Paying the Players and the Impact on Fans
2020 Update – This was a longer piece that digs into how paying college players might affect competitive balance. While the names and examples are dated, the piece holds up pretty well.
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 to consider is how a shift to paying players might impact fans. The impact on fans 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.
My view is that fandom (the ultimate source of revenue) will be most impacted by 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 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 (this was originally written in 2014) 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 revenue sharing or payroll constraints to maintain competitive balance and team profitability.
College sports have their 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 discrepancy 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. Still, 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, college sports' conference structure 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. Title IX essentially requires revenue sharing within institutions. If college football players receive salaries, does that mean that women golfers would also be compensated?
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.
The O’Bannon case began with a complaint about the embargo against athletes profiting from their images. A relatively minor change might allow athletes to market their 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 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 the trend to accelerate. The preceding scenario would likely lead to a “rich getting richer” scenario. 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 sign with agents while still in school. Players would need representation when negotiating with video game, clothing, and shoe companies. Undoubtedly, shoe companies 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 team would make a player such as Andrew Wiggins’ college choice 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 pure free market would be a tremendously interesting experiment. Just as in MLB, the college sports landscape is composed of schools that vary greatly in 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 many schools would suddenly be entering a world of significant financial risk, where previously profitability was almost guaranteed.
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 antitrust 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.
My speculation is that any move towards paying players would greatly reduce many schools' incentives 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.
