1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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”

9. 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

10. 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.

11. 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

12. 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

13. 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

14. Table 11.1

15. 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

16. 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

17. Table 11.2

18. 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
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

19. 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

20. 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

21. Table 11.3

22. 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

23. 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

24. Table 11.4

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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”

33. 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

34. 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

35. Table 11.5

36. 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

37. 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

38. 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

39. Figure 11.1

40. Figure 11.2

41. 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

42. Figure 11.3

43. 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

44. 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

45. 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 )

46. 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 ( ) to avoid Stage 4

47. 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

48. 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

49. 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

50. 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

51. 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

52. 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

53. Table 11.6

54. 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

55. Table 11.7

56. Table 11.8

57. 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