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Revenue and spending in college sport

This is an excerpt from Sport Finance 5th Edition With HKPropel Access by Gil B. Fried,Timothy D. DeSchriver & Michael Mondello.

Strategies help drive collegiate athletics as well, and spending on collegiate athletics is influenced in the United States by alumni, students, administrators, faculty, sponsors, broadcasters, and government officials. Over the previous two decades, athletic expenses have outpaced athletic revenues in all National Collegiate Athletic Association (NCAA) divisions. Consequently, collegiate athletic programs are facing unprecedented financial challenges. Although a myriad of factors are contributing to these challenges at all NCAA institutions, at the Division I level, coaching salaries, facility construction, and tuition increases appear to be the major items affecting collegiate budgets. The University of Alabama’s Nick Saban was the second-highest-paid college football coach in 2022, earning over $9.9 million under his employment contract. The highest-paid coach was Lincoln Riley, who took home $7.6 million with the University of Oklahoma Sooners in the 2021 season, a number that made him the Big 12’s highest-paid coach, until he went to the University of Southern California (USC), which offered him over $10 million a year (Crawford, 2021). The shouts to let athletes partake in some of the funds generated through college sport grew to screams when news broke during a 2017 Federal Bureau of Investigations investigation into pay-to-play college basketball practices. University of Louisville basketball coach Rick Pitino was eventually terminated as part of a scandal. Two months earlier, Adidas (also implicated in the scandal through the actions of several of its employees) renewed its 10-year, $160 million apparel contract. Under the prior contract, while funds were meant to go to the athletic department, records indicated that 98% of cash provided by Adidas ($1.5 million) went just to the head coach, and only a small fraction went to the athletic department to benefit students (“Pitino Pocketed,” 2017). No wonder those challenging college athletics were claiming the system is broken.

Such clamoring for change resulted in several states passing laws that allow student-athletes to be paid. Then as the result of litigation and state government pressures, the NCAA began allowing student-athletes to sell their name, image, and likeness (NIL). In 2021-2022 NIL deals started flowing, and some college athletes earned over a million dollars a year. However, NIL issues abound. One issue is whether payments are used for recruiting and whether the athletes are providing a valuable service. These issues and regulations (or lack thereof) are vague, and some fans started pooling their resources into consortiums to help recruit athletes to a school. Some coaches challenged other coaches and accused them of trying to buy a championship-caliber team. Some high school athletes started to receive NIL deals, which raises the question of what that would mean for the integrity of their education. Other questions abound. Athletes would need to pay taxes on any NIL deal, so what if they fail to disclose revenue or fail to pay taxes? Similar to other celebrity endorsements, can a sponsorship prove that a given customer bought the product due to the endorsement? Can NIL deals favoring men’s sports actually cause a conflict with Title IX funding requirements? Are NIL deals racist or sexist, with some of the best female-oriented deals going to very attractive women? Can athletes artificially bump up their social media numbers to attract deals, and if so, is such activity equivalent to fraud that can get an athlete into trouble? Other issues include international athletes and whether they can receive any NIL compensation without violating the terms of their visa. NIL is the new frontier, and many hard lessons will need to be learned.

One glaring example of the problems with collegiate athletics is the University of Michigan. The storied athletic department was $240 million in debt due to significant facility construction and renovation-related expenses (Dalgleish, 2017). The university was making a $17 million debt payment every year to help cover debt. (While that might be high, it is still lower than the University of California’s $445 million debt [Dalgleish, 2017].) However, the athletic department debt for Michigan’s athletic department cannot be viewed in a vacuum; the entire university had debt of $2.1 billion.

The Michigan athletic department was banking on the Big Ten’s new six-year media rights deal in 2016 with ESPN, which, combined with FOX and CBS Sports contracts, would bring in $2.64 billion—approximately $188.6 million to each Big Ten member school during the contract. If such funds were insufficient, the school perhaps would have to raise ticket prices (Dalgleish, 2017). That was not a preferred option because ticket sales, especially for students, had declined significantly, from nearly 19,000 students in 2013 to less than 12,000 in 2014 (Murphy, 2014). In 2014 the cost for a student season pass was $280, but due to weak demand, the athletic department dropped the price 37% to $175 for the 2015 season. The COVID-19 pandemic affected revenue, and the university expected a loss of almost $63 million in 2021, but then the university was expecting a surplus in 2022. The surplus was due in part to a return of fans but also an almost $10 million dollar increase in broadcast fees (Chengelis, 2021). Through the increased revenue Michigan was able to bounce back and actually generate a nice return in 2022. If the revenue trend continues, they hope to make larger repayments for debt service.

Besides highly paid coaches, athletic programs have been mandated to provide additional support for student-athletes, including enhanced living quarters, better training venues and programs, and student educational assistance such as tutors to keep athletes eligible. The largest chunk of these increased expenditures to run athletic departments was financial aid for scholarships—covering tuition, fees, room and board, and the new category of incidental expenses. As tuition has increased steadily over the years, so has the amount athletic departments need to reimburse their universities.

One of the biggest revenue sources for college athletics remains broadcast rights. While some stadiums can attract over 100,00 fans to a football game, the key revenue driver for the last 30 years has been broadcast contracts. There are multiple deals when it comes to sport broadcasting contracts: local, national, radio, and streaming. If colleges can create another kind of deal, they will try to sell it. The NCAA owns its championships including March Madness basketball tournaments. From that tournament alone the NCAA generates hundreds of millions of dollars per year. CBS and Turner purchased the rights to the March Madness tournament under a 14-year contract that runs through 2024 for $10.8 billion. The contract was extended for an additional eight years in 2016 for $8.8 billion and will now run through 2032 (Norlander, 2016). Some of the money goes to athletic conferences and individual member schools. Other funds go to help run the NCAA.

Additionally, conferences have contracts, and individual schools can try to negotiate their own contracts, but that is often only applicable to major independent schools that can attract a national following, such as the University of Notre Dame’s contract for NBC to broadcast their football games. The biggest collegiate broadcasting contracts are reserved for the largest, most influential collegiate conferences such as the Southeastern Conference (SEC) or the Big Ten. In 2022 the Big Ten earned $440 million a year from Fox and ESPN. Those deals are set to expire at the end of the 2023 season. The conference is intent on not re-signing right away and letting the contract expire so it will be open to other bidders; the conference hopes to get close to a $1 billion a year for future rights (Bassam, 2022). The SEC is leaving CBS in 2023 for Disney (ABC, ESPN, and their streaming service Disney+). The new deal is for a minimum of $3 billion over 10 years.

ESPN has made a significant investment in college athletics, but such an investment is not without risks, as seen with significant ratings declines for a number of football bowl games. Ratings for bowl games continued to be overall weaker in 2021, even though they had a post-pandemic bump. The 31 non–New Year’s major college bowl games on the ESPN family of networks averaged 2.57 million viewers in 2021. That was up 12% from 2020 (which had a reduced schedule of 28 games because of COVID-19), but down 9% from 2019. Thus, sometimes having a lot of inventory does not benefit the seller. Scarce inventory of key games normally does better such as the primary New Year’s bowl game, but the playoff games in 2021 (Alabama versus Cincinnati and Georgia versus Michigan) drew lower ratings compared with the semifinal games from 2020 (Bromberg, 2022).

While salaries are growing, based in part on higher broadcast revenues, public universities are asking for more money from state legislatures. Private universities do not have the same funding options and often rely on donations or student fees to help cover the cost of running an athletic department. With student debt increasing to unsustainable levels, many are asking why students should pay several thousand dollars a year to help support athletics when they are borrowing money to make these payments and it will burden them for years to come.

More Excerpts From Sport Finance 5th Edition With HKPropel Access