allen sanderson is a senior lecturer in economics at the University of Chicago. john siegfried is a professor emeritus of economics at Vanderbilt University and a visiting research fellow at the University of Adelaide.
Published July 31, 2018
Some 130 American universities field big-time commercialized football teams, each offering 85 grants-in-aid ( a k a athletic scholarships). Meanwhile, over 300 colleges sponsor men’s basketball teams with 13 scholarship players each, all competing for slots in the National College Athletic Association’s annual “March Madness” basketball tournament.
These two sports businesses collectively generate over $10 billion in revenue annually that flows to institutions whose primary purpose is to educate students and advance knowledge — not to entertain the public. Indeed, the charters of none of these universities even mention sports as part of their mission.
How did this come about, and why does it persist in an organizational structure that severely tests the integrity of players, coaches and administrators? For that matter, why does it persist at all in light of the evidence that the greatest revenue producer — football — poses serious health risks to players?
The sports connection seems especially baffling in light of the reality that fewer than two dozen programs earn revenues sufficient to cover their operating costs, let alone the costs of massive physical facilities and other indirect costs such as security. Indeed, once full-cost accounting is applied, the vast majority of universities must redirect funds to cover sports deficits — funds that might otherwise support academic programs.
Here, we offer some perspective on how commercialized college sports got started, what spawned their massive growth and why it is so difficult to reform or discontinue these activities in spite of repeated scandals.
In the Beginning
The sports connection dates to the second half of the 19th century, when large state “land grant” universities were spawned by the Morrill Act of 1862, which funded them through gifts of federally owned lands. (Kansas State University was the first.) Over the next 40 years, many of these institutions found themselves with excess capacity as the supply of low-cost higher education outstripped demand. They responded with sports programs that raised their visibility and made them more attractive to sports-crazed young men.
Simultaneously — mostly at elite private colleges and universities — teenage boys sought camaraderie and recognition by organizing competitions in America’s emerging team sports: football, baseball and basketball. Football rivalries began in 1869 with a game resembling rugby played between Princeton and Rutgers.
Over the next 35 years, rules changes morphed the sport into what looked a lot like modern football. The most important modifications occurred in 1905 after President Theodore Roosevelt demanded action to reduce the injuries resulting from what amounted to semi-organized mayhem. Indeed, in 1906, the forerunner organization to the National College Athletic Association took Roosevelt’s threat to ban football seriously. One of its first actions was to require seven of the 11 players on each team be on the line of scrimmage when the ball was snapped (a rule still in effect today), thus eliminating the common tactic of offensive players linking arms and gaining a running head start toward the defensive line.
The University of Chicago was the first to pay its head football coach, Amos Alonzo Stagg, who was lured from his volunteer coaching position at Springfield College in 1892. Harvard built the first large permanent football stadium, with a seating capacity of 31,000, in 1903. With investments in staff and facilities, universities now needed to ensure sufficient revenues to pay their mortgages and coaches; thus began the focus on sports finances.
In those early years, intercollegiate competitions were usually organized by students, rendering universities potentially liable for injuries and the occasional death. With time, the universities managed to gain greater control over their teams, specifying who could play and under what rules. Closing ranks on the governance of intercollegiate athletics also enabled universities to improve their ability to use sports to recruit students to fill empty classroom seats.
Student recruitment remains one of the ostensible rationales for hosting commercialized intercollegiate sports, although there is little evidence that the boost to enrollment for schools with winning teams is either substantial or enduring. Moreover, most of the (limited) effect is simply to rearrange students among institutions rather than stimulate overall college attendance. In any event, one has to wonder whether students (or the institutions) are well served by marketing that conflates the quality of education offered with the win-loss records of their sports teams.
From the turn of the 20th century through the end of World War II, commercialized intercollegiate athletics remained on a reliably upward trajectory, supported by rising enrollment in higher ed. Meanwhile, enthusiasm for teams was bolstered by growing ranks of alumni, most of whom lived within driving distance of their alma maters.
Before 1950, costs remained largely under control because revenues were sufficiently modest that competition to buy better coaching staff and players was simply out of the question. Professional players were prohibited from participating in intercollegiate athletics controlled by the NCAA. Compensation to players in the form of tuition remission and reimbursement for room and board was an off-again, on-again affair — but did not absorb big bucks even when it was on-again because university residence halls were spare and food was basic.
A New Era
Dramatic technological and demographic changes disrupted the college sports business in the decade immediately following World War II. The first of these changes was the market diffusion of television. The University of Pennsylvania got a jump on competitors, televising its home football games in 1940 for the then very thin ranks of television owners. A decade later, Penn was earning $150,000 (real money in 1950) for its annual football broadcasting rights. And that was just the beginning. In 1950, only 9 percent of U.S. households owned TVs; in 1960, market penetration had reached 90 percent. Sports, it should be noted, provided popular broadcasting content at low marginal cost because the games were already scheduled to be played even if the cameras weren’t around. Payments for TV rights was lagniappe.
One has to wonder whether students (or the institutions) are well served by marketing that conflates the quality of education offered with the win-loss records of their sports teams.
For a variety of reasons, live spectator demand for college and university sports events also increased sharply after the war. First, the G.I. Bill increased college and university enrollment, adding to the ranks of loyal alumni as veterans graduated. Second, the post-war baby boom increased interest in college and university sports as the population of teenage boys and young men spiked in the late 1950s and early 1960s.
In 1951, the NCAA decided to prohibit televised college football because it thought the opportunity to watch games on TV would cut into live gate attendance and receipts. Penn, however, refused to stop televising its games, precipitating the threat of a boycott by other NCAA teams.
Penn backed off. But in 1952, tempted by the prospect of a large and growing payoff, the NCAA concocted its own “Television Plan,” which endured for decades. The scheme was anchored by an agreement among NCAA members to broadcast only a single Saturday afternoon football game (or a single game in each region) and to limit the number of appearances by any team in order to spread the wealth sufficiently to build and sustain support for the overall scheme.
All told, revenue from college sports broadcasting rights has increased by 1,500 percent since the Supreme Court decision liquidating the NCAA football broadcasting cartel.
The rights to broadcast the weekly game were auctioned off to the three major television networks, creating competition that led to rapid fee escalation. But the Television Plan’s division of the revenues plainly favored less popular teams. In a challenge in 1984 by the University of Oklahoma, the Supreme Court decided that the agreement violated the Sherman Antitrust Act, thus ending the plan after 32 years. In the meantime, broadcast rights fees for college football had grown significantly, rivaling ticket sales as the largest source of college football revenue.
The commercialization of men’s college basketball developed more slowly. The first intercollegiate championship was the 1938 National Invitation Tournament, sponsored by the Metropolitan Basketball Writers Association and held in New York City — then ground-zero for interest in the sport. The NCAA started a competing tournament in 1939, and the two tournaments co-existed uneasily until 1970, when the NCAA flexed its muscles by prohibiting any team invited to its tournament from participating in the NIT. That precipitated a prolonged antitrust challenge by the NIT — one only settled in 2005, when the NCAA purchased the NIT. Since then, the NIT has been run as a consolation prize tournament for teams that don’t make the cut for the main show.
The NCAA’s three-week men’s basketball tournament was first called “March Madness” by a television broadcaster in 1982. But the tournament organizers weren’t the sort to leave a dime on the table. They trademarked March Madness soon thereafter and have been aggressively enforcing their exclusive right to it since 1995. All told, the tournament brings in over $1 billion annually, enough to cover virtually all of the NCAA’s formidable organizational costs.
The Pot of Gold
Surprisingly, in light of the 1984 Supreme Court decision dismantling the cartel on college football broadcasting, TV rights revenues have subsequently soared.
The immediate impact was, as to be expected, negative. Advertising rates fell by two-thirds immediately after the court swept aside the NCAA’s Television Plan. But soon thereafter, regional conferences, first collectively and later individually, began to market their member teams’ broadcast rights. They soon discovered that football fans were drawn to regional rivalries, and the rise of the cable sports networks — notably ESPN and Fox Sports — gave them almost as much market power for broadcast rights tailored to each conference’s geographic presence as the NCAA had possessed with its national cartel.
The burgeoning pot of gold might have been competed away in bidding wars for star athletes. But the NCAA recognized the importance of using its cartel power to control these outlays at about the same time that revenues began to mushroom.
In the immediate aftermath of World War II, the NCAA adopted what it called a “sanity code” (on the grounds that paying players was “insane”) that forbade any compensation to the athletes, including tuition remission or the cost of room and board. This code lasted only a few years, however. And in 1951, just as the NCAA was asserting control of college sports broadcast rights via the Television Plan, athletic scholarships (called grants-in-aid, which include tuition, room, board, health insurance, books and some incidentals) came back to stay. Compensation exceeding grants-in-aid, however, has been forbidden ever since.
Player costs were not really brought under control until 1973, though, when the NCAA capped the number of grants-in-aid that could be offered by a team as well as the size of the grants. Football was initially restricted to 105 scholarships, which was lowered to 95 in 1978 and 85 in 1992. As a further cost-containment measure, freshmen were declared eligible to play on varsity teams, thus reducing the number of scholarship players needed to field competitive teams.
Tightening the Monopsony
One might have expected the most talented young players to bypass college — with its snug cap on compensation — and head for the pros, where money talks. Some basketball players, including superstars Kevin Garnett and LeBron James, did just that, going directly to the National Basketball Association from high school. But in 2007, the NBA extended a helping hand to the NCAA, requiring players to wait at least one year after their high school classes had graduated before they could be employed. The NFL raised the ante in this regard, requiring three years to pass after high school.
This has been rationalized in any number of ways — most notably, as a way to ensure that players have adequate training and time to mature before facing the less forgiving environment of the pros. Maybe. But it’s worth noting that 18-year-olds are still welcome to fight the Taliban. Or, for that matter, to play big-league hockey or baseball, join the rodeo circuit or drive 200-plus miles an hour in NASCAR races.
One need not be excessively cynical to assume that universities like the rule because it guarantees them a steady supply of talent at a low, capped price. The NBA and NFL have less to gain. But they do benefit because the value of players who have been trained and tested in big-time college sports is easier to assess. It probably doesn’t hurt either that funneling players through colleges generates goodwill among college-sports-mad legislators who, if they wished, could turn a gimlet eye on the market power exercised by the professional leagues.
The commercial value of virtually all sports programming got an added boost with the arrival of the cheap digital video recorder, which allowed viewers to record programs to view later while fast-forwarding through the ads. This reduced revenue from most programming — but not, ironically, from sports, where the audience seems to be hooked on live action. As a consequence, the cost of ad time on sports programming is as much as triple that of popular prime-time entertainment. All told, revenue from college sports broadcasting rights has increased by 1,500 percent since the Supreme Court decision liquidating the NCAA football broadcasting cartel.
Funneling players through colleges generates goodwill among college sports-mad legislators who, if they wished, could turn a gimlet eye on the market power exercised by the professional leagues.
Following the Money
At first blush, then, it’s hard to understand why colleges lose money on football and men’s basketball while their professional counterparts (the NFL and NBA) are immensely profitable, as evidenced by the everincreasing market value of their franchises. Granted, the professional sports cartels have the decided advantage of being able to threaten to leave town unless local taxpayers cough up a new stadium — something Ohio State can’t do to Columbus. Moreover, the NFL and NBA only have to keep about 30 owners each in line, rather than several hundred heterogeneous institutions.
On the other hand, the professional leagues have to contend with players who have free-agency rights after an initial probationary contract period, and must bargain collectively with the players’ labor union — as opposed to simply stipulating uniform, grantin — aid compensation. On balance, these financial pluses and minuses seem to favor the universities and the NCAA. So what’s wrong with this picture?
A partial explanation for most colleges’ grim bottom lines is that, while player costs may be limited by the cartel, there are still ways to compete away the surpluses ensured by the combination of fat broadcast rights and caps on player costs. For one thing, training facilities and stadiums must be kept in a whole lot better shape than classrooms. For another, the market for high-profile coaches is very competitive. Indeed: 77 college football coaches were paid more than $1 million in 2017, with Nick Saban of Alabama commanding $11.1 million.
Assuming that university administrators understand all this as well as we do, why do these institutions continue to field so many money-draining operations?
First, consider Title IX of the 1972 Higher Education Amendments, which addresses gender equity at colleges and universities. Title IX requires these institutions to provide approximately equal opportunities and funding for male and female athletes. Thus athletic departments of universities that play men’s basketball or football are required to field a wider array of resource-draining teams — something the NFL avoids. (So does the NBA, except for its subsidiary, the Women’s National Basketball Association, which has only recently begun to make a profit.)
A second possibility is that, while the costs of maintaining these athletic programs are tangible and measurable, university administrators are aware that much of the benefits that go to myriad university stakeholders are not. Students get the vicarious pleasure provided by the commercialized sports teams, along with the opportunity to participate in non-revenue sports as indirectly mandated by Title IX. Alumni, who follow football or basketball as a way to stay connected to their alma maters, often return the favor with contributions. Likewise, nearby towns get to identify with the fortunes of the teams — and their merchants may get a boost from gameday sales or the true bonanza associated with hosting a bowl game or basketball tournament. Coaches and other athletic staff earn far more than they would in jobs outside commercial sports. And then there’s the need to stay on the good side of state legislators who control public universities’ purse-strings — there’s nothing like a winning team to keep lawmakers sweet.
Athletic departments of universities that play men’s basketball or football are required to field a wider array of resource-draining teams — something the NFL avoids.
Using a little imagination, this list of stakeholders can be expanded until the cows come home. The NCAA supports a large bureaucracy that is paid from what amounts to taxes on member teams. As mentioned above, the NBA and NFL capture some of the value of the training provided by university commercial sports programs. And while broadcasters pay a lot of money for television rights, unless the networks miscalculate, some of the value (what economists call “producers’ surplus”) accrues to their bottom lines. Ditto for apparel makers, who presumably earn more on sports-branded clothes than they pay for the rights to the logos. And while none of these indirect beneficiaries is in a position to persuade university administrators to invest heavily in commercial sports, they do support a popular culture in which life without the rituals of big-time college football and basketball seem unimaginable.
The Beginning of the End?
While big-time college sports are part of the American landscape, it’s still worth examining whether the current iteration of this accidental industry represents a stable equilibrium. To put it another way, what could possibly go wrong?
First, while legislatures are inclined to turn a blind eye to the market power of the NCAA, the courts may not. Legal challenges to the NCAA’s rigid cap on the amount “studentathletes” may be paid are winding their way through the courts. If the cartel rules were declared illegal, one would expect a bidding war for the best high school athletes, raising the cost of fielding commercialized college teams and, arguably, paring down the number of universities willing to make the investment. By the same token, the courts could rule that the NFL and NBA rules delaying access to athletes who skip college could further erode the supply of players willing to risk careerending injuries in return for scholarships and all the steak dinners they can eat.
Next, changing technologies could erode the value of the broadcast rights fueling both college and professional sports. The challenge to cable television from streaming apps has driven the cable companies to bid for the sort of exclusive programming that constitutes must-see TV. Sports has fit the bill perfectly. But as the trend toward cable-cutting accelerates (as is widely predicted), the cable companies won’t be willing to pay as much for broadcast rights to keep patrons on the hook.
Finally, it’s worth remembering that the NCAA is a cartel and, as with most cartels, there are powerful incentives for dominant members to seek other means of organization that give them a bigger share of the gravy. Specifically, the NCAA cartel could devolve into a few professional-like groupings — most likely, the five large power conferences that exist under the NCAA umbrella today — with more compensation for athletes and looser affiliations with the campuses. The sports programs of the remaining universities would find it harder to generate break-even revenue, at the very least forcing them to cut back on staffing salaries, gold-plated training facilities and the number of student-athletes on the payroll. At some point, university administrators may have to weigh the benefits accruing to big-time intercollegiate athletics against the costs of scrimping on the academic side of their mission.
It’s not that breaking the link between commercial sports and higher education would be unprecedented. The NCAA dropped boxing in 1960 after a slew of injuries — and without much consequence for the institutions that had previously embraced it. For that matter, some of the most prestigious (and well-funded) universities today — Boston University, New York University, George Washington University, Caltech and three of the University of California campuses (Santa Barbara, Irvine and Riverside) — manage to excel without the cash or goodwill generated by football. Others choose to play it at the less-demanding, nonscholarship level (MIT, Chicago, Washington University, Emory, Carnegie Mellon, Johns Hopkins).
The marriage of commercial sports and higher education was not inevitable. Nor is it inevitable that the forces binding them together will — or should — hold indefinitely.