Posted by John Vrooman on Friday, August 8, 2014 in Major League Soccer.

Interview with CNBC. 

1. How does a league decide how many teams it should have? Is the MLS being smart with a jump from 19 teams now, to a planned 24 by 2020?

After a critical mass is formed usually in multiples of 8, a sports league will expand as long as the marginal (extra) benefits of expansion are greater than the extra costs of expansion. The costs of expansion are usually the extra demand placed on increasingly diluted talent supply. When the NHL added 9 teams in 9 years player salaries went from 50% of revenues to over 70% just before the lockout of 2004-05 because they had expanded too rapidly.

 In a revenue sharing league like the MLS the costs of expansion also involve the reduction in the national TV packages which are usually divided equally among clubs. The MLS TV revenues have just tripled in value from about $30 million to $90 million annually  in an 8-year deal with ESPN/Univision and FOX.

 A League will still expand beyond the league profit max point if they charge an expansion fee that compensates the League for the present value of the lost cash flow. So with 19 clubs the TV money would be about $4.7 million but with 5 new clubs (to get to 24) the share would drop to $3.75 million. The new clubs are to some degree responsible for the increase rights fees (MLS expansion may have even been one of the chips in media rights negotiations). This is one reason why the MLS expansion fees may be approaching $90-$100 million and why the expansion fees vary directly with the size of TV money and the amount of revenue that is shared.

2. The MLS has a salary cap. Is that keeping it exciting, or forcing it to always be a lesser league than its European peers?

No the purpose of the salary cap is simply to control player costs and generate profits for the marginal clubs with the same pretzel logic as an infant industry tariff. This creates a large windfall gain for the larger revenue clubs. Since Beckham (2007ish) the league has been experimenting with a designated player exception and so the MLS has the greatest earnings disparity of any professional sports league in NA.

Ironically the MLS salary cap is currently set at $3.1 million (designated players excluded) which is below the projected club TV share of $3.75 million for 24 clubs ($4.7 million for the current 19 clubs). By comparison the NFL salary cap is set at $133 million also well below the club TV share of about $190 million under the current TV deal.

The difference is that MLS is an open league where players can move or be transferred to and from other leagues competing in the total world-wide talent pool, whereas the NFL is a closed only league in town with significant monopsony power. There are no salary caps in the premier divisions of European football and the cap must be relaxed (there is apparently room) if MLS wants to attract talented international players in their prime.

3. Is increased interest in the international sport of soccer (from the World Cup) easily leveraged to increase interest in American soccer? (I’m thinking about swimming and ice skating, which Americans get excited about during Olympics, but aren’t exactly big draws the rest of the time)

Yes there is post world-cup excitement but the buzz is usually killed within 2-3 years. The key to the MLS is to locate where there is a significant presence of European or Latin America demographic groups. The love and appreciation of the beautiful game is inbred as part of the culture of these groups. For example, witness the political ramifications of Brazil’s World Cup performance.

More people watch the seasonal matches between Real Madrid and Barcelona (El Clasico) than watch the SuperBowl.  (110 million). The Olympics are the most watched sporting event in the world followed by the World Cup and then El Clasico. By comparison MLS ratings (about 330,000 viewers per match) in the US are below the English Premier League and about the same as the WNBA.

4. Is there usually a defining turning point for the popularity of a sport (as some are claiming we’ve seen this summer for soccer), or do these things happen in fits and starts?

Yes but the turning point is cultural and it must evolve and cannot be taught. MLB was “America’s pastime” until 1967 until the NFL blew past the pastime because of its co-evolution with TV and especially color TV. MLB games are more appreciated by actually going to the games and they are quite frankly not ready for prime time.

The same is true for MLS in the US, the change will come and popularity will gradually move inland from the demographically diversified Coasts. The population demographics are changing and merging and along with them will come the acceptance of “European football” and at  about the same pace.

The fits and starts of the World cup and friendly matches with the touring European champions like Man City and Bayern Munich are the nudging forces behind the continental drift.

5. And finally, if soccer does in fact become more popular, will this necessitate a decrease in popularity for another major sport in the U.S.?

Not necessarily because of the regional specificity of the fan base, but perhaps the most vulnerable would be MLB because of the relative importance of the gate and the relatively large proportion of Latin American players.

Soccer fans are more like NHL fans they are few, but they are tenacious, dedicated and knowledgeable about the subtleties of the game not apparent to the impatient NA viewers.

In the end US soccer must compete with way too many other culturally specific NA sports, the continental drift toward the beautiful game will be slow moving.

V