Chapter 11

1. The Economics of Sports FIFTH EDITION Chapter 11 The Economics of Amateurismand 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

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 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

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 2015-16)

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 (2012-13) 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