Has MLS set the bar too high for expansion?

Assuming that single-entity isn't going away anytime soon, and regardless of which market may be comparatively better or worse, is MLS currently demanding too much from a potential investor or stadium situation? (There are plenty of threads about expansion to specific towns - not trying to start another here. I’m also not trying to a re-open a debate about single-entity, although that may be inevitable.)

Here are the current MLS investor and stadium expansion issues, as I understand them:

Owners

No one wants to see snake-oil salesmen ruining the sport’s or the league’s credibility even further. It’s no good to have teams pop up one season, last for one or two seasons, and then fold or move. Very bad magic. But does MLS really need to be as exclusive as it appears to be?

If MLS demands around $20 million to join the club, no one will put up that kind of cash in the foreseeable future. Even asking for $5-10 million seems like too much. The league’s losing money and they're asking otherwise sensible business people to risk a huge chunk of cash on something that's never had much success as a business in this country.

Stadiums

No one wants to see MLS playing on baseball diamonds or astroturf. Atmosphere for even 15-20,000 people in a cavernous NFL stadium isn’t great. The field looks bad with football markings. Leases with poor terms regarding revenue streams aren’t going to work financially. And we need to have more control over scheduling. All true enough - but are SSS’s really the only alternative to a ludicrous lease? And what makes us think we can hold out for only a stadium situation that addresses all of these issues - why not just focus on the financial terms of the lease for now?

The league is asking people to put up at least $20-30 million for an investment in what can reasonably only be viewed as part of a high-risk business venture. I think everyone agrees that SSS’s would be best, but it’s too much to ask of an investor or a community.

Alternatives?

Owners

If an NFL owner (see the thread in this forum discussing NFL ownership of MLS clubs) would want to put an MLS team in his stadium (leaving aside the stadium question for just a moment), he shouldn't be required to come up with a big fee. Is anyone really worried about an MLS club operated by an NFL owner folding or moving so long as the it helps him fill a few home dates during the NFL off-season?

Should business people with experience running either a soccer or a sports marketing business be turned away because they can’t come up with several million for an expansion fee? If the owners of an A-League team or a minor-league hockey team can come up with a good business plan that addresses cash-flow issues for an MLS club in their market, why should they be required to come up with even $5 million just to join?

Stadiums

The thread in this forum on NFL owners with MLS clubs in NFL stadiums speaks for itself. It’s not a perfect solution, but it’s financially feasible.

Then there’s the option of playing in smaller, college or high school stadiums where they’re available. There may not be many of them, but Robertson Stadium (real grass, adequately wide field, 35,000 capacity) at UH in Houston can’t possibly be the only such stadium in the republic - or can it? Such stadiums don’t always have much revenue coming through them now (certainly Robertson doesn’t), so their owners may be very reasonable on lease terms (Lockhart’s school district owners certainly were).

What about modular solutions? If Chicago can set up 10,000 bleacher seats in Naperville and Milwaukee can set up 7,000 seats in the A-League, why couldn't a MLS come up with 15,000 bleacher seats and about 75x120 yards' worth of grass on a college campus or somewhere within reasonable driving distance of population centers? Yeah, I know you also need infrastructure, but this isn't Afghanistan. We've got running water and phone lines all over the place.


I think MLS sets the bar too high. MLS doesn’t have a great business proposition to offer anyone. In holding out for perfect ownership and SSS's as necessary conditions for expansion, MLS may get no takers. Compromising some of the league’s ownership and stadium ideals in the short-term may at least ensure that the league has a long-term.


Here's the "NFL stadiums, hear me out" thread to which I refer above: https://www.bigsoccer.com/forum/showthread.php?s=&threadid=11042

 

Ok, you got me there. I admit to being impatient with the current MLS expansion model.

It’ll take a long, long time to grow MLS if it insists on the $20 million investor plus SSS model. Fair enough. But it’s also fair to ask whether that’s the only reasonable model. MLS seems to be posing a false dichotomy: either (1) $20 million expansion fees plus SSS or (2) fly-by-night owners and teams playing on baseball diamonds or hs astroturf football stadiums that move or fold every other season. Many of us, as impatient as we may be, also think that there may be more than one reasonable way to grow MLS. We may be impatient, but that doesn’t mean that MLS isn’t also presenting a false dichotomy.

The fundamental question is why insist on the current MLS expansion model. Why take only such a long, long, loooooooooong view? Why not compromise reasonably on a few investor and stadium requirements so that MLS can grow sooner?

That’s a good point - under the current MLS expansion model. But why should MLS insist on an expansion model that requires only the ultimate risk takers as investors? Why not pursue another model that actually mitigates some of the risks for potential investors? Sensible business people seek to minimize risk, not maximize it. The soccer business is a high-risk business any way you slice it, but the MLS expansion model seems to maximize, rather than minimize, the risks for new investors.

We would love them apples. But we don’t see them apples because that doesn’t address the stadium piece of the puzzle. Why don’t they put a few more teams (regardless of who owns them) in reasonable stadiums that aren’t SSS’s? I don’t blame Phil and Lamar for not wanting to dish out another $30 million for a new SSS for each new team. If they insist on $30 million SSS’s for each new team (regardless of who owns the team), then it makes sense that they don‘t start new teams. But that’s not the only model, is it?

I don’t think that three owners, or even one owner, is an inherently intolerable thing (but as Paul points out above, it may not be the most sensible thing). I think the main problem is with having too few teams, not too few owners.

 

That makes perfect sense if you accept the alternatives that MLS suggests (i.e., either snake-oil salesmen and astroturf hs stadiums or billionaire soccer-lovers and SSS's) as the only alternatives. But why is that not a false dichotomy?

A pro soccer league is a high-risk business, but the MLS expansion model ratchets up the risk level by setting unreasonably high barriers to entry. Sensible business people - who take reasonable risks for a living - can only conclude that these entry barriers make the total risk levels unreasonable.

Investors must have an extraordinarily high level of risk tolerance when MLS sets extraordinarily high barriers to entry - $30+ million for a SSS (plus $20 million to join the club if you're not already in). This expansion model can attract only the ultimate risk takers, as FootyMundo calls them above.

Why not try a model that minimizes the amount of money that an investor could lose - one of the less financially-demanding alternatives suggested above?

 

No one wants whimsical investors, but I think that’s the false dichotomy that’s too easily accepted in this discussion. I acknowledge that it’s entirely possible that there are simply no other sensible business people in the country who (1) control stadium leases and/or have experience running a successful sports business and (2) are capable of developing and executing a reasonable business plan for an MLS club. It’s possible, but unlikely. I just don’t see why we should accept that it’s either whimsical, fly-by-night investors or billionaire ultimate risk-takers.

I think the question is how big a safety net is appropriate - what’s the appropriate risk level? The current MLS expansion model is an extreme answer to that question - it maximizes the risks. We don’t have to set the risk levels so low that snake-oil salesmen come slithering in, but do we really have to set the risk levels so high? Do we really think there isn’t a more sensible approach that reduces risk to a level that reasonable business people would find more acceptable?

If it’s the case that the expansion fee can be reduced significantly in the event that an investor brings along a SSS, then that certainly seems more reasonable. I’m suggesting that the expansion fee should be eliminated or varied at lower levels if the investor brings a SSS, an NFL or other stadium in which he controls the lease, or a similar stadium situation that’s part of a sensible business plan.

Let’s assume that the current investors are reasonable business people who make rational decisions. Even assuming fair error in decision-making, we can probably count on Phil and Lamar to keep out potential investors with poorly developed business plans, unsuccessful records as managers of sports business, and whimsical fly-by-night types. They can safely exercise that sort of judgment without the current excessively-high entry barriers.

I agree that SSS’s significantly mitigate risk to the current investor group. But you also mitigate risk through a good business plan executed by competent management. If an NFL owner brings along his stadium lease, why doesn’t that mitigate risk sufficiently? If a long-term ownership group in the A-League, or even minor league hockey, comes along with a record of sports management success and a good business plan for an MLS team, why doesn’t that mitigate risk sufficiently? Obviously, it’s a case-by-case decision-making process, but there’s more than one way to mitigate risk. And taking the risk mitigation strategy that most reduces the chances of expansion seems unnecessary.

I suspect you have a very good argument here...

...so, what end does the current MLS expansion model serve that would also not be served by a more moderate set of requirements? (Assuming, of course, that the false dichotomy that I outline above is indeed a false dichotomy. If it's not, then why isn't it?)

 

All good points, but I’m not suggesting that Phil and Lamar should let just any business person into their club who shows up with a good plan and professes a sincere love for the beautiful game. MLS can compromise on the expansion fee and SSS requirements without opening the floodgates to every romantic with a business plan and a dream.

If Apoo, the savvy owner of a thriving local business in Springfield, rides up to Uncle Phil’s ranch with a very good business plan for an expansion Springfield Slushees for MLS, someone may need to explain to him why MLS only wants investor groups with long-term sports management experience and a record of success in the pro sports business - and probably a little more capitalization than the Quickie-Mart.

Even if Monty Burns, who owns the Springfield Atoms football team and controls Springfield Stadium, corners Lamar at the country club and shows him the unquestionably brilliant business plan that Smithers devised for an expansion Springfield Wednesday Athletic Foot-Ball Club for MLS, someone may need to explain to him why MLS only wants investor groups who agree with the single-entity model and are willing to play by all the other MLS operating rules.

Hmmm. There are definitely sketchy lawyers who make a living threatening to file annoying and somewhat dubious claims that they'll gladly abandon in exchange for an amount that’s much less than the legal fees that you would incur to get the claimed dismissed in court. But I’m not sure that would work in this situation. MLS has salaried, in-house counsel who could handle this sort of matter with a few hours' work. I used to make a living as a corporate lawyer and I’m pretty confident that I could’ve dealt with this sort of claim in less than a day’s worth of billable hours - plus research and expenses, of course.

Yes, presumably, MLS only wants you if you have a good business plan and a pile of money. And by “a pile” of money, I assume we mean enough for a $30+ million SSS, plus a few million, although perhaps not as much as $20 million, for some sort of expansion fee. I’m not questioning whether that’s a true statement. I think we all agree that MLS has probably set those requirements as part of their expansion policy.

Where we may disagree is whether those requirements ought to be part of the policy, not whether they are in fact part of the policy. If we conclude that they ought not or need not be part of the policy, then we have a false dichotomy.

Assuming that a potential investor group with good sports management credentials, as described elsewhere in this thread (e.g., NFL owner, long-term A-League or minor-league sports ownership group with record of success), brings a sensible business plan that includes a stadium situation, as described elsewhere in this thread (e.g., NFL stadium like Reliant, college stadium like Robertson, hs stadium like Lockhart, etc.), and agrees to play by the single-entity and all other MLS rules, I think it makes no sense for MLS to turn them away only because they won’t build a SSS and/or come up with a few (perhaps up to 20) million for an expansion fee.

Reasonable people differ all the time about all sorts of things, but it seems unreasonable to me, given what MLS has to offer anyone, for MLS to set such a policy when more flexible expansion policies may also achieve the league’s long-term goals.

 

Stan, you're right - if MLS turns out to be as flexible as you suggest about their expansion requirements, then my assumptions are wrong. I'd love to be wrong in this case. We’ll see how expansion unfolds over the next few years. If there any new investors at all, it’ll probably be because MLS has compromised on the stadium and expansion fee requirements.

I'm curious about how MLS responds if Allen or McNair says "I want to put a team in my stadium and play by your rules, but I don't want to give you a full-price, or even half-price, expansion fee." Given the parties' relative bargaining positions, I'm not sure why Allen or McNair should agree to full-price.

As to voting power for new investors, that’s a really interesting point. I hadn’t thought about that issue, but it can turn out to be critical. IIRC, MLS is an LLC (limited liability company). For purposes of our expansion discussion, the significance of MLS being an LLC is that it's governed by an LLC agreement that allows for varying voting and economic rights among the members (i.e., the investors). The LLC organizational form therefore gives MLS a great deal of flexibility in dealing with new investors.

For example, the LLC agreement can specify that a member (or class of members) has different economic rights in relation to allocation of profits and losses, as well as amounts and timing of cash calls. It can also specify different voting rights for different members (or class of members) regarding various matters. The LLC agreement can also place restrictions on transfers of LLC units (i.e., the “shares" or "interests” in the LLC) and on the admission of new members. So, Phil and Lamar can have very different economic and voting rights than the new investors.

Of course, if you’re, say, an NFL owner who controls a shiney new stadium, you’re probably in a relatively strong negotiating position and you may not want to accept the restrictions that Phil and Lamar may offer you in the LLC agreement. Be that as it may, the LLC form at least gives MLS a lot of options to put on the table. Even more reason why it probably makes little sense for the current investors to insist on high entry barriers. They can also mitigate their own risks though the LLC agreement.