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Courting cash on campus

Maximizing revenue for college sports programs
University Business, March 2016
  • Excitement and talent are high at match-ups featuring top-level Division I institutions such as the University of Kentucky. (Photo Credit: UK Athletics)
  • Loyal students, alumni and community supporters help make home games for The University of Tennessee at Chattanooga basketball team financially successful.
  • Fancy arenas and masses of fan apparel are hallmarks at The University of Kansas, where sports are an intrinsic part of the college experience.
  • Fancy arenas attract fans, TV coverage and revenue at the University of South Carolina.

The madness of March swirls around the excitement of collegiate sports. The most successful Division I teams are competing for tournament wins—and the large cash payouts associated with those high-profile victories.

“Some athletics departments, particularly those in the Power Five conferences, bring in revenue and are not overly reliant on the greater university budget,” says Joel Maxcy, associate professor at Drexel University in Pennsylvania and president of the International Association of Sports Economists.

What’s the source of that cash flow beyond championship revenue? Conference payouts for the best teams—$31.2 million was awarded to each of the Southeastern Conference’s 14 member institutions for the 2014-15 fiscal year. The Big 12 divvied up $252 million. Distributions to these powerhouse institutions are funded by TV contracts, bowl games, tournaments, NCAA championships and conference surpluses.

“Beyond that, institutions can make money from paid attendance to men’s basketball and football games and licensing relationships with companies like Under Armour and Nike,” says Maxcy.

There is a lot of money to be had, but only a select group of elite athletic programs are reaping high financial rewards. Smaller institutions with less competitive athletics programs are left to scramble for what they can get—mere pennies in comparison.

This begs the questions: What are the strategies behind this arms race? And is the quest for financial and prestige domination through sports a worthy goal for a higher education institution?

Big guns stick together

Home games are by far the most lucrative for institutions, so much so that teams often make mutually beneficial arrangements to play each other in back-to-back years, alternating the home-site locations. The University of Arizona, for example, has played these “home-and-home” games with New Mexico State University and The University of Texas at El Paso.

“The relatively close proximity of these campuses to ours means a lot of our fans will come and buy tickets,” says Greg Byrne, athletics director for Arizona.

Home-and-home games against equally strong opponents have positive tournament implications. Teams hoping to reach end-of-season tournaments and bowls are helped by playing a certain number of games against opponents in competitive divisions and conferences.

“We need to build a strong schedule so we can get a high seed in tournaments,” says Byrne.

Getting that desired seed in basketball comes down to a team’s rating percentage index (RPI). RPI ranks teams based on the strength of their schedule, or on the number of wins against strong opponents. Seventeen to 20 victories per season is the goal for a highly competitive basketball team.

As Maxcy notes, “Wins in big-time sports are valuable because they give a lot of exposure to the institution.”

Neutral territory

Athletic departments can also earn revenue by playing at a neutral site, such as a professional sports arena.

“Neutral site games are an opportunity to play on an NBA court,” says DeWayne Peevy, deputy director of athletics for the University of Kentucky. “It prepares us for NCAA tournaments because you cannot replicate that atmosphere at a regular season home game.”

Often, Kentucky and its opponent receive a flat fee from the arena, says Peevy. “We can get a guarantee because the arena knows we have the fans and will fill the seats.”

In some cases, Kentucky negotiates to receive ticket revenue and a flat fee, such as when its men’s basketball team plays at Barclays Center in Brooklyn. Alternatively, ticket revenue can be shared between the arena and both institutions. In arenas with 18,000 to 20,000 seats—such as Madison Square Garden in New York City or Philips Arena in Atlanta—the venue may sell 4,000 tickets itself and give the rest to the competing institutions to sell on their home campuses.

“It is all about playing in the right place,” says Larry Keating, special assistant to the athletics director and men’s basketball scheduling manager for The University of Kansas. “We aim to make at least $300,000 for a neutral site game. If we cannot clear that much, financially it does not make sense for us to play.”

Key to getting to that $300,000 is finding a neutral site relatively near a large alumni base that’s willing to pay for tickets and get to the game.

Guarantee funds, guarantee wins

For many small schools, getting paid $300,000 to play at a neutral site is simply unattainable. However, it is possible to clear similar figures through a guarantee game arrangement. A university with a highly-ranked team pays a less competitive institution a fee to play at the more successful school’s home arena. Such contracts are typically arranged for high-profile sports such as football and basketball.

The University of Tennessee at Chattanooga is often on the receiving end of large guarantee payouts.

“In our conference, the Southern Conference, the guarantee rate for football is usually $400,000 to $600,000,” says David Blackburn, director of athletics for UT Chattanooga.

Contracts typically have liquidated damages clauses built in: If a game fails to happen due to weather or an unforeseen cancellation by the host university, the visiting team still gets to collect 50 to 60 percent of the guarantee rate.

For men’s basketball, UT Chattanooga usually gets a guarantee rate between $60,000 to $80,000. The rate for the women’s team ranges from $10,000 to $15,000.

“If our men’s basketball team plays a team like Kentucky, we might receive up to $100,000,” explains Blackburn. “The rate will be less for a team that is not as highly ranked.”

The rest of the guarantee game check—minus travel expenses—deposits to the athletics department’s accounts. With charter planes costing $60,000 to $80,000, UT Chattanooga earns more by driving to play semilocal teams such as Florida State or The University of Alabama, says Blackburn.

Beyond the financial benefit to the school, guarantee games give the players at UT Chattanooga valuable experience against top competition and TV time, says Blackburn. “It is a great way for us to showcase what we’ve got. And players are exposed to professional league recruiters that may not have otherwise seen their skills.”

Oklahoma State University occasionally plays guarantee games against weaker teams. Typically scheduled early in the season, these contests give freshmen and sophomores big-game experience and add a win to the calendar, says Mike Holder, directory of athletics.

But weighing the cost-benefit of a guarantee game is critical. “Our stadium only holds 60,000, not 100,000 like some other institutions,” says Holder. “It is easier for those bigger schools to justify the payout because they know it will come back in ticket revenue.”

Reputational economics

Athletic directors are generally given the autonomy to make financial arrangements. But it may be the case that their decisions aren’t the best for the university as a whole.

“Athletic departments are allowed to do what they want because many college presidents believe sports are the easiest way to increase an institution’s profile,” says Nathan Tublitz, professor at the University of Oregon and former head of the Coalition on Intercollegiate Athletics.

Investments in athletics buildings and programs are short-term projects that presidents, who now typically spend only four years at one institution, can easily accomplish and promote.

“It’s easy to spend a lot of money on something that attracts community and national attention and then walk away,” says Tublitz. “It’s easier than developing new academic programs.”

But an elevated athletics profile should not be as highly valued as a reputation for strong academics, Tublitz believes. “Better sports does not mean better students.”

Salary-wise, however, athletics positions are compensated at higher levels than academic positions: Many football and basketball coaches earn a higher salary than the institution president.

“These coaches are paid like professional coaches because they are able to win,” says Maxcy. “Funds could be diverted to compensation to the players instead. But that raises the question of how that fits into their education.”

Mandatory student activity fees often pad athletics budgets. The University of Virginia charges students $657 annually; George Mason University, also in Virginia, charges an auxiliary student fee each semester, of which $272 is sent straight to athletics.

“It is always the students who end up paying,” says Tublitz. “Since athletics is not the purpose of a college, it makes no sense to put an athletics-related financial burden on a group that is already financially strapped and receives no academic benefit.”

Perhaps that’s something college leaders should keep in mind, even during a month of college sports madness.

Sports revenue terms to know

Guarantee game: A competitive team pays a less competitive team a fee to play at the better team’s home field

Home-and-home game: When two teams make an arrangement to play at each other’s home location in back-to-back years

Neutral site game: When teams play at a professional or non-collegiate arena for an agreed-upon fee

Rating Percentage Index (RPI): A figure calculated for each team based on the number of wins against strong teams

Kylie Lacey is an associate editor at UB.

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