Click here for Part 1 (The marketing perspective)
Click here for Part 2 (The value created by colleges)
Click here for Part 4 (How would paying players change college sports)
In part two of our series on the Ed O’Bannon lawsuit, we considered the value that schools provide athletes. The gist of the argument was that schools provide a high profile stage that student athletes can use to develop their personal brands. In that article, we focused on the specific example of Tim Tebow and the Florida Gators. In this next installment, we switch perspectives and consider the value that athletes provide to universities and colleges. To keep things consistent we will again examine the specific case of Tim Tebow.
The O’Bannon case is fundamentally about the fairness of NCAA rules that do not allow players to share in revenues. The O’Bannon case is primarily concerned with rules that prohibit athletes from sharing revenues derived from products that use the athlete’s name and images. However, the O’Bannon case also highlights the issues associated with whether and how institutions should compensate or pay players.
The arguments for paying players tend to focus on the enormous revenues generated in football and men’s basketball. For example, in the 2011-2012 season, the University of Texas football program generated $103 million in revenues. Furthermore, while players are limited to receiving scholarships, coaches and athletic directors can often receive significant compensation. Nick Saban’s salary has been reported to exceed more than $5 million per year, and Vanderbilt’s athletic director David Williams’ compensation exceeds $2.5 million per year.
In our previous post we considered the value provided to athletes by schools using an argument based on brand equity. A cornerstone of this argument was that for high profile schools such as Notre Dame or Florida that sell out almost every year, it is difficult to claim that individual athletes improve the school’s revenue. HOWEVER, a major flaw in this argument was that we did not consider the role that athletes play in maintaining and expanding a school’s brand equity. To make a simple argument, while Notre Dame will undoubtedly sell out next year, if the team became a perennial loser, at some point Notre Dame would likely need to cut prices, and would suffer a drop in attendance.
To consider the potential long-term impact of a player like Tim Tebow to Florida, we conducted the following analysis. First, we developed a revenue based measure of brand equity. The idea behind this model is that a school’s brand (or fan) equity can be measured by comparing a school’s actual revenues to predicted revenues based on factors such as a team’s record, student population and other factors that reflect on a team’s quality level and market potential. More details on this method are provided here.
In the second stage of the analysis, we then developed a statistical model that explained this brand equity measure as a function of team past performance metric (prior to the current season) such as total wins, bowl games, major bowl games and national championships. We also included in this model a variable that measured the number of Heisman trophy winners produced by the school. We found that this Heisman term yielded a positive and significant parameter.
When translated to dollars (2008 dollars) we found that a Heisman winner added to a school’s brand equity by $2.15 million dollars per year. While this is in itself a significant number, it is important to note that brand equity is an enduring asset. For example, the brand equity associated with BMW provides value year after year as consumers are more prone to buy BMW cars, and to pay premium prices for these cars.
Calculating the long-term value of this brand equity asset requires assumptions about growth rates and the rate at which brand equity decays. If we assume a 2% real growth rate in college football revenues and a 10% discount rate for brand equity, the value of the brand equity created by a Tim Tebow is approximately $27.5 million dollars.
A couple of points should be made about the previous number. First, it is in several respects a conservative number. In addition to winning a Heisman trophy, Tebow also contributed to two national championship teams. The championships also greatly enhance Florida’s brand equity. Second, a challenge in analyzing the relationship between team success and individual player achievements is that the degree of cooperation in football is enormous. Mr. Tebow himself would likely credit his teammates with helping him win an individual award such as the Heisman. Finally, please note that we have again taken a fairly extreme point of view by focusing on an extreme example such as Mr. Tebow.
Our plan is to conclude this series with each of our (Mike and Manish) perspectives on the big question of whether and, if so, how should schools pay players. On a final note, we could also execute the football-based analysis described above using basketball data. We just want to know if you guys are interested. If so, please follow us on Twitter, and let us know.
Next: Part 4 – How Would Paying Players Change College Sports