Is The MLS Salary Cap Responsible For Its Sustained Growth?

Major League Soccer (MLS) has steadily grown since its inaugural season in 1996. And while the league made major financial losses over the years, attendance figures and international interest are now on the rise. In addition, the league attracts more and more high-level players following David Beckham’s impactful move in 2007.

With five-time Champions League winner Gareth Bale and 2020 European champion Giorgio Chiellini the latest to move to the MLS and Sergio Busquets and Lionel Messi rumoured to make the switch in the future as well. Add to this the FIFA World Cup taking place in America, Canada, and Mexico in 2026 and there are a lot of opportunities for the league to capitalise on in the coming years.

However, the question is whether the MLS can compete with more established football leagues in countries with a higher historical interest in the sport. Especially with European football leagues like La Liga and the Premier League or even with smaller leagues such as the Dutch Eredivisie or Portuguese Primeira Liga. With a different organisational structure, no promotion and relegation, salary caps and a different sports culture, how does the league stack up against other football leagues? Does the salary cap and league structure influence the league’s growth?

Growth Of The MLS Since Its Inception

The MLS has gone from a league with just 10 teams in 1996 to 29 teams – 26 American and 3 Canadian clubs – during the 2023 season. For now, the league plans to extend its roster to at least 32 teams in the coming years. A size comparable to other major American sports leagues.

During its existence, the value of MLS franchises has gone up immensely. The average MLS team was worth $157 million in 2015, a 52 percent increase compared to the average 2013 value. By 2022 this has risen to around $582 million. Meaning that the average value of an MLS franchise increased 5.6 times since 2013 alone.

Collectively, the 28 franchises were worth $16.3 billion (including team-related businesses and real estate) in 2022, up from $14.8 billion in 2020.

Average Value Of MLS Franchise Over The Years

sources: Sportico & Forbes

MLS Teams’ Valuation Compared To Europe’s Elite

In 2022, Los Angeles FC (LAFC) was the most valuable franchise with a value of $900 million. 2.3 times more than the least valuable franchise CF Montreal, worth $390 million. A remarkable feat for a club that was only founded in 2014 and competed in their first MLS season in 2018. Their location (Los Angeles) is an important factor influencing this, with city rivals LA Galaxy coming in second with a $865 million valuation.

Yet, while LAFC tops MLS clubs with respect to valuation, their value is only 18 percent of that of Real Madrid (2022: $5.1 billion), the world’s most valuable football team. When comparing it to European clubs, LAFC’s value is on par with Premier League club West Ham United, who finished seventh in their domestic league in 2021/22.

Top 5 Most Valuable MLS Teams In 2022

(source: Sportico)

Rising Revenue

In addition to its high valuation, LAFC’s rapid rise from its inception onwards can also be seen in their revenue growth. The clubs had a revenue of $31 million in 2020 (note: impacted by COVID-19), an amount that rose to $71 million in 2021. Projected revenue for 2022 was set at $100 million, which would mean a 41 percent year-on-year increase. Only Atlanta United’s projected revenue of $103 million tops that.

In 2020, COVID-19 impacted the whole league with average revenue being around $18 million. In 2021, the average revenue for an MLS franchise was 2.5 times higher with a revenue of just below $45 million. Atlanta United made the most with $87 million, while Canadian club CF Montreal made only $19 million. All teams were projected to increase their income during the 2022 season.

Revenue MLS teams

*(COVID-19 impacted)
(source: Sportico)

Attendance On The Rise

One factor contributing to rising revenues across the league is the increase in ticket sales. During the 2022 regular season, clubs had a record attendance of over 10 million. Compared to 2019, when overall attendance was at 8.6 million, 10 clubs saw a rise in attendance.

Atlanta United, Charlotte FC and Seattle Sounders topped the charts with over 30,000 fans per match. With Atlanta attracting over 45,000 fans on average between 2017 and 2019 and 48,000 in 2022. A main factor contributing to them being the highest revenue generating team. Charlotte FC set an MLS record with an attendance of 74,000 fans during their first ever MLS game.

The high attendance figures, especially for new teams, is a positive sign for the league. It bodes well for further expansion and to capitalise on in-game promotional activities. The league’s attendance figures also hold their own against other American sports leagues (apart from the NFL) and many European football competitions.

MLS Teams Have Financial Power

When it comes to financial power, more than half of the MLS teams can keep pace with more established European football clubs. A 2020 published report by Soccerex naming the top 100 football clubs with the greatest financial power, listed 17 MLS teams. Based on 2017/18 balance sheets and annual reports, the number of MLS teams was only second to the amount of Premier League teams listed.

Despite the MLS consisting of more teams than most other leagues, it shows that the league’s franchises are not only catching up with attendance, but financially as well. LAFC (number 18) and LA Galaxy (number 22) were the highest listed teams, while Seattle Sounders came in at number 27.

Average MLS Club Generates Far Less Revenue Than The Big Five League Clubs

However, it is mostly based on valuation that MLS clubs can compete, to an extent, with European clubs. They are still lagging when it comes to revenue. While West Ham United had a similar valuation to LAFC, they made €221.5 million during the 2020/21 season compared to the $71 million LAFC generated in 2021. That is three times more (after currency conversion). Even the highest revenue generating MLS club Atlanta United, with $87 million in 2021, generated far below the 30 highest revenue generating football clubs and many Big Five league clubs.

The average revenue generated by a Premier League club was €275 million in 2020/21. An MLS team made on average just 14 percent of that with around €38 million ($44.8 million). Compared to the average Ligue 1 side’s revenue, they generated just below half the revenue. They did generate more than an average club in the Championship, England’s second division.

A major factor for the disparity, despite attendance figures on the rise and stacking up to other football leagues, is the amount of income generated from the sale of broadcasting rights.

New Apple Broadcasting Deal

So far, the MLS has not generated astronomical figures from broadcasting rights. In 2007 the MLS’ TV deal was worth around $21 million annually. Their 2015-2022 agreement with partners ESPN, Fox Sports and Univision was thought to be worth $90 million per season.

In June 2022, the league announced a record-breaking 10-year broadcast deal with Apple worth a minimum of $2.5 billion. This comes down to $250 million per year, increasing the league’s broadcasting income by at least 178 percent.

The value of the MLS’ deal with Apple falls short of that of other major football leagues though. For example, the Premier League’s domestic deals are worth £5.1 billion, while the league makes £5.3 billion from the sale of international broadcasting revenue for the 2022-2025 rights cycle. La Liga’s current domestic deal, running from the 2022/23 until the 2026/27 season, is reportedly worth €4.95 billion ($5.58 billion). A figure that comes down to almost a billion euros per season.

MLS’ Streaming And In-House Production Of Content

The choice for a deal with a streaming service like Apple is interesting and probably a strategy for the long run.

The MLS has a young, diverse, and tech-savvy audience, especially relative to other American leagues. These characteristics make them more likely to stream sports online. Therefore, the deal is ideal to capitalise on their fans’ preferences by offering and monetising content across multiple online channels.

Currently, the MLS ranks among the top 20 most-followed leagues around the world with over 45 million followers across the league’s and teams’ social channels.

Although all matches will be available on Apple TV and free to watch for season ticket holders, the league also announced a new four-year linear television agreement with FOX Sports and TelevisaUnivision in the US, and TSN and RDS in Canada for the broadcasting of selected games. Such linear TV deals were expected to generate around $50 million extra per year, making the total package worth $300 million per year. A figure the MLS aimed for during the bidding process.

With the switch to Apple TV, the league will produce games and extra content that is set to air on the streaming app, themselves. The in-house production is projected to cost the MLS around $60 million per season, excluding initial start-up costs, and will thus cut into any revenue made from the deal. However, it gives the league more control over their content and how they utilise and monetise it. Which could be more profitable in the long run.

Major Inflation In Expansion Fees

The growth of the league is also reflected in the rising amount expansion teams have paid over the years to join the league. Toronto FC, for example, only paid $10 million in 2007 to join. By 2012 the fee had increased four times, with Montreal Impact having to pay $40 million to enter the league. New York City FC, part of the City Football Group like Manchester City, had to pay a reported $100 million expansion fee in 2015, just three years later. The entrance fee rose to $150 million in the following years, with several new entrants. While the league’s commissioner Don Garber reported a $200 million expansion fee for teams 28 and 29. Charlotte FC supposedly paid between $300 and $325 million to enter the league in 2022.

Becoming an investor and operator of an MLS club has thus become more expensive, because the product has become more valuable over time. Just as tech stocks, the franchises are thought to have a lot of growth potential. Time will tell whether the fees are justified.

In the past, expansion fees have offset the losses the league and its clubs made, with fees sometimes making up half the league’s revenue. A situation that is not sustainable if the league does not soon reap more financial rewards from its growth since the league is unable to extend beyond a certain point.

Closed Vs Open League Structure

This cut-off point for expansion will likely be reached at 32 teams. What makes the biggest difference between the MLS and most other football leagues, is that the MLS is a closed league with no promotion and relegation. A common format in American sports. It means that when the maximum capacity is reached no new teams or teams from other leagues can enter unless a team is folded.

According to a study by Deloitte in 2016, a closed format made sense at the time with the league still in its early years, encountering problems and not running at a profit. However, it was also noted how an open format, like most of its football league counterparts, could be beneficial to North American football in the long run. Such a structure would enhance fan interest and increase the viability of the league.

Another difference with most football leagues, is that the league acts as a single-unit entity. This makes the league’s franchises all dependent on one another. The financial health of all clubs is therefore important to the league’s existence.

Salary Cap For A Competitive Balance

It is unlikely that the MLS will change its structure any time soon. Due to its format, the interdependence of teams and sports culture, there is a lot of emphasis on cost control and competitive balance. Hence, there are strict spending regulations in place. The amount MLS teams can spend on players is regulated by three main pillars: salary cap, General Allocation Money, and Targeted Allocation Money.

The league reached a new collective bargaining agreement with the MLS Player’s Association in February 2021 that will be in effect until 2027. For 2022, the salary cap was set at $4.9 million, rising yearly to an amount of $7 million by 2027. A club can spend this amount on their senior roster which is made up of 18 to 20 players. The maximum a player can earn is $612,5000.

The salary cap has increased along with the league’s growth, with the cap set at $1.2 million during the first MLS season. With each new collective bargaining agreement, clubs could spend more on their players.

Salary Cap For Each MLS Club

In addition to the senior roster, clubs have a supplemental roster consisting of 10 players. Their salaries do not count towards the club’s salary cap and consist of players receiving either a Senior Minimum Salary of $84,000 or a Reserve Minimum Salary of $65,500 (in 2022).

Allocation Money To Supplement Salary Cap

Clubs receive allocation money to go beyond the salary cap and to buy or loan players. The General Allocation Money, set at $1.625 million in 2022, can be traded with other teams and can be used in various ways to contract and pay players.

The Targeted Allocation Money, set at $2.8 million in 2022, cannot be traded and can be used to go beyond the maximum salary budget charges imposed.

The David Beckham Rule

These regulations limit the amounts teams can spend on players and hence keep cost down. It should also level the playing field among clubs. However, it makes it difficult for MLS franchises to compete with European teams for quality, or even star, players.

After David Beckham made the switch to the MLS for a base salary of $5.5 million and guaranteed compensation of $6.5 million, the league introduced the Designated Player Rule (also known as the David Beckham rule) to give clubs more financial power in the (international) transfer market.

This rule allows clubs to acquire up to three players whose total compensation and acquisition costs exceed a certain maximum salary threshold. The club bears the financial responsibility for the compensation amount above the threshold. Designated players who are at least 24 years old can have a maximum salary budget charge of $612,500.

MLS 2022 Salary Budget

(source: MLS)

The rule allows for more higher-quality players to make the switch, because they can earn a significant salary in the MLS as well. For a few years, the Chinese football league was able to lure a lot of players with astronomical salaries. Amounts the MLS, and other football leagues for that matter, could not compete with. When it became unsustainable and undesirable for the Chinese league, a rule change put an end to it and simultaneously reduced the competition for players seeking a football adventure outside of Europe.

Differences Among Players

Although the Designated Player Rule gives teams the chance to sign higher-quality players, it has led to more salary inequality. Something that is common in the European football market as well. In 2021, for example, Carlos Vela (Mexican international and former Arsenal and Real Sociedad player) was the highest paid player in the league with a salary of $6.3 million per season. Former Manchester United striker Chicharito (Javier Hernández) earned $6 million during that same year. However, Ola Kamara, who was in the race to become the season’s topscorer only earned around $335,000 per season.

Over the years, the average salary and the number of high earners has increased. During the 2022 season, Swiss international Xherdan Shaqiri earned the highest ever guaranteed compensation with $8.153 million. Even more than the $7.2 million Zlatan Ibrahimovic earned in 2019.

Highest Earner MLS Per Year

(source: MLSPA)

The Squad Cost Rule Is UEFA’s Equivalent

Yet, it is little compared to the €630 million in gross salary Kylian Mbappé reportedly earns at PSG over three seasons. An outlier, but in line with increasing and astronomical salaries paid by many European clubs in a bid to achieve on-field success. It has led to calls for a salary cap in Europe as well, as too many clubs are running losses and finding themselves in an unsustainable and unhealthy financial situation.

Since such a measure is difficult to implement with European and country-specific regulations, UEFA has implemented their own Financial Sustainability regulations in June 2022. Including a squad cost rule that must ensure that clubs can only spend 70 percent of its revenues on player and coach wages, transfers, and agent fees by 2025/26. A strict rule for European standards, but not comparable with the MLS’ strict regulations.

The salary cap gives the MLS a competitive disadvantage on the player market compared to its European counterparts. For now, it is not a problem. The league is growing and along with it the salary cap. Attendance figures are also up, while the expansion fees imply a positive feeling about where the league is heading. Time will tell whether the MLS’ structure and regulations will limit the league’s ability to keep pace with more established leagues.