Pro-Rel a viable cash cow to grow soccer exponentially in North America

In which we grab hold of American soccer's third rail and don't let go until we resolve this thing once and for all (or go up in flames trying).

Unless you're one of a handful of the MLS owners who stands resolutely against changing the status quo, you're probably at least intrigued by the possibilities of instituting a system of promotion and relegation in North American soccer. If there existed the political will to implement it here, how could it be accomplished?

The goal should be to create structures and strategies that benefit all stakeholders while limiting or even eliminating serious economic risk to those who have the most at stake -- to help soccer reach its full potential without harming those who have already invested so heavily in building it. Here are four paths.

The Pure Way: Pro/Rel mandated by the governing bodies

The simplest, albeit least realistic, and potentially most-damaging way of instituting pro/rel would be for the U.S. and Canadian soccer federations to simply retract the sanctioning of leagues that do not participate in it. Such a move would create a void at the top of the American professional soccer pyramid, and there would be massive political and legal fallout.

Practically speaking, this type of unilateral approach would require a highly unlikely change in the leadership of U.S. Soccer and the Canadian Soccer Association or of FIFA, which has a rule about this: "A Club shall qualify for a domestic league championship by remaining in a certain division or by being promoted or relegated to another at the end of a season."

However, the very next line in the FIFA statutes provides an out: "In addition to qualification on sporting merit, a Club's participation in a domestic league championship may be subject to other criteria within the scope of the licensing procedure, whereby the emphasis is on sporting, infrastructural, administrative, legal and financial considerations."

In short, this path to pro/rel simply isn't going to happen, nor should it.

Attendance at Seattle Sounders matches increased 822 percent in the club's first season playing in Major League Soccer. Otto Greule Jr/Getty Images

The Safe Way: Splitting MLS into two divisions

The least risky way to implement pro/rel is to keep expanding Major League Soccer until the league decides that splitting itself into two divisions has become a logistical necessity. This would allow promotion and relegation to exist while limited to a specific group of teams that play in either the top-flight, "MLS Premier," or second-division "MLS Championship," and it could be achieved with as few as 28 teams or as many as 40. In this iteration, a system of two leagues of 20 teams each playing a double round-robin schedule of 38 games in total would function essentially like the English Premier League and Championship.

The risks to MLS owners would become diluted, but so would the benefits. There would be more meaningful games for teams in the bottom of the first and top of the second divisions. However, games involving teams in the bottom of the second division would still lack meaning. It does little to engage fans in neutral markets and nothing for those in the dozens of markets left out of this bigger, but ultimately closed, system. By controlling both levels, MLS could allocate broadcast, sponsorship and other resources to minimize the economic challenges for second-division teams.

Ultimately, this would represent a step in the direction of pro/rel, but it would still fall short of achieving the system's full promise.

Teams from USL and NASL could potentially try pro/rel without including MLS. Anthony Gruppuso/USA TODAY Sports

The Pragmatic Way: A new league with a new vision

This direction envisions a brand new, multidivision league assembling more than 100 teams from various sources with pro/rel as the critical element of its structure. The new league could be divided into two or more amateur or semi-pro levels at the bottom, plus two or three professional levels at the top. This could include MLS at the top, if MLS owners concluded it was in their best interest to join (more on that below). The new league would be much stronger with MLS' involvement, but it could be launched independent of MLS.

The professional level would be populated by teams from several sources. One would be the best-run clubs in the NPSL, a national amateur soccer league that is equivalent to a fourth division and already has nearly 100 teams -- such as Detroit City FC, Grand Rapids FC, Chattanooga FC and others -- throughout the United States. These better-funded and better-operated clubs could populate the third and possibly some of the first and second levels.

In December, a half-dozen NASL expansion candidates made presentations to the league. These ownership groups could join the professional levels along with the existing NASL clubs and even some current USL clubs looking for a different structure. Based on inquiries received from potential outside investors and current NPSL owners, I am confident that a critical mass of new professional teams could be added over the next several years if this structure were implemented.

The pro/rel aspect would not begin for several years, until the top two (or three) levels are fully populated at 20 teams each. Once populated, the pro/rel system would be implemented.

There are two critical components that would need to be included for this plan to work. First, the new league would need to work with experienced advisers who would help staffs of lower-division and new clubs improve their operations via best practices. Second, the new league would need to work closely with an experienced investment bank to raise capital. The funding would be needed for both existing clubs with ambition to grow and new clubs that would like to buy their way into the highest two divisions before the 20 slots per level are populated.

Absent MLS, this direction could easily include an element of fan ownership by mandating or encouraging the formation of supporters' trusts -- a way of doubling down on fan engagement and helping promote the structure's success.

A supporters' trust is a formal, democratic, and not-for-profit organization of fans who work with the clubs they support to make them better. As part of the restructuring of the three leagues, I would recommend mandating that all teams located in states allowing crowdfunded equity to provide for the creation of supporters' trusts. This would enable fans to become minority owners and secure board representation. In the Bundesliga, a minimum of 51 percent of each club must be owned by its members. In England, there are 110 supporters' trusts that own shares of their clubs. I would suggest that the initial percentage can be as little as 10 percent and the representation can vary.

Until recently, U.S. securities regulations forbade public investment in for-profit entities. However, the federal JOBS Act of 2012 is now spawning state-level crowdfunding legislation throughout the country that permits exactly this sort of model. The additional capital could be used to assist promoted clubs as they adjust to new leagues. In addition to raising capital for clubs, which would be significant for teams on the smaller end of the spectrum, the relationships between supporters' trusts and club owners increase personal connections, passion and support between fans and their clubs.

In addition to having supporters involved in the management of the clubs, the new league should reserve a position on its board of directors for a supporters' trust or supporters' group representative. The rep could be elected annually by the chairs of all the club supporters' trusts or supporters' groups. This would give the league and owners greater insight into the needs and views of the fans and vice versa.

The Best Way: Pro/Rel with MLS at the top

If MLS owners were to decide that transitioning to pro/rel was in their interest and could be persuaded to pursue a broader vision than the one outlined in Option 2, then Option 3 could easily be adapted to include them. In fact, this would be the ideal scenario and the one with the best chance of success, as it's the economic risk to MLS investors and operators is the greatest challenge to securing their participation. To buy into a new system, those owners will need to see the potential for massive growth at the top end and reasonable protections against financial instability at the bottom, and the transition would have to take effect without allowing them to extract concessions that would dilute the pro/rel structure beyond usefulness.

Here are seven measures that could be implemented in varying degrees the ideal structure of a system with America's current top flight as the highest tier.

Don Garber and MLS have a great single-entity system and could co-opt other teams to join to reach pro/rel. Andy Mead/YCJ/Icon Sportswire via Getty Images

1. Bring the top-three divisions under the MLS umbrella

Increasing the connections among the three existing top leagues -- MLS, USL and NASL -- is imperative for a sustainable pro/rel structure. The current ownership structures of the three leagues are unique, making common interest difficult. The USL is owned by a private limited liability corporation controlled by two individuals, Rob Hoskins and Alec Papadakis. The USL sells franchises that operate in given territories. The NASL operates as a group of independent club owners. Each club is a shareholder in the league. And MLS is structured as a single entity, meaning MLS investors purchase a financial stake in the league, which grants them the right to operate a team. Structuring pro/rel so that the various leagues benefit from each other's success may necessitate corporate restructuring that aligns each group to more readily share a common interest.

The top tier has the greatest resources and the greatest ability to unite the 60-plus clubs' interests by investing throughout the lower divisions. MLS teams currently own 12 of the 41 lower-division teams and have affiliations with nine others. While MLS's single-entity structure has led to significant fan criticism and skepticism, it has also helped the league maintain stability and cost certainty and allowed MLS to achieve consistent financial growth over two decades.

Extending the single-entity structure through the lower divisions would create stability and sustainability for all three tiers of soccer in the U.S. and Canada. The merger would bring more significant properties under the MLS umbrella, aligning the economic interests of all three divisions and expanding inventory for Soccer United Marketing (SUM), the for-profit marketing arm of MLS and the exclusive marketing partner of the United States Soccer Federation, to monetize. This would require lower-division owners to restructure and sell or trade, in some fashion, equity in their clubs and league to MLS, which could be done in a way that guarantees the current lower-division club owners their exclusive rights to operate the teams in their markets just as they currently do. In exchange for the benefits of participating in pro/rel, lower-division clubs would receive parachute and solidarity payments (more on that below), and they would provide commercial assets such as league sponsorship and broadcast rights to MLS and SUM.

Lower-division salary budgets, player contracts, and pay would become centralized as they currently are in MLS. Players in lower-division leagues would likely join the MLS Players Union and negotiate a collective bargaining agreement that would standardize team salary caps, minimum player salaries, and other labor terms. Expanding the single-entity structure to lower divisions and consolidating under MLS may be difficult for many to accept, but it would provide a very good chance to stabilize the sport and allow a smooth transition to pro/rel.

Not including MLS would simplify this element significantly, as laid out in Option 3, but would also reduce the attractiveness significantly by taking away the top division.

In England, teams that are relegated receive parachute payments to offset the transition to lower divisions. AMA/Corbis via Getty Images

2. Parachute payments for relegated clubs

In England and other countries, relegated teams receive payments to ease the financial transition to a lower division and improve the potential for a quick bounce-back. These payments come from revenues generated by the top division's broadcast fees and are supplemented with additional annual "solidarity" payments shared with all other lower-division clubs.

Currently, the parachute payment in England is equal to a single club's share of broadcast revenue paid to a Premier League club but is spread out over two seasons. There is an additional 20 percent share paid in year three if the club was in the Premier League for more than a single season. Parachutes benefit the relegated clubs, but they also make it more difficult for existing lower-division clubs to compete, sometimes resulting in a rotation of the same clubs into the first division. The financial rewards of being promoted (even if only for a single season) can have the effect of incentivizing existing lower-division clubs to spend more to compete, but salary caps can be instituted to minimize this risk.

MLS is still a maturing broadcast property whose current TV deals are worth a reported $90 million annually, a 500 percent increase over the previous agreement. If the new league were to institute this policy with similar ratios, it would provide relegated teams approximately $2 million per team spread over two years plus a possible year-three payment of $400,000. Assuming another 500 percent increase when MLS negotiates its next round of rights fees in 2023, relegated teams could take in parachute payments of more than $10 million per year for two seasons plus $2 million in year three. That would go a long way toward alleviating financial concerns about being relegated from MLS. Parachute payments, as well as the solidarity payments and the promotion fees described in the next two elements, could be included with lesser amounts in a pro/rel structure that does not include MLS.

Richard Heathcote/Getty Images

3. Solidarity payments to lower-division clubs

In addition to parachute payments to relegated teams, providing annual "solidarity" payments to all lower-division clubs makes sense. Currently, clubs in England's second tier each get about $2 million annually. Clubs in the next two tiers each receive approximately $600,000 and $400,000, respectively. These figures are tied to revenue from EPL broadcast rights. A similar percentage of the MLS broadcast deals would result in solidarity payments of less than $100,000 annually for second-division clubs and $25,000 for third-division clubs.

However, instead of tying the solidarity payments to broadcast fees, I recommend creating a solidarity endowment fund utilizing as-yet unpaid expansion fees. Minnesota paid a reported $100 million, and MLS president Mark Abbott has said that subsequent rounds of expansion could fetch fees of $200 million. MLS has announced its plans to grow to at least 28 teams; I'd be surprised if it didn't eventually grow to 32. This would mean that the final eight teams could generate a minimum of $1.6 billion in expansion fees and likely exceed $2 billion.

If MLS were to allocate $400 million of this amount to a 20-year solidarity fund endowment, it could support clubs in the two lower divisions much as the EPL does for England's lower-division clubs. At 3 percent interest, the fund would generate $600 million over 20 years that could be distributed all or in part to lower-division clubs to maintain stability and hedge against the variance of reduced revenues for long-term relegated clubs. Planning for a capacity of a fourth division at some point in the next 20 years would be wise, bringing the total number of professional clubs to 80 in four divisions of 20 teams each. Even assuming that the increase to 60 lower division clubs would occur in year one, that endowment would provide an average of $500,000 per year per club, with more for second-division clubs and less for third- and fourth-division clubs.

There are plenty of variables, but the general concept is one in which clubs are working together to assure long-term sustainability and growth.

With MLS continuing to grow, using expansion fees to generate additional revenue for existing clubs could be an option. Andrew Snook/Icon SMI/Corbis via Getty Images

4. First-division promotion fee

To ensure quality ownership for first-division clubs, a significant annual "promotion fee" to be charged for the first decade a lower-division club plays in the first division is advised. It could be anywhere from $5 million to $10 million per year. This money would be added to the expansion fund. It is also a way for newer first-division owners to acknowledge and contribute to the considerable investment already made by MLS owners.

5. Tie salary cap to revenues

Team salary caps in all divisions should be linked to league revenues from the previous season, a concept that is similar to the NBA's soft cap negotiated into that league's collective bargaining agreement. Tying revenues and labor costs will align the interests of players and management and provide both parties with a positive sense of partnership as the overall business improves. It will also limit labor cost exposure for management if revenues don't increase at the projected rate.

6. Minimum standards for promoted clubs

An important concern for MLS and lower-division club owners alike will be the ability of promoted clubs to meet minimum first-division standards on and off the field. Infrastructure standards, such as stadium capacity and amenities, should be governed with a firm and reasonable approach that would incentivize more clubs to upgrade facilities. Many of the lower-division owners could not currently operate in MLS, but if they had the opportunity to join, they would find partners to make it happen or sell outright to owners who could afford the higher level of investment. A much-overlooked fact in the pro/rel discussion is that this structure will attract investors who have until now chosen not to invest in a soccer club. Options to permit teams to confer their promotion to a runner-up club due to economic or facility constraints may also be considered. While minimum standards would also be a concern for a pro/rel structure that does not include MLS, the standard gap would not be as great without the top division.

One issue facing pro/rel is ensuring the smaller teams can meet MLS standards for stadiums, fields and amenities. Todd Warshaw/Getty Images

7. Scheduling and pro/rel mechanics

A variety of scheduling, playoff, and pro/rel specifics could be utilized to maximize the interest in pro/rel and to minimize negative effects. In his series exploring pro/rel last year for Fusion, Steve Davis proposed a limited crossover schedule between clubs in the first and second divisions, which would allow fans in those markets to see opponents' star players and teams to maintain rivalries.

The vagaries of pro/rel could result in unbalanced regional loads for various divisions, which would impact travel expenses and rivalries. Creating dual regional pyramids solves this issue but creates other problems, such as limitations on fans in one region getting to see teams from other areas of the country. However, scheduling a number of games against geographic rivals one level higher and/or lower until the two pro levels are filled with 20 teams each would serve to minimize travel costs for division two and three teams.

Davis also had two recommendations to reduce the likelihood any team would spend too many years in a lower division. First, he would have more teams in the first division (20) than the second division (10). He also suggested promoting and relegating a greater number of teams (four or five) each year than the traditional two or three.

There are also lessons from Liga MX and other Latin American leagues that should be taken into account. To minimize the chance of a big club being demoted, Argentina instituted a system in 1983 by which clubs were relegated from the first division based on a three-year cumulative record. This method was instituted by Liga MX in 2012, but in Mexico only one club is promoted and relegated per year. Many second divisions around the world, including England's Championship and Mexico's Ascenso MX, use a playoff system that adds excitement to the annual promotion battle. In some countries, a playoff between the teams that are slated to swap divisions gives a club that is on the brink of relegation one final chance to stay up.

This piece has addressed the pros and cons of implementing pro/rel. It does not address the consequences of deferring or avoiding pro/rel altogether. Maintaining the status quo has its own implications -- positive and negative -- for domestic soccer. Projecting American pro soccer's trajectory while maintaining the current closed system is likely more accurate than predicting all the unknowns that come with implementation of a new structure.

Keeping a closed system would likely mean more of the same: slow, managed growth in MLS with the expectation, or hope, that at some point media revenues grow to justify competitive bidding for the best players in the world. Lower-division clubs will continue to have starts and stops as some establish roots and relevance in their communities and others fail and fade away.

There is no doubt pro/rel would increase the value of all lower-division clubs. Given the opportunity to attain first-division status, lower-division clubs would be incentivized to invest more in their own infrastructure and in player-development programs. They would become more attractive to outside investors, and individually, the clubs would increase in value by tens of millions of dollars. Cumulatively, the positive impact could be in the billions of dollars for lower-division clubs and the sport of soccer. And, if done right, that increase should not come at the expense of MLS, U.S. Soccer or the Canadian Soccer Association. Indeed, if implemented well, MLS's value would also likely grow, and the governing bodies would see many benefits as well.

There are several ways to implement the pro/rel system that would minimize the economic risks to MLS investors. And there are many ways to divert existing revenue streams and mine new ones to mitigate the economic risk. Like any great transformative project, making it happen will require courage, vision, and honesty. But the potential windfall -- in economic growth, fan interest, and player development -- is so massive that all stakeholders in the sport must take the issue seriously, explore solutions and refrain from dismissing it as a topic for a future generation.

Peter Wilt Wilt has launched teams in five professional soccer leagues. His teams have led their leagues in attendance four times and won 10 championships. He is now a managing director for Club 9 Sports.

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