The Effect of Competitive Balance
on Revenues and Fan Interest in the MLS
By Josh De Leon
It’s the 8th minute and the score is zero-zero. It’s a fast break, and David Beckham cuts right, passes the defender, receives a pass by Donovan, and…GOAL! Beckham puts the LA Galaxy up by one for his first MLS goal! Welcome to the world’s most popular sport: soccer. Nearly every country in the world is a member of the Fédération Internationale de Football Association (FIFA) and has professional or semi-professional clubs devoted to the game. In the United States, Major League Soccer is in a transitional state which may see it lifted into the realm of global relevancy, competing with European soccer. This transition is driven by contracting well-known superstars from Europe through the designated player (DP) rule, which allows clubs to offer higher wages to a select few players that would otherwise exceed the team’s salary cap. As players from Europe join the MLS, the league’s competitive balance is disrupted. Competitive balance measures the relative level of equality in on-field strength between teams in a league. According to William Henry Hobbs III, a professor at Clemson University, the DP rule has caused higher levels of salary dispersion within the league, and this dispersion is found to be negatively related to team performance. High wage differentials may cause dissatisfaction among low-wage players, hereby reducing their incentive to perform well. This article examines effects of the DP rule on competitive balance of the league, wage dispersion among teams, and its effect on the standing of the MLS among world leagues.
The Uncertainty of Outcome Hypothesis states that fans would rather see a game in which teams are evenly matched with one another in terms of talent. According to Woodrow Eckard, a Business professor at the University of Colorado Denver, the Uncertainty of Outcome Hypothesis posits that sports fans value competitive contests, implying that competitive imbalance within a league will motivate stronger teams to leave. When a league experiences higher levels of competitive balance, there is more uncertainty of the outcome of matches and championship titles. When there is more uncertainty, fans become more interested and watch games more regularly. This positive effect causes an increase in revenues for a given league. Keeping this in mind, the MLS has begun slowly hiring superstars from European soccer leagues in order to increase revenues and fan interest via the DP rule. By hiring these superstars, the league introduces new uncertainties of outcomes.
This rule is unique in the sporting industry because it is a single entity structure, meaning the MLS has authority over player contracts and all teams (Lawson et al., 2008). According to Dennis Coates et al. (2012) a professor at University of Maryland, the MLS believes that the single-entity structure and salary cap are more important to the long term success of the league. This structure also allows the MLS to legally control the escalation of player salaries, maintain greater homogeneity in the quality of teams, improve league competitiveness, and avoid the large versus small market issues that plague other North American sports. The salary cap rule is an agreement or rule that places a limit on the amount of money that a team can spend on player salaries, makes it similar to other sports such as the NBA, but the designated player rule allows the league to merge its structure with that of a non-restricted wage system in European soccer leagues.
Lawson et al. (2008) conducted research which analyzes variables that have a significant effect on attendance in MLS. Games involving David Beckham for the 2007 season saw a significant increase in attendance. According to BBC News, the LA Galaxy average home game attendance increased by 3,738 fans. Even games where Beckham was on the bench, attendance increased significantly. LA Galaxy, accounted for over 20% of league revenue in 2007, an outcome that can be attributable to the arrival of David Beckham to the team that year. This externality has been coined as the “Beckham Effect.” The “Beckham Effect” is analogous to the impact of NBA superstars, such as Michael Jordan and Larry Bird. Lawson et.al. (2008) estimated that the additional revenue supplied by Beckham to the LA Galaxy via ticket sales and found that Beckham generated approximately twice as much revenue as his annual salary.
The absence of wage restrictions in European soccer causes high wage bills and low profit margins. European football clubs like Real Madrid, Barcelona, and Manchester United (the top three valued sporting clubs in the world, according to Forbes) have some of the highest revenues and valuations, but lag behind American clubs in profits. Once European superstars, Andrea Pirlo, David Villa, Frank Lampard, and Steven Gerrard are now apart of the MLS and the MLS continues to attract more European players. By increasing the number of superstars in the league, fans will begin to watch MLS more, however profits may dwindle.
China is another country that is focusing its efforts on recruiting foreign players to increase its global relevance. Similar to the famous Beckham signing in 2007, Lyle Martin signed with the Chinese Super League in 2010 as a major foreign player in the league. More recently, China’s soccer teams spent $430 million acquiring new foreign players. In late January, Jiangsu Suning paid $31 million to sign former Chelsea midfielder, Ramires. A week later, a different Chinese team, Guangzhou Evergrande, spent $46 million to sign Jackson Martinez from the Spanish club giant, Atlético Madrid. According to NPR, when Jiangsu Suning signed Teixeira for a breathtaking $55 million, the soccer world's eyes opened. According to Forbes, China aims to nearly double the portion of its GDP from sports, which lags the U.S. and many other countries. Consulting firm, PwC, has estimated total sports revenues in China to be $3.4 billion from ticketing, media rights, sponsorship and merchandising. In comparison, the U.S. generated an estimated $63.6 billion in 2015.
So, where does the MLS stand among the world leagues? The league has focused its efforts on international relevancy and there is no doubt that they are yielding impressive results. According to Forbes, the average MLS team is now worth $157 million, up 52% from a study taken in 2013. New York City FC (NYCFC) and Orlando began their inaugural season in 2015 and have seen remarkable outcomes. New York City’s newest team squandered no time in setting a record for single-game-in stadium merchandise sales. NYCFC is now home to the famous trio of European Superstars, Andrea Pirlo, Frank Lampard, and David Villa, which has positively affected revenues and fan attendance.
In conclusion, the effect of the DP rule on the competitive balance yields inconclusive results. However, William Hobbs III suggests there is a negative correlation between the two, while asserting that future research must be conducted to conclusively determine the effect of the DP rule on competitive balance. In the meantime, teams in the MLS should keep salary dispersion at a minimum, but should increase the average salaries paid to acquire high caliber talent. Although the DP rule creates competitive imbalance in the short run, competitive balance should return as superstar players become more common among teams, while yielding increased revenue and fan attendance.
About the Author: Josh De Leon
As of May 2016
Josh De Leon is a Business Economics major and a double minor in Quantitative Business Analysis(QBA) and Statistics at Pace University. He is currently the Executive Vice President for The Economics Society at Pace University along with working as a tutor for Micro and Macro economics. As a young student, Josh is always looking for opportunities to do research on intriguing topics like the ones he looks forward to writing for On the Margin. He hopes to publish an article every semester before he graduates in May 2018.