Part 3 Foreword:
In the second part of the 2014 series on the Ed O’Bannon lawsuit, I considered the University side of the branding issues. In the post below, the focus shifts to the individual athletes. The article is dated in that the primary example is Tim Tebow.
In the previous entry to 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 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 a school’s revenue. HOWEVER, a major flaw in this argument was that we did not consider the role 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 or 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. This model's idea is that a school’s brand (or fan) equity can be measured by comparing a school’s actual revenues to expected revenues. In this analysis, expected revenues are projected based on a team’s record, student population, and other structural elements that indicate a team’s quality level and market potential.
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 metrics (before the current season) such as total wins, bowl games, major bowl games, and national championships. In this model, we also included a variable that measured the number of Heisman trophy winners produced by the school. We found the Heisman term yielded a positive and significant parameter.
When translated to dollars (2008 dollars), we found that a Heisman winner added $2.15 million per year to a school’s revenue. While this is a significant number, it is important to note that brand equity is an enduring asset. For example, BMW's brand equity provides value year after year as consumers are more prone to buy BMW cars and pay premium prices.
Calculating this brand equity asset's long-term value requires assumptions about growth rates and the rate at which brand equity decays. Suppose we assume a 2% real growth rate in college football revenues and a 10% discount rate for brand equity. In that case, the value of the brand equity created by Tim Tebow is approximately $27.5 million dollars.
A couple of points should be made about this estimate. 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 football's degree of cooperation is enormous. Mr. Tebow himself would likely credit his teammates for helping him win an individual award such as the Heisman.