In Soccer in a Football World, David Wangerin expertly detailed the 1980’s era collapse of the North American Soccer League. In contemporary debates about Major League Soccer, the current professional league, the NASL is the trump card for cautionary acolytes – attempts to introduce designated players, increase the salary cap, and expand receive biblical finger-wagging & stern looks from chicken littles. Yet a look at another bubble-rebirth industry, silicon valley, illuminates why, currently, irrational pessimism may impede progress.
For the early decades of the NASL, emotions trumped accounting. Why? From a psychological perspective, exuberance is contagious. Exuberance is self-perpetuating. Most importantly, exuberance is blinding. At the height of the North American Soccer League, one word could describe the feeling around soccer: exuberance. The NY Cosmos signed legitimate stars, while other teams imported not-yet-has-beens. A modest broadcast deal was viewed as a crucial first step. Glamor and pizazz draped the league. But there was one glaring problem: cash flow.
Many of the NASL teams only drew attendance in the four figures. Thus, gate receipts were paltry. The short-lived television deal with ABC only amounted to $30,000 per team. The wage bills exceeded this. Plus, recurring costs sprung up. Most teams rented over-sized American football stadiums, a precarious proposition. Why? Well, the owners of the stadium had no economic necessity to rent and thus were in a greatly superior bargaining position. They could pretty much charge what they wanted. While Lamar Hunt and some other owners did have both NFL and NASL franchises, the fundamentals were skewed.
Most importantly, as David Wangerin noted, the business had a short-term cash injection “solution” that temporarily papered over these weaknesses: the franchise entry fee. This resulted in a Ponzi scheme situation – old owners only got money by recruiting new owners, which required expansion. In the early stages of any business, insta-cash flow mechanisms can be essential to covering marketing expenses, unforeseen costs, and either pay down debt or acquire credit. But no mature business can depend on one trick ponies. Especially not a sports league with serious limits to expansion both in terms of a player talent pool and suitable cities.
When the insta-cash well ran dry, the exuberance wore off. Skeptical eyes saw shrinking revenues, rising costs, and little capacity for expansion. The NASL had started with lots of capital and bet the house on capturing market share from the National Football League, even naming the league final the “Soccer Bowl.” Instead, while at the same time the National Hockey League steadily grew by appealing to die hard hockey fans, the NASL disappeared.
In this way, the NASL collapse mirrors the first tech bubble in Silicon Valley. Novelty and excitement gave rise to an initial massive wave of capital, but investors grew skeptical as Pets.com and other online disasters multiplied. The capital from angel investors allowed for flawed internet businesses to paper over serious revenue or “monetization” flaws. The exuberance wore off, people started crunching numbers and thinking things through, and soon pessimism reigned.
Yet the recent IPOs show that Silicon Valley has reinvented itself. And so has soccer in America. The reason for success has been that parable of philosophy for centuries: “Know thyself.” Online companies have largely shifted from the tapped out ecommerce realm (who wants to buy a dog online anyway?), to social media with advertising. Facebook and Twitter are built on communication with friends and like-minded individuals, a staple of civilization since its inception. The sunk and operating costs are marginal compared to other businesses, like, say, manufacturing a jet, so the advertising revenues look massive when translated to operating profit.
American soccer has followed the sensible NHL path to stability: sell your product to people that already like it at a good price. On a micro-level, MLS has a pretty strict salary cap to keep costs down, has made soccer stadiums a priority for both cost and fan experience motives, and has favored very moderate expansion. On a macro-level, MLS is not trying to steal market share from the NFL or knock Europe off the perch as the King of soccer. Yet the regular five figure attendance levels at games, controlled operating costs, and television deals, all lead to one conclusion: MLS may be what contrarian investors refer to as a “trove.” A trove is the opposite of an asset bubble – it is a business that the market irrationally undervalues. Did you notice how Warren Buffet bought a ton of financial stocks around 2009? That’s because, while things were bad, they were not that bad. The MLS has vastly superior fundamentals to the NASL.
And the cautionary acolytes overlook one important fact: MLS does not need to chase the NFL market share, because that market is increasingly Hispanic, loves soccer, and is coming to MLS. The potential for increased revenues is not exponential, but doesn’t require a visionary to see. Also, other streams of profit can be further developed. The transfers of Adu, Dempsey, and Altidore indicate a possible upgrade to an Argentine/Brazilian export model – blooding young American talent to eventually be sold abroad. An influx of capital into academies plus a loosening of export/import restrictions on transfers would facilitate this transition.
As Wangerin duly noted, in 1984, the NASL died. The commissioner had imposed a salary cap, a novel concept at the time, and the league had contracted to a handful of teams. But it was too late. The last remaining corporate sugar daddy, Warner Communications, took a beating after Atari plunged due to the shitty video game crash of 1983, and soon the NY Cosmos found themselves playing indoor. The NASL at least provided valuable lessons for the tender years of MLS, even if cautionary trepidation may not be the best approach as the league enters adolescence and a different set of challenges.