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Profit Goals
A Longtime Loser, Pro Soccer Begins To Score in U.S.

New Investors and Stadiums Boost Decade-Old League, But Ambitions Are Modest
Red Bull Bets on New York
By STEFAN FATSIS/Wall Street Journal
June 17, 2006; Page A1

The U.S. men's soccer team plays Italy in the World Cup Saturday, and a loss would all but end U.S. hopes of advancing to the second round of the tournament -- arming critics who say soccer in America is forever stuck in neutral.

But a funny thing is happening back home. Five years after nearly going out of business, Major League Soccer, the top U.S. league, is showing signs of growth, stability and even profitability. MLS is attracting well-heeled investors from the major U.S. sports leagues and from traditional soccer countries. The Austrian maker of the energy drink Red Bull is spending more than $100 million on the league's New York team, and the owner of one of Mexico's most popular soccer clubs has started a team in Los Angeles.

MLS teams are enjoying a $700 million stadium-building spree that will result in seven of the league's 13 teams playing in venues designed for soccer by next year. And the league's exposure on television is increasing. For the first time, networks are paying MLS for the right to show its games. Pending deals with Walt Disney Co.'s ESPN and ABC and with the Spanish-language network Univision are set to take effect in 2007. The high-definition network HDNet started showing games this year.

"We're at the tipping point," says MLS Commissioner Don Garber.

That's been said before. The old North American Soccer League drew huge crowds to watch highly paid international stars in the 1970s before folding in 1984. The sport's boosters have been waiting two decades for the hordes of soccer-playing kids to turn into passionate fans. As recently as 2001, with MLS plagued by mounting losses and poor attendance, several businessmen bankrolling the league considered shutting it down.

Even today, MLS has a long way to go. Its games average about 16,000 fans, but plenty of matches draw fewer than 10,000. TV audiences are tiny. The quality of competition, while improving, remains well below that of the top leagues in Europe. So do paychecks. Some players earn as little as $11,700 a season.

Backers of the league say they don't expect soccer to become a dominant sport in the U.S. like football, baseball or basketball anytime soon. Their goals are modest -- 20,000-seat stadiums and TV contracts measured in the millions of dollars, not billions. Their game plan is long-term.

"If you can own [soccer] in this country, you own something that 10 years, 20 years, 30 years from now is going to be worth a lot more," says Jonathan Kraft, who runs MLS's New England Revolution and whose father, Robert, is one of the league's founding investors.

MLS started play in 1996. The U.S. Soccer Federation had promised FIFA, soccer's international governing body, that it would form a bona fide pro league as a condition of hosting the 1994 World Cup.

Unlike other sports leagues, which sell individual franchises, MLS was created as a "single entity," with investors owning all teams collectively. Players sign contracts with the league, not with a team, a system designed to control labor costs. League investors hold operating rights to one or more teams. Each team decides who plays for it, with input from the league office.

MLS averaged more than 17,000 fans per game in its first season, exceeding projections, but the honeymoon didn't last. Attendance tumbled and losses mounted to about $250 million in the league's first five years. "We had no leverage in dealing with stadium people, in dealing with sponsors, in dealing with television," says Doug Logan, MLS's first commissioner.

High-Level Meeting

Mr. Logan was fired and replaced by Mr. Garber, who had run the National Football League's international arm. In December 2001, MLS officials gathered at the Colorado ranch of sports and entertainment mogul Philip Anschutz. The three businessmen bankrolling the league -- Mr. Anschutz, the elder Mr. Kraft, who owns the NFL's New England Patriots, and Lamar Hunt, who owns the NFL's Kansas City Chiefs -- retreated for a private meeting. According to people familiar with the discussion, Mr. Anschutz presented a choice: fold the league or commit even more resources.

The owners took a few weeks deciding what to do. Preparing for the worst, MLS officials drafted a news release announcing that the league was shutting down. Messrs. Anschutz, Hunt and Kraft, believing in soccer's potential, decided to persevere -- with a new focus of strengthening the bonds between American and world soccer.

MLS shuttered its financially weakest teams, in Miami and Tampa, Fla. Mr. Anschutz took over two other flagging clubs, giving him control of six of MLS's 10 teams. At Mr. Anschutz's insistence, the investors created a television and promotions arm to capitalize on growing interest among Americans in international soccer.

The first acquisition by the new company, Soccer United Marketing, was the U.S. television rights to the 2002 and 2006 World Cups. The company produces the game telecasts, which are shown on ABC and ESPN. Soccer United Marketing also has booked exhibitions by top European teams that have packed football stadiums. This summer's lead act: FC Barcelona of Spain, the reigning European champions.

The steps helped slow the financial bleeding and attract investors. In 2003, Mr. Anschutz sold the operating rights to the Denver team to Stan Kroenke, who also owns that city's pro basketball and hockey teams. Other investors with impressive sports résumés bought into the league in Salt Lake City, Los Angeles and, just last month, Toronto.

MLS is replacing American-style marketing with soccer authenticity. Gone are deviations from international rules such as a shootout to settle ties. The Dallas team, formerly the Burn, changed its name last year to FC Dallas, as in "football club."

The new Los Angeles team, Club Deportivo Chivas USA, is the league's boldest gambit. It is co-owned by Mexican businessman Jorge Vergara Madrigal and named after his Mexican team, Chivas Guadalajara. Mr. Vergara, the founder of nutritional supplements company Grupo Omnilife SA, paid $25 million to join MLS -- a $10 million fee to create a new team and $15 million to Mr. Anschutz's company, AEG, to share the market with AEG's Los Angeles Galaxy.

The goal is to tap into the growing U.S. Hispanic population. Chivas USA President Javier Leon says both the team and the league want Hispanic fans to "buy into MLS and watch games in the stadiums" rather than only following their favorite clubs south of the border. The league hopes to strengthen the cross-border connection with an in-season tournament pitting MLS teams against Mexican league teams.

Reaching those fans isn't easy. At the Libertad Soccer Club in Santa Monica, Calif., pictures of Chivas Guadalajara and the U.S. national team adorn the walls -- but nothing from MLS. "The quality of play is inferior," Jorge Santos said yesterday while watching Mexico play Angola in the World Cup. Mr. Santos, 25 years old, was born in Los Angeles but his favorite team is Club America of the Mexican league, which he watches on television.

The biggest new MLS investor is Dietrich Mateschitz, chief executive of Red Bull GmbH. Mr. Mateschitz has built a sports mini-empire -- including a soccer team in Salzburg, Austria -- to promote his caffeine-laced drink. In March, Red Bull agreed to pay AEG $25 million to take over the New York-area team, the MetroStars. The company plans to spend about $65 million in a joint venture with AEG to build a 25,000-seat soccer stadium in Harrison, N.J., and $30 million to put its name on the building for 10 years.

For its opening game in April at Giants Stadium in New Jersey, the team, renamed the New York Red Bulls, brought in three legends from the New York Cosmos of the North American Soccer League: Pele, Giorgio Chinaglia and Franz Beckenbauer. Skydivers delivered the game ball. Despite rain, more than 35,000 fans showed up. Attendance has fallen below 10,000 for several games since then. The Red Bulls have won just one of 10 matches.

A big challenge is to get attention in the crowded New York sports market, with multiple pro teams in each of the major sports. To generate some local buzz, the team is in talks with New York City about erecting temporary stands in Central Park and playing a regular-season game there this summer, people familiar with the matter say.

MLS has made soccer-specific stadiums a priority. Crowded, intimate venues are a staple of international soccer -- and livelier than the mostly empty football stadiums in which most MLS teams still play. MLS officials say the Galaxy and FC Dallas, both of which play in recently built stadiums, are profitable.

Drawing in Young Players

Stadiums also are seen as a tool to convert youth-soccer players into MLS fans, one of the league's biggest struggles. The Colorado Rapids' new stadium outside Denver, due to open next April, is surrounded by 24 fields for use by youth soccer leagues. "They can play all day and stick around for the game that night," says Kieran Cain, the team's marketing director.

While stadiums are improving, salaries remain a fraction of what top international players earn. MLS sets each team's payroll at $2 million and the maximum salary is $350,000. Investors pay a share of the league's total salary expenses based on how many teams they operate -- not the particular salaries of the players on their own teams.

The league does make some exceptions. Mexican forward Paco Palencia of Chivas USA makes $1.3 million, U.S. star Landon Donovan of the Galaxy earns $900,000 and Freddy Adu of D.C. United, who signed with MLS at age 14, makes $500,000.

To boost its appeal and improve play, MLS is debating a rule that would allow club operators to pay one or more players with their own money. Some call it the "Beckham rule" after English star David Beckham, who with AEG owns a soccer academy in Los Angeles and has said he might like to end his playing career in the U.S.

"There are 40 or 50 gifted players on the world stage in football. We need a few of those to help us take our league to the next level," says AEG's chief executive, Tim Leiweke. MLS has given Red Bull permission to go after Brazil's Ronaldo, whose contract with Real Madrid expires in 2008.

Dave Checketts, operator of the Salt Lake City team, is cautious about the Beckham rule. "Not until this league starts to generate some operating cash flow and break-evens across the board can we even consider something like that," he says. The league's losses, while slowing in recent years, are estimated to have climbed to $300 million to $350 million.

Restraining Competition

The underlying tension is that while MLS's structure controls costs, it restrains competitive urges. MLS players would welcome more competition for their services. They weren't represented by a union until 2003, and still have no free-agency rights. Player salaries average around $75,000.

MLS player salaries and benefits this year total about $33 million, according to the players' union. That's roughly 20% to 30% of league revenue, which industry executives estimate at less than $150 million. Players in big-league football, basketball and hockey take well over half of league revenue.

MLS's restraint is due partly to a lack of income from television. The league has produced its own national telecasts for ESPN and ABC, losing money in the process. That's changing. The league has signed a three-year contract with HDNet and is expected to announce agreements soon with ESPN and ABC, and with Univision. The three deals will generate a total of about $12 million a year in rights payments, people familiar with the negotiations say. MLS declined to comment.

On average, only about 230,000 viewers watched MLS games on ESPN last year. But millions have tuned into the World Cup. The U.S.-Czech game attracted 2.8 million viewers on ESPN2, the network's biggest audience this year, and another 1.9 million on Univision. A match between Mexico and Iran drew 5.4 million viewers on Univision alone.

Reaching such ardent fans, many of whom grew up following European leagues on television, is crucial for MLS. "It's going to take better players, because you're used to watching a really high level of play," says Sean Wilsey, co-editor of "The Thinking Fan's Guide to the World Cup."

-- Jon Weinbach contributed to this article.

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