One interpretation of our model is that it speaks to the different roles of brand equity in sports revenues. At the pro level, revenues are twice as sensitive to winning rates as at the collegiate level. Our feeling is that college revenues are driven more by the permanent nature of the fan base, and by the brand equity created over time. We have made an earlier argument along these lines, that while Ed O’Bannon should be able to profit from the use of his image, the revenues that would be generated would have as much to do with Kareem Abdul-Jabbar and Bill Walton as they have to do with Ed O’Bannon.
The continuing debate about whether high-level collegiate basketball and football players should be paid seems to be moving in the direction of these athletes receiving some form of compensation above their scholarship. In the last year we have seen steps towards forming a college athletes’ union, and increased rhetoric from the Big Five conferences about the need to start providing increased compensation to athletes. (Of course, a cynic might view the statements by the Big Five conferences as justification for gaining increased control over lucrative television dollars)
At one extreme, we have folks that advocate for no additional payment beyond the athletic scholarship. An increasingly popular viewpoint is that athletes should be provided an additional living wage type stipend. At the other extreme, we have individuals that advocate the use of a professional sports-type model. For example, Roger Noll used a 50-50 revenue split (similar to that used in the NBA) to value player contributions as part of the Ed O’Bannon lawsuit.
A complicating factor in this debate is that the structure of consumer demand is possibly very different between college and professional sports. Our specific concern is that the affinity between graduates and their colleges may mean that colleges start with more natural and stronger fan bases. As an example, consider the difference between the University of Florida and the city of Jacksonville. A UF graduate is by definition a member of the “Gator Nation”. The graduate belongs to a community of graduates that may tend to use the university’s football team as a natural focal or bonding point. In contrast, a resident of Jacksonville is supposed to root for the Jaguars merely because of where they live. Of course, this is a simplification, but hopefully our point is clear.
One way to test the preceding conjecture regarding natural and stronger fan bases is to analyze the relationship between team winning percentage and team revenues for both college and professional sports. If the relationship between revenues and wins is the same for the professionals and colleges, then it makes more sense to view the college game as essentially a professional league. If there is no relationship between revenues and wins at the college level, then player quality doesn’t matter (and consequently players probably shouldn’t be paid).
In honor of the upcoming NCAA Men’s Basketball Tournament, we modeled the relationship between revenues and win percentage for the NBA and Division 1 Men’s Basketball programs using data from the last decade. The models for each league had similar inputs or specifications. The dependent variable in both models was revenue. In the case of the NCAA, we used the revenue attributed to men’s basketball in each school’s annual Title IX filing. For the NBA, we used an estimate of home ticket revenue: average ticket price multiplied by home attendance. In the case of the NBA, the home box office revenue is a proxy for overall revenues (the correlation between our home revenue estimate and Forbes total revenue estimates is about 0.8). The explanatory variables for each equation included current season winning percentage, past playoff (or NCAA Tournament appearances), past championships, arena capacity, metro area population (or student population), and team level fixed effects (also conference fixed effects for colleges). Finally, we also used log transforms on winning percentage and revenues so that the coefficients could be interpreted as elasticities. An elasticity tells us how much one variable (revenue) changes as a function of another variable (wins percentage).
Our results suggest that NBA revenues are twice as sensitive as college basketball revenues to winning rates. In the case of the NBA, the elasticity of revenues to win percentage was 0.20 and the R-squared for the model was 0.83. At the college level, the elasticity was 0.097 and the R-squared was 0.90. The college model also included an interaction term between winning percentage and membership in a major conference (ACC, SEC, Big 12, Big Ten, Big East and Pac 12).
Where does this leave us in the debate of how much to pay players? We will defer on providing an exact percentage because doing so would require several more analyses and even more assumptions. But, it does appear that the two extreme points of view that we mentioned earlier are misguided. The college players do generate significant revenues, but their degree of responsibility for revenues is far less than the professionals.
One interpretation of our model is that it speaks to the different roles of brand equity in sports revenues. At the pro level, revenues are twice as sensitive to winning rates as at the collegiate level. Our feeling is that college revenues are driven more by the permanent nature of the fan base, and by the brand equity created over time. We have made an earlier argument along these lines, that while Ed O’Bannon should be able to profit from the use of his image, the revenues that would be generated would have as much to do with Kareem Abdul Jabber and Bill Walton as they have to do with Ed O’Bannon. So what should be done? We would like to see a three-way split of revenue. The colleges get their share, the current players get a piece, but the players that built the college brands should also get something. As professors that have seen the difficulties of obtaining an education while playing a major sport, we would like to see some type of program that at a minimum provides educational grants for past players. Furthermore, given that we seem to learn more about the health consequences of big-time football each day, it also seems reasonable to establish a trust fund for future player health issues.
Mike Lewis & Manish Tripathi, Emory University, 2014.