Football Economics 101
by Lee Cannon, 7/22/03
Editor's Note: Recently, Hokie alum Lee Cannon sent us this article, which he submitted as a paper for an Economics class. It's a slightly different angle on ACC expansion, from an economics standpoint. Lee says he got an A+, and he asked if we would be interested in running it on TSL. Hey, we said, that's what Voice of the Fan is for. -- Will
Bill Finley of the New York Times stated the obvious when he wrote in a June 28th article that it was money that drove ACC expansion. Despite the claims of the ACC’s marketing representative, Dean Bonham, that expansion was not driven by economics, Finley observed that it was about "football—and football money."
The ACC, in examining the college football market, was looking for ways to expand its share. Among all college conferences, the ACC already secures the highest per team distribution ($9.7 million) for its members (compared to $5.5 million for the Big East), but it wants more. More is available through increasing television markets, securing an additional BCS bowl berth, and playing a league championship game. An additional BCS berth, worth $4.7 million, could only be obtained if the ACC has two teams good enough to be considered national championship contenders. A conference championship game is played by both the SEC and Big 12 conferences; the SEC brings in $12.4 million each year from this one game.
Miami, a perennial contender for the national championship, was an obvious expansion prospect for the ACC. Miami increases the appeal of the conference by delivering a product that has nationwide demand. Miami is also located in a large city where there is high interest in its football product.
College football games are a form of trade. One could say that the visiting team is imported to the home team’s stadium one year, on the condition that the other team visit their stadium the following year. While a few locals might be interested in watching their players toss the ball around among themselves, most of the interest of college football is found in the appeal of playing the imported team. Instead of 10,000 fans paying $5 to see an intra-squad scrimmage, 65,000 fans will pay $25-35 to see the home team versus the import. And, if the game is interesting enough (a product valued by enough consumers), it can bring in the biggest revenue from television exposure. In the end, both teams make more money, and buyers of the college football product get what they want to see most.
The biggest question that faced the ACC was about which teams to invite to their expansion. Which could bring the most profit? They began by considering two teams, in addition to Miami, that resided in large T.V. markets—Boston and New York. Miami, the one team that everyone knew that the ACC wanted, requested these teams as additions. Logically, one could convince television networks to pay a lot more for games in these cities, it would seem, yet these teams were not chosen.
Not much discussion went into the economics of omitting these teams. Many of the reasons were given as political or geographic. One can look at a map and see that Boston and New York are not close to any other ACC teams, and there may be some very good economic reasons for omitting them. It costs a lot of money to pack a group of baseball players, coaches, equipment, and cheerleaders on a chartered plane. As for television, a game involving Syracuse or Boston College in a 12-team ACC would not be the ACC game of the week (on average) but once in six games (17%). So, how many viewers in Boston could be expected to tune in for a game between Georgia Tech and Wake Forest? Not many. As it is, Boston College competes with the Bruins (hockey), Celtics, Patriots, and others for local attention for its football product. Just being in a large city does not guarantee lots of revenue.
So, why was Miami ever interested in bringing Syracuse and Boston College into the ACC with them? Travel costs to compete in the Big East (especially for low-revenue sports like soccer and women’s softball) had caused Miami’s athletic department to lose $1.4 million in 2002, despite playing in college football’s most lucrative game, the national championship game. Still, Miami’s president, Donna Shalala, "remained undecided" about joining the ACC for several days after discovering that the ACC would not admit Boston College or Syracuse. The reason for the hesitancy is that Shalala understands the economics of Miami’s student base. A private school like Miami wants to appeal to the wealthy prospective students from the northeast. Kids from the mountains of Virginia aren’t interested in going to Miami, even if their parents were willing to sell the family tractor to send them. Trading their athletic products gave Miami exposure to the wealthy and numerous prospective students in large northern cities.
While Finley’s article explains the driving forces behind conference football economics, his article does not explain why increasing athletic revenue is important to a university. Very few universities ever funnel college sports’ income into their academics. Income is channeled directly back into the athletics programs. More money means better athletics facilities, bringing better recruits, more wins (a more desirable product), and greater fan interest. It is the fan interest that gets the attention of college administrators and governors. The economy of college athletics serves universities by attracting students. It serves a state by drawing buyers to its region and industries.
Colleges are price-searchers; there are always good substitutes for any particular university. A student can study law at Harvard, Yale, Washington and Lee, Virginia, or a host of other colleges. Some colleges attract their customers with a superior educational product—a quality education. But in many fields of study, the differences in the quality of education are difficult to measure. At any given school, a student can obtain a degree and quality job; otherwise, the school would go out of business.
Increasingly, schools are using college athletics to attract the limited number of college-quality students to their schools. Students want more than an education. They want to be entertained while they are at school. They value a college life that includes athletic competition. As more potential students are exposed to a college’s name brand and opportunities, the demand to attend that school increases, and tuition can be raised to produce more revenue for the school. Demand also drives up the quality of student that the school will attract (the school can reject lower-quality students), making its graduates more attractive to businesses. By increasing its reputation of placing students in good jobs, demand for an education at the school increases further—a cycle that began partly with more money from football.
When the governor and senators from the state of Virginia realized that Virginia Tech might suffer long-term financial setbacks due to being left out of the more lucrative ACC, they lobbied for Virginia Tech’s inclusion, despite the fact that none were graduates of Virginia Tech. They recognized the importance of the overall football industry to the southwestern corner of their state. Traveling football fans generate trade. They support the development and continuance of industries in the area (hotels, restaurants, sports apparel). More demand for the state’s colleges also allows the colleges to raise their tuition prices and generate revenue that no longer must be supplemented by the state government.
For Miami and Virginia Tech, the decision about whether to join the ACC included opportunity cost. Either team could decide not to join the ACC at this time, hoping for improvements in the revenue stream of the Big East. For Virginia Tech, the cost of not joining the ACC is much higher. Tech has fewer options and is a less desirable national product (lower demand) than Miami. The ACC was very close to accepting substitute products for Tech’s athletics: Boston College and Syracuse. Boston College, in particular, has a higher relative price (for travel expenses) than Virginia Tech, but it could provide the ACC with the desired utility it needs to reach its 12-team goal for a championship game.
In the end, the ACC decided that travel costs associated with the more northern schools would be too high as compared to Tech’s geographically suited program. So, Tech was careful to quickly accept the invitation while it stood. A rejection would have left Virginia Tech in a depleted Big East that lacks its top football draw and, most likely, a team from one of its major media markets (Boston).
Through 2005, the Big East might offer the opportunity to split BCS revenues fewer ways, and Tech would have an increased opportunity to reap the lion’s share by winning the Big East (as its most powerful remaining football program). After 2005, however, the Big East would likely lose its BCS bowl bid and its associated annual revenue. Its television contract with ABC/ESPN would also have to be renegotiated immediately, since it contains a clause protecting the network against changes in the Big East’s membership. Knowing that the average ACC team last year received $9.7 million as opposed to the Big East’s distribution of $5.5 million to its teams made the opportunity cost decision easy for Tech. The revenue for the Big East will only be declining, while the revenue from the ACC will be increasing, and travel costs for Virginia Tech will decline (by at least half a million dollars, according to Tech AD Jim Weaver) as it competes with the closer ACC schools.
For Miami, the opportunity cost decision is somewhat tougher. Its decision to leave the Big East was initiated by the loss of $1.4 million in the previous year, despite reaping its maximum potential revenue from playing football in the Big East (by playing in the National Championship game). Traveling to compete with teams in the Northeast has been expensive for Miami. While the Big East offered guarantees to Miami that they would receive a minimum of $9 million annually, the ACC will offer more in the long run, at less cost. Still, it took time to consider a hard-to-measure quantity: the number of students from the northeast who will no longer be interested in attending the University of Miami.
The ACC will have to continue to consider the marginal benefit of adding additional members. It easily discarded an idea to expand to 13 teams (dividing the diminishing marginal revenue among more teams would leave each with less). An additional team would allow the ACC to overcome the NCAA’s regulatory barrier to play a conference championship game. The ACC, though, has already appealed to the NCAA to change the rule so that conferences of ten teams or more can play a championship. By doing so, the revenue would only be divided among its 11 teams, rather than twelve. If the championship game rule can be changed, a twelfth team would be added only if the potential team could generate revenue of more than the ACC’s average variable cost of the payouts to each team (currently $9.7 million).
In the end, consumers of college football will be the winners. More games of interest to fans will be scheduled, and fans on the eastern coast will eventually have additional championship games. Once someone figures out how to provide an appealing arrangement in the northeast, the northeastern region will provide the same appealing products.