SBJ/Dec. 2-8, 2013/In Depth

A pay-for-play model

While the debate grows over whether to pay college athletes, here’s one idea that could actually work.

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More than $2.3 billion of network-funded revenue will course through the veins of college sports’ five power conferences by the year 2020.

History gives us a pretty good idea of how the 65 schools in those leagues will spend that windfall. Mostly, they will pay coaches more and build extravagant new facilities.

But as the money has risen, so too has the crescendo demanding that players be paid a share of it.

SBJ Podcast:
Michael Smith & Bill King on how they came up with a model for compensating college athletes
SBJ Podcast: Hear how it would work
SBJ Podcast: Hear how the story originated

Gene Smith, Ohio State’s athletic director, summarized the response of most ADs and commissioners to suggestions that athletes get more than a scholarship and, potentially, living expenses.

“If you want to go pro, go pro,” Smith said. “If you want an education, if you want to grow and mature in this incubator called higher education, come to us.”

Proponents of paying players say that’s the rhetoric of a business that doesn’t want to pay for labor.

“You almost have to believe in Santa Claus, or some weird, way-out, abnormal un-American philosophy to make their arguments make sense,” said Ramogi Huma, a former football player at UCLA who in 2001 created the National College Players Association to serve as a voice for athletes. “The underlying reason isn’t about the spirit of amateurism or education. It’s about greed.”

The debate over whether athletes should be paid is as old as college sports. From the view of administrators, it often comes down to a question of need. For those on the other side of the debate, it isn’t about need, but merit.

This is an attempt to move past the debate and to establish a model for compensating college athletes. The model does not advocate for or against change, it only explores what is possible in a world of college athletics that is constantly being shaped and reshaped by the massive amount of dollars flowing into the system.

Bill Battle, the athletic director at Alabama, certainly never envisioned a day when the Crimson Tide’s football locker room would have a waterfall flowing through it. But it’s that sort of excess, both in lavish new facilities and in coaches’ salaries, that has taken the question of athlete compensation to a new level of discourse.

The model simply takes 25 percent of the new TV revenue pumping into the system and puts it in a trust earmarked for scholarship athletes in all sports. Money to cover the full cost of attendance would be paid on an annual basis to the athletes. A balance would accrue in the name of each athlete and then be available when they leave school.

In all, a scholarship athlete after four years would walk away from college with anywhere from $25,000 to more than $100,000, depending on the variation of the model. That cumulative amount would grow as TV revenue grows.
The money would be treated as income based on a licensing arrangement between the players and the conferences.

What’s clear, based on conversations with nearly two dozen administrators and former athletes, is that they strongly disagree on what the collegiate model should look like.

Administrators staunchly oppose any model that’s not tied to the educational mission of their universities. Many are willing to go as far as a $2,000 stipend for scholarship athletes, which is pending NCAA legislation that seems to have enough momentum to pass. Such a move would cover the full cost of attendance at many schools and provide the athletes with some spending money. That could be enacted within the next year or two.

Those on the other side don’t understand why there should be any limitations. The 65 schools in the five power conferences reported $5.15 billion in total revenue in 2011-12, an average of $79 million per school. With so much new TV revenue coming in, couldn’t some of that money be paid to the athletes, especially when Alabama football coach Nick Saban makes $5.5 million a year and more than half of the major football coaches are paid $2 million or more annually?

Smith, who played football at Notre Dame in the 1970s, acknowledged, “It’s a fair debate today. But I’m not in favor of turning athletes into employees. The only way to get any traction is to tie it to academics.”

Court case drives debate

The case that moved this from a discussion of philosophy to one of law, O’Bannon v. NCAA, was filed in 2009. A former college basketball Player of the Year at UCLA, Ed O’Bannon challenged what he argued was the NCAA’s unauthorized use of his likeness in DVDs and video games. What began with O’Bannon has taken on passengers along the way, building into a class-action lawsuit that bleeds over into other commercial aspects of college sports.

The case has chugged forward, on pace to go to trial in the summer. A recent ruling chopped the legs out from
Ed O’Bannon’s lawsuit against the NCAA renewed the call to compensate athletes.
Photo by: AP Images
O’Bannon and other former players, saying they must sue the NCAA individually in order to seek damages. But the judge agreed that current and future athletes could proceed as a group with their antitrust claim, which seeks to stop the NCAA from using their likenesses without their approval — which one can assume they would grant only if they were paid.

It’s an issue that has attracted the attention of longtime antitrust lawyer Jeffrey Kessler, who in October launched a college sports practice at the New York-based firm Winston & Strawn. Known for his work on behalf of players and unions in pro football, basketball, baseball and hockey, Kessler said he moved into the area because of the change he sees coming, largely as a result of the O’Bannon lawsuit.

“There is so much of a difference in how people now perceive the reality that the top level of college sport, in fact,
is a business. We think change is going to come,” Kessler said. “You want to find a new paradigm that works for everyone.”

The more radical proposals would overhaul the current system.

ESPN analyst and former Duke basketball player Jay Bilas, perhaps the most outspoken proponent of paying players, favors a free-market approach: If a school or one of its boosters wants to pay a football player $50,000, so be it. That’s how the market is established.

“They’re not going to do anything to compensate the athletes until they’re made to do so,” Bilas said of the administrators of college sports. “You hear them say that they’d have to cut sports if they paid the players. But you never hear them say they’d have to cut sports if they paid the coaches more. … If athletes were getting paid, nobody would care. People would still buy T-shirts, wave the flags and go to the games.”

The NCPA’s Huma advocates, in part, for an Olympic model that would permit college athletes to sign endorsement deals, be paid for autograph signings and, additionally, receive a share of revenue upon graduation.

“A situation we’d want to avoid is one where players go to certain schools based on the type of money they could guarantee from appearances and autograph signings,” said ACC Commissioner John Swofford. “That has nothing to do with education.”

In an attempt to examine how all this could play out, we created a model that treats the debate as if it were a settlement negotiation, putting aside the question of whether schools should pay athletes in favor of what it might like look if they did pay athletes. The model we’re proposing is an attempt to find a middle ground without disrupting the current system.

It’s pretty simple, at least at its foundation. The 25 percent of new TV revenue would be set aside for scholarship athletes as compensation, just as any licensing arrangement pays a royalty to those whose rights are being used.

That model would distribute $9,000 to $17,000 a year per scholarship athlete. An athlete on 50 percent aid would get half of the compensation. This kind of money vastly exceeds a simple $2,000 stipend, but it doesn’t come close to approaching the $405,000 minimum salary that an NFL rookie will earn this season.

Because this model represents a middle ground, almost everyone dislikes it. Administrators say it moves college sports to a pay-for-play model, which they oppose. Athlete advocates, who argue that a scholarship requiring them to show up for practices and games already constitutes pay-for-play, say it’s not nearly enough money. And shouldn’t the football and basketball players receive more?

What’s clear, said Mike Alden, is that all of the new TV revenue coming in to college sports creates an opportunity. Alden, the athletic director at Missouri, also is president of the National Association of Collegiate Directors of Athletics, the AD trade group.

“From an AD perspective, no one has moved over to the compensation side,” Alden said. “What we’re all looking to do is elevate our programs, improve the student-athlete experience and provide the full cost of attendance. … All of us recognize the amount of money coming in and there are worthwhile conversations to be had about expanding educational programs and even looking beyond education, perhaps to medical needs of the athletes and former athletes who come away from the game with lifetime issues. But none of us have ever done a model, that I’m aware of, that would be considered compensation.”

TV deals drive revenue surge

So how did we get here?

Much of the new revenue coming into collegiate athletics is the result of rich, new long-term TV contracts, negotiated individually by each conference.

Conference realignment not only shifted schools from one league to another and led to expansion, it also prompted a rash of renegotiated TV deals in the past year or two, at the very time that both Fox and NBC were aggressively chasing programming to fill new channels and ESPN was fighting to keep its foothold. Every time a league has added schools, it has gone back to the table to negotiate for more money.

Former UCLA football player Ramogi Huma created the National College Players Association. He supports allowing athletes to sign endorsements and to be paid for autograph signings.
Photo by: AP Imagesnter Name Here
Every conference among the big five, except the Big Ten, is in the early stages of an enhanced contract that runs well into the 2020s, and the Big Ten will have a new one by 2016. Other TV revenue flows to the conferences from the NCAA basketball tournament and the College Football Playoff, which goes into effect next season.

Those three revenue streams — conference TV deals, the College Football Playoff and NCAA tournament — represent the source of money to pay the players.

Consider how each of those streams will grow:

The value of the five conference TV deals, plus Notre Dame’s deal with NBC and conference-branded channels, totaled $696 million in 2011-12. That number will grow to $1.099 billion by 2014-15, and $1.633 billion by 2019-20.

CBS and Turner paid $705 million to the NCAA in 2011-12, of which $87 million went to the big five leagues.
Each conference is paid based on “units,” which essentially is the number of tournament wins by its schools over a six-year revolving period. Historically, the five power conferences combine to take home 47 percent to 49 percent of those NCAA tournament units. That should go up now that schools like Syracuse, Pittsburgh, Notre Dame, Rutgers and others have migrated out of the Big East and into one of the five power conferences. Based on that history, we project units distributed to the five power conferences to be worth $100 million in 2015 and $125 million in 2020.

Revenue from the College Football Playoff will be distributed through a formula that gives the five power conferences and Notre Dame 73 percent of the TV revenue. ESPN agreed to a 12-year deal beginning next season that will average almost $500 million a year, starting at $400 million in the first year and growing from there.

In 2015, the five power conferences will share $292 million, and that will increase to $365 million by 2020. The big five also benefit from separate deals with the Rose, Sugar and Orange bowls, worth a total of $220 million annually.
By combining those three sources of TV revenue, $1.711 billion will flow to the five power conferences in 2015 and $2.343 billion in 2020. The comparable number in 2012, the last year of the old TV contracts for most of the conferences, was $943 million.

That jaw-dropping growth has driven much of the debate over whether athletes deserve a portion of the revenue.

“We know there’s a lot of money coming in, and that some of it already has been spent on facilities and coaches’ salaries,” said Amy Perko, executive director of the Knight Commission on Intercollegiate Athletics. “We have to ask if the increases are strengthening the educational missions of the universities. Are they creating more opportunities?”

How the model would work

There is neither legal nor practical precedent to tie the compensation of an athlete directly to payments from the networks. The four major North American leagues distribute licensing royalties based on merchandise sales, not live broadcasts.

Still, the salaries of pro athletes undeniably are linked to television revenue. In the three leagues that employ salary caps, those are set based on a calculation of team and league revenue, including that from broadcast rights.

We’re not suggesting college athletes collect a salary, largely because it could create a range of employment
Said ESPN analyst and former Duke basketball player Jay Bilas, "You hear them say that they'd have to cut sports if they paid the players. But you never hear them say they'd have to cut sports if they paid the coaches more."
Photo by: Getty Images
concerns. But this model examines what they would get if their licensing royalties were tied to TV revenue, not just merchandise and the use of stock footage in commercials.

The 65 schools in the five major conferences will see their share of annual revenue in these areas increase by $544 million from 2012 to 2015 and by $1.12 billion from 2012 to 2020. By taking one-quarter of the increases from only those areas, the five conferences could together create a pool that would start at $136 million in 2015 and increase to $280 million by 2020.

Because the plan targets only increases in revenue, it won’t cause any school to take less than it’s already getting. And it doesn’t touch a penny that a school generates on its own campus, including money from ticket sales, sponsorship rights and donations.

Athletic budgets would not grow as sharply, but they would grow.

Based on documents schools are required to file with the U.S. Department of Education each year, the University of Texas athletic department claimed $163.3 million in revenue in 2011-12. According to Big 12 tax filings, $14.5 million of that came from the conference. Using those figures as baselines and projecting gains in conference payouts — but projecting no increases from any other area — Texas’ annual revenue will grow to $174 million in 2015 and $180 million in 2020. Under our model it would grow from $163 million to $171 million and then $176 million.

The story is similar at another gilded program, Ohio State, which reported $142 million in revenue in 2011-12. In our model, the Buckeyes’ annual revenue would grow from $142 million to $143.1 million and then $151 million.

“You can create any model using any multipliers so, yeah, you can get there,” Smith said. “But you have to take into consideration that every institution has its own issues locally. [If] everyone keeps revenue locally, that’s great if you’re Ohio State or Georgia, those schools that sell out. But within that 64, there are a lot of schools that aren’t healthy locally.

“You make a lot of assumptions, which any model is going to have. But what it comes down to is philosophy.”

There are shortcomings in the DOE data, to be sure. Accounting practices are not uniform. Any school might argue that its forecast looks different from ours. But, taken in their entirety, the financials allow for an accurate snapshot on which to base a model and better understand its impact.

The model won’t do much to address the chasm between schools such as Texas and Texas Tech, who in 2011-12 were separated by $103 million in revenue. But it will address athlete compensation without making those gaps any worse.

What about the next tier of schools?

The gaps that caused difficulties when creating the model weren’t the ones within the power conferences, but those between the five power conferences and the other five conferences currently included in the Football Bowl Subdivision: The American, the Mid-American, the Mountain West, the Sun Belt and Conference USA, also known as the Group of Five.

As realignment has recast the large football-playing conferences, it has upended the five that make up the next tier.
The comings and goings from those leagues, and the associated adjustments to their media contracts, make it impossible to get a clear view of what a model like this would mean to schools individually. But we do know a few things about the group in aggregate.

In 2011-12, average revenue reported from the Group of Five schools was $27.6 million, making it slightly more than one-third the size of the average program in the big five conferences.

That vast gap between the power conferences and the Group of Five led us to conclude that in order to fairly compensate the athletes at the top half, the bottom half couldn’t be part of the model. Consider the way each path would play out.

Applying the model to the five power leagues would create a pool of $136 million in 2015, which would grow to $280 million in 2020. Distributed equally among the 17,451 scholarship athletes at those schools, it would provide each with an annual payment of $7,786 in 2015, growing to $16,066 per athlete in 2020 (see charts).

Bringing that same approach to all 126 Football Bowl Subdivision programs would pay each of 31,599 scholarship athletes $4,957 in 2015 and $9,632 in 2020.

The decision to fund athletes from only the power conferences led us to a second question: Why should an Olympic sport athlete in a power conference receive royalties when a football or basketball player in the Group of Five does not? In fact, that was the question we got most frequently, not only from those who advocate paying players, but also those who oppose it.

“It is tough to argue for that type of money going to non-revenue athletes at the same schools, and exclude more valuable athletes at other schools,” Huma said. “The whole premise is that football and basketball are professional industries. The NCAA can argue about whether they consider the athletes amateurs, but these are professional industries.”

It’s a valid point. And there’s a feasible solution. By treating football and men’s basketball differently, you could better compensate the athletes who earned those royalties, while still awarding the $2,000 stipend to the Olympic athletes.

Applied across all 126 FBS programs, that model would produce an annual payment of $9,566 each to all 12,348 scholarship football and men’s basketball players in 2015, growing to $21,531 per player in 2020. Applied to only the power conferences, football and basketball players would get $17,851 each in 2015 and $40,535 in 2020.

It’s a compromise that would appeal to some, but it conflicts with one of the tenets we set at the start of the exercise: the equal treatment of all athletes, regardless of sport. We looked at it that way, in part, because many we spoke with suggested that doing otherwise could violate Title IX guidelines meant to create opportunities for female athletes.

We also found a consistency in treating all scholarship athletes the same. Under the current scholarship model, a volleyball player receives the same financial benefits as a football player. We chose to handle licensing payments the same way, again sticking as closely to the current educational model as possible.

The choices are difficult, but with each come possibilities and alarms, including this one from Christian Spears, the deputy AD at Northern Illinois and past president of the National Association of Athletic Compliance, the trade group for compliance officers.

“I don’t think a lot of people have thought about the unintended consequences of a compensation model,” Spears said. “There won’t be athletic scholarships anymore if student athletes are paid.”

Spending what they make

History provides something of a road map for how schools will spend all of this new TV money if it isn’t shared with the athletes. An NCAA study spanning 2004 to 2012 shows the greatest expense was growth in tuition and coaches salaries.

Within the 11 conferences that constituted the Football Bowl Subdivision from 2004 to 2012, expenses (94.1 percent median increase) grew at a faster rate than revenue (77.5 percent).

Facilities are typically capital expenses not figured into the annual budget because it’s paid for with donations or borrowed funds, but we know that spending has skyrocketed as part of the facilities arms race.

The Pac-12 is in the second year of its $3 billion TV contract with ESPN and Fox, and the schools are wasting no time spending it. Commissioner Larry Scott said recently that $1 billion worth of facility projects are either in the works or just completed in his league.

That brings up a primary concern of administrators: Schools already have started spending against the future revenue that would be used to compensate athletes.

One major conference school that ranks in the middle of the pack, revenue-wise, provided SportsBusiness Journal with a glimpse of its future budgets. Those budgets include estimates on future revenue from its conference TV deal.

Much of the new revenue going forward is earmarked for facility maintenance, an area that’s often overlooked until a big-ticket item breaks. The school also is building its reserves for increases in coaches’ salaries, travel expenses and the NCAA proposed legislation that would require the school to pay each scholarship athlete a $2,000 stipend.

Across the country, athletic directors also are sharing more money with the rest of campus, Alden said.

“It becomes difficult to project revenue when you have a challenging football season or bad weather that hurts the attendance,” Alden said. “But as the resources grow, more schools are looking at using those assets to benefit other areas of campus. A big need at our university is for a welcome center. I know of another school that’s using money from athletics to help build a business building.

“And you’ve got to have that rainy-day fund and money set aside for deferred maintenance. I know it’s not a sexy area, but we’re trying to take care of facilities built, in some case, 80 years ago so that they’ll be around 80 years from now.”

Dealing with programs that view new revenue as a life preserver is a major sticking point.

There’s also the matter of what this will mean to the schools from outside the college football world that play Division I basketball, especially those in the Big East. How could Georgetown compete for the best recruits if others could offer $10,000 to $40,000 a year in licensing royalties and it could not?

We found a solution within the model that pays football and basketball players a royalty and offers other athletes a stipend. You could allow a conference such as the Big East to opt-in to a similar, but separately funded model that pays its men’s basketball players the same amount as those in the other 10 conferences.

Based on the same assumption we made with the other conferences — that each school would fund the maximum number of scholarships for each of its teams — that would cost the 10-member Big East $4.5 million, or $455,000 per school, in 2015 and $6.1 million, or $610,000 per school in 2020.

Big East Commissioner Val Ackerman, the former commissioner of the WNBA, said basketball programs in her conference are committed to competing at the highest levels, but compensating athletes beyond the $2,000 stipend “isn’t even on the radar screen,” she said. “Full cost of attendance is one thing, but the case remains to be made for why they should be compensated.”

The next step

Twenty-one years ago, Kessler argued in front of a Minneapolis jury on behalf of New York Jets running back Freeman McNeil in the famed case that brought free agency to the NFL. The league contended, as it had for years, that the disruption that came from unfettered free agency would destroy continuity and drive fans from the game.

They said they couldn’t afford free agency. They said fans didn’t want free agency.

“I think 20 years from now there will be a generation involved in college sports who will not say the old system is the only thing that could exist,” Kessler said, drawing comparisons to owners’ long-ago claims that free agency would bring down pro sports.

This model certainly won’t end the debate over athlete compensation, but it could in fact fuel it. Several administrators along the way have said they don’t mind taking some of the new TV revenue and putting it in a fund, as long as it’s used for academic purposes, like postgraduate work or continuing education.

Mostly, what we found was fear. What about those programs that live on the edge financially, the ones trying to keep up with the big boys by spending excessively to find the next Nick Saban, or build the most extravagant facility? They need that incoming revenue.

“You can see levels where it breaks apart,” former NCAA executive Greg Shaheen said. “You saw the separation of the schools in conference realignment. You worry about the smaller schools [within the five power leagues].”

Whether it’s a judge’s ruling in the O’Bannon case, or something more dramatic and divisive, like an athlete boycott of some sort, college sports seem to be moving toward a tipping point. That’s what money has done in most sports.

Whenever more revenue comes into the system, the tension around what to do with it builds. That’s been the case in pro sports for years. And it’s coming in the college game.

The NCAA has dug in its heels in the O’Bannon case, saying it won’t settle. Meanwhile, in the small college town of Grambling, La., a few weeks ago, players found out what would happen if they joined together to boycott. The game that week was canceled. And nobody was punished.

“Clearly, something else is going to exist,” Kessler said. “The question is will it be a good thing or a bad thing. But it’s going to be a different thing.”

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