The Economics of Sports The Economics of Amateurism and College Sports FIFTH EDITION Chapter 11 The Economics of Amateurism and College Sports Michael A. Leeds | Peter von Allmen

Introduction Intercollegiate athletics echoes many themes Athletic departments balance “profit” against alternative goals Colleges and conferences exert monopoly power The NCAA has a lucrative broadcast deal Colleges provide facilities to athletic teams Intercollegiate sports provide public goods and externalities Colleges exert market power over athletes They reduce pay

Learning Objectives Appreciate how the “Olympic ideal” of amateurism developed and was integrated into intercollegiate sports Identify the benefits and costs of intercollegiate sports to a university and explain why colleges might want to support athletics even if they are not profitable See how the NCAA can be viewed as a regulatory agency, a club, and a cartel and how each framework affects the interpretation of the NCAA’s actions Recognize how student-athletes benefit—and fail to benefit—from their college experience

11.1 The Troublesome Concept of Amateurism Much of the controversy in college sports stems from its perceived professionalization Critics hearken back to a time when “it made sense to regard athletics as an educational undertaking” (Knight Commission) Colleges place restrictions on themselves because they see student-athletes as athletes first

A Brief History of Amateurism and the Olympic Ideal The Olympic Games no longer require their participants to be amateurs In contrast, American colleges and universities still require their athletes to be amateurs Many justify the requirement by appealing to the original Olympic amateur ideal We examine the ideal to see how amateur it was

The Original Olympic Games They began in 776 BC to honor Zeus They were an integral part of a set of four religious festivals. The other three were Pythian Games Held in Delphi, they honored Apollo Nemean Games Held in Nemea, they honored Heracles and Zeus Isthmean Games Held in Corinth, they honored Poseidon The word athlete comes from the Greek word athlos, which means “conflict” or “struggle” The struggle brought them closer to gods 6

The Original Olympic Games The ancient Olympians were not amateurs Cities rewarded them, especially winners Local pride played as much a role then as now Some athletes earned enough to train full-time The Romans further professionalized the Games The ancient Games were suppressed by the Christian emperor Theodosius in 393

The British Ethic and War Recall the impact of the Industrial Revolution on professional sports in Chapter 1 By the 19th century, the British took to heart Juvenal’s claim mens sana in copore sano (“a sound mind in a sound body”) The Duke of Wellington was convinced that his victory over Napoleon at Waterloo in 1815 was attributable to British athleticism “The Battle of Waterloo was won on the playing fields of Eton”

The Origin of Modern Games The modern Games were created by Pierre de Coubertin, a French aristocrat He felt humiliated by French defeat in the Franco-Prussian War in 1871 He wanted to show France how to restore its vitality – and beat the Prussians The name “Olympics” came from a local British festival – not from an appeal to ancient Greece De Coubertin was a great Anglophile Women were barred from the first games in 1896

Amateurism in American Colleges Just like the upper classes felt threatened by the athletic participation of the working classes, the expansion of colleges and sports generated social conflict Yale and Harvard responded to losses in crew to “lesser” colleges by withdrawing from intercollegiate competition in 1875 Similarly, The British Rowing Association defined an amateur as Any gentlemen who has never competed in an open competition, or for any public money, or for admission money, or with professionals for a prize, public money, or admission money, and who has never in any period of his life taught or assisted in the pursuit of athletic exercises as a means of livelihood; nor as a mechanic, artisan, or labourer.

Amateurism in American Colleges US colleges were based on the British system Colleges emphasized character as well as knowledge Sport rose as religiosity declined The NCAA Manual explicitly calls sport “an avocation” Participants are “motivated primarily by education and the physical, mental, and social benefits” This has led to the NCAA to limit aid to athletes

11.2 The Costs and Benefits of College Athletics Should athletic programs show a profit? Fans have trouble accepting profit-seeking in professional sports Do we ask philosophy departments to show a profit? But programs that not show profits are criticized as a drain on university resources

The Revenue from Intercollegiate Athletics Almost all revenue comes from football and men’s basketball Most comes from football Table 11.1 shows the revenue, profit, and market value of the top football programs

Table 11.1

Gate and Venue Revenue Tickets used to be the sole source of revenue They now account for about 25% of the revenue of state university football teams Unlike professional teams, college teams cannot move Like professional teams, they have begun to sell naming rights and offer luxury boxes

Broadcast Revenue The major conferences all have their own versions of RSNs Example: “The Big 10 Network” Some colleges have their own deals Notre Dame’s deal with NBC (the “Notredame Broadcasting Company”) Texas has “The Longhorn Network” This has equalized revenue within conferences As with professional leagues, the conferences share the revenue It has worsened inequality among conferences See Table 11.2

Table 11.2

Television and Basketball The NCAA Basketball Tournament The 14-year contract (2010) with CBS & Turner is worth $10.8 B The NCAA received $680 M in 2011-12 This was almost 90% of the NCAA’s total revenue About 60% of this revenue goes directly to colleges It provides supplemental aid to student athletes It bases payments on the number of scholarships or sports a college offers This tends to reward the big programs more than the small ones

Rewards for Performance Conferences – not teams – receive payments for successful performance In 2011, this totaled $180.5 million For each tournament win, a conference receives $250,000 per year for 6 years UK’s championship run was worth $1.25M/year to SEC Even appearing once and losing is worth a total of $1.5 million It pays to belong to a conference that has many good teams Even a bad team in a good conference benefits

The Revenue from Bowl Games Bowl Games began as tourist attractions They matched a local team (to draw local fans) with a distant team (to draw tourists) The Rose Bowl traditionally paired a West Coast team (Pacific 12) with one from the Midwest (Big 10) Television altered the equation It became important to have a nationally attractive game TV gave rise to the Bowl Championship Series (BCS) See Table 11.3 for selected bowl payouts

Table 11.3

The BCS The BCS is not an NCAA organization It was created by TV networks and the “major” football conferences Its goal is to generate revenue for these two groups plus the Bowl organizing committees Schools from non-BCS conferences earn far less from TV appearances and other bowl appearances

How the BCS Stacked the Deck The big conferences automatically put a team in one of five BCS Bowls -- see Table 11.4 Schools that are not “automatic qualifiers” must compete for one of four remaining spots There are only 3 spots if Notre Dame qualifies To qualify, an outside school must Rank in the top 12 or Rank in the top 16 and be ranked higher than the champion of one of the BCS conferences There is no guarantee for a second school that meets the criteria This led the University of Utah to file an antitrust suit against the BCS The payoffs from the upcoming playoff system seem similarly skewed

Table 11.4

The Cost of Intercollegiate Athletics Athletic departments may resemble commercial enterprises, but they are unique in one key respect: they do not pay their labor force Universities have been accused of engaging in an athletics arms race, with athletic budgets steadily rising, even as the rest of their budgets are being cut

Scholarships Scholarships are the biggest single cost 14% of average athletic department’s budget Many feel this overstates the burden What do scholarships cost? They are not an explicit cost – they are not paid The opportunity cost could be close to zero Would the athlete have paid to attend? Does s/he displace a paying student? If not – there is no cost A partial scholarship might even generate revenue

Coaches’ Salaries Head coaches averaged ~$1 million/year in 2011 Nick Saban (Alabama football) will average $5.62 million through 2020 John Calipari (Kentucky basketball): $3.7 million in 2012 Salaries rose 650% between 1986 and 2010 Faculty salaries rose 39% At the 20 most valuable football programs, the coach’s salary was 5.2% of total team revenue This would pay NFL coach about $15 million/year More than double that of highest paid NFL coach

Capital Expenditures Average expense at FBS program is $27 mill./year This exceeds operating expenses University of Michigan in 2006 spent $226 million on capital improvements to Michigan Stadium Colleges spend a large absolute amount on athletics but a relatively small fraction of their overall budget On average about 3-3.5% for FBS programs This is means that athletic departments are a much bigger presence in universities than professional sports are in cities

Do Colleges Profit from Athletics? Counting all revenues, 72% of all BCS schools are profitable This includes revenue allocated by university Counting only revenue generated by the athletic department, less than 30% are profitable Deleting scholarships (recall MC = $0), over 80% of BCS schools are profitable Non-BCS schools all lose money All sports except football and men’s basketball lose money

Spillovers from Athletics to the University Like cities, universities must look beyond profits Sports can be seen as public goods Athletics provide a sense of identity at large schools We have seen that professional teams have done the same for cities Most of the big programs developed in small Midwestern or Southern university towns Professional sports did not have a foothold in these locations

Admissions Several studies find that big-time athletics increases the quantity and quality of applicants Many of these studies use only one year of data One year makes hard to separate out forces that affect both academic success and broad appeal Recent studies have looked at how schools have performed over time Longer time frame makes it easier to isolate athletic impact These studies have mixed results – some support previous findings but others do not

Donations and State Funding Donations are 22% of athletic revenues It can be hard to separate donations from investment in tickets Studies suggest that there is little spillover to giving to non-athletic programs Some schools have used sports to spur state funding Michigan State successfully used football in the 1950s The University of Oklahoma president asked legislators for “A university our football team can be proud of”

11.3: The Role of the NCAA It is the largest – but not the only – intercollegiate association in the US It can be viewed many ways As a regulatory body As a club (as in Chapter 3) As a cartel As a result, one can often view its actions many different ways

The NCAA as a Regulatory Agency College sports were originally controlled by the students Control shifted in the late 1800s to the faculty and to the NCAA in the early 1900s An early goal was to control the “tramp athlete” Football players selling their services to colleges Some made college sports a career Colleges found it difficult to police themselves They were caught in a prisoner’s dilemma See Table 11.5

Table 11.5

The NCAA as a Club We have treated conferences as clubs We can think of the NCAA subdivisions as clubs Originally in three divisions (I – III) Division I split into Football Bowl Subdivision (IA) and Football Championship Subdivision (IAA) The formation of finer subdivisions comes from the rule for the optimal size of a club (MR=MC) The MB of adding Swarthmore to the FBS is tiny The MB of adding the University of Georgia is much greater

The NCAA as a Cartel Most cartels arise because a group of producers desire monopoly power over their output They want to restrict their output to raise prices The NCAA can exercise monopoly power The NCAA can also use its market power to exercise monopsony power over its inputs

NCAA as a Monopoly Cartels must agree on a common price Then they allocate output and hence profit An efficient cartel allocates the most output and profit to the most efficient member See Figures 11.1 and 11.2 In colleges, the BCS schools are the most “efficient” at producing football Less efficient schools get less output/profit Some schools get none at all

Figure 11.1

Figure 11.2

The NCAA as a Monopsony A former director of the NCAA has said, “Amateurism is not a moral issue; it is an economic camouflage” Critics view the NCAA as a monopsony that drives down the cost of labor Restrictions on player movement drive down the market power of the intercollegiate labor force See Figure 11.3

Figure 11.3

Academic Standards Positive view: Standards preserve academic integrity Standard prevent colleges from recruiting unqualified students Negative view: Standards create a barrier to entry Established powers keep out new competing entrants Competitors cannot pay athletes more With standards, competitors cannot take weaker students either

NCAA’s Current Standards To qualify for an athletic scholarship Student must complete 14 core courses in high school Must satisfy a sliding scale for GPA and SAT scores 2.0 core GPA requires 1010 SAT 3.55 core GPA requires 400 SAT Schools must maintain an adequate Academic Progress Rate (APR) for individual sports as well as for the overall athletic program

Computing the APR Each school receives an APR rating It gets 1 point if a scholarship athlete stays enrolled It gets 1 more point if s/he stays academically eligible The APR is the % of total possible points Consider a typical big-time basketball team 52 possible points (13 players *2 points*2 semesters) If one player is ineligible in spring – it loses 1 point APR=100*(51/52)=981 APR must be at least 925 (930 by 2015-16)

What if the APR Is Too Low? The school is subject to sanctions that increase year by year Stage 1: The school receives a public reprimand Stage 2: The school loses scholarships and/or practice time Stage 3: The school is banned from post-season play Stage 4: The school loses membership in NCAA School in trouble in 2012 include UConn’s men’s basketball team, which is at Stage 3 Grambling State has this year (2012-13) to avoid Stage 4

Academic Standards as a Barrier to Entry Schools that oppose standard could be accused of trying to win at all costs Less established athletic programs find it difficult to compete with traditional powers, which have an advantage recruiting athletes who meet the higher academic standards Some studies find that higher standards decrease competitive balance Penalties for violation of standards could offset the advantage

11.4 The Returns to the Athlete There are two ways to view student-athletes: We can see them as underpaid entertainers We can see them as obtaining a free education at a bargain price We begin by examining the payment granted to student-athletes and what the term “student-athlete” really means

Athletic Scholarships: The Grant-in-Aid National Signing Day is now a major event It is first Wednesday in February for football NCAA forbade athletic scholarships until 1956 Penn State gave the first athletic scholarship in 1900 Scholarships caused the “Seven Sinners” fiasco After the Sanity Code failed, the NCAA permitted scholarships It argued that it is easier to police support in the open This is analogous to policing drugs or prostitution Scholarships open door to workmen’s compensation claims

The “Student-Athlete” Athletic scholarships created a problem They were given “regardless of financial need or academic merit” They effectively turned students into employees They allowed students’ seeking workmen’s compensation for injuries “on the job” Student-athlete is a legal term Players must sign that they are not being paid to play They thus agree not to file for workmen’s compensation

Measuring the Net Value of Athletes The NCAA uses its monopsony power to generate economic rent Excess return comes from depressing labor costs A simple way to measure players’ value: The average revenue of the 20 most valuable football programs is $62.25 million In the NFL, 48% this goes to players ($29.88 million) Assuming the team pays its 85 scholarship athletes The average salary would be $355,000 A star quarterback would earn about 15% of payroll Eli Manning earns 15% with the Giants This implies a star college quarterback is worth $4.4 million

College Athletics as an Investment Very few college athletes enter the professional ranks See Table 11.6 for the probabilities of signing It may still pay to participate in athletics Long and Caudill (1991) show that athletes earn more in later life than non-athletes They do not separate athletes by college or sport A Swarthmore squash player is indistinguishable from an Ohio State linebacker

Table 11.6

Athletic and Academic Success Graduation success rate (GSR) GSR is percent of athletes who graduate within 6 years GSR does not include those who transfer out GSR includes those who transfer in GSR is very low for men’s basketball teams that made the At 2012 “Sweet 16”—Table 11.7 Teams in the women’s “Sweet 16” had much higher GSRs—Table 11.8 Differences appear even at small, elite colleges

Table 11.7

Table 11.8

Why Do Some Sports Do Worse? Some athletes are less prepared for college Have lower SATs, class rank, and gpa This is true for “money sports” like basketball and football Not true for softball or golf Leaving college early might be a rational choice Athletes go to some schools to go to the NFL or NBA Joining the NBA or NFL as an underclassman is a sign of success – not failure