USL franchise fees: Shepard tone or sign of progress?

Whether or not you’ve heard the term, you’ve experienced an example of Shepard tone. Think of the endless stairs in Super Mario 64 or even in the soundtrack of Christopher Nolan films. It is the (auditory) illusion of ascendancy; the feeling that the music is rising in scale, seemingly forever. In reality though, the musical motif is a cheap brilliantly disguised parlor trick. There is apparent ascendancy, but, really, you’re stuck in the same place after eight bars.

As Soc Takes revealed last week, the USL’s expansion fee has risen from $5 million to $7 million. In American sport, the value of a sporting entity is often worth what someone is willing to pay for it. By that argument, the USL is on a strong upward trajectory. But while the (pay)scale does seem to rise, is the league still stuck in the same place?

Quick History

Lower-division soccer in the U.S. was reconfigured in 2009. The United Soccer League (USL) and North American Soccer League (NASL) became separate entities, and it ushered in the latest era of the American “soccerwarz.”

It’s widely known that the NASL experienced a sigmoidal curve of success. Initially promoted to Division II, it secured strong markets such as San Antonio, Tampa, Jacksonville, Miami, Indianapolis, etc. However, by 2015, the tide was turning. The NASL had lost the financial support of Traffic Sports, and the initial defections of Tampa Bay and North Carolina foreshadowed the eventual collapse of the NASL. (For an excellent summary of the “soccerwarz,” read Kartik Krishnaiyer’s “Soccerwarz: Inside America’s Soccer Feud Between MLS, NASL and USL.”)

Meanwhile, the USL, which had for five years remained in the shadow of the glitzy and bombastic NASL, was slowly gathering steam. Per information provided to Soc Takes, the USL was already planning to apply for DII sanctioning as early as 2015. This culminated in a co-awarding of DII sanctioning between the NASL and USL in 2017. By 2018, the USL was sanctioned as the sole DII league in the United States.

Fees

The USL’s upward trajectory is best typified by its consistently rising initial franchise fee. In fact, this rise is truly remarkable.

Per documentation obtained by Soc Takes, these were the USL’s expansion fees starting in 2009:

2009: $750,000 (emergence of the NASL)
2010: $150,000
2011: $250,000
2012: $500,000
2013: $750,000
2014: $2 million
2015: $3 million
2016: N/A (rumored to be $3 million)
2017: $5 million
2018: $7 million

The remarkable rise in the USL’s expansion fees

Within the space of nine years, the initial franchise fee has increased 47-fold. That is remarkable, but this increase cannot be judged in a vacuum. There are many simultaneous events in play, including the aforementioned “promotion” from Division III to II, as well as the demise of market competitors. Here’s more context:

In 1998, the Miami Fusion are believed to have paid $20 million to join MLS. In 2018, FC Cincinnati is believed to have forked out $150 million. That means in 20 years, MLS’ valuation of clubs has risen 7.5-fold. In half that time, the USL’s 47-fold increase has far outpaced even the top professional league in U.S. Soccer.

This clearly indicates that the USL is in demand and, based on the operationally defined metric of expansion franchise valuation, is succeeding. If you want soccer to succeed in America, that’s certainly good news. But it also raises two very central questions: Is the USL making money, and why is the league’s growth out-accelerating even MLS?

Is the USL making money?

Yes, but that wasn’t always the case. Per documentation obtained by Soc Takes, the USL, as a league entity, operated at a net loss between 2009 to 2011. The tide began to turn in 2012, when the USL recorded a profit of $174,522. Since then, the USL has turned over a profit each year. Between 2012-15, the annual profit was six figures. In 2016 and 2017, its net income was $2.42 million and $6.68 million, respectively. Its most profitable year was 2017, and based on multiple expansion announcements, 2018 is likely to be even better.

One misnomer is that the USL collects expansion fees in one lump sum. This notion is fostered by the league’s operational agreement, which suggests that expansion fees are payable as one lump sum at the time of agreement. However, three independent sources confirmed to Soc Takes that expansion franchises usually pay their franchise payments in annual installment payments, per the terms of each franchise’s agreement to join the league. Given that the USL has brought on over 10 new teams in the last couple of years, the league will will reap the benefits — albeit in smaller amounts every year — of that income for years to come.

Improvements

Depending on your own metric, there are other signs of upward progress for the USL.

The USL’s broadcast deal with ESPN+ places the league within the consciousness of American soccer at large; you can fire up your Roku player and see “North Carolina FC vs. Nashville SC” next to the El Trafico derby.

The USL’s media and public relations game is precise and has elevated the lower-division soccer PR in unprecedented ways. FC Cincinnati continues to be one of the best stories of lower-division soccer success. Moreover, with the imminent launch of USLD3 and having potentially secured one of the last bastions of independent soccer, it is clear that the USL is well placed to control non-MLS pro soccer in the U.S. While the NASL’s league office was barebones, the USL’s office in Tampa is constantly expanding and hiring more employees.

Additionally, per documentation, the USL is poised — for the first time in its history — to assist teams with costs associated with broadcasting games, which would be a welcome relief for current owners.

The improvements are not all about business and money either. On the pitch, the USL’s standard of play has improved. I do not have metrics on this, more my subjective opinion based on watching the league between 2016 and 2018. Louisville City FC (last season) and FC Cincinnati (this season) are two of the stronger lower-division teams assembled in recent history. Additionally, goals from USL games regularly feature on ESPN SportsCenter, highlighting at the very least, improved technical ability of outfield players.

Player wages

But, are those technically superior players being paid better? Sort of.

Based on documentation obtained by Soc Takes, while the total expected expenditures for a new USL team were between $1.1 million to $1.5 million in 2012, the total expected expenditures skyrocketed to between $10.6 million to $15.8 million in 2018, a 10-fold increase. Yet, the total expected player salaries per club only increased from $150,000-$200,000 in 2012 (when the USL was third division) to $250,000-$500,000 in 2018, an increase of 2.5-fold at the upper end. So, while owners are forking exponentially increasing expenditures, that money isn’t going toward players at the same level of increase.

Click here for information on expected expenditure for first-year USL owners.

According to USL documentation, the current expected initial investment by a new team is at least $10.6 million (including a $7 million expansion fee). That investment comes in the face of lower-division soccer teams and owners struggling to survive. (Since the publishing of our previous story on this subject, additional USL owners have confirmed the magnitude of annual losses experienced.)

Per the aforementioned documentation, 12 USL-aligned franchises (including the PDL) were terminated in 2017. While the identity of those teams remains unclear, one is believed to be the Rochester Rhinos and the other two are believed to be Vancouver Whitecaps 2 and Orlando City B. Meanwhile, the Harrisburg City Islanders, under new ownership, rebranded as Penn FC.

WTF lads

That brings us to the second question raised by the unquestionable growth of USL valuation. WTF? Except in this case, the ‘W’ stands for “Why.” Perhaps they simply love the sport. And that certainly has a big part in it. But, romanticism notwithstanding — given these owners are also successful businessmen — it still remains confusing.

What is so attractive about the USL that it seduces owners to act against historical financial data and personal financial interests (at least in the short-term)? After all, the league is not misrepresenting the financial hole owners will find themselves in (see table).

Is the USL creating an illusion of artificial scarcity? It is reasonable to believe that with the purported end of MLS expansion, the USL will become the biggest game in town. Therefore, owners believe that this acceleration of USL expansion fees is only headed skyward. This would make financial sense — an owner who spent $500,000 in 2012 could make potentially serious money if the USL’s expansion fees continue to head upward by selling the franchise to another investor.

The USL’s Shepard tone (Credit: @Jeremyya on Twitter).

In an excellent interview conducted by WRALSportsFan’s Neil Morris, USL president Jake Edwards suggested that USL (DII) expansion is about to cessate. “There is a finite number, really,” Edwards said. “We don’t put a hard cap on that, but I would imagine it would be somewhere in the high 30s.”

If true, interested investors may feel under pressure to seek a USL franchise. However, that is contingent on the clockwise rotation of the MLS spigot. If MLS continues to expand beyond its current aspirations, the USL potentially becomes a less interesting commodity.

And, even if the spigot does finally tighten all the way, will “MLS dreamers” — owners in the USL who are simply biding time to get an MLS spot — get disillusioned at the lack of potential for upward mobility? Perhaps they will walk away.

So, regardless of whether MLS curbs expansion, there may yet be an efflux of USL owners depending on their initial goal for investing.

Another potential reason for increasing USL’s valuation may be an attempt by USL to redirect interested owners into joining USLD3. Per documentation provided to Soc Takes last year, the initial expansion fee for USLD3 is $500,000, certainly far more affordable than the USL’s $7 million. In turn, USLD3 might be able to increase its own franchise fee at a rate consistent with the USL’s. USLD3 needs eight teams to apply for Division III sanctioning. Currently, the league has five announced teams.

Problems

There are potential hurdles ahead for the USL. One is that a number of teams may soon have a get-out-of-jail-free clause.

Many of the early USL clubs signed a five-year franchise agreement with the league. That five-year term, depending on the club, may expire at the end of this year or next (Soc Takes was able to confirm this clause with two existing USL owners). This would allow those franchises to exit the league without paying an exit fee — close up shop, cut their losses and put their money in a sure shot investment, like a Marouane Fellaini jersey.

A sureshot investment. (Credit: Man United store)

However, the USL, having recognized this potential problem, started instituting measures in 2016 to incentivize owners to remain in the league. The increased expansion fees was one, while another is a meager fee of $10,000 to re-up for another term. Oh, and this time, the new term is for 10 years.

While the USL has been turning out a yearly profit, now in the millions of dollars, some of that money is being diverted — at a rate of 3.5 percent of annual income — to investors and partners in NuRock holdings. The USL’s 10-year contract with NuRock’s Management and consulting branch expires at the end of the 2019 season, but could be extended for another five years. This does not seemingly affect the ownership of USL, which NuRock Soccer Holdings, LLC still controls at 99% (with Robert Hoskins owning the other 1%).

(UPDATE July 31st, 1030AM: Soc Takes was informed by readers that this was unclear, so the statement about NuRock was clarified. The clarified portion is italicized)

While the USL is currently winning the “soccerwarz,” independent soccer has not disappeared. There are continued conversations regarding NPSL Pro and NISA. Additionally, the potential outcomes of lawsuits involving NASL entities, if successful, would result in the dissolution of professional standards; this would destabilize the USL and MLS in significant ways. For one, it would immediately remove the illusion of artificial scarcity.

(*For excellent coverage of these lawsuits, check out Miki Turner’s articles over at Soccer ESQ.)

Conclusion

There are certainly strong signs of upward mobility for the USL, and in the difficult atmosphere of lower-division soccer, that needs to be appreciated and admired. The USL has already exceeded what the NASL was able to achieve in terms of the league’s financial stability, franchise longevity and measured expansion.

But, concerns remain over the long-term future of the USL. As the league embarks on populating another league of committed owners, it is unclear why those owners continue to invest and hemorrhage money. While the league has created a scenario where increasing expansion fees is possible, all of it may yet sit upon a house of cards, one that — pending a court decision, the no-penalty exit of USL owners due to term expiration or changes in MLS’ expansion processes — may slowly collapse like the upper octave of a Shepard tone.

WRALSportsFan’s Neil Morris contributed to this report.

Follow Nipun on Twitter: NipunChopra7.

Support Soc Takes on Patreon for access to exclusive content and supporter benefits. Click here to become a patron today.