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Single Entity

in glhf

CGS got a lot wrong. This post is about the one thing they may have actually gotten right.

Ignoring for a moment that the league was inexorably tied to the television production, the league was reportedly designed as a single entity league. Had it been financially viable and independent from the start, it might still be running today.

Back in the day, say sixty or more years ago, sports leagues started as groups of indivdually owned teams getting together to do business with each other, enforce player contracts consistently, setup matches, and collectively ensure stability for everyone’s business. As the sports around these leagues grew, and as breakthroughs in transportation technology made cross-continent travel easier and cheaper, this genesis set up painful situations for these leagues later down the road as they started to bump up against each other.

Major League Baseball is comprised of two leagues glued together; the same is true for the National Football League. The fusion of these leagues was no light undertaking, and was brought on by their need to keep hold on their top-dog status and keep any leagues in competition with them at bay. A primary function of the top professional league in any sport is to retain it’s dominance, and keep the best players in the game in their league; it’s basically the way they ensure their continued success.

But, when you have thirty or so individually owned businesses all cooperating with each other to keep other similar businesses under their thumbs, you quickly run up against these little things called anti-trust laws. As a result, Congress has afforded these major leagues exemptions from anti-trust laws in most cases, as long as they stay within certain reasonable bounds. This, coincidentally, is why Congress has felt it prudent in recent years to bring juiced up athletes in for some testimony and photo-ops; since these exemptions are in place, Congress can butt in on what’s going on when it sees fit.

American professional sports leagues have spent the last couple few decades using a single-entity argument when fighting litigation against them from parties other than Congress, arguing that sometimes they should be considered as thirty individual businesses, and in other cases, they should be considered as one large business.

They’ve had limited success doing so, coming off as manic as a photon. Sometimes it’s a particle, sometimes it’s a wave; pick a side, we’re at war.

This stance has also created significant complications when collective bargaining agreements expire between these leagues and the players they employ, leading to damaging situations like lockouts or strikes. While such things seem to be an inevitability in modern professional sports, newer leagues are experimenting with structures that attempt to head these complications off.

Major League Soccer was founded with a unique single entity structure in 1993, with its first season of play in 1996. Taking lessons learned from soccer leagues worldwide, legal troubles American leagues in other sports have fought in recent years, and the implosion of the North American Soccer League in the decade prior, MLS was designed, I think, with three things in mind: longevity, parity, and staying out of costly legal battles over anti-trust issues.

I’ll quote the Fake Sigi blog for a pretty good rundown of how it’s structured:

MLS LLC is a limited liability company with single taxation and partners that own it who are a mixture of corporations, partnerships and individuals. MLS owns all of the teams that play in the league (a total of 12 prior to the start of 2002), as well as all intellectual property rights, tickets, supplied equipment, and broadcast rights.

At the same time, MLS contracts with owners to operate the teams it owns. These contractors retain a portion of ticket sales and other revenue, and must pay a portion of operation expenses. Contractors have a right to operate the teams they contract for and can sell a percentage of that right to other investors who may not be investors in MLS LLC. MLS “recruits the players, negotiates their salaries, pays them from league funds, and, to a large extent, determines where each of them will play”.

Soccer United Marketing doesn’t appear to be a separate company, but is mere an activity owned by MLS, LLC, and the revenues from SUM flow to MLS LLC owners, but not necessarily to those who own a percent of an interest of the right to operate an MLS team and are not “owner-investors”

To be frank, not a lot of the general soccer community understands this or why it works in the way it does. I’ll come right out and say that I probably don’t either. The whole thing was designed to avoid the anti-trust litigation that had plagued the NBA and NFL, in addition to providing some sort of centralized control and discussion over salaries to avoid an NASL-esque implosion. It’s an arrangement that had been contemplated and talked about by many in the sports business word, but nobody had done it on the scale that MLS did. It’s that uniqueness that makes the arrangement fascinating to me.

On the topic of salaries, it forces the owners to come together and really negotiate among themselves what the league expenditures will be. It provides a mechanism beyond the salary cap for preventing a situation where one owner can come in and spend a ton of money all by his lonesome, fundamentally altering the parity structure of the league. If the salary cap or wage structure of the league is going to increase, then it’s going to be done in a way that requires a large percentage of the ownership to be on board. The arrangement helps assure that when wages do go up, there’s a better chance of it being in the best financial interest of the league as a whole.

So basically, as an ‘owner’ in MLS, you don’t actually own a team – you own a ‘Class A’ share which gives you the right to operate a team. Salaries are not paid from your pocket, but instead from the league’s general fund. For operating a team in MLS, the league pays you a portion of what comes in from your team’s ticket sales and broadcasting, but you also share more directly in the overall health of the league. Instead of each team being individually profitable or not, everyone shares more generally in the losses of the league while everything gets going, but will all share in the profits once the league turns that corner.

Since all teams are owned by the league, most operating costs for teams are covered by the league, and since they’ve been quite careful to not expand faster than demand for soccer here in the States has, the possibility of a team imploding and causing damage to the league is incredibly slim. Yes, as an ‘owner’ you don’t have the scale of potential profits enjoyed by, say, the Yankees or Cowboys; but that’s replaced with much larger league stability and a built in mechanism that ensures parity across the league.

Why is parity important in a team-based sport? Without mechanisms to keep teams within the same relative performance level, teams that are successful early on in the history of a league can get a head start on the rest of the teams that becomes increasingly larger as time goes on. Where there’s no revenue sharing or salary caps, teams that win more often, and bring in more revenues from their success on the field, then have more resources to improve their team and further cement their dominance – it’s a positive feedback loop that produces teams that are always in the running for championships, leaving other teams in a permanent second-class status.

Since players are all paid by the league, it allows the league to easily enforce a salary cap, a common mechanism towards improving parity. But MLS’s single entity structure also allowed it to innovate in this area with a ‘designated player’ rule, which allowed teams to pay one player on their team whatever they wanted – $330,000 of which would be paid by the league and counted towards the team’s salary cap, the rest of which would come out of the owner’s pockets. This allowed teams with a bit more cash at their disposal to bring in big-name players (this rule was originally called the ‘Beckham rule’) without it having gross effects on their salary cap situation or the league’s finances in general. It’s basically a strong salary cap with a large asterisk, and it’s working out quite well for teams, players and fans.

So, why am I bringing this up now, esports readers? Why such a glowing review of this system today?

CS:GO is right around the corner. Even though it’s always best to reserve judgement until release day, I think there’s good reason for fans of FPS esports to be excited, and it’s not just because the game looks good.

We could very well see a resurgence in the game as an esport once CS:GO hits the shelves, and regardless of how well it does, the hints around a ‘CS2’ have been too great to think that Valve isn’t at the least considering it. Meanwhile, the American scene is all but dead.

CS is a time-tested format that could easily enjoy the same footing that Starcraft does today. But it requires a proper foundation, and prizes aren’t it. It’s the perfect opportunity for some enterprising teams to put together something that isn’t subordinate to prize circuits. The situation today is a blank canvas. We could relive the mistakes of last decade, or we could build something to last.

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