Last month, Major League Soccer (MLS) grabbed the headlines in the world’s football media with the confirmation of the long-awaited franchise in Miami to an ownership group led by David Beckham.
By contrast, less publicised in Europe was the completion of the MLS record transfer of 18-year-old Argentinian midfield Ezequiel Barco from Independiente to Atlanta United (reported at USD 15m). The transfer highlighted both the growth of the league’s financial muscle and the evolution of MLS as a destination for international youth talent.
In this article, the KPMG Football Benchmark team reviews the transformational process of MLS in the league’s quest for worldwide recognition.
Following the model of other major American sports, MLS regulations differ from the dynamics of traditional football markets across the globe. However, while the implementation of a hard salary cap was fundamental in the league’s early years, in recent seasons MLS has shifted its focus from business sustainability to developing talent and attracting peak-age quality imports.
For this purpose, the league provided teams with centrally-allocated funds (USD 1.2m per team), so-called Targeted Allocation Money (TAM), to attract players that, while lacking the price tag of a Designated Player, would be able to make a difference on the field while maintaining the league’s parity. TAM players’ salary and acquisition cost should be between the maximum salary budget charge and USD 1.5 million.
The equal distribution of these funds resulted in a relatively low difference in market value between the TAM players of each squad. As an example, in 2017 the market value of TAM players amounted to between EUR 2 and 4 million for 11 out of the season’s 23 franchises. Conversely, as illustrated in the graph below, the difference in market value of each teams’ Designated Players, much more dependent on owner appetite to spend, was significant.
Following the arrival of ambitious ownership groups and the league’s determination to continue growing the quality of its “middle-class” athletes, MLS has decided to provide its franchises with new opportunities to invest their own funds on their squads. From the 2018 season, beginning in March, MLS teams will be allowed to self-fund up to an additional USD 2.8 million on TAM players.
This sum represents, by comparison, 12% of the total compensation of the 2017 season’s biggest spenders (Toronto FC) and 55% of the league’s lowest payroll (Houston Dynamo) and is thus expected to not only have an impact on the overall standard on the pitch, but also bringing MLS a step closer to the less egalitarian European model.
With MLS teams investing more on young foreign imports, also drawn by the presence of well-known managers across traditional football nations such as ‘Tata’ Martino (Atlanta United) or Patrick Vieira (New York City FC), and growing domestic talent development, the league undoubtedly has the potential to become an important talent pool for major European leagues.
In this regard, though, the league faces the challenge of a system that does not allow cash payments among MLS franchises and does not incentivize international transfers. According to MLS regulations, teams can use a maximum of USD 650,000 from the transfer proceeds of non-Designated Players to increase their squad’s General Allocation Money, being forced to use the remaining amount either off-the-field (e.g. youth development, infrastructure) or on a Designated Player. Moreover, as a result of the league’s single-entity model, franchises only receive 75% of the transfer fee, with 25% collected by the league.
While exceptions are being implemented for homegrown players (100% tranfer fee collected by franchises), thus incentivizing investment in youth academies, in most cases MLS teams, unable to spend the potential fees on replacing a valuable member of their squad, may prefer to let a player’s contract expire, rather than enter into an international transfer.
Given MLS is becoming an increasingly popular destination for young South American talent, the league’s ability to provide a pathway towards European top competitions will undoubtedly be a key decision factor for future prospects. Moreover, facing unprecedented growth, MLS will need to remain flexible and continue adapting its regulatory framework to the expectations of increasingly ambitious teams and ownership groups and the demands of the global football industry.
Further investigation into leagues’ regulatory framework and related topics can be undertaken by KPMG Sports Advisory Practice.