Friday, January 12, 2007

Why signing David Beckham was a great business decision

To some it must seem like the ‘second coming’, a heralded arrival along the lines of Pele joining the New York Cosmos in 1975 after the greatest name in soccer history signed a $2.8-million, three-year contract with the Cosmos. His presence in the NASL helped boost average attendance by almost 80 percent from 1975 (7,597) to 1977 (13,584). For Major League Soccer, Thursday’s announcement of the Los Angeles Sparks, five-year $250 million signing of David Beckam will serve as the catalyst for soccer’s growth in North America.

How important is the 'second coming' to the future of Major League Soccer? According to a report in The Washington Post MLS will pay Beckham $400,000 per year, with the Anschutz Entertainment Group (who own three MLS franchises and the Los Angeles soccer specific stadium) paying the balance.

One of the key's to how the MLS has managed their business affairs, each franchise has to manage their team working with a $2.2 million salary cap. So how than could the Galaxy’s management team circumvent the cap? Last year the MLS Board of Governors agreed to a Designated Player Rule, but that rule has been known from its inception in MLS circles as the Beckham Rule, the ability to exceed the salary cap with the signing of one designated player, hence nicknamed the Beckham Rule.

In 1977, the year Pele led the Cosmos to the North American Soccer League championship 77,691 filled Giants Stadium to ‘experience’ Pele and his Cosmos teammates Franz Beckenbauer (organizer of the 2006 World Cup in Germany), Carlos Alberto (teammate of Pele's on Brazil's Cup-winning squad of 1970) and the brash Chinaglia (a top scorer in Italy).

"We were as big as the Yankees and bigger than the Giants," says Shep Messing, a Harvard grad whose part-time passion for soccer turned full-time when the Cosmos went big time. "We had our own tables at all the clubs. But we weren't any more decadent than players today."

Seven years after Pele played his last game, the NASL folded after their 1984 season. Major professional soccer was gone from the American sports landscape until 1993 when organizers of the 1994 World Cup, the first World Cup to be contested on American soil, announced the formation of Major League Soccer.

Beckam’s $250 million (that doesn’t include revised endorsement agreements) makes Beckham the highest paid athlete playing a North American sport, surpassing Alex Rodriguez’s ten-year $225 million.

"This week, Real Madrid asked me to make a decision regarding my future and the offer to extend my contract by a further two seasons," said David Beckham. "After discussing several options with my family and advisers to either stay here at Madrid or join other major British and European clubs, I have decided to join the Los Angeles Galaxy and play in the MLS from August this year."

"I am proud to have played for two of the biggest clubs in football and I look forward to the new challenge of growing the world's most popular game in a country that is as passionate about its sport as my own."

"For the rest of this season I will continue to give 100% to my coach, team mates and fans as I believe Fabio Capello will bring this club and its supporters the success they truly deserve."

Having been Captain of the English soccer team and the driving force behind two of the world's best and most popular soccer clubs, Manchester United and Real Madrid, Beckham's latest chapter of his superstar career will see him joining one of MLS's most successful franchises.

MLS was formed on December 17, 1993, in fulfillment of Alan Rothenberg and U.S. Soccer's promise to FIFA to establish a "Division One" professional football (soccer) league in exchange for the staging of the FIFA World Cup USA 1994 in the United States. The league began play in 1996 with ten teams and enjoyed promising attendance numbers in its first season. Numbers declined slightly after the first year, but have stabilized in subsequent years. The original 10 teams were divided into two conferences: the Eastern Conference (Columbus Crew, D.C. United, New England Revolution, NY/NJ MetroStars, and Tampa Bay Mutiny), and Western Conference (Colorado Rapids, Dallas Burn, Kansas City Wiz, Los Angeles Galaxy and San Jose Clash).

The question that needs to be asked after the Los Angeles Galaxy signed one of the most recognizable names in the world today, a name that goes far beyond sports, will professional soccer’s second “opportunity of a lifetime” be managed better than the three years Pele played soccer in North America? Have those involved learnt the lessons paid by those who first attempted to bring the world’s most popular sport to America not going to make the same mistakes made by others? In a resounding word – YES!

When the league was started, most teams played in stadiums built specifically for NFL or NCAA (college) American football. This was based on the record attendances achieved at the 1994 FIFA World Cup. However this turned out to be a considerable expense to the league because of modest attendance and poor lease deals. To provide better facilities as well as to control revenue for the stadium, a major goal of MLS management is to build its own stadiums, which are often called soccer-specific stadiums (though they are capable of accommodating high school football, lacrosse, and concerts).

In 1999, Lamar Hunt personally financed the construction of Columbus Crew Stadium, the first major stadium ever built from the ground up specifically for soccer in the United States. The Crew formerly played at Ohio Stadium on the campus of The Ohio State University, but was forced to find a new home when the university began renovations on the stadium.

The Los Angeles Galaxy got a new home beginning with the 2003 season, The Home Depot Center (HDC) located in Carson, California. The Galaxy previously played at the Rose Bowl in Pasadena, California. In 2005, expansion club C.D. Chivas USA joined the Galaxy as tenants at the HDC. Chivas USA does play a few games per season at the Los Angeles Coliseum, usually in tandem with its Mexican parent club.

The move to soccer-specific stadiums has been seen by many as essential to building up attendance and fan support for MLS. So far, every team that has built its own stadium has not only seen its game attendance rise, but also has helped MLS to come closer to the ultimate goal of profitability. Thanks to their new stadium, the Los Angeles Galaxy became the first team to make a profit, and is projected to be followed in 2006 by FC Dallas (final financial numbers for Dallas’ 2006 season are not available yet). With the league's new TV rights for the 2007 season, several more teams are projected to be profitable.

Major League Soccer lost more than $350 million in its first decade, according to a report by Business Week in 2004 However, several signs in media, a landmark TV rights deal, and trends in the league itself suggest a brighter future in the next decade. First, soccer is gaining coverage on American television, with the Fox Soccer Channel and the ABC/ESPN family of channels now airing games in MLS, various Latin American leagues, major European leagues, as well as the World Cup. The exposure helps to erase the image of MLS as being a league of a 'niche' sport.

Last year, MLS and ESPN announced that the network would be paying the league its first ever rights fees to air its games and would produce the games instead of MLS, and also promote the sport on its networks with more time on SportsCenter and a primetime slot on Thursday’s on ESPN2 right after SportsCenter. The deal is said to be worth between $7-8 million a year, and will extend from the 2007 season through to 2014.

This deal is said to be a landmark event for professional soccer in the United States. Combined with other broadcasting rights deals (Fox Soccer Channel and Fox Sports en Español (combined rights deal), HDNet, and Univision), the league in 2007 will take in around 20 million dollars in TV rights for the first time. ESPN, Fox Soccer Channel, HDNet, and Univision are at an estimated $15 million a year as of 2007 before the Univision deal.

Beckam’s contract is with AEG, a wholly owned subsidiary of the Anschutz Company. If you’re going to rationalize AEG’s business decision you need to understand how much money AEG has invested in soccer. Their soccer assets only begin with Beckam and the Galaxy.

AEG developed, owns and operates The Home Depot Center in Carson, California, one of the world's premier soccer stadiums. AEG also owns three MLS soccer teams (Los Angeles Galaxy, Chicago Fire, Houston Dynamo), and through it's affiliation with Soccer United Marketing, the U.S. rights to the Mexican National soccer team and The Copa Libertadorias Tournament, as well as sponsorship, marketing and broadcast rights for the 2005 MLS expansion team, Chivas USA. It also owns an interest in The Hammarby Football Club in Stockholm. Chivas USA plays their home games at The Home Depot Center (owned by the AEG and the home of the Galaxy as well).

"David Beckham will have a greater impact on soccer in America than any athlete has ever had on a sport globally," said Tim Leiweke, president & CEO, AEG. "We are acquiring an individual that will not only be the best ambassador and the best role model for athletes and fans of soccer but the best example of what any athlete can and should be. David is truly the only individual that can build the 'bridge' between soccer in America and the rest of the world," added Leiweke.

"In addition to David's tremendous desire to further elevate the sport of soccer in the United States and worldwide, we would also not be here today without the unbelievable cooperation of the members of his management team beginning with Simon Fuller," Leiweke continued. "We owe you all a debt of gratitude and appreciation and give you our commitment that we will support you as you support us every step of the way."

"This historic partnership with 19 Entertainment and CAA Sports will also create tremendous and exciting new opportunities for us to collectively develop additional worldwide initiatives," Leiweke continued. "The synergies created with 19 Entertainment, the worldwide leaders in branding and imaging along with CAA Sports, the premier sports representation agency will result in numerous new and profitable ventures."

The BBC reported the breakdown of Beckham’s MLS record contract:

An annual salary of $10m

His existing sponsorship contracts with his four sponsors - Motorola, Pepsi, Gillette and Volkswagen - are estimated to be worth $25m

His merchandising shirt sales will bring in $10m

His share of the club profits: $10m

That adds up to $55m. Multiply it by five and you get well over $275m. The ‘released’ $250 million figure offered by the Los Angeles Galaxy likely didn’t include the endorsement agreements with Motorola, Pepsi, Gillette and Volkswagen that have been extended as a result of Beckham’s decision to not retire and play the remaining years of his soccer career in North America.

Its interesting the Galaxy who reportedly have made a profit each of the last two years are so confident in Beckham’s ability to generate enough additional revenue, the team has effectively made Beckam their partner. Imagine if at the height of his popularity Michael Jordan had demanded his share of Bulls owner Jerry Reinsdorf’s profits. And the merchandise sales figure included in his contract; another sign AEG regards Beckham as more of a partner than a member of their team. But Beckham soccer shirt sales are among the highest selling jerseys worldwide.

The unprecedented agreement was negotiated by representatives of Beckham's international personal management agency 19 Entertainment and CAA Sports.

"David Beckham is an extraordinary sporting icon," said 19 Entertainment's Simon Fuller. "His achievements to date as a player would satisfy even the most ambitious athlete. However, David's decision to move to the Los Angeles Galaxy and play in the MLS is the beginning of probably his greatest and most important adventure of all."

Fuller continued, "David's passion for soccer means that there could be no greater ambassador for the world's most popular sport and this will undoubtedly help its continued growth in the world's biggest sporting nation. I am proud to have played a part in this unprecedented and highly innovative deal which takes David to the United States. With our friends and partners at AEG, I look forward to an exciting and memorable five years ahead."

"David Beckham coming to MLS provides the league with an athlete capable of raising awareness and interest in soccer in North America to the next level," said Derek Aframe, a vice president with the Octagon sports marketing agency. "Beckham has the cache to further legitimize MLS in the eyes of potential fans, investors and sponsors. When American and Canadian children dream of sports success, those who play soccer will now have a hero to emulate who attained fame, wealth and success on par with the great heroes of other popular sports," he said.

"David Beckham is a global sports icon who will transcend the sport of soccer in America," said MLS Commissioner Don Garber. "His decision to continue his storied career in Major League Soccer is testament to the fact that America is rapidly becoming a true 'Soccer Nation' with Major League Soccer at the core. In the last few years, MLS has added three new teams, six new owners, four new soccer specific stadiums and signed four long term television agreements. The addition of David Beckham represents another significant step forward for the MLS and the sport."

"As importantly, David's enormous success as a player and team leader will serve as an inspiration to millions of soccer players and fans in this country and his global popularity will help take MLS and the sport of soccer in this country to an unprecedented level of excitement and popularity here and abroad."

The media reaction to the Beckham signing was swift and overwhelming for Major League Soccer. Beckam’s signing was included in CBS, ABC and NBC’s evening national news reports. Virtually every American sports media outlet led with news of the Beckham signing, and the home page of all major sports websites led with Beckham coverage. That kind of coverage alone is worth hundreds of millions of dollars in awareness to the Los Angeles Galaxy and Major League Soccer. In building their brand Thursday was a dream come true for those who have long believed soccer could grow as a sport in the United States.

According to a Bloomberg News report that was released immediately following the end of the World Cup in early July: in the last two years, MLS says it has benefited from an infusion of $1 billion, including expansion fees and investment in new stadiums. Soccer United Marketing, or SUM, sells TV and arena ads and signed a 10-year, $150 million sponsorship agreement with apparel maker Adidas AG.

Even with a tremendous infusion in working capital, the nine of the current 12 MLS franchises continue to lose money annually.

"All the indicators are there to suggest soccer is ready to grow in the U.S.,'' says Scott Guglielmino, vice president of programming at ESPN. ``Ratings are up, and MLS has done a nice job adding stadiums and sponsors.''

Soccer's growth "will mirror the increase in this nation's immigrant population," Roland Lazenby, a sports historian at Virginia Tech told the USA Today. "American football may always dominate, but even this World Cup you're seeing bars and cafes filled with people of different ethnic backgrounds watching together. It's a small thing but significant."

"America was all about being independent from Great Britain, so soccer's inability to stick here really is a product of historical forces," Randy Roberts, a historian at Purdue University told the USA Today. "It's also worth noting that the sports that gain popularity in any culture tend to have great appeal with the lower classes. That's true with soccer in the rest of the world and with sports like basketball here."

According to a Bloomberg News report: Adidas sells $350 million to $375 million of soccer products in the U.S. annually. With about 18 million people playing the game in the U.S., Adidas says it wants to at least double sales by 2014.

''That's a conservative figure,'' McGuire says. ``We got here early, and we'll reap a lot of the benefits as time goes on. But we have to grow the sport.''

The question isn’t where soccer is today, but where it will be in ten years. Beckamania will have long faded to black. All one needs to remember is where the sport was 16 short years ago (United States on the outside looking in when it came to soccer). If the signing of David Beckham is ever going to make sense, ten years from now expect to see the following:

Expansion possibilities include San Jose (a return of the Earthquakes), Seattle, Tulsa, Cleveland, St. Louis, Milwaukee, and Portland, Oregon. Portland already has a stadium appropriately sized for soccer (PGE Park), and soccer has long been popular there. Other cities frequently mentioned for future expansion include Rochester — home of a popular USL team, San Antonio, Cincinnati, Philadelphia, Detroit, and a return to Miami, which itself has one of the largest soccer fan bases in the country. Count on MLS adding at least five expansion franchises in the next ten years, at more than the current $30 million expansion fee.

One or two additional Canadian franchises. Montreal, Vancouver and Edmonton would each support an MLS franchises.

Every MLS franchise playing in soccer-specific stadiums, with each stadium offering seating between 20,000 and 25,000.

The United States hosting either the 2010 or 2018 World Cup (all-right that would make it an 11 year plan). There remains a very real possibility South Africa will be unable to host the 2010 World Cup. FIFA reportedly has an emergency plan in place to move the 2010 World Cup to the United States if the South Africans as many believe are unable to fulfill their commitment.

Surpassing the National Hockey League as the fourth major team sport in the United States. You can make a solid argument that soccer has already passed hockey, but ten years from now soccer will have left hockey in its rear-view mirror with corporate America and all facets of the media. The NHL is heading nowhere, soccer is moving forward. Thursday, was yet another nail in the NHL’s coffin in the United States.

If the United States were to win a World Cup, or make it to the finals, everything would change, especially if the former takes place. FIFA national rankings are at best an inexact science. Heading into the just completed World Cup, Czechoslovakia was ranked second and the United States fifth in world rankings. Neither country made it past the first round in the 2006 World Cup. However, the Americans did make the quarter finals in 2002.

Great sports leagues aren’t built overnight. It takes years of patience, vision and determination to create and build a sports league.

Paul Swangard, managing director of the University of Oregon's Warsaw Sports Marketing Center in Eugene, believes U.S. fans are too quick to compare the MLS to the world's other premier leagues, some of which were unprofitable for decades.

''You don't have to be Nike to be successful in the apparel business,'' Swangard told Bloomberg News. ''You can be a good solid revenue producing enterprise, and that's OK.''

Soccer in America is here to stay. It will never become as popular a team spectator sport as football, baseball or basketball. Those in charge of professional soccer today are determined to correct the mistakes those who created the North American Soccer League made. The NASL was created in 1968 and died in 1984. At one time the NASL had 24 teams, played in NFL stadiums and tried to “Americanize” the rules. Given a second chance, those entrusted to create a major professional American soccer league appear determined to get it right and grow the sport in America. Thursday, was a monumental day for Major League Soccer.

For Sports Business News this is Howard Bloom

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