How I Became an Agent for America’s Most Powerful Cartel
For the past thirty or so years I have made a small annual donation to my alma mater, Boston College. I usually earmark a part or all of the donation for BC’s athletic programs, which, outside of hockey — and football for a few glorious years in the early 1980s when Doug Flutie played — have been decidedly mediocre. In recognition of my modest donations, I just received an emailed brochure from BC entitled “A Guide to NCAA Regulations for Donors, Alumni, and Friends of Boston College Athletics.”
To my surprise, the brochure informed me that I am a “representative of athletics interest” for the university. One comes by such a clumsy designation by making a donation to any of BC’s athletic programs, holding membership in any donor, booster, or alumni group, employing or helping to arrange employment of student-athletes, being either the parent of an enrolled student athlete or a former varsity athlete, or helping to promote BC athletics in any way. As a “representative,” I am “prohibited” from providing “extra benefits” to any “enrolled student athlete.” These benefits include cash, loans, and co-signing for loans in any amount. Also prohibited are gifts of any kind to student athletes or their families including holiday gifts, clothing, and even birthday cards. I am also barred from providing special discounts for goods and services or rent-reduced or free housing to student athletes or their relatives; nor am I permitted to pay a student athlete an honorarium for a speaking engagement or allow him or her to use my cell phone to make a call without charging a fee.
The rules regarding my interactions with a “prospect” are even more stringent. Although the term is not explicitly defined in the brochure, as far as I can ascertain, a “prospect” is an interscholastic athlete on any level who may be interested in participating in college sports. The student remains a prospect even after signing a “letter of intent” committing to a particular school or receiving a financial aid award until the first official day of team practice, after which he becomes officially an enrolled student athlete with whom my interactions are governed by the rules in the preceding paragraph. It is impermissible for me to have any contact with a prospect, including phone calls, letters, faxes, and social media messages. I am also not permitted contact with the prospect’s coach, principal or counselor to discuss his proficiency as an athlete.
Of course, giving cash, gifts, loans, or special discounts to the prospect, his coach or his family is also strictly forbidden. If I attend an athletic event in which the prospect participates I must avoid any contact with him. Should “unavoidable incidental contact” occur, it is permissible only for me to offer “normal greetings.” If I already have an established relationship with the prospect — say he’s my best friend’s son — it may continue as long as I make no effort to “recruit” him (i.e., encourage him to attend, my alma mater). If the prospect initiates contact by calling me on the phone, I must rigorously restrict my end of the conversation to general information about the university. Evidently, the rules governing my dealings with both student athletes and recruits are quite numerous because both lists of rules are parenthetically labeled “not all-inclusive.”
Finally, the brochure ominously warns: “Once an individual has been identified as an institutional ‘representative of athletics interest’ the individual retains that title for life.” [Emphasis added.] The brochure then goes on to sternly instruct the lifelong representative that he has a responsibility to notify the BC Compliance Office of any infraction that he may know has occurred, even if the infraction is unintentional.
The NCAA Cartel
Okay, so let’s cut to the chase. Why was I, and probably hundreds of thousands of other alumni donors to NCAA member institutions, sent this absurd brochure? The reason is that almost all intercollegiate athletic programs in the US operate under the purview and supervision of the National Collegiate Athletics Association (NCAA). The NCAA is what is called in economics a “cartel,” whose primary purpose is to maximize the net revenue of the athletic programs of its member institutions. The NCAA does this in two main ways. As a seller’s cartel, it collectively bargains on behalf of its member schools with broadcast and cable networks in arranging contracts for televising their premier athletic events, particularly for the two main revenue producing sports, football and men’s basketball.
The NCAA has been overwhelmingly successful in this endeavor. For example, in 2012, the NCAA negotiated a 12-year agreement with ESPN beginning in 2014 to broadcast the six bowl games that constitute the college football playoff and all its associated “branded content,” e.g., the official announcement of the four semifinal teams. The total price tag of the deal: a stunning $5.64 billion, which works out to $475 million per season for six games. Earlier this year, the NCAA worked out an 8-year extension of its contract with CBS/Turner to broadcast its “March Madness” Division 1 men’s basketball tournament. In exchange for a cool $8.8 billion, the contract gives CBS/Turner the exclusive rights to broadcast the tournament from 2024 to 2032. The new contract extends the existing 14-year contract between the two parties signed in 2010 and valued at $10.8 billion.
Although the NCAA comprises about 1,100 member institutions and 99 sports conferences, the lion’s share of its benefits goes to the 65 schools competing in the so-called Power Five conferences. The Power Five conferences are dominated by gigantic state universities, which are supported by tax dollars. These five conferences each receive between $200 and $240 million per year of TV revenue to split among their members, although not all of it stems from NCAA-negotiated contracts.
One of the main problems with the cartel arrangement is that it is partial: part of the total athletic revenues earned by each member school flows from sources not controlled by the NCAA and are dependent on how well its teams perform. These revenue sources include live gate receipts from games, alumni donations, payments from sports’ apparel companies like Nike, Under Armour, and Adidas in exchange for outfitting the school’s teams in their brands, and licensing of the sales of sports apparel bearing a university’s name, logo, and mascot to fans. In addition, the greatest source of a school’s athletic revenue comes from sharing in payments for TV broadcast rights of regular season games negotiated by the individual conferences. The relative success of a school’s athletic programs enhances its chances of moving to more a lucrative conference.
How the Cartel Controls Wages and Compensation
Faced by these financial factors, every school has an incentive to aggressively compete for the main input into its athletic teams, the players. The best of these “prospects,” the four- and five-star high school athletes, are extremely scarce, very valuable and would command stratospheric wages if the schools could bid freely against one another for them. But if this were the case, then college athletes would each receive their “marginal revenue product” or the additional revenue generated by their performance on the field or on the court, and the total wages of athletes would rise to the point where they absorbed most of the huge incomes now appropriated by the athletic programs of the top NCAA member schools. For example, studies have estimated that a football player with potential to play in the NFL would generate $2 million in rents for his university over his 4-year collegiate career and an NBA-caliber player would generate $3.6 to $4.0 million during his collegiate career.
This is where the NCAA comes in as a “buyer’s cartel” that mandates that compensation to college athletes exclusively via “scholarships” whose dollar value does not exceed “the cost of attendance” at the particular educational institution. But the incentive to compete is still present as long as the marginal value of a player exceeds what he or she is being paid in the form of a scholarship. So in the absence of additional rules, schools would compete by contriving to covertly pay athletes by providing them and their families directly or through their boosters and alumni with all manner of non-monetary compensation, including free phone service, no-show jobs, expensive holiday and birthday gifts, interest-free loans, rent-free housing, the complimentary use of upscale-model “demo” cars from alumni automobile dealers, plush on-campus housing, etc. In addition, athletic departments and coaching staffs would spend aggressively in contacting and entertaining elite prospects and their families and coaches. Of course all of this spending on non-wage forms of competition would dissipate the revenues extracted from athletes by not paying them overt wages and the cartel would collapse, because it would be no more profitable then open competition. And this explains the NCAA’s draconian enforcement of rules and regulations governing the most minute details of interaction between alumni and boosters and student athletes and prospects.
It's Not a Free-Market Cartel
It should be emphasized, by the way, that the NCAA is hardly a free-market cartel that enhances efficiency and productivity. As noted, the cartel is dominated by state institutions and even the powerful private institutions (e.g., Notre Dame, Stanford) are the beneficiaries of huge federal research grants and subsidized student loans. The educational programs of all NCAA members are also overseen by government-sanctioned educational accrediting agencies. In this era of unbridled cultural Marxism and egalitarianism, you can bet that the federal government, which holds a $1 trillion dollar portfolio of student loans, and its allied agencies would take punitive measures against colleges and universities that defected from the NCAA and began to compete with the cartel by openly paying their student-athletes and giving them special treatment. But even government-run cartels can be destroyed by powerful market forces, as we have witnessed with the collapse of the OPEC oil cartel and, earlier, the airline cartel in the US, which had become unprofitable even before deregulation of the industry in 1978. Lately the conflict of interests between the haves and the have-nots in the NCAA has greatly intensified and some argue that dissolution of the cartel looms in the not too distant future. Not only will the well-deserved death of the NCAA result in the payment of student athletes, but I will reap a personal benefit as I am released from my unwanted position as one of its representatives of athletics interest.
Joseph T. Salerno is professor of economics in the Lubin School of Business of Pace University in New York. He is editor of the Quarterly Journal of Austrian Economics; Academic Vice President of the Mises Institute, and Director of the Mises Institute Fellows Program. Contact: email.