbes and Deloitte is the world's most valuable sports franchise at USD 3.4 billion, generated more revenue in 2013-14 (USD 750 million-plus), than all four of the cited futbol leagues in the USA and Canada and their 64 teams combined.

Take some time and think about that. Let it sink in.

One European club, which is fan owned by the way, is worth more than all four leagues and their 64 teams combined in the USA and Canada. Two of the richest countries in the world.

MLS's recent 8-year TV contract (2015-2022) for USD 90 million/year, coupled with its recent collective bargaining agreement (CBA) with the players for five years, and an average stadium size of 21,000 across its current 20 team league, means that the next decade of MLS's underperformance and losses is practically guaranteed. That will be 30 straight years of losses.

What kind of business model is this?

The Myth of the Single Entity

We have been told repeatedly that MLS is a single entity. It is and it isn't. The truth is that MLS has divided the balance between Delaware legal vehicles. MLS is an LLC focused on the expense side of the balance sheet, and Soccer United Marketing (SUM), a separate LLC, is focused on the revenue side of the balance sheet.

All of MLS's investor-owners have invested in the Delaware LLC, MLS. Hence, the single entity idea.

These same owners have invested in SUM. SUM, in theory, is divided on a pro rata basis amongst the 20 owners of MLS. Except for two things. First, we have no idea what SUM's cashflows are and what cashflow obligations there are (for instance, are all revenues that SUM generates obligatorily divided pro rata amongst the 20 owners or are they used to off-set MLS's expenses, or does SUM hold the prerogative of reinvesting those revenues and ignoring MLS's liabilities?), and second, Providence Equity, a private equity firm, holds 25 percent of SUM, which it acquired a few years ago, according to news reports, for USD 150 million. That would give SUM a valuation of USD 600 million as of 2012.

This raises some additional questions. One of which is why would MLS divide up its balance sheet between two legal vehicles?

MLS's Business Model Inside Out

In answering this question, let's be as rational and business savvy as possible, recognizing that we have no access to audited financials. If MLS has publicly declared USD 100 million-plus in losses (a 20-year trend, and these numbers have been subsequently corroborated by MLS officials), it means that those losses are being passed along to the 20 owners of the MLS LLC as losses allocable on a pro rata basis.

LLC's are pass-through mechanisms, meaning that gains and losses get passed through directly to the owner-investors of the LLC for tax purposes. Hypothetically, that means for say USD 100 million in losses at the MLS LLC level, each owner would absorb those losses via a 1/20 share or USD 5 million in tax loss carryforwards, when they are passed through the LLC to the owners above the LLC at tax time.

What about SUM's revenues? Again, are those revenues being offset against MLS's losses, so that the publicly admitted MLS losses of USD 100 million-plus last year are inclusive of SUM? Or are tax returns being filed and losses declared on the MLS LLC and SUM separately? Again, we have no way to know.

The one thing we do know, is that if USD 5 million in average tax loss carryforwards are being generated annually for each of the 20 MLS owner-investors, the owners can certainly utilize those tax loss carryforwards at their respective business ventures above the LLC (note: we have not mentioned the off-balance sheet Beckham Rule player costs that each owner is responsible for -- although they very well may be part of the tax loss carryforward picture). Which brings us to a conclusion: from a tax perspective and on annual operating basis, MLS as an investment is a wash for the owners.

In short, there is no financial incentive to change. And worse, no financial incentive to generate, much less maximize revenue. In fact, there may even be an incentive to limit revenue growth so as not to jeopardize the creation and flow of tax loss carryforwards.

Given that the majority of MLS's investors are billionaires, each of them can find innumerable legal vehicles and ways to reduce taxable income in other business units by simply upstreaming the tax loss carryforwards.

Just as importantly, MLS has awarded four new franchises in Atlanta, Minnesota, Miami and Los Angeles. If each of those owners builds a 30,000 seat stadium, that will increase the average stadium size in MLS to 22,500 from roughly 21,000. Again, based on the recent TV contract (MLS must share a portion of that USD 90 million a year with the USMNT and Providence Equity), the new CBA and average stadium size, MLS's revenue upside has reached a glass ceiling.

In short, mediocrity and second tier status (when measured against our global benchmarks of the EPL and Bundesliga) has been institutionalized at the highest levels of the game in the USA and Canada.

MLS is generating less revenue after 20 years, than respectively, the English and German second divisions.

The EPL's latest TV contract is for USD 2.6 billion per year. That is about 27 times greater than MLS's TV contract. Manchester City's payroll for 25 players (USD 200 million-plus) is more than the entire payroll of MLS, including Bechham Rule players (over 600 players), and MLS's entire league and team administrations.

Given MLS's 20-year performance, if this occurred in any other industry vertical, it would be time to fire the management team, replace them and restructure the company and/or sell off the assets.

In truth, the only on-field global standard of excellence that the USA can point to is the USWNT. Their 2015 World Cup campaign and their spectacular performance in the final (which garnered the largest TV rating of any futbol game in U.S. history, men or women) is testament to more than two decades at the top (or near it) of the world rankings.

When we ask what did MLS contribute to the USWNT, the answer is not much. Possibly nothing. However, one could argue that by keeping the game alive at the pro level, MLS has maintained the flame alight, and this in turn has helped the women's game (as well as the men's game for that matter). Concretely, however, and statistically, MLS's contribution to the women's game is very difficult to measure.

Everyone knows that the women did not win the World Cup in 2015 (or any World Cup or Olympics for that matter) by relying on a thriving foundation of a massively successful women's league in the USA and Canada.

Which begs the question -- why can't the men do the same? Why can't the men win a World Cup without having a world-class league (or any league at all)?

The answer is very simple. On the men's side there is too much global competition.

The global standard of excellence is too high. Only with sustained training, on-field practice and professional games at the highest level day-in and day-out, can any country hope to field a competitive men's team to win the World Cup. And by the way, it isn't enough to win it once. To establish a global powerhouse reputation in this sport, you need to have won the World Cup several times.

In this context, the USA needs to face one essential fact: we are the equivalent of a developing third-world nation in the world of futbol.

We have no reason or justification to have swagger. Much less be arrogant. The USA has accomplished very little, outside of staging the 1994 World Cup, which was admittedly a resounding success. But on the field, what have our men accomplished?

Even our women, who are clearly world class, get scant attention, much less funding and media coverage unless it is a World Cup or Olympic year.

Lamentably, for the other three years and 11 months until the next World Cup (or the next Olympic Games), the women will be marginalized -- marginalized financially, in terms of media coverage and exposure, and marginalized in terms of their very own global standard of excellence, because the league they play in, NWSL, and the clubs they play for in the USA, fail repeatedly to translate into any meaningful form of monetization. NWSL is subsidized by the futbol federations of the USA, Canada and Mexico. Without that subsidy, we would bear witness to a third failed women's league in the USA and Canada.

Interestingly, one obvious question to be asked is this: if the USWNT is stocked with women who are world-class and who trained for years in our youth system and then refined their skill sets in the NCAA (almost without exception), why can't the men do the same thing? The men do it with the NFL, the NBA, MLB and the NHL -- why not futbol?