The NCAA: It was fun while it lasted!
While the NCAA has experienced enormous success recently, its unsustainable operating model could put an end to college sports as we know it.
As a non-profit organization, the NCAA has a very noble purpose: “To govern competition in a fair, safe, equitable and sportsmanlike manner, and to integrate intercollegiate athletics into higher education so that the educational experience of the student-athlete is paramount“.7,8 Furthermore, the NCAA seems to have an extremely successful business model. In 2014, the NCAA had $989 million in revenues, compared to $908.6 million in expenses, their fourth straight year with surplus over $60 Million.5 Most of this revenue is coming from a $10.8 billion, 14 year deal with Turner Sports to broadcast March Madness, bringing in over $700 million a year.1
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Furthermore, the NCAA not only generates those revenues for themselves, they also enable individual athletic programs from within the NCAA to earn approximately $11.4 billion from their own ticket sales, alumni contributions, etc.6 However, despite the massive success of the NCAA, their performance is unsustainable due to the many inconsistencies that exist in their operating model. The NCAA has decided to maximize their economic returns in the name of amateurism, directly conflicting with their stated purpose.
Most notably, the NCAA is severely taking advantage of their most value-driving employees. Traditionally, NCAA student-athletes were considered true amateurs. However, two landmark rulings in the past two years have asserted that NCAA athletes should in fact be considered NCAA employees, rather than amateurs. First, it was ruled that the big money generated when the NCAA and its schools sell the images of their own athletes for television and videogames, but do not share any revenue with the student-athletes themselves, violates U.S. antitrust laws. This, along with an earlier ruling by the National Relations Hearing Board that Northwestern University’s football players are university employees who may unionize assert that we should evaluate student-athletes as NCAA employees in any business model evaluation.2 After accepting that NCAA athletes are employees, it becomes easy to see why the NCAA operating model is unsustainable. While the average athletic scholarship at these schools is worth $23,204 per year, the NCPA finds that football and basketball players would command salaries of $137,357 and $289,031 respectively. Furthermore, that scholarship value is over $3,000 less than the real cost of education, leaving 85% of athletes technically under the poverty line.4 To make matters worse, the NCAA is not liable for any injuries that occur in the workplace and only guarantee scholarships for 1 year at a time.3 While the NCAA claims that their goal is to integrate athletics with higher education, they only require 50% of team’s players to be on track to graduate.4 Also, the average athlete practices 50 hours a week, not including travel4, leaving very little time for the athletes to also study as full time students. This severe mistreatment of the NCAA’s core employees will blow up the NCAA business model if student-athletes join together and disrupt the existing operating model.
While the athletes act as employees and deliver value for the NCAA, the university athletic departments act as the vessel that showcases the value for the public. Therein lies the other major flaw with the NCAA operating model. For a university to participate in Division 1 sports, the NCAA requires them to field 15 Varsity teams.3 However, only 3-4 teams per university actually bring in any revenue. This has resulted in the median football playing Division 1 athletic department to operate at a $10 Million deficit.3 In fact, only 14 of 120 athletic departments were able to cover their costs last year.4
How could a business consistently operate when the employees are severely under-valued and the participating organizations are bleeding money? The answer lies in the fact that the NCAA essentially operates as a cartel of loosely organized universities that have agreed to band together for athletic participation. The people with power in this cartel are the coaches and athletic directors who are making the money that the athletes deserve. The NCAA also has a lot of power, with their business model that relies on the risk free revenue from media deals for their championship events, only giving a small fraction of these revenues to the athletic departments who take on all the operating costs of fielding teams that participate in these marquee events. The problem for the NCAA is that a cartel only works when everyone involved gains value. Therefore, while extremely successful in the past, the NCAA’s business model is at risk of imploding unless it is able to make some major changes to its operating model to allow everyone to reap rewards.
Sources:
- Milford, Joseph. “It’s All Profit And No Pay: How The NCAA Is An Ingenious Business.” Elite Daily Its All Profit And No Pay How The NCAA Is An Ingenious Business Comments. N.p., 20 Mar. 2014. Web. 07 Dec. 2015. http://elitedaily.com/money/ncaa-ingenious-business-ever-created-tuesday/
- Davenport, David. “Legal Cases Are Blowing Up the NCAA Big Business Model — Why It Matters.” Forbes. Forbes Magazine, 11 Aug. 2014. Web. 07 Dec. 2015. http://www.forbes.com/sites/daviddavenport/2014/08/11/legal-cases-are-blowing-up-the-ncaa-big-business-model-why-it-matters/
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“Interview Andrew Zimbalist.” Interview. PBS. PBS, 29 Jan. 2011. Web. 07 Dec. 2015. <http://www.pbs.org/wgbh/pages/frontline/money-and-march-madness/interviews/andrew-zimbalist.html>. http://www.pbs.org/wgbh/pages/frontline/money-and-march-madness/interviews/andrew-zimbalist.html
- Mayyasi, Alex. “The Pseudo-Business of the NCAA.” Priceonomics. N.p., 17 May 2013. Web. 07 Dec. 2015. http://priceonomics.com/post/50660332678/the-pseudo-business-of-the-ncaa
- Berkowitz, Steve. “NCAA Nearly Topped $1 Billion in Revenue in 2014.” USA Today. Gannett, 11 Mar. 2015. Web. 07 Dec. 2015. http://www.usatoday.com/story/sports/college/2015/03/11/ncaa-financial-statement-2014-1-billion-revenue/70161386/
- “Revenue.” NCAA.org. N.p., 22 Nov. 2013. Web. 07 Dec. 2015. http://www.ncaa.org/about/resources/finances/revenue
- “NCAA Mission Statement – The Citadel – Charleston, SC.” NCAA Mission Statement – The Citadel – Charleston, SC. N.p., n.d. Web. 07 Dec. 2015. http://www.citadel.edu/root/ncaa_mission
- “NCAA Commercial.” YouTube. YouTube, n.d. Web. 07 Dec. 2015. http://https//www.youtube.com/watch?v=6ltaRIJ0N2o
Excellent analysis on how NCAA business model is not fully supported by its operating model which leaves several important stakeholders worse-off. I hope NCAA is able to quickly adapt and transform operating model to make its business more sustainable. For the sake of March Madness!
Thanks for you analysis, Brian. I agree that given the recent rulings you cited there is an increased disconnect between the NCAA business and operating model. I haven’t heard much about this in the media since the Northwestern ruling; any idea of if/how/when the rulings might come to have an impact? In either case the focus on athletics at the price of academics is already an issue, especially in light of the stated NCAA mission. Maybe everyone should just pursue sports like swimming — less money, fewer problems.
Regarding the Northwestern ruling, this past summer the NLRB dismissed Northwestern player’s petitions to formalize the union. Essentially, there were concerns that if players at a private school in the FBS were allowed to unionize, it would have unknown consequences for public institutions. Also, the board noted that the position of scholarship players may change in the near future so they didn’t want to rule until they saw these effects. Pretty much, they are postponing putting the ruling into effect, with the possibility of future review- What a mess!
While I agree that focusing on sports with less revenue could solve some issues, it would probably just create new ones. First of all, at many of the larger schools, college swimming is funded by the revenue generating teams. This means that a shift from the revenue sports would ultimately take money away from the other sports as well, dooming them. Also, swimming has plenty of its own issues related to sponsoring amateur athletes and letting them profit off of non-university related events like The Olympics.
Good summary of the current situation. It’s remarkable that the NCAA has been able to keep its huge amount of power in recent years given the rise of social media. The only group of people that has a stake in seeing changes made are D-1 football and basketball players. Literally everyone else involved has a cushy current model, including athletes in less popular sports. Given that lets hope the athletes can band together across schools and force change to happen. I am unfortunately not that optimistic given that these athletes often have no plan B in life.
Great post. I’m really keen to see if college football expands the playoff system (8 teams maybe) as the next driver of cashflow to the organization. It’s really the only other NCAA sport which does not compete with minor league teams (baseball, hockey) for professional recruiting.
Either way, you’re comments about the hypocrisy of the organization is spot on. Reading about the cronyism and abuse amongst some of their less honorable officials makes my skin crawl.
Great post Brian! It is starting to feel like there will be some ‘crucible’ moment for the NCAA and its stakeholders very soon, if it hasn’t already happened. I also question the sustainability of the current model as the performance bar for ‘student-athletes’ goes higher and higher as more is at stake (money, recruiting, etc.). One place where I’ve seen this manifest is in recruiting policies. When I was recruiting for lacrosse in 2004-2005, it was standard to focus your recruiting efforts in your Junior year. It was an intense, high-pressured process for any 17 year old, particularly given its implications on your college education. My nephew just went through the same process – only he is Freshman and, from what I have gathered, recruiting is even more competitive and intense now than it was when I went through it. He was being asked to make some very difficult choices and commitments about his higher education when he had hardly started high-school. I don’t think this is right, but I fear that it is a product of the increasingly competitive NCAA environment. I worry that as the stakes around NCAA sports continue to rise, schools, coaches and other overseers will become increasingly aggressive at the detriment of what’s best for the student athletes (or perhaps they should start calling them ‘athlete-students’?).
Thanks for bringing to light how fraudulent this whole system is. I think what saddens me most is how the vast majority of college athletes are being required to work and sacrifice for their teams (often at the expense of their long-term education and well-being) while receiving very minimal economic benefit. No real other comment here, just wanted to recommend to you one of my all-time favorite long-form articles, The Shame of College Sports (here: http://www.theatlantic.com/magazine/archive/2011/10/the-shame-of-college-sports/308643/ ). It’s a few years dated now, but covers very thoroughly many of the issues you discuss here.