Yesterday the judge delivered her decision in the O’Bannon case, ruling that the NCAA prohibition on paying college athletes is a violation of the antitrust law. However, she also said that she stipends as low as $5000 per year would be enough to comply with her ruling, which would lead to only a modest increase in costs given the $8 billion or so that college sports generates annually. For example, if the 230 biggest schools paid $5,000 to 250 athletes each that would still add up to only 4% of annual income.
However, that doesn’t sound like a very likely outcome if the ruling, which seems bound to go to appeal and probably end up in the Supreme Court, is ultimately upheld. NCAA schools already spend money on benefits to student athletes by giving them scholarships worth thousands of dollars. Based on the data published here by ESPN, colleges currently pay out 15% of revenue in the form of tuition subsidies and related expenditure. If athletes are allowed to be paid in addition, we should expect to see competition for talent bid up its price significantly.
Happily we don’t just have to rely on economic theory for this, we can look at what has happened in professional sports. Until the 1960s professional leagues operated restraints which held down player salaries on one way or another. We can compare the percentage of revenues paid out to players in three different leagues – Major League Baseball, the National Football League and the English Football League in the 1950s and today
Percentage of revenue going to players
The MLB and NFL data come from Rod Fort’s Sports Business Data and refer to 1956 and 2012, while the EFL comes from clubs accounts data that I have gathered and refers to the top four divisions of the English football in 1958 and 2013.
It seems therefore reasonable to believe that a much larger share of college athletic department spending will end up going to the players if restraints are withdrawn. From the data it looks like 50% might be a reasonable guess – or roughly $4 billion a year. Among how many athletes? The NCAA say there are 420,000 students athletes, so that would amount to less than $10,000 each. However, everyone knows we are really talking about football and basketball, the revenue generating sports. Here there are probably around 25,000 student athletes in these sports on scholarships, and dividing the money among them would be healthy $160,000 each per year. But presumably we would see the same kinds of salary inequalities that we see in the professional sports. The rest of the world has become used to seeing 18 or 19 year old professional soccer players making millions, Americans may be about to experience the same thing in college sports.
Where will the money come from? Coaches’ pay currently accounts for almost as large a share of total expenditure as player costs- my guess is that these pay rates will not rise significantly in the future. The value of a coach often lies in his ability to recruit talent- but if the money can do the talking then this won’t seem so important. College athletic departments have also grown into large administrative units and these may be trimmed. Facilities investments in football and basketball are often more lavish than in the professional sports – these may be cut back. Cutbacks in other sports which may be cross subsidized may happen, but my colleagues Rod Fort and Jason Winfree have argued in their excellent book that this is not likely to be significant.
In any case, the transition will not happen overnight. Revenues are still growing rapidly in college sports, especially from broadcasting, and this trend can be expected to continue. A large fraction of the increases can be expected to find their way to the players.
Perhaps most interesting will be changes in competition structure. I have argued elsewhere in work with Jason Winfree (see here: collegeFBfinal (1)) that college sports are much more like European football- with large numbers of teams and huge inequalities in terms of revenue generating capacity – than the major leagues with small numbers of team and relative equality among teams. In Europe there is constant pressure for a shake-out, with smaller teams reducing their ambitions. However, small clubs have been resistant to reducing their ambitions as a result have chronic financial deficit problems. Maybe this will also happen to the smaller schools. In either case, increased dominance of the big teams and the big conferences seems likely.