The expectation, of course, is that MLS will achieve similar profitability to the other leagues, which averaged 18% of revenues in 2017. In the meantime, they are the beneficiaries of strong growth. MLS grew revenues 390% over the last decade while NBA great run was driven off more modest revenue growth of 124%.

MLS is earning their strong valuations on the back of revenue growth, and the expectation is that they’ll eventually turn their -8% operating margin to 15-20%. The issue as we turn to this CBA is how many more losses will the league want to pile up in the short term knowing that their overall returns will still be strong enough to overcome them?

MLS owners and the CBA

We’ve established that owning a sports team is at the very least on par with, and likely better than, the alternative investment options available to people with lots of money to invest. We’ve also established that sports investments perform exceptionally well during recessions. We’ve shown that the value of MLS franchises as a whole have grown at a faster rate than any other sports league since 2007. That’s partly due to their smaller size, but there have been plenty of small leagues that have gone the other direction. The bottom line is, it’s good to be a sports owner from a financial perspective, even if the money is illiquid, and even if there are some additional investments made along the way. While this is a meta-analysis using Forbes’ work to put sports investments in context, you can bet that these savvy financial owners are keenly aware of these dynamics. See also: the line to get in forming outside Don Garber’s door.

The owners appear to have a precious asset, but they are losing money operating the league. Let’s try to add more context as we close in on a big CBA negotiation. Here are a few things we know.

According to the player union salary releases the league is spending nearly $300 million on players in 2019, not including net transfer fees.

Following the last CBA negotiation the player compensation immediately increased 20%

According to Forbes, the franchises collectively lost $63 million in 2017

If for the 2020 season the salaries increase 20% like last time, it’s another $60 million in costs per year, and regardless of who pays the salaries, the single-entity or the owners, it will still impact the overall value of their shares. There would also be offsetting revenue from such an increase, as there would presumably be better tickets revenues because of the increased quality of the league, as well as improved sponsorship revenue. And as we’ve seen historically the value growth of the asset has more than compensated the owners and the league for their operating losses. And now back to the question: how many more short term losses can the league afford while knowing they’ll get compensated further down the line?

Let’s look at two ways to can try to frame the cost of the short term sacrifice in wages. First, we can simulate what would have happened in the last decade. Going back to the Chicago Fire example, we’ve established annual gross asset value growth of 21%. Net of operating losses the return shrank to 18.7%. If average wages were 20% higher over that time frame and all of those losses went straight to the bottom line, then the returns would have been 18.3%. Such a sharp increase in wages would have had almost no impact in the big picture. We are really evaluating the impact of an exceptional increase, one that could really offer a step change in the quality of talent attracted to the league.

Through a different lens, Forbes increased the total value of MLS teams from $4.458 billion in 2016 to $5.529 billion in 2017, an increase of $1.071 billion, or 24% year-over-year growth. A removal of $60 million, or even $120 million, due to higher wages would still give the ownership growth of 23% and 22%, respectively. Phenomenal. It’s also worth noting that Forbes is very likely already considering some wage growth in the valuation.

Even though the league might currently be losing money the growth of the owners projected team values is more than compensating them for those losses, and very sharp increases in player wages would do little to alter that story. The owners might pull their pockets inside out showing us how much their spending on the league, but someday they’ll be cashing out and stuffing those pockets full.

Note: Forbes recently released their valuations for the 2018 season. The total value of the 24 teams included is $7.5 billion, nearly a $2 billion increase in value from 2017 or 36%. That increase was larger than the cumulative increase between the 2007 and 2012 seasons.