Business Opportunity: “Heavily Subsidized Company, Pay Workers Fringe Benefits Only”

Major college athletics is built on a contrived financial model.

“Boy, do I have a great deal for you!”

That’s what I told an audience recently. But people weren’t buying it. “It’s not real world!” one person said.

“Well, yes it is!” I countered.

“Be an athletics director at a mid-major university,” I said. “You won’t be able to pay all of your bills from athletic revenues alone, but you’ll generate other money from the school’s general fund, student fees, and from the state from time to time (if you’re at a public school). Those sources are considered subsidies to a school’s athletic budget–counted as revenues, just like ticket sales.”

“Donors will help out a lot, too,” I continued. “Athletic philanthropy is hot in higher education today, generating billions of dollars each year.”

“But you’ll need even more to make your business complete. And this one is the $BIG$ item. You won’t pay salaries to your front-line workers (AKA athletes).  That’s right. Workers that fans pay to see to play–who generate your revenues–won’t get paid salaries. You’ll pay them fringe benefits only (scholarships, room, and board).”

Courtesy: Sportskeedia

‘Really?” was chiseled on faces around the room.

“USA Today tracks the numbers annually on about 230 public universities,” I continued. “There’s a pattern. Schools spend billions of dollars each year on athletics and the vast majority of schools need subsidies to make ends meet.”

The audience was interested in the local university, a major conference school. “Very limited subsidies are required,” I said. “That school generates plenty of revenue for athletics from tickets, TV, bowls, the conference, merchandise, and donors. Football is the big money-maker.” I saw relief.

“But let me make this clear: big schools (about seventy of them) are exceptions to the rule.”

For evidence of how the other half lives, I displayed data for three nearby regional universities. The alumni of those schools were especially interested in what I was about to reveal.

“Football is an issue at one of the schools,” I continued, “Home games don’t draw well and the school has high fixed costs (e.g., equipment, facilities management). The faculty urged the president to drop out of major college football competition, but he said no. And he made that call for good reason, too: big-time football gets the school in the news, attracts students, and keeps the alumni engaged. To help make ends meet, the AD cut four other sports–two on the men’s side and two on the women’s side.”

“Does any of this bother you?” I asked. “It bothers me. I hate to see all that subsidy money go for athletics. Besides, if we don’t do something, then the situation will just get worse.”

“And it may be getting just that,” I continued.

Last week The Wall Street Journal reported that college football attendance has dropped nearly 8% over the past four seasons. But the situation may be worse. How so? In college football, there’s a significant overstatement–by about 70%– of announced football attendance vis-a-vis the actual number of fans in the stands.

The situation is especially challenging for mid-major schools. At Buffalo, for example, the announced-actual attendance gap in 2017 was nearly 60,000 fans. That’s huge for a team that attracted 80,000 fans for the entire home season.

It’s another example–subtle at that–of a subsidy at work in college sports. Fans buy tickets they don’t use. Schools offer tickets free of charge or at a steep discount. And there’s another question–the answer unknown at this point: How many schools buy back tickets and then report those seats the same way they report conventional ticket sales?

So here’s the bottom line as I see it. While I enjoy the games as much as you (that’s what I told the audience that day), I’ve concluded that major college athletics is built on a contrived financial model.

CONTRIVED, created or arranged in a way that seems artificial and unrealistic.

Try running any other business this way.

What’s the solution? If a college athletic program can’t achieve fiscal viability without relying heavily on subsidies, then it should be required to scale back to a sustainable level. Required by whom? The president would have to recommend it. The board would have to approve it.

A crazy idea? Not really. It makes business sense, but it would take will, wouldn’t it?

Holy Alma Mater!

TO SUBSIDIZE OR NOT?

Athletic Finances for Ten Selected Mid-Atlantic Public Universities, 2016-17

(source: USA Today)