Why The NCAA Needs To Pay Former Players, Not Just The Current Ones

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).

Elasticity Graphic

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’BannonSo 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.

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.