Advertisement
Sports

An Economist Explains Why Darren Rovell Is Wrong About Paying College Athletes

ESPN sports business reporter Darren Rovell doesn't think college athletes deserve to be paid, so we got an economist to explain why he's dead wrong.

by Andy Schwarz
Mar 30 2015, 1:19pm

Image via Rich Barnes-USA TODAY Sports

What is someone worth to a sports team?

To hear some people tell it, the answer is nothing. Or next to nothing. Or maybe even less than nothing. At least when it comes to college athletes in the multibillion-dollar sports of football and men's basketball. Over the years, I've heard everyone from National Collegiate Athletic Association expert witnesses (see page 24) to Sports Illustrated writer Seth Davis insist that the vast majority of the players smashing helmets on Saturdays or participating in March Madness aren't even worth their scholarships. Last weekend, ESPN sports business reporter Darren Rovell made essentially the same claim on Twitter, and then argued with me (and others, including an editor of this website) about it.

Rovell's logic goes like this: the money in major college sports flows from fan interest. Fans buy tickets and tune in to watch their favorite schools, and maybe a group of iconic coaches, and perhaps a handful of superstar athletes. Otherwise, the overwhelming majority of players come and go with scant personal fame and individual marketability. They're essentially jersey-fillers, and their value is negligible. And if they can be replaced by someone willing to do the job for less, then they're overpaid.

A bunch of damn leeches. Image via Rick Osentoski-USA TODAY Sports

Are you, the fan, paying to watch a third-string offensive lineman? A second-string shooting guard? A fifth-year senior who can't crack the eight-man rotation? No? Then said players are value-less, have no right to complain that amateurism limits their compensation to the cost of athletic scholarships, and downright lucky that schools offer them anything at all. Case closed.

This is also the argument that NCAA expert Lauren Stiroh made in the O'Bannon case:

"... there likely exists an excess supply of NCAA-eligible student-athletes who would be willing to play on these teams for less than a full scholarship (e.g., walk-ons and those who played in high school but did not qualify for teams at DI schools they wanted to attend). At the time of the NCAA's September 2011 analysis, there were approximately 155,955 high school seniors playing men's basketball compared to approximately 1,523 freshmen men's basketball roster

positions at DI colleges."

This, of course, is ludicrous, provided you accept the basic economic principle of "revealed preference"—that is, when faced between a cheaper choice and more expensive one, those who choose the more expensive one preferred it enough to pay more for it. Every D1 school that offers a full scholarship to a high school basketball player instead could offer less to a player from Stiroh's "excess supply" pool. Doing so would save those schools lots of money; in fact, the schools theoretically could make money by charging the substitute players for full tuition. Only schools don't actually do that.

Why? Because better athletes cost more, and they're worth it.

Go back to our initial question: What's someone worth to a sports team? This is actually really easy to answer, at least in any market where teams and athletes are free to transact in competitive circumstances. Consider European soccer—a great player can field bids from teams in each of the five major soccer leagues (English, Spanish, French, Italian, and German). Aggregate player pay in those leagues ranges from just under 50 percent of total team revenues to over 70 percent, depending on the country. Mostly free from player or team salary caps—Germany features some limited caps, and across Europe there's a rule preventing salaries from exceeding 100 percent of team revenues—athletes can earn whatever they can command in the marketplace for their unique talents.

"I don't get up off the pitch for less than the GDP of Bhutan, darling." Image via Winslow Townson-USA TODAY Sports

Cristiano Ronaldo, arguably the very best soccer player in the world, reportedly signed a 5-year contract worth $206 million with Real Madrid. Economics says that unless Ronaldo or Real Madrid were forced to sign the deal, the outcome of their arm's length negotiation is the best estimate of what Ronaldo's market value is. No more and no less.

Let's move to America. In most major leagues, players are bound by collective bargaining agreements (CBAs) that often include team or individual salary caps. There are also entry drafts and rookie pay scales. All of this restricts competition between teams for talent, and the result is that athletes in the National Football League, National Basketball Association, National Hockey League, and Major League Baseball tend to earn a lower share of overall league revenues than European soccer players, but they still take home around 50 percent of the pie, with roughly 60-80 percent of that slice going to stars.

This is a less free market than in Europe, because of these restrictions, but nevertheless, even within the restraints imposed by collective bargaining, economics says that whatever these athletes can command in the marketplace—as long as it is above any mandatory minimum payment—is the lowest estimate of what the same athletes are actually worth. That is, if we see a team voluntarily paying more than the collectively bargained minimum payment, then we know his true value to that team is at least what they were willing to pay him, but because their ability to pay more may be limited by the same CBA, it might be even higher.

Please note: I am not saying that individual teams don't make mistakes, where everyone else looks askance at the payment. And I am not saying that if there is collusion designed to depress the market value that we should ignore that and assume the wisdom of the crowds applies no matter what. Rather, in aggregate across a rich set of data, in the absence of collusion, willing buyers and willing sellers will converge on a fair measure of market value.

Now, all of the above is not some novel theory I've been developing for decades in my basement, plotting my stealth assault on the Nobel Prize committee. To the contrary, it's very, very basic economics. Google the words "willing buyer willing seller" and see what you get. Okay, spoiler alert, here's what comes up:

Fair Market Value: The "mother of all definitions", fair market value is by far the most commonly used value definition/standard ... IRS Revenue Ruling 59-60 characterizes the arm's length definition of fair market value as follows:

The amount at which the property would change hands between a willing buyer and willing seller, when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.

You should know: economists argue about almost everything. But the above is a well-agreed upon definition. Thing is, smart people—even smart people who know what "fair market value" means and therefore ought to know better—can and will ignore it when it comes to revenue-sport college athletes.

For example, Rovell replied to my suggestion that market rates are excellent measures of value by Tweeting:

I've heard other people make a similar argument. Glenn Pomerantz, the lead lawyer for the NCAA at the O'Bannon trial, told federal judge Claudia Wilken that if pay caps via amateurism were lifted, college athletes would get paid more than they are actually worth, because it would be a "fake" market. That is, if willing buyers and willing sellers were allowed to strike an arm's length bargain in an open market, that there would be a persistent tendency for schools to overpay for athletes because they were really paying for some unspecific "something else" that doesn't fit a financial cash flow model.

This is a common enough sentiment that maybe you've heard it like this: "Oh, if we let kids do advertisements, some local car dealer will overpay the athlete to do a commercial, just to get him to come to the school."

Overpay is a such a weird word here. Is University of Alabama football coach Nick Saban overpaid when he gets his $7 million per year? Not if that's what it took to get Saban to stay put. If the University of Texas was willing to pay $7 million to lure Saban away and Alabama decided to match that offer to keep him, that's the ultimate measure of Saban's value. A cash-flow model—which compares that expense to the incremental revenue Saban generates for his school and/or athletic department—might say he's not worth it, but that probably means the model isn't capturing all of the ways in which Saban adds value.

As George Box once explained: "Essentially, all models are wrong, but some are useful." That is, the process of taking the almost infinite complexity of real life and boiling it down to a formula is inherently a process of simplification that creates error. The question is whether that increased error is worth it, given the simplification the model brings. But when the model's error is revealed, any good scientist blames the model, not the reality it is trying to model. It's not, as Rovell would have it, that athletes are overpaid when they are given access to a competitive market, but rather that the cash flow approach Rovell is applying is too simple, has too much wrong baked into it, and thus isn't useful.

University of Michigan professor and economist Rod Fort echoed Box's sentiment in a paper in the International Journal of Sports Finance from 2006 about why the values of major league baseball teams don't seem to match to a pure cash flow model of value: "... our ability to untangle values other than operating profit depends on data we rarely get to see."

With that in mind, let's turn back to Rovell's contention that 99 percent of college athletes are utterly replaceable and thus aren't even worth the scholarships they currently get. It's true, as Stiroh explained above, that there are hundreds of thousands of high school athletes eager to replace the benchwarmers getting full scholarships. And yet, somehow, we don't see the market price of the unknown North Carolina State athletes driven down to zero. They still get a full scholarship, despite no NCAA rule mandating any scholarship at all. (People sometimes think the association's "counter rule" requires full scholarships in football and basketball—it doesn't. It simply says you can't use the savings from a partial scholarship to add to the number of scholarship recipients).

Economics says this is incontrovertible evidence that scholarship athletes are worth at least this much, and likely more. Schools had the choice in the market—as limited by collusion as it is—to take a lesser player for a lesser price, and yet they went with the more expensive one. That means he was worth it. On the other hand, Darren Rovell argues that because his model of value says otherwise, economics is broken when applied to sports. I'm putting my money on economics, at least until they start awarding a Nobel Prize in Rovell.