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Why MLS is completely justified in charging a $200 million expansion fee

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How can MLS ask potential owners to pay a $200 million expansion fee to get into a league where most teams lose money? Pretty easily.

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Recently, it was reported that the MLS expansion fee for a new team could be $200 million dollars, and that number has fans scratching their heads. Many have asked how a league with a small national TV contract and numerous teams still losing money could demand a fee that large.

The answer is simple: MLS’s $200 million franchise fee still makes business sense for potential owners. And you can expect another decade of expansion even if you, the fan, don’t like it.

First, the recent history. Only a few years ago, MLS reportedly bought back the floundering Chivas USA franchise for about $75 million. David Beckham, as part of his playing contract, bought a franchise in Miami for only $25 million. Toronto FC paid just $10 million to join the league in 2007. No matter how you measure it, in the span of a decade, the value of an MLS franchise has jumped quite a bit. So where did that most recent nine-figure number come from?

Forbes valued at least three MLS franchises north of $200 million back in 2015. By comparison, Forbes also estimates the value of the five worst-off NHL teams to be between $180 million and $250 million. MLS franchises are the same ballpark. If you’re wondering how this is possible when lots of MLS teams operate in the red, you might be surprised to learn that 14 of the 30 NHL teams have "negative operating income." Many MLS clubs lose money, but that doesn’t mean they can’t be hot properties.

Sports franchises in North America are more akin to buying a restaurant or real estate than a venture that promises large annual profits. Business owners buy a sports franchise for the medium or long-term: they hope annual revenue covers costs like player salaries, they try to squeeze a publicly financed stadium out of local politicos, they bank on always increasing TV revenue and then they sell the franchise at a handsome profit after a decade or two. You don’t have to be a genius to realize how sweet a deal that is. It’s as simple as sit and hold.

Even minor league baseball franchises are profitable for patient and tight-fisted investors. This is due to the structure of leagues and, of course, the ratio of risk to reward. North American sports are risk averse and control costs; a salary cap and CBA assure that wages remain low compared to revenue. The lack of promotion and relegation means that today’s TV deal is also tomorrow’s TV deal and one can reasonably predict future revenue. Also, the fungibility of franchises, a.k.a. "the threat of leaving town," means they hold the ultimate bargaining chip when dealing with local cities and counties in the stadium-building game.

From a business sense, the $200 million franchise fee in MLS is a bargain compared to other North American leagues. A few chummy real-life billionaires could get together, have a drink, let it roll in Vegas, get on a lucky streak and plunk down that kind of cash. Soccer is also a "growth" sport in the US as compared to most others. Lots of metrics show this. Thus, that low nine-figure franchise fee for the right location makes sense for an owner that is happy to sit around for a decade and wait for the next bigger TV contract and, as a cherry on top, squeeze out a publicly financed stadium in the meantime.

New MLS owners are also buying into more than just the league itself. The league’s media and marketing arm, Soccer United Marketing, was valued at $600 million back in 2011 when the league sold a 25 percent share in the company. No one knows how profitable SUM is, but considering the lengths commissioner (and SUM CEO) Don Garber goes to hide the answer from players and media during labor negotiations, the answer is something in the neighborhood of "a lot of money." MLS isn’t just MLS -- it’s an ad agency and event promotions company too. They’ve diversified their revenue streams.

Of course, naysayers look at the expansion fee and recall the old heyday of the NASL. Dearly departed David Wangerin wrote an excellent book, Soccer in a Football World, and he chronicled this era with factual research and wit. Historians can and often disagree, but many believe that the NASL collapsed because costs -- namely, recruiting and paying foreign stars -- greatly outpaced revenue from turnstiles, jersey sales, sponsorships and TV deals. The NASL relied on expansion fees to pay bills and keep the show going, and you can only grow so much.

Basically, where there’s a boom -- and economic fundamentals are glossed over -- there’s inevitably a bust. It’s worrying that a single franchise fee ($200 million) is more than double the annual TV deal ($90 million) for MLS. Yes, the league has come a long way since the contraction of Tampa Bay and Miami, but annual revenue is still only $400 million per year according to Forbes. That means the years when MLS gets paid a fee, revenue goes up by 50 percent.

That’s quite the payday. So what are the chances of the bust coming after it? At first glance, MLS has slowly and methodically expanded, so there’s no appearance of this being an unethical cash grab. Still, forgetting the fee money for a moment, expansion is itself a thorny subject; MLS has reached a crossroads in regards to "growth." The league could have looked towards Europe and South America as a model, but instead seems to have decided on emulating other North American leagues.

I say this based on the numbers. Currently, there are 20 teams in MLS and soon there will be 22. In most European leagues -- including the Premier League, La Liga and Serie A -- there are only 20 teams. European leagues also have pro/rel and a pretty decent second-tier of soccer as compared to the US. Conversely, most NBA D-League teams and AAA baseball franchises are really just feeder teams in small cities. MLS’s investment in USL has a similar structure.

More on MLS expansion

So here we are at 22, and MLS is not stopping anytime soon. Despite MLS’s vague remarks and intimations that "this round of expansion" may be the last -- a clever negotiating ploy -- Garber spends a good chunk of time flying to possible new city sites for teams. Presumably, he is not just crisscrossing the country to rack up frequent flyer miles. MLS is probably headed towards a number near 30. I say that because there are 30 NBA teams, 30 MLB teams and 30 NHL teams. More teams will help MLS negotiate a better national TV deal.

But because MLS currently operates with foreign player limits and a tight salary cap, there are reasonable concerns about the product on the field suffering with expansion. Controlling costs while providing opportunities for American and Canadian players are the league’s foundational principles, so changes in those two areas will be difficult. MLS will need to find creative solutions for upholding those principles while making sure the standard of soccer in the league continues to improve.

You can expect another decade of expansion from MLS, and maybe even higher expansion fees. The good news for fans of existing teams is MLS probably doesn’t need the expansion fees to pay its bills, unlike the old NASL, and more markets could lead to a bigger TV contract down the road. Still, the league can’t grow forever, and a saturation point lingers at some distant point on the horizon. When MLS reaches that point, franchise values should start going up, and the $200 million franchise fees that new owners pay now will start to make a lot more sense.

You can follow Elliott on Twitter or subscribe to his Tiny Letter. He is also the author of "An Illustrated Guide to Soccer & Spanish."