O’Bannon Versus the NCAA: Remove Profit Motivation (Part 5)

For those of you following along, we have done a series of posts regarding the Ed O’Bannon lawsuit.  Our take on this issue has been a little different than most as we have emphasized the value that each entity (athletes, schools) provides to one another.  This discussion is at heart about whether and how college athletes should be compensated.  To conclude the series we will give our take on this overarching issue of compensation for college athletes.

I have seen a number of proposals (Whitlock, Barnhart) for how athletes should be compensated.  A common approach is to look at total revenues and then determine the appropriate split between athletes and schools.  These proposals largely use professional sports as a model.

My take on the issue is conflicted.  On one hand, I think the current state of affairs borders on immoral.  NCAA players have few rights and operate under significant constraints.  Scholarships are renewed on a yearly basis so essentially athletes have one year contracts.  In contrast, coaches operate in a free market system and can sell their services to the highest bidder.  Coaches also typically have contracts that continue to pay them even if they are fired.  Transfer rules are particularly one sided.  If an athlete transfers, he must sit out for a season and the school can limit the athlete’s choices.  Coaches can, of course, move on whenever a better opportunity arises (often the new suitor will pay the coaches buyout).  The hypocrisy of these asymmetric rules is dramatically highlighted when NCAA sanctions are levied.  Often the coach, on whose watch the infractions occurred, moves on while players then suffer the consequences.

My starting point in this discussion is that the NCAA and college sports need significant reform.  A system that allows coaches and schools operate in the free market while restraining the players is unethical and exploitive.  However, I do believe that the argument is not entirely clear cut.  The NCAA platform does provide significant value to players.  In addition to educational benefits, athletes are given an opportunity to perfect their craft and to build their personal brands.

On balance, I think the facts suggest that the players should be paid.  The dollars being collected are just too significant for the current system to be viewed as fair.  Men’s basketball and football are essentially managed as professional franchises and it is unconscionable for the athlete to exist on poverty level stipends while coaches and athletic directors are paid millions of dollars.

However, and this is a big however, just asking whether the players should be paid misses a big part of the fundamental issue.  The missing piece is whether colleges should be in the business of paying players?  My answer to this question is no.  I just don’t see any way in which paying players is remotely consistent with these institution’s fundamental missions.

While some folks may feel that I am being naïve due to the large dollars involved, I don’t think this is the case.  Paying the players is likely to fundamentally change the economics of athletic programs.  The revenue bases of schools like Texas, Ohio State and Florida will make it very difficult for other schools to compete and still remain profitable.  To maintain competitive balance, schools and leagues would likely need to adopt some form of revenue sharing and salary caps.  Will the Big Ten fund the MAC?  Will Florida write a check to Western Michigan?  Short of a significant revenue sharing program or a strict salary cap across conferences, the economics of big time sports would quickly change.  Currently the revenues provided by the Big Ten network and the SECs television contracts means that many schools operate with essentially guaranteed profitability in the major sports.  These profits often fund money losing programs like women’s golf and men’s wrestling.

If a substantial amount of revenues are shifted towards paying players in the major sports (for now we will ignore title 9 requirements that might require paying female athletes at comparable rates).  Schools would likely need to make further cuts in non-revenue programs or even re-evaluate continued D1 participation.  It is one thing for a school to participate in big time sports when the profits are guaranteed.  It is another when the institution would be operating in a financially risky environment.

The other point that is often raised is that the dollars are too big for schools to drop out.  To take an extreme example, the 2012-13 budget for the University of Texas is listed as $2.347 billion.  This budget also lists the athletic program as a self-supporting unit with a budget of $137 million.  So while sports may be the public face of many large research institutions, these sports are a relatively minor part of the overall university.

As marketers we are well aware of the important role played by big time sports. High profile sports may attract future generations of students and may be the foundation for the alumni community.  But, sports are but one way to market a school (e.g. the Ivy League).

To bottom line this discussion, if I were a university president and was faced with an environment where college sports explicitly became professional organizations, it would be an easy decision.  I would take this “structural change” as an opportunity to reposition my school to be more consistent with the larger institutional mission.  And remember this is coming from a guy whose primary hobby is college sports.

My ultimate conclusion is, therefore, that for schools to save their athletic programs it is necessary to remove the profit motivation from the system.  This is, however, different from saying that profits should be removed.  As I see it the main problem is that we have evolved to a system coaches and athletic departments can harness the loyalty of alumni and other fans to make themselves amazingly wealthy.