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O’Bannon Versus the NCAA

O’Bannon versus the NCAA: A Marketing Perspective (Part 1)

Of all the sports in the world, my favorite is college basketball.  But I do have to admit that being a college basketball fan often feels a bit dirty.  Simply put, major college sports have evolved to be a strange animal that often seems exploitive of the athletes, and counterproductive for educational institutions.  This topic is top of mind due to the progression of the O’Bannon versus the NCAA lawsuit.

For those not following the case, O’Bannon versus the NCAA is an antitrust case that is concerned with NCAA rules that allow schools to profit from merchandise such as jerseys with a player’s names, or video games that feature a player’s likenesses without compensation being offered to the player.  This issue is the result of the strangeness of a system whereby schools and coaches are essentially operating as profit maximizing professionals while student athletes are bound to a code of amateurism.  Essentially, the O’Bannon suit argues that athletes are a vital element of the major college sports industry and that these athletes should receive a bigger portion of the revenues.  The next critical date is June 20th when it will be decided if the suit can proceed as a class action lawsuit.

While the suit is classified as an antitrust case, and the key objection of the plaintiffs is that the NCAA has engaged in price fixing, my view is that this case is really about marketing issues.  In particular, I view the case as about the creation of brand equity and the distribution of the value of this “marketing asset.”  This is a complicated issue.  Sports products are co-created by leagues, schools and players.  To take a notable and extreme example, one of the most successful sports products of the 1980s and 1990s were the Bulls teams headlined by Michal Jordan.  In this case the NBA, the Bulls and Jordan all reaped tremendous benefits.

At the college level, the benefits of brand equity flow more towards the coaches and institutions than the players.  The NCAA and its member institutions might argue that this is a legitimate distribution because their “brands” are a product of history and alumni loyalty rather than the presence of specific players.  For example, while a great many Tim Tebow jerseys may have been sold in Gainesville from 2006 to 2009, it is also clear that Florida would have continued to sell-out games, appear on television and receive significant benefits from being part of the SEC, even if Tebow had gone to another program.

In addition to being fundamentally about “marketing assets,” this topic may also be addressed through analytics.  This past week the Wall Street Journal reported the results of a study conducted for the plaintiffs by Roger Noll that suggests that a 2009 Michigan basketball player would have made about $250,000 per year if revenue distribution rules used in professional leagues were employed.  While the details of this analysis are not available, it sounds as though the calculations are based on revenues and revenue sharing rates across professional leagues.

Because, this case has the potential to fundamentally change the business of college athletics, we think this is an issue worthy of comment and study.  Over the next few weeks, we plan to offer a series of short articles that examine several of the key issues in the case and perhaps offer some analyses that speak to the ability of players to grow a school’s brand equity.

O’Bannon versus the NCAA (Part 2): Does Tim Tebow Owe Florida?

In a previous post, I began a discussion of the Ed O’Bannon lawsuit.  In this second part of the series, we delve a bit deeper into the nature of sports brands and how these “brands” are related to the antitrust concepts at the core of the case.  In this post, we will take the perspective of the university.  Our next post will examine the issue from the individual athlete viewpoint. The original issue in the O’Bannon lawsuit is that the structure of college sports, where athletes are unable to sell their images violates the Sherman act.  Michael McCann, discussed the antitrust elements of the lawsuit in Sports Illustrated, and describes the suit’s two main claims:

“First, by requiring student-athletes to forgo their identity rights in perpetuity, the NCAA has allegedly restrained trade in violation of the Sherman Act, a core source of federal antitrust law. Here’s why: student-athletes, but for their authorization of the NCAA to license their images and likenesses, would be able to negotiate their own licensing deals after leaving college. If they could do so, more licenses would be sold, which would theoretically produce a more competitive market for those licenses. A more competitive market normally means more choices and better prices for consumers. For example, if former student-athletes could negotiate their own licensing deals, multiple video game publishers could publish games featuring ex-players. More games could enhance technological innovation and lower prices for video game consumers.
Second, according to the plaintiffs, the NCAA has deprived them of their “right of publicity.” The right of publicity refers to the property interest of a person’s name or likeness, i.e. one’s image, voice or even signature. Last year, when explaining why the NCAA has refrained from suing CBS over its use of player information in its fantasy sports game on CBS Sportsline.com, NCAA officials acknowledged that players’ rights of publicity belong to the players, and not to the NCAA.”

Viewed collectively, these two issues really speak to the concept of brand equity, and about whether players should have the ability to “monetize” their individual brands while student athletes.  Branding issues in sports are fairly complex due to the nature of the sports product.  The key point is that sports products and brands are co-created by a collection of players, teams and leagues. What I mean by this is that while sports are inherently about competition, they also require cooperation between multiple entities.  Furthermore, while it is obvious that athletic success is correlated with an athlete’s or team’s brand equity (think Lebron, Michael or the Yankees) this equity is created through competition with other players and teams.  This co-creation is important because while fans may gravitate to star players, it is also obvious that league and team structures are needed for individual athletes to become valuable brands.  It is probably only the rare athlete, such as Michael Jordan, that can grow a league’s overall revenues or fan base.  The vast majority of athletes only temporarily capture some share of the overall brand equity of the teams and leagues with which they are involved.

This is particularly true in the case of college sports.  With a few exceptions, student athletes are relatively unknown prior to joining college football and basketball teams.  When a player puts on a college jersey, they immediately acquire a devoted fan base.  To take an obvious example, a Notre Dame Football player such as Manti Te’o (neglecting the strangeness that became public at the end of his college career) was the focus of a great deal of attention during his senior year.  Manti could have made money by endorsing products or licensing his image during his time at Notre Dame (again, lets clarify that we mean before December 2012).  However, Manti’s fame and marketability was, undoubtedly, largely a function of his playing at Notre Dame.  An argument could be made that Manti had minimal impact on the revenues of the Notre Dame Football program.  Notre Dame has a long and storied history, and already possessed a devoted fan base along with a lucrative television contract.  Notre Dame has a record of consecutive sellouts dating back to the late 1960s.

Tim Tebow is another, and more extreme, example of a high profile college player that could easily have made significant dollars while at Florida.  And again we could argue whether Tebow’s presence on the Gators actually increased Florida’s revenues.  This table shows that Florida’s home attendance increased slightly during the time that Tebow was on campus.  A comparison between 2009 and 2011 shows that attendance dropped by about 1,500 people or 1.7% per game.  At a ticket price of $25 multiplied by 7 home games, this would equate to an incremental $250,000 in revenue.  Of course, it is not entirely clear what these numbers mean, as Florida reported attendance that exceeded stadium capacity in every year (capacity = 88,548).  Also, we are not considering incremental merchandise sales.  Furthermore, given Tebow’s lack of success in the NFL, and his continuing marketability, a claim could be made that Tebow’s brand equity was entirely built at Florida.  Given that Tebow had little effect on Florida’s football revenues, it could be argued that Florida provided an opportunity for Tebow to build his brand while only slightly benefitting them.  Could Tebow have had similar success at another university?  Of course, this is an incomplete example, as Florida may have benefited from increased donations from alumni or seen an increase in applications from prospective students.

Another easy objection to the preceding argument is that it is based on marginal revenues generated by Tebow’s presence.  The distinction between marginal revenues and total revenues is important if one is truly concerned with fairness.  College athletic programs have significant and valuable brand equity.  This brand equity is maintained by current players.  If a team stopped fielding competitive teams, its brand equity would diminish over time.  In a perfectly fair world, players would enjoy rewards equal in value of how well they maintain and grow the school’s brand.  This would, however, be a difficult quantity to measure, as college teams’ brand equities have been built through extensive histories.  In the case of UCLA basketball, I think most would agree that the Bruin brand was primarily built by John Wooden, Kareem Abdul Jabber, Bill Walton and others.  If this is the case, then players like O’Bannon are merely temporary caretakers of the school’s brand.  Would Mr. O’Bannon have been on the cover of the EA sports game if he could not have been pictured wearing a UCLA jersey?

From this perspective, allowing current individual players to market themselves to the highest bidder could be viewed as unfair to past athletes.  If college athletes were suddenly allowed to pursue endorsement deals, I would expect that current high school players like Andrew Wiggins could become instantly wealthy (the fairness of Wiggins not being allowed to go directly to the pros is beyond the scope of this post).  And while many might view this as a fair outcome, I would have to ask the question as to how valuable the Wiggins’ brand would be in the absence of Kansas, the Big Twelve and the NCAA Tournament.  Consider for a moment that the MLB draft takes place in early June.  How well known are the players that are likely to be taken in the first few picks?  Would not a more equitable solution involve compensating past athletes that helped create the pre-existing fan interest that the next generation of athletes would be able to exploit?

Sports and anti-trust laws have a long history, and likely will generate controversy long into the future.  While competition between firms is typically the best way to improve consumer welfare, in the case of sports, sometimes pure competition may not be feasible.  All the major professional leagues now use some form of revenue sharing or salary caps to maintain some level of competitive balance.  As sports continue to morph into an entertainment product (remember the O’Bannon case began with a video game), it will be necessary to include greater consideration of the role of marketing assets such as a player’s brand equity and a college team’s fan equity to moderate future disputes.

O’Bannon versus the NCAA (Part 3): Okay so Florida Helped Tebow.  What did Tebow Provide to UF?

In part two of our series on the Ed O’Bannon lawsuit, we considered the value that schools provide athletes.  The gist of the argument was that schools provide a high profile stage that student athletes can use to develop their personal brands.  In that article, we focused on the specific example of Tim Tebow and the Florida Gators.  In this next installment, we switch perspectives and consider the value that athletes provide to universities and colleges.  To keep things consistent we will again examine the specific case of Tim Tebow.

The O’Bannon case is fundamentally about the fairness of NCAA rules that do not allow players to share in revenues.  The O’Bannon case is primarily concerned with rules that prohibit athletes from sharing revenues derived from products that use the athlete’s name and images.  However, the O’Bannon case also highlights the issues associated with whether and how institutions should compensate or pay players.

The arguments for paying players tend to focus on the enormous revenues generated in football and men’s basketball.  For example, in the 2011-2012 season, the University of Texas football program generated $103 million in revenues.  Furthermore, while players are limited to receiving scholarships, coaches and athletic directors can often receive significant compensation.  Nick Saban’s salary has been reported to exceed more than $5 million per year, and Vanderbilt’s athletic director David Williams’ compensation exceeds $2.5 million per year.

In our previous post we considered the value provided to athletes by schools using an argument based on brand equity.  A cornerstone of this argument was that for high profile schools such as Notre Dame or Florida that sell out almost every year, it is difficult to claim that individual athletes improve the school’s revenue.  HOWEVER, a major flaw in this argument was that we did not consider the role that athletes play in maintaining and expanding a school’s brand equity.  To make a simple argument, while Notre Dame will undoubtedly sell out next year, if the team became a perennial loser, at some point Notre Dame would likely need to cut prices, and would suffer a drop in attendance.

To consider the potential long-term impact of a player like Tim Tebow to Florida, we conducted the following analysis.  First, we developed a revenue based measure of brand equity.  The idea behind this model  is that a school’s brand (or fan) equity can be measured by comparing a school’s actual revenues to predicted revenues based on factors such as a team’s record, student population and other factors that reflect on a team’s quality level and market potential.  More details on this method are providedhere.

In the second stage of the analysis, we then developed a statistical model that explained this brand equity measure as a function of team past performance metric (prior to the current season) such as total wins, bowl games, major bowl games and national championships.  We also included in this model a variable that measured the number of Heisman trophy winners produced by the school.  We found that this Heisman term yielded a positive and significant parameter.

When translated to dollars (2008 dollars) we found that a Heisman winner added to a school’s brand equity by $2.15 million dollars per year.  While this is in itself a significant number, it is important to note that brand equity is an enduring asset.  For example, the brand equity associated with BMW provides value year after year as consumers are more prone to buy BMW cars, and to pay premium prices for these cars.

Calculating the long-term value of this brand equity asset requires assumptions about growth rates and the rate at which brand equity decays.  If we assume a 2% real growth rate in college football revenues and a 10% discount rate for brand equity, the value of the brand equity created by a Tim Tebow is approximately $27.5 million dollars.

A couple of points should be made about the previous number.  First, it is in several respects a conservative number.  In addition to winning a Heisman trophy, Tebow also contributed to two national championship teams.  The championships also greatly enhance Florida’s brand equity.  Second, a challenge in analyzing the relationship between team success and individual player achievements is that the degree of cooperation in football is enormous.  Mr. Tebow himself would likely credit his teammates with helping him win an individual award such as the Heisman.  Finally, please note that we have again taken a fairly extreme point of view by focusing on an extreme example such as Mr. Tebow.

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, atEmory 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.

O’Bannon Versus the NCAA: Remove Profit Motivation (Part 5)

For those of you following along, we have done a series of posts regarding the Ed O’Bannon lawsuit.  Our take on this issue has been a little different than most as we have emphasized the value that each entity (athletes, schools) provides to one another.  This discussion is at heart about whether and how college athletes should be compensated.  To conclude the series we will give our take on this overarching issue of compensation for college athletes.

I have seen a number of proposals (WhitlockBarnhart) for how athletes should be compensated.  A common approach is to look at total revenues and then determine the appropriate split between athletes and schools.  These proposals largely use professional sports as a model.

My take on the issue is conflicted.  On one hand, I think the current state of affairs borders on immoral.  NCAA players have few rights and operate under significant constraints.  Scholarships are renewed on a yearly basis so essentially athletes have one year contracts.  In contrast, coaches operate in a free market system and can sell their services to the highest bidder.  Coaches also typically have contracts that continue to pay them even if they are fired.  Transfer rules are particularly one sided.  If an athlete transfers, he must sit out for a season and the school can limit the athlete’s choices.  Coaches can, of course, move on whenever a better opportunity arises (often the new suitor will pay the coaches buyout).  The hypocrisy of these asymmetric rules is dramatically highlighted when NCAA sanctions are levied.  Often the coach, on whose watch the infractions occurred, moves on while players then suffer the consequences.

My starting point in this discussion is that the NCAA and college sports need significant reform.  A system that allows coaches and schools operate in the free market while restraining the players is unethical and exploitive.  However, I do believe that the argument is not entirely clear cut.  The NCAA platform does provide significant value to players.  In addition to educational benefits, athletes are given an opportunity to perfect their craft and to build their personal brands.

On balance, I think the facts suggest that the players should be paid.  The dollars being collected are just too significant for the current system to be viewed as fair.  Men’s basketball and football are essentially managed as professional franchises and it is unconscionable for the athlete to exist on poverty level stipends while coaches and athletic directors are paid millions of dollars.

However, and this is a big however, just asking whether the players should be paid misses a big part of the fundamental issue.  The missing piece is whether colleges should be in the business of paying players?  My answer to this question is no.  I just don’t see any way in which paying players is remotely consistent with these institution’s fundamental missions.

While some folks may feel that I am being naïve due to the large dollars involved, I don’t think this is the case.  Paying the players is likely to fundamentally change the economics of athletic programs.  The revenue bases of schools like Texas, Ohio State and Florida will make it very difficult for other schools to compete and still remain profitable.  To maintain competitive balance, schools and leagues would likely need to adopt some form of revenue sharing and salary caps.  Will the Big Ten fund the MAC?  Will Florida write a check to Western Michigan?  Short of a significant revenue sharing program or a strict salary cap across conferences, the economics of big time sports would quickly change.  Currently the revenues provided by the Big Ten network and the SECs television contracts means that many schools operate with essentially guaranteed profitability in the major sports.  These profits often fund money losing programs like women’s golf and men’s wrestling.

If a substantial amount of revenues are shifted towards paying players in the major sports (for now we will ignore title 9 requirements that might require paying female athletes at comparable rates).  Schools would likely need to make further cuts in non-revenue programs or even re-evaluate continued D1 participation.  It is one thing for a school to participate in big time sports when the profits are guaranteed.  It is another when the institution would be operating in a financially risky environment.

The other point that is often raised is that the dollars are too big for schools to drop out.  To take an extreme example, the 2012-13budget for the University of Texas is listed as $2.347 billion.  This budget also lists the athletic program as a self-supporting unit with a budget of $137 million.  So while sports may be the public face of many large research institutions, these sports are a relatively minor part of the overall university.

As marketers we are well aware of the important role played by big time sports. High profile sports may attract future generations of students and may be the foundation for the alumni community.  But, sports are but one way to market a school (e.g. the Ivy League).

To bottom line this discussion, if I were a university president and was faced with an environment where college sports explicitly became professional organizations, it would be an easy decision.  I would take this “structural change” as an opportunity to reposition my school to be more consistent with the larger institutional mission.  And remember this is coming from a guy whose primary hobby is college sports.

My ultimate conclusion is, therefore, that for schools to save their athletic programs it is necessary to remove the profit motivation from the system.  This is, however, different from saying that profits should be removed.  As I see it the main problem is that we have evolved to a system coaches and athletic departments can harness the loyalty of alumni and other fans to make themselves amazingly wealthy.