How Would Paying Players Change College Sports: O’Bannon vs the NCAA (Part 4)

In our series on the O’Bannon case and the associated issue of paying college athletes, we have focused on the value that athletes and universities provide to each other.  Another perspective that should be considered is how a shift to paying players might impact fans.  This is a tough issue to contemplate given that the ultimate impact on fans or customers would be a function of the specific system used to compensate athletes.

Our view is that the fan’s perspective should be considered in terms of how paying players would affect competitive balance levels across a mix of very different schools.  Perhaps the most frequent source of concern about competitive balance has been the New York Yankees in professional baseball.  The fear has always been that that large market teams like the Yankees will use their greater revenue bases to attract all the top talent, so that teams in small markets such as Kansas City or Milwaukee will be unable to field competitive teams.  The opening day payroll of the Yankees this year was $228 million while the Houston Astros lagged the field with a payroll of just $22 million.  However, concerns about competitive balance in MLB have faded in recent years as the teams such as the St. Louis Cardinals, Tampa Bay Rays, Colorado Rockies, and the Detroit Tigers have played in the World Series.  Notably, all major US professional leagues have adopted some form of revenue sharing or payroll constraints in order to maintain competitive balance and team profitability.

College sports have their own issues with competitive balance. The University of Texas athletic program is a $150+ million business while the 50th ranked (in terms of revenues) Northwestern program produced only $56 million.  This allows Texas to pay its football coach more than $5 million per year.  Some revenue sharing already occurs but it is at the conference level.  It must be noted that Northwestern’s spot in the top fifty is largely due to its membership in the Big Ten Conference (it has been reported that the Big Ten Network distributes more than $20 million per school).  Whether or not college sports operate with an acceptable level of balance (The SEC has won the last seven BCS Championships) is debatable, but the prohibition against paying athletes can be viewed as an incredibly rigid salary cap.  Paying players means that some other structure for maintaining competitive balance would be needed.

To a large degree, the conference structure of college sports increases the complexity of coming up with solutions for maintaining competitive balance.  Currently, conferences operate with extensive revenue sharing agreements.  But an extension to sharing revenue with non-members would require a paradigm shift.  In addition, Title IX regulations that strive to equalize expenditures on men’s and women’s sports are another source of complexity.  This means that revenue sharing is implicitly required within institutions.  If college football players receive salaries does that mean that women golfers would also need to be compensated?

All this is fine, but the question remains as to how big time college sports would evolve if college players could be paid and how might these changes affect the fans?  While considering the impact on the fans may seem a bit tangential, at the end of the day it is the fans that are the ultimate source of revenues and profits associated with college athletics. We, at Emory Sports Marketing Analytics view the entire situation as driven by marketing considerations.

The O’Bannon case began with a complaint about the embargo against athletes profiting from their own images.  A relatively minor change might allow athletes to market their own images to the highest bidders while still preventing direct compensation from colleges to players.  We would expect that such a change would have significant effects on recruiting, with the end result being an even greater concentration of elite recruits at high brand equity schools.  As high school athletes begin to make their college decision based on their personal brands, we expect that we would see many situations that are analogous to LeBron James’ decision to move to the high profile Miami market.  The potential would also exist for schools to gain recruiting advantages by more aggressively marketing their individual athletes.  While, we could argue that the situation described above already exists (e.g. Kentucky basketball) we expect that the trend would accelerate.   The preceding scenario would likely lead to a “rich getting richer” scenario.  The open question would be whether this increase in the advantages of more marketable schools would create dangerous levels of imbalance.

Allowing players to sign licensing deals would also mean that players would be able to sign with agents while still in school, since they would need representation when negotiating with video game, clothing and shoe companies.  Undoubtedly, shoe companies in particular would become even more powerful players in college basketball.  Shoe companies already sponsor AAU and college teams, and it’s not farfetched to imagine a scenario where a player such as Andrew Wiggins’ college choice would be made by a team of agents and other representatives working in conjunction with shoe companies.  A further question would then arise as to what schools could promise athletes in terms of marketing support?  Would high profile athletes insist on being featured on billboards or in other marketing communications?

A more extreme, and perhaps fairer, solution would be to allow athletes to participate in a free market system where they could sell their services to the highest bidder.  We say “fairer” since the college sports marketplace already includes many examples of coaches and athletic directors becoming extremely wealthy.

Moving to a totally free market would be a tremendously interesting experiment.  Just as in MLB, the college sports landscape is composed of schools that vary greatly in terms of market potential and current popularity.  Texas, Florida, Notre Dame, Ohio State and others have resources that would enable them to greatly outspend even other members of the power conferences.  Imagine a scenario where the power schools can outspend other institutions by a significant multiple.  We would also ask the question of what would happen to transfer rules.  How could the NCAA prohibit transfers or require athletes to sit a year when such a regulation would harm players earning capacities?  Would colleges need to negotiate compensation and contract length with prospective student athletes?  The real danger in moving to a free market system is that suddenly many schools would be entering a world of significant financial risk, where previously profitability was almost guaranteed (for examples of this look at the investments in programs made by Big Ten schools such as Northwestern and Illinois).

If our conjectures are true, a move to a free market could well have a negative effect on the capacity of the industry (and therefore on consumer welfare – which is a common consideration in anti-trust cases).  We expect that many schools would need to take a step back from competing at the highest level, unless some system of revenue sharing was put in place.  The challenge would be in creating a revenue sharing or salary cap system across a variety of conferences.  If anyone doubts the challenge this would involve, just consider the case of creating a college football playoff system.  For the last twenty years we have seen the College Bowl Coalition, The Bowl Alliance and multiple versions of the BCS.  Our guess is that this would lead to a system of four or so “super conferences”.  And even within these conferences we might evolve to a Harlem Globetrotters versus the Washington Generals model where perennial winners like Ohio State and Florida finance perennial losers like Illinois and Vanderbilt, so that they have someone to play.

In sum, our speculation is that any move towards paying players would essentially greatly reduce the incentives of many schools to play sports at the highest levels. Opportunities to leverage a school’s brand equity would shift the competitive balance while paying players directly would greatly increase school’s financial risks.  Absent strong revenue sharing mechanisms and some type of salary cap (would college players need belong to a union?) we would guess that a significant set of schools would move to lower levels of competition.  This would limit both consumer choice and, ironically, the choices of prospective student athletes.

Mike Lewis & Manish Tripathi, Emory University, 2013.

O’Bannon versus the NCAA (Part 2): Does Tim Tebow Owe Florida?

Click here for Part 1 (The marketing perspective)

Click here for Part 3 (The value  created by athletes)

Click here for Part 4 (How would paying players change college sports)

In a previous post, I began a discussion of the Ed O’Bannon lawsuit.  In this second part of the series, we delve a bit deeper into the nature of sports brands and how these “brands” are related to the antitrust concepts at the core of the case.  In this post, we will take the perspective of the university.  Our next post will examine the issue from the individual athlete viewpoint. The original issue in the O’Bannon lawsuit is that the structure of college sports, where athletes are unable to sell their images violates the Sherman act.  Michael McCann, discussed the antitrust elements of the lawsuit in Sports Illustrated, and describes the suit’s two main claims:

“First, by requiring student-athletes to forgo their identity rights in perpetuity, the NCAA has allegedly restrained trade in violation of the Sherman Act, a core source of federal antitrust law. Here’s why: student-athletes, but for their authorization of the NCAA to license their images and likenesses, would be able to negotiate their own licensing deals after leaving college. If they could do so, more licenses would be sold, which would theoretically produce a more competitive market for those licenses. A more competitive market normally means more choices and better prices for consumers. For example, if former student-athletes could negotiate their own licensing deals, multiple video game publishers could publish games featuring ex-players. More games could enhance technological innovation and lower prices for video game consumers.
Second, according to the plaintiffs, the NCAA has deprived them of their “right of publicity.” The right of publicity refers to the property interest of a person’s name or likeness, i.e. one’s image, voice or even signature. Last year, when explaining why the NCAA has refrained from suing CBS over its use of player information in its fantasy sports game on CBS Sportsline.com, NCAA officials acknowledged that players’ rights of publicity belong to the players, and not to the NCAA.”

Viewed collectively, these two issues really speak to the concept of brand equity, and about whether players should have the ability to “monetize” their individual brands while student athletes.  Branding issues in sports are fairly complex due to the nature of the sports product.  The key point is that sports products and brands are co-created by a collection of players, teams and leagues. What I mean by this is that while sports are inherently about competition, they also require cooperation between multiple entities.  Furthermore, while it is obvious that athletic success is correlated with an athlete’s or team’s brand equity (think Lebron, Michael or the Yankees) this equity is created through competition with other players and teams.  This co-creation is important because while fans may gravitate to star players, it is also obvious that league and team structures are needed for individual athletes to become valuable brands.  It is probably only the rare athlete, such as Michael Jordan, that can grow a league’s overall revenues or fan base.  The vast majority of athletes only temporarily capture some share of the overall brand equity of the teams and leagues with which they are involved.

This is particularly true in the case of college sports.  With a few exceptions, student athletes are relatively unknown prior to joining college football and basketball teams.  When a player puts on a college jersey, they immediately acquire a devoted fan base.  To take an obvious example, a Notre Dame Football player such as Manti Te’o (neglecting the strangeness that became public at the end of his college career) was the focus of a great deal of attention during his senior year.  Manti could have made money by endorsing products or licensing his image during his time at Notre Dame (again, lets clarify that we mean before December 2012).  However, Manti’s fame and marketability was, undoubtedly, largely a function of his playing at Notre Dame.  An argument could be made that Manti had minimal impact on the revenues of the Notre Dame Football program.  Notre Dame has a long and storied history, and already possessed a devoted fan base along with a lucrative television contract.  Notre Dame has a record of consecutive sellouts dating back to the late 1960s.

Tim Tebow is another, and more extreme, example of a high profile college player that could easily have made significant dollars while at Florida.  And again we could argue whether Tebow’s presence on the Gators actually increased Florida’s revenues.  This table shows that Florida’s home attendance increased slightly during the time that Tebow was on campus.  A comparison between 2009 and 2011 shows that attendance dropped by about 1,500 people or 1.7% per game.  At a ticket price of $25 multiplied by 7 home games, this would equate to an incremental $250,000 in revenue.  Of course, it is not entirely clear what these numbers mean, as Florida reported attendance that exceeded stadium capacity in every year (capacity = 88,548).  Also, we are not considering incremental merchandise sales.  Furthermore, given Tebow’s lack of success in the NFL, and his continuing marketability, a claim could be made that Tebow’s brand equity was entirely built at Florida.  Given that Tebow had little effect on Florida’s football revenues, it could be argued that Florida provided an opportunity for Tebow to build his brand while only slightly benefitting them.  Could Tebow have had similar success at another university?  Of course, this is an incomplete example, as Florida may have benefited from increased donations from alumni or seen an increase in applications from prospective students.

Another easy objection to the preceding argument is that it is based on marginal revenues generated by Tebow’s presence.  The distinction between marginal revenues and total revenues is important if one is truly concerned with fairness.  College athletic programs have significant and valuable brand equity.  This brand equity is maintained by current players.  If a team stopped fielding competitive teams, its brand equity would diminish over time.  In a perfectly fair world, players would enjoy rewards equal in value of how well they maintain and grow the school’s brand.  This would, however, be a difficult quantity to measure, as college teams’ brand equities have been built through extensive histories.  In the case of UCLA basketball, I think most would agree that the Bruin brand was primarily built by John Wooden, Kareem Abdul Jabber, Bill Walton and others.  If this is the case, then players like O’Bannon are merely temporary caretakers of the school’s brand.  Would Mr. O’Bannon have been on the cover of the EA sports game if he could not have been pictured wearing a UCLA jersey?

From this perspective, allowing current individual players to market themselves to the highest bidder could be viewed as unfair to past athletes.  If college athletes were suddenly allowed to pursue endorsement deals, I would expect that current high school players like Andrew Wiggins could become instantly wealthy (the fairness of Wiggins not being allowed to go directly to the pros is beyond the scope of this post).  And while many might view this as a fair outcome, I would have to ask the question as to how valuable the Wiggins’ brand would be in the absence of Kansas, the Big Twelve and the NCAA Tournament.  Consider for a moment that the MLB draft takes place in early June.  How well known are the players that are likely to be taken in the first few picks?  Would not a more equitable solution involve compensating past athletes that helped create the pre-existing fan interest that the next generation of athletes would be able to exploit?

Sports and anti-trust laws have a long history, and likely will generate controversy long into the future.  While competition between firms is typically the best way to improve consumer welfare, in the case of sports, sometimes pure competition may not be feasible.  All the major professional leagues now use some form of revenue sharing or salary caps to maintain some level of competitive balance.  As sports continue to morph into an entertainment product (remember the O’Bannon case began with a video game), it will be necessary to include greater consideration of the role of marketing assets such as a player’s brand equity and a college team’s fan equity to moderate future disputes.

Next in the Series: Part 3 – Valuing Exceptional College Athletic Performances

2013 MLB Competitive Balance Forecast

Since the advent of free agency in the 1970s, baseball fans have feared that competitive balance will decrease, and small market teams will become less competitive.  The logic is that large market teams like the Yankees will be able to acquire the best talent and small market clubs like the Pirates or Royals will be noncompetitive.

We have developed a competitive balance forecast for the 2013 MLB season.  This forecast is based on a statistical model of the relationship between the distribution of payrolls across teams and the amount of competitive balance observed in past seasons.  For the analysis, we defined competitive balance in a variety of ways.  A standard measure for competitive balance in the academic literature is the standard deviation of winning percentages in a given year.  This measure would be minimized if each team achieved a 50% winning rate, and become larger when teams show greater variation in winning rates.

The chart below shows the evolution of the standard deviation of normalized payrolls and the standard deviation of winning percentages.   The correlation between these two measures is .25 and a linear regression model suggests that the relationship between payroll dispersion and winning rate dispersion is non-significant.  However, when the dispersion in winning rates is examined at the division; level we do observe a significant relationship.

 

For our analysis, we focus on the range of winning rates.  For example, if a division winner wins 60% of their games, while the last place team wins 40% of their games, then the range would be 20%.   The reason we like this method is because it is easily translated into the common baseball measure of “games back”.  To predict the levels of competitive balance we use multiple measures of the dispersion or variation in payrolls across clubs.  Based on opening day payrolls, we predict that the AL East will be the least competitive division while the AL West will be the most competitive.

Of course, competitive balance or lack of balance is a mixed bag for fans.  If a fan roots for a high payroll, large market franchise, a lack of competitive balance may generally be a positive as the fan’s preferred franchise (sorry Cubs fans) will tend to win on average.  But for the small market teams, a lack of competitive balance can be a dangerous situation.  For further background on competitive balance and its impact on fan loyalty, the following research paper and NY Times OpEd may be useful.