Thursday, April 7, 2011

Revenue is Not Profit

I don't know what it is about college sports that gets otherwise smart people loony, but I'll say it again: revenue is not profit. If I buy an aircraft carrier for $15 billion and sell it for $150 million, I have not made $150 million. I have lost $14.85 billion. There is no profit in that set of transactions, even though there is revenue.

That's why things like this drive me gray(er):
As non-profit organizations, NCAA colleges and universities are mostly tax exempt. At present, that includes the huge profits that are generated by many big time football and basketball programs (of course, not all are profitable; some are cash sinks dragging down the rest pf the university). 
These profits go to support enormous salaries for coaches, bowl game officials, top NCAA executives, athletic department staff, and so on. Sure, at some schools, some pittance goes to support non-revenue sports, but that can't excuse the massive corruption that pervades revenue sports.
Now, Steve Bainbridge is a really smart guy: UCLA law professor, top scholar in the field of corporate law, etc. It would be insulting to go through the "revenue is not profit" rant in front of him. He understands that.

What he doesn't understand is that the bolded part of that paragraph above isn't some parenthetical you can throw out in a "to be sure" sentence. At every major school--major defined quite liberally--a huge percentage of total revenue goes towards supporting dozens upon dozens of sports that don't come within a metric mile of breaking even. Women's basketball programs alone lost about $2 million per team last year, and women's basketball is the only other program that has a national television deal. Everything else is pure money suck without anything in return. That difference comes from somewhere, and somewhere is football. He knows revenue isn't profit, but when he hears the huge revenue numbers, he assumes there must be many digits of profits there.

His categorization of athletic department expenses is screwy as well. Coaches salaries are becoming an ever-increasing drain on athletic departments, but the rest of those categories listed by Bainbridge are almost nothing. The NCAA's operating expenses are laughably small (about $250k per major football-playing school, and that's not counting contributions from the Villanovas, Gonzagas, and Butlers of the world. As for the rest, Brian Cook broke down the numbers for Michigan, which I figure are representative for the highest revenue-producing schools:

Who is benefiting from hypothetical exploitation? Three parties:
  • Non-revenue athletes
  • . About 30% of Michigan's expenses are related to housing, educating, transporting, and outfitting athletes with another 16% devoted to giving them places to play.
  • Coaches
  • . 17% of Michigan's revenue pays them.
  • Everyone else
  • . 21% of Michigan's revenue goes to the rest of the department.
Michigan profited by about $17 million last year, which is highly unusual; Ohio State profited by only 400K, while Nebraska profited by about $1.7 million (All numbers from the USA Today database). These are not wild amounts. And remember, these are the biggest of the big programs. At the vast, vast majority of schools, the only way the athletic department breaks out even or "profits" is from direct aid from either the government or the school.

The margins are tight all around. Schools are already cutting sports wherever possible, but Title IX requires balance between women's and men's sports, so the former can only be cut so far. Make those margins tighter, and you will decrease coaching salaries. You will also drive a nail into the heart of every single men's non-revenue sport, along with every women's sport no longer necessary for federal compliance.

The tax argument (not the legal argument, but the "should or shouldn't we" argument) is the same as the paying players argument: the money just isn't there, unless you pay only a few (and try explaining to people why male athletes should be paid but female athletes shouldn't in a way that doesn't sound creepy). Both arguments a premised on this idea that there's a huge pot of gridiron gold being hoarded by mustache-twirling athletic directors (an idea that gets reinforced by every "the NCAA gets how much money from March Madness?" story without people doing the arithmetic to figure out just how many friggin' teams are in Division I alone). I'd much rather have the "should college sports exist?" debate, which really cuts to the quick of the matter, than a debate founded on a false premise.