Published September 21, 2011 - 9:09amNEW: Follow on facebook -
The ongoing conference realignment chaos has led the typically reactionary sports press to identify and decry “greed” as the root cause of all that plagues college football. This is not economic analysis but rather street corner sermonizing. There is actually a fairly straightforward explanation for what is now taking place, and one not need get into the ethics or motives of the people involved.
When we strip away the politics and emotion, we are left with a basic truth: Conference realignment is an attempt to deal with the various forms of malinvestment that have built up over the years. Much like the housing bubble, there is an “athletics bubble” that is trying to correct itself. The problem is not that conference leaders are greedy; the problem is that their solution may only serve to further inflate the bubble.
The economic concept of “malinvestment” is from the Austrian School, and it refers to the misallocation of resources based on false signals. In Austrian business cycle theory, government inflation via central banks leads to malinvestment, causing an unsustainable boom, which then leads to bust, where the malinvested resources must be liquidated before the economy can recover.
There are several areas of malinvestment in college athletics. All athletic departments maintain programs that cannot generate sufficient revenue to meet expenses. College football and men’s college basketball are usually the only programs where revenue exceeds expenses, and the surplus goes to subsidize the other programs. And even football and basketball can’t get the job done at most schools. Less than two dozen Division I athletic departments sustain themselves on internal revenues alone. Most rely on student fees or support from the university’s general funds or other government sources.
The second area of malinvestment is the NCAA itself. The organization contributes nothing of value to the product of college football yet imposes numerous regulatory costs. All of the recent “scandals” — which are nothing more than gripes over a relative handful of benefits paid by third parties to players — generate a disproportionately large media and bureaucratic backlash that force the misallocation of even more resources on worthless “compliance” and “enforcement.” The NCAA is simply bureaucratic waste that needs to be flushed out of the system.
A third area of malinvestment is the much criticized bowl system. Again, the media tends to focus on narrow scandals like the recent Fiesta Bowl audit that showed funds used to reimburse questionable expenses and, in some cases, illegal political donations. Yet the real problem with the bowl system isn’t corruption. All bowls are run by local not-for-profit corporations that organize games and distribute the bulk of their profits to various charitable endeavors. The participating schools and conferences get a cut of that payout. But at a time when all athletic departments are struggling to make ends meet, it’s illogical to continue subsidizing these expensive middlemen. Rather than have half the Division I schools play in exhibition games that mostly benefit third parties, it would make far more sense, for example, to allow every school to schedule a 13th regular season game (and for the conferences to administer their own postseason).
Finally, it’s not just the athletic departments but the universities themselves that are awash in malinvestment. Government subsidies of universities — and most BCS automatic qualifier schools are public — produce higher enrollments than would exist in a purely private system. These subsidies manifest themselves in the form of “activities fees” used to support athletic departments. This further drives up athletics spending as schools use sports both as a form of advertising and as a tangible demonstration of the university’s standing relative to its competitors.
This all leads back to the current round of conference realignment. Conferences serve two basic functions: They coordinate scheduling and serve as a negotiating block for broadcasting rights. The latter function came into play after 1984, the year the Supreme Court stripped the NCAA of its power to restrict telecasts of football games. That decision directly contributed to the conference realignments of the early 1990s, when a number of eastern independents joined or formed conferences. Another factor was a previously dormant NCAA rule that allowed conferences with at least 12 members to play in two divisions and stage a conference championship game.
There are four basic sources of revenue for any athletic department: ticket sales, university subsidies, private donations, and broadcasting rights. The conferences only deal with this last item — broadcasting rights — and in the current economy, where the first three items are either maxed out or in decline, even the mere potential for additional broadcast revenues via the conferences is an attractive option.
Thus, we have a scramble by the major conferences to add teams in order to (1) increase leverage in future negotiations with broadcasters; (2) secure the conference’s position by discouraging defections to other conferences; and (3) marginalize the smaller conferences and schools that are themselves products of malinvestment. Put another way, the major conferences are attempting to contract a market that has become bloated with too many underperforming schools that are consuming exceedingly scarce resources.
When you think about it economically, what’s happening here is not unusual. In most markets, a period of increased competition is often followed by a period of contraction when the struggling firms either go bankrupt or merge into the more successful firms. College football is unusual in that the “firms” are politically fixed entities that can’t simply merge or go bankrupt. Instead, as we’ve seen throughout the NCAA’s history, there is a simply a greater and greater subdivision. The NCAA once had two divisions, then three, then four (for football), and now we may be seeing the emergence of a fifth division.
This is also why it should surprise nobody that the Big East and Big 12 are the two conferences on the verge of collapse. They are the newest of the major conferences. The Big 12 was the result of a questionable merger — the rump of the Southwest Conference and the Big Eight — that ultimately proved unstable. There is simply nothing holding the Big 12 together other than political inertia, which was broken last year when Colorado and Nebraska departed.
The Big East also fell into a common business trap. It produced an excellent core product — basketball based in big cities with private and public schools — and tried to attach its brand to a football product that simply couldn’t compete against the more established brands in the SEC, Big 10, and Pac-12.
(It’s also no surprise that reports have surfaced about a possible Big 12-Big East merger in a last ditch effort to salvage their BCS standing. If such a deal came to pass, it would almost certainly be the sports equivalent of AOL Time Warner.)
Now as to the surviving conferences, the question becomes whether expansion will deflate or further inflate the bubble that clearly exists. The conventional wisdom underlying all this is that adding schools will generate enough of an increase in television revenues to offset the costs of sharing those revenues with the additional members. There’s no guarantee of this. At this point it is pure speculation. Conference leaders are relying on the belief that the market for sports broadcasting rights is itself not in the midst of a bubble. If it is, when that bubble collapses, it may bring down the nascent “superconferences” with it.
We must also keep in mind that new broadcast arrangements like the Pac-12 Network and the Longhorn Network are still in the experimental stage. Nobody can say with any certainty if these deals will generate substantially greater revenues. Yet the lure of such riches is driving much of the current conference switching — which is another sign that this is, in fact, part of the bubble as opposed to a correction of the bubble. In adding new members, the conferences are likely creating yet another category of malinvestment.
Even if conference realignment does yield marginally higher television returns, that won’t solve the other malinvestment issues outlined above. You cannot grow your way out of malinvestment. At some point the malinvestment must cease. Schools need to permanently cut back on athletics spending. The major football powers must break away from the NCAA. The bowl system needs to go. If conference realignment brings us closer to these goals, then it will have been worth it.