Major League Soccer
Here's Why MLS Should Put A Ring on Sacramento
August 19, 2015
DURING AN APRIL meeting with Associated Press sports editors, Major League Soccer Commissioner Don Garber stated that MLS plans to expand beyond 24 teams, though when pressed for specifics regarding the scope and location of future expansion, Garber demurred that the league would spend the next six months developing an “expansion plan” before making further announcements.
MLS currently has 20 active teams and has awarded four franchises that have yet to begin play: Atlanta (inaugural season set for 2017), LAFC (2017 or 2018), Minnesota United (2018) and Miami (unknown). A half-dozen other cities have expressed interest (varying from mild to fervent) in joining MLS, including Sacramento, Indianapolis, San Antonio, Austin, St. Louis, and Las Vegas.
If the metrics MLS has publicly identified as prerequisites for joining the league are those upon which it actually relied in making expansion decisions, Sacramento is the obvious choice.
- Because Sacramento has a well financed, locally based ownership group with a soccer-specific stadium in a downtown location already signed off on by local officials.
- Sacramento’s ownership group has the seven-figure franchise fee, a sound business plan for fully financing its stadium with private money, and the deep pockets necessary to fund the team long-term.
- Local politicians, notably Mayor Kevin Johnson, are vocal supporters of Sacramento’s MLS bid.
- Sacramento Republic FC, a USL club, has a huge and passionate fan base and sells out almost every game at Bonney Field. It has a youth academy, sponsorship deals, and its social media is excellent.
Garber conceded in an interview with The Sacramento Bee that California’s state capitol has done everything asked of it to obtain an MLS franchise:
"We told Sacramento that they needed to have the right ownership group, and they have that… We told them they need to have a stadium plan, and we believe they do. And we told them they needed to prove the market through attendance. There is no doubt that all the elements are in place … Sacramento is far more advanced than any other market we are talking to."
Since MLS plans on expanding and Sacramento is the only city that has actually met every publicly stated prerequisite to be awarded an MLS franchise but has yet to receive the nod from MLS, the league is likely relying on an unstated requirement to make expansion decisions.
And what is that? Broadcasting revenue.
Last year MLS brokered an eight-year deal with Fox, ESPN, and Univision worth $90 million per year, a vast improvement over its previous TV deal. Due to its relationship with Soccer United Marketing (SUM), MLS will split this income with U.S. Soccer. MLS will receive at least two-thirds of this income and possibly more.
In the past year, MLS has also entered into multiple international media rights deals with the following companies: Sky Sports (UK broadcast rights) Eurosport (non-UK European broadcast rights), Globosat (Latin American broadcast rights), and Abu Dhabi Sports Channel (Middle East and North Africa broadcast rights). The value of these international deals derives more from the fact they make MLS games available to 80% of the global television market than from the revenue they generate— collectively, they are probably worth no more than $10 million per year.
Many MLS teams also have their own local broadcast deals. For example, the Los Angeles Galaxy’s deal with Time Warner is for $55 million over 10 years. If only half of MLS’ remaining teams have deals that are 50% as valuable as the Galaxy’s, then that would add approximately $33 million in revenue from local broadcast deals.
This all sounds pretty good until the value of MLS’ broadcast rights (also referred to as media rights) are compared to those of the other major sports leagues in the United States: The NFL’s annual television rights bring it between $5 and $6 billion; Major League Baseball receives approximately $2.5 billion; the NBA $2.6 billion (starting in 2016); while the NHL receives $600 million (including both the U.S. and Canada).
Now in its 20th season, MLS is still lagging far behind the competition.
Focusing on Increasing TV Revenue
Despite the fact that nearly one-third of all TV advertising expenditure in the U.S. is on sports programming, most of MLS’ revenue still comes from gate receipts. Further, the gap between the value of media rights compared to gate receipts, sponsorship, and merchandising is only going to increase.
According to the 2014 Price Waterhouse Cooper Sports Outlook—which included the NFL, NBA, MLB, NHL, and MLS—the compound annual growth rate of media rights will far exceed that of other sources of revenue over the next few years. The compound annual growth rate of media rights is expected to increase at 9.1% per year, as compared to 4.8% for sponsorship revenue; 2.6% for gate revenue; and 1.4% for merchandising revenue.
MLS needs to increase the proportion of its revenue that it derives from media rights, and the league knows it.
“Where we need to be financially is to have a more valuable television product and be no different than the other leagues, whether it's the Premier League or the other American-based leagues, and have media be our primary revenue stream,” Garber said in April. “Today our primary revenue is tickets, our secondary revenue is our stadium income, and our third revenue is media.
“That needs to shift literally and be turned upside down.”
Thus, MLS’ No. 1 priority for the next seven years will be to ensure that when it starts renegotiating its media rights in 2022 it has a more valuable product to sell.
A close look at D.C. United’s projected revenue steam shines a light on the uphill battle the league faces.
In November of 2014, the advisory and planning firm, Conventions Sports & Leisure (CSL), delivered detailed projections of D.C. United’s earnings once it moves to its new stadium in 2017, which the District of Columbia relied on in awarding Buzzard Point to D.C. United. CSL based its numbers on a review of MLS league data and market conditions and therefore CSL’s number provide a rough indicator of how MLS teams’ revenues break down.
(Even though CSL’s numbers are 2017 estimates, and likely higher than current earnings, D.C. United makes less money than most MLS teams because it has some of the lowest attendance in the league. Consequently, its 2017 numbers are probably comparable to the current revenue streams of an average MLS team that owns its own stadium and, to my knowledge, D.C. United is the last team in MLS that does not own its own stadium. Orlando is leaving the Citrus Bowl next year).
CSL projected D.C. United’s non-broadcast revenue would break down to include approximately $15.6 million in annual gate revenue and approximately $12 million in annual merchandise and sponsorship revenue.
Now let’s compare MLS’ gate receipts and sponsorship income to its broadcast revenue. An MLS team’s broadcast revenue in 2017 can be calculated as follows: (U.S. broadcast revenue + International broadcast revenue) ÷ (Number of teams in MLS in 2017) = Average broadcast revenue per team in 2017. If MLS’ U.S. media rights are worth approximately $93 million and its international media rights are worth approximately $10 million, and there will be 21 teams in the league in 2017, then the broadcast revenue in 2017 would average $4.9 million per team.
The problem with these income streams is brought into stark relief when one compares how MLS’ revenues break down relative to soccer teams in other leagues. Last year, the auditing firm Deloitte reported the breakdown of revenue for the world’s largest soccer clubs in its annual Football Money League publication. For almost all of the Top 10 teams in world football (in order those teams are Real Madrid, Barcelona, Bayern Munich, Manchester United, Paris Saint-Germain, Manchester City, Chelsea, Arsenal, Juventus and AC Milan), a much higher proportion of their income comes from broadcasting revenue. Of the 10 teams identified above, the team with the lowest percentage of revenue derived from media rights is Bayern Munich at 24%. The team that earns the highest percentage of its revenue from media rights is Juventus at 61%.
By way of comparison, D.C. United’s revenues would break down with 48% of its revenue coming from gate receipts, 15.1% from broadcasting, and 36.9% from sponsorship and merchandise. Since the ratio of MLS’ broadcast income relative to its other income streams is much lower than that of football teams in the world’s biggest leagues, when MLS negotiates its next deal with broadcasters, it will be looking to increase the proportion of its broadcast revenue so that it is more closely aligned with the world’s biggest leagues.
Why Are Media Rights in Sports Valuable?
Media rights encompass more than just TV. They include live broadcasting, webcasting/streaming, delayed broadcasts, highlights packages, and multi-device rights for second-screen viewing. Media rights can be broken down into these segments or may be negotiated as a single bundle, though even when negotiated as a single bundle, rights can still be fragmented through sublicensing agreements.
Live broadcasting is currently the most valuable bundle of rights because it attracts the highest audience. Other broadcast rights such as highlights packages are popular because they can be replayed and because users can view the content on demand. Webcasting, or live streaming on the Internet, is similar to live broadcasting in terms of its core advertisers and is rapidly increasing in popularity. Another segment of fans follows matches via social media outlets if they cannot watch the event live.
The most valuable sporting events to broadcasters are those that capture the most viewers. There are certain things that a sports league can do to increase the value of its media rights, some of which MLS has already started implementing. For example, flex scheduling allows broadcasters to change game times and game days to ensure that games broadcast later in the season have playoff significance (choosing not to air games for teams that have been eliminated from playoff contention) or involve teams that are more attractive to advertisers. MLS is open to flex scheduling: only a couple months ago, MLS announced that the August 23, 2015, game-time between NYCFC and the L.A. Galaxy was being advanced two hours, in part to accommodate its broadcasting partners and in part to address heat conditions.
Another way in which a sports league can increase the value of its media rights is by instituting consistent broadcast windows. Once again, MLS has started to nail down consistent broadcast windows for MLS games: It has licensed at least one game every Friday night to Univision and has a Sunday night doubleheader at 5pm ET on ESPN2 and 7pm ET on Fox Sports 1.
Dan Courtemanche, MLS’ Executive Vice President of Communications, has said that the standardized viewing times which are part of the league’s new contract will help MLS games become “appointment viewing” and lead to higher ratings. Indeed, some of MLS’ efforts may already be paying dividends. Though MLS viewership numbers are tiny when compared to the NFL, MLS ratings have been trending upward this season.
However, the single most important thing a sports league can do to increase the value of its media rights is to ensure that the greatest number of desirable viewers are available to watch its product.
And this is where we turn our attention back to Sacramento.
The East Coast Bias
In sports advertising, the Eastern time zone is the de facto official time and sports broadcasters tend to give greater attention to teams located on the East Coast as opposed to the West Coast—a phenomenon known as the “East Coast bias.” Much of the United States’ sports infrastructure is concentrated in the East Coast: both ESPN and NBC Sports are based in Connecticut.
One reason for this is that for sports that play according to local time zones, teams based on the West Coast may occasionally play games after the East Coast has gone to sleep.
For example, when the San Francisco Giants gave Fox its lowest ratings for the World Series in 2012, many speculated that potential viewers on the East Coast were asleep while the games were being played, which resulted in lower television ratings. As a result, media outlets and sports leagues prefer East Coast teams over their counterparts to the West, and MLS’ lukewarm reception to Sacramento’s overtures suggests that the East Coast bias could be playing at least some role in MLS’ decision-making regarding expansion.
Go West, Young League
There are countervailing factors which MLS should consider before it allocates less weight to Sacramento’s bid then it would receive based on merit alone.
First, a primer on advertising: Advertisers assign different values to distinct demographic segments of the population. The perfect consumer to an advertiser is someone who is young (and therefore can be a customer for decades to come), wealthy (with ample disposable income to spend on advertisers’ products), and cool (likely to set trends among his or her peers). Consequently, advertisers prefer younger audiences to older ones, wealthy audiences to poorer ones, and more cosmopolitan audiences to rural ones.
With this in mind, MLS should build into its assessment of Sacramento’s bid current population and demographic trends in Western and Southern cities relative to their Eastern and Northern counterparts. According to the last U.S. Census conducted in 2010, the fastest gains in U.S. population are in the South and West. The Northeast grew 3.2% and the Midwest 3.9%. These gains were far outpaced by a 13.8% gain in the West and 14.3% in the South.
Further, the oldest states are in the Northeast. The five states with the highest median age in 2010 were Maine (42.7), Vermont (41.5), West Virginia (41.3), New Hampshire (41.1), and Florida (40.7). In all, there were seven states in the U.S. (the previous five plus Connecticut and Pennsylvania) with a median age of 40 or higher. In contrast, the states with the lowest median age (excluding the District of Columbia) are in the South and West: Utah (29.2), Texas (33.6), and Idaho (34.6). There is no state in the West with an average age over 40 and three have an average age under 35.
Will demographics impact MLS’ future broadcast deals? Absolutely. MLS has a higher concentration of fans in the coveted under-30 demographic than any other sport in the United States, which makes the league extremely attractive to advertisers despite its much smaller fanbase.
MLS’ young fanbase is also helpful for increasing the value of its future broadcast deals because the fastest-growing segment of media rights is online streaming, and young adults are more likely to watch sporting events on the Internet than their older counterparts. According to the sports data company Repucom, 25% of soccer fans use a tablet to watch matches live and 40% watch via a mobile device. Digital advertising is growing at double-digit rates and will account for 65% of the total increase in global advertising over the next five years. Including the digital components in television advertising, digital advertising will nearly reach overall television advertising levels by 2018.
MLS should also build into its calculus the appeal of the Sacramento TV market relative to its potential competitors. A Television Market Area (TMA) is a group of counties covered by a specific group of TV stations, and Sacramento is currently the 17th biggest market in the country with a population of 3.9 million.
Here are the top 34 TMAs in the United States. Regions that currently have MLS franchises are in bold.
1. New York City
2. Los Angeles
5. San Francisco-Oakland-San Jose
6. Dallas-Fort Worth
8. Boston-Manchester, New Hampshire
10. Washington D.C.
14. Minneapolis-St. Paul
15. Tampa-St. Petersburg-Sarasota
16. Miami-Fort Lauderdale
19. Puerto Rico
21. Orlando-Daytona Beach-Melbourne
22. St. Louis
24. San Diego
27. Salt Lake City
31. Hartford-New Haven
33. San Antonio
34. Kansas City
Among the TMAs without an MLS team, Sacramento is the most attractive viable option—and not just because of its population. Here's a quick look at the TMAs with a population larger than that of Sacramento but without an MLS team
No. 7—Atlanta is already joining MLS in 2017.
No. 11—Phoenix is eliminated from contention because its average temperatures during the summer rival Riyadh and Baghdad.
No. 13—Detroit essentially became an urban wasteland during the recession. Detroit entered Chapter 9 bankruptcy in 2013 and while fans of Detroit FC no doubt hope that their city will emerge from administration relieved of the onerous pension obligations and culture of graft that has long plagued the city, until Detroit proves it has moved past its “hot mess” phase, MLS will not be awarding it a franchise.
No. 14—Minneapolis/St. Paul will join MLS in 2018.
No. 15—Tampa/St. Petersburg. Ever hear the phrase, “Fool me once shame on you, fool me twice shame on me”? The Tampa Bay Mutiny was one of the charter members of MLS. The team suffered from low attendance and revenue and folded in 2002. MLS is unlikely to return to this particular well.
No. 16—Miami. David Beckham has already been awarded an MLS franchise in Miami though its timeline for joining MLS is uncertain.
That leads us to No. 17, Sacramento.
It is a relatively young, diverse, and educated city. According to the U.S. Census Bureau its median income compares favorably to other cities being considered by MLS as locations for future franchises:
St. Louis: $29,156
San Antonio: $36,214
Don Garber has said he wants MLS to be one of the best leagues in the world by 2022. If this is more than just hyperbole, then MLS needs to ensure its next broadcast deal increases the proportionate value of MLS’ media rights relative to its other revenue streams, both because media rights are growing faster than other segments of sports revenue, and because MLS’ young fanbase positions MLS perfectly to exploit the shifting landscape of broadcasting from being television-centric to internet-centric.
Sacramento is not a bad place to start.
Wendy Thomas is an attorney and contributor to American Soccer Now. Follow her on Twitter.