College football: Multibillion industry with great margins

By | December 2, 2012

College football industry

Just watched the Alabama-Georgia game. For international readers, this was the equivalent of  the semi-finals for college football between two rival teams who both had a winning season so far (11wins-1loss).  It was a very close game which Alabama won (32-28).

College football is huge business.  It generates enormous money for the universities. Forbes magazine listed the most valuable teams based on enterprise value, revenues, and profits. Typically, revenues come from ticket sales, alumni donations tied to club seats, corporate sponsorship, licensing, and television distribution rights. I am not convinced on how they calculated profits, so I only show revenues.

The top 10 teams generated revenues of $742 million in 2011. The University of Texas was the clear leader with $96 million in revenues; they received corporate sponsorship from Coca-cola, Gatorade, and have their own cable channel in conjunction with Disney’s ESPN called the Longhorn Network.

College football industry team revenues - tableCollege football is more profitable than Microsoft or Google. Forbes estimated the profits of each team in the same survey.   For the top 20 teams, the average profitability was about 63%, which means that 63cents out of every dollar was net profit.  Crazy.  To me, this seemed outlandishly high.  After all, college football cannot be 3x more profitable than Microsoft (MSFT net margins of 21%), or can it?

Forbes does great work, but I can only assume that they did not factor in all the fixed costs that might be shared by the university (e.g., depreciation of the stadiums, training facilities, etc). As an alumnus of one of these top 20 revenue-generating football teams, it makes me pause to think that the university is largely funded by the football team.

Should college athletes be paid? There has been a long-running debate among sports lovers on whether college athletes should be paid. Currently, they are not compensated for playing sports (other than their year-to-year scholarships). I am not a huge sports fans, but there is not shortage of polemics on this topic; you can find well-argued points supporting both sides of the debate: New York Times, Sports IllustratedESPN.

Economists would say something needs to change. Whatever the solution, some changes are needed.  It is no surprise that the richest football teams (e.g., Penn State, Alabama, Texas, Southern California, Auburn, Georgia, Ohio, Florida etc) also had football-related scandals recently. You cannot have an multi-billion dollar industry where the main assets are people who cannot be officially paid.  It is a powder keg waiting to explode. Eventually, there will be too much at stake and people will rationalize cheating.  We are not setting up people for success.

Coaches are paid. Unlike the players, coaches can be paid. USA Today put together this database of football head coach salaries here.  As a bit of a libertarian, people should be paid for their work and it is a free market for labor.  If you can get this kind of pay, good for you. Even so, take a look at these numbers and you will find them a bit surprising, even by American executive pay standards.

College football industry coach salary - tableCoach pay is not equal. Nor should it be. I believe that good coaches make a difference, just like good leaders make a different in organizations. Good ones should be paid more. Here is the graph that shows how football head coach salaries drop off by 50% around the 20th team, then drops off another 50% by the 60th team. The pauper in this list of salaries is for the head coach of Louisiana-Monroe. Don’t feel sorry for him though, $250K is not bad.

College football industry coach salary - graph

Post script: How Can a New College Football Coach Avoid Getting Fired, Freakonomics

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2 thoughts on “College football: Multibillion industry with great margins

  1. globeflyer

    When ANY sport brings in the revenues (for their respective schools) that some of these better-known football teams do, I think it’s a bit disingenuous for anyone to act sanctimonious about their budgets. The General Funds of these schools receive millions of dollars simply because their football teams have become valuable, national BRANDS. Heck, some of them have their own TV channel! For anyone to imply that because they happen to have a good football team (or any other sport) that the student, somehow, doesn’t get a good education is ludicrous. I do agree with your point about the players not receiving some sort of “dividend” for their efforts. Sure, a degree is worth a lot of money, but some of these kids come from homes where they can’t afford a burger, fries, and a Coke when their teammates go out.
    Putting things in (economic) perspective, Nick Saban’s first year at Alabama caused revenues (season tickets, merchandise, etc.etc,) to go up enough to pay for his contract. A good return on investment, I think. Remember, no one is forced to pay for those tickets and jerseys, unlike an increase in tuition or taxes.

    1. consultantsmind Post author

      Thanks for the comment. Agree with many of your points. If Alabama can pay $5M in coach salary + other costs, and make $77M in revenue at 50%+ margin, it is a great return. Definitely makes sense.

      My main point was that there will continue to be NCAA football cheating and bribery scandals for the foreseeable future because the incentives are not aligned. There is a moral hazard because some people will make the calculation that it makes sense to risk getting caught for cheating. . . because the payoff is so large. Not too different from companies polluting in the river because the fines are so small and not even punitive.

      Don’t believe there is a simple answer to this. College football provides HUGE entertainment for most everyone I know. It is a service and deserves the revenues and profits it brings in. The on-going challenge is how to make it live up to the standards that fans have of their alma mater, coaches, players and university brand.

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