Is Toleration In Moderation The Right Financial Decision For Sports Organizations?

            Just when you thought the Manti Te’o controversy was over, along came the NFL Scouting Combine. Pro Football Talk’s Mike Florio reports that NFL GMs are asking if the hoax that had the Notre Dame standout linebacker Te’o “dating” a woman he had never met in person was created as result of Te’o being gay.

            Sports have always had a complicated relationship with race, gender and sex issues. In particular, sexual orientation has been the leading source of controversy when it comes to equality issues in sports over the past decade. In many instances, players, coaches, and fans have made homophobic comments in a variety of different contexts. This ranges from Kobe Bryant uttering anti-gay slur at a referee during a 2011 game on the same day the NBA was shooting sexual orientation tolerance public service announcement to a USA Today report that states “Fans of two-time defending Russian [soccer] champion Zenit St. Petersburg are calling for non-white and gay players to be excluded from the team.”

When it comes to toleration in sports, there appears to be a gap between what is the right moral / ethical decision and what is the right financial decision. At least some number of fans, media, GMs, and players clearly struggle with these issues – particularly when it comes to gender and sexual orientation. Should sports organizations potentially alienate the athletes, fans, and media members that condone some form of sexual discrimination at a time when teams and leagues are struggling to generate revenue or increase publicity?

            The answer, from an economic standpoint, is yes. Racial, gender, and sexual toleration is the correct economic decision. First, having a gay player would appear to have little to no impact on a team’s ability to win games. Prior to repealing the Don’t Ask, Don’t Tell legislation (which prevented openly gay soldiers from serving in the military) in 2011, the U.S. Department of Defense commissioned numerous studies to see if allowing openly gay and lesbian soldiers to serve in the military would impact “unit cohesion” and prevent soldiers from completing combat missions. A vast majority of these studies found there would be no impact.

A year after Don’t Ask Don’t Tell was repealed, there has still been no negative impact on soldier performance. While there is not a one-to-one correlation between the impact on openly gay military members and the impact openly gay athletes on sports teams, much of the logic behind asking Te’o (or any athlete) if he is gay comes from the same arguments that prevented openly gay soldiers from serving in the military. If there was no impact on performance in the military then it is likely that there would no impact on performance of a sports team.  

            From a marketing standpoint, numerous new opportunities emerge for sports teams that have an openly gay player. In 2009, Welch rugby player Gareth Thomas announced he was gay while still playing for the Cardiff Blues in an interview for The Daily Mail. This led to the Cardiff Blues being profiled in national, European, and international outlets, including Real Sports with Bryant Gumble, and allowed the team to gain exposure it never would have received without Thomas. The profile on Real Sports also documented how Cardiff players quickly came to accept Thomas’ sexuality and preformed in a similar manner after the announcement. Cardiff finished sixth in the Celtic League during the 2008-09 season and fifth during the 2009-10 season (the season when Thomas made his announcement).

            In addition, having an openly player would allow sports organizations to more easily target gay fans. While many major professional teams have policies on tolerance, very few actually proactively target gay fans – particularly male gay fans (the WNBA and LPGA have made great strides in targeting lesbian fans). This is likely a big financial mistake. In 2010, despite comprising just 6.8 percent of the American population, the buying power of lesbian, gay, bisexual, and transgender people was “projected” to be $743 billion, according to Harris Interactive and Witeck-Combs Communication. This lucrative demographic is being aggressively targeted by hotel, travel, and restaurant companies that compete with sports organizations for people’s leisure dollars. More importantly, sites like Outsports.com show there are large numbers of gay sports fans. For sports teams and leagues that are struggling to attract fans and generate revenue, directly targeting gay audiences could prove to a new approach to helping address these issues.

The recent developments in the Te’o story show how far some people in the sports industry need to come in terms of tolerance and acceptance people’s sexual orientation. Similar to the B6A analysis in our post about the Washington Redskins, we find that there is no real financial or economic justification for this type of sexual discrimination. In fact, sports organizations are largely costing themselves money by not targeting gay fans. 

Are Schools Selling Their “Souls” For Sponsors?

           Yesterday, Florida Atlantic University (FAU) agreed to a naming rights deal with the GEO Group to rename its football stadium the GEO Group Stadium. Why would a seemingly innocuous name change for a college in Florida receive coverage from the The New York Times? The GEO Group’s primary source of revenue comes from owning and operating federal and state prisons and illegal immigration detention centers. More importantly, the GEO Group “has been cited by state and federal regulators and lost a series of high-profile lawsuits” related to its owning and operating of these facilities.  

Of all the attempts to generate revenue in sports, stadium naming rights deals have often been the target of criticism for both the sponsor and the rights holder. From the sponsor’s perspective, the public often does not understand why or how having a stadium named after a company adds value to that firm. Former Massachusetts Congressman Barney Frank summed up popular sentiment about naming rights sponsorship when talking to banking leaders at the height of the recession in 2009 when he stated, “I don’t think anybody has ever opened a bank account or decided to buy a CD because a bank’s name is on the stadium.” B6A has written numerous blog posts refuting the basic premise of Frank’s assertion. Sports organizations often do deliver tremendous value to their sponsors; yet these organizations often have difficulty quantifying and communicating how a naming rights deal increases a sponsor’s revenue or meets its marketing goals.

            From a rights holder’s perspective, fans and media have often criticized sports organizations for naming their venues after companies. However, the proliferation of these deals over the past 15 years has made the impact on sports organizations’ brands relatively minor. For example, ESPN’s Eamonn Brennan criticized the “tasty name” of the University of Louisville’s KFC Yum! Center before stating, “It will take no time at all for people to forget that this name is funny -- corporate stadium nicknames have a way of ingratiating themselves into the lexicon and losing all meaning except ‘that big building’ as soon as everyone gets used to the idea.”

            But sometimes corporate sponsorships can do more serious damage to a sports organization’s brand. B6A has written about how sports organizations can address issues with sponsors after naming rights deals are secured during the Brooklyn Nets’ recent response to Barclays’ LIBOR scandal. Yet this issue with Barclays occurred after the naming rights deal had been signed – a problem more familiar for sports organizations. One of the most famous examples is how the Houston Astros had to deal with the Enron fallout after naming its stadium Enron Field.

            The GEO Group naming rights deal, however, seemingly presents a new ethical quandary that has not been fully examined by most professionals in the sports industry: should FAU knowingly accept a $6 million gift from the GEO Group to fund athletic costs when it knows the company has been dealing with serious ethical issues? It is public knowledge that The GEO Group both runs prisons and detention centers and has a history of questionable human rights issues. In addition, it is likely that FAU knows that the GEO Group is using its naming rights deal as a way to enhance its brand perception to combat the negative attention that has come from both lawsuits and a grassroots organization’s protest. At the same time, GEO’s chairman has “two degrees from Florida Atlantic and once served as chairman of the Board of Trustees.” In addition, the company hires many FAU graduates, including the last two FAU student body presidents.

Moreover, FAU has significant costs related to the new football stadium.  The school recently completed construction of a new $70 million venue and receives no state government subsidies for its athletic program. The $6 million gift from the GEO Group will help cover stadium costs and fund athletic scholarships.

When faced with a similar moral issue, the New York Giants and New York Jets took a different approach. In 2008, the New Meadowlands Stadium LLC (the company in charge of building the stadium for the two teams) entered into negotiations with Allianz for a naming rights sponsorship. There was only one problem: during Adolph Hitler’s reign as chancellor and dictator of Germany from 1934-1945, “the German company insured Adolf Hitler's engineers at the Auschwitz death camp, had a chief executive in his cabinet and allegedly refused to pay off life insurance policies to Jews during the Holocaust.” Even though it had publicly apologized for its role in helping Adolph Hitler and the Third Reich during this time, public outrage -- particularly within the relatively large New York Jewish community – caused the end of the negotiations.

It would be easy to say that FAU should have simply followed the New Meadowlands’ approach and terminated its negotiations with a company with publicly known and much more recent ethical issues. But the economic reality is that the Giants and Jets are in a much more financially stable position than FAU. These professional organizations could afford to turn down Allianz because they enjoy additional revenue streams to fund operations (most notably the NFL’s massive television rights deal). In addition, the New Meadowlands could much more easily find another partner for a naming rights deal. MetLife soon agreed to pay $400 million over 25 years (less money on annual basis than the proposed Allianz deal) for the Jets and Giants to host games in Metlife Stadium. Meanwhile, the $6 million gift from the GEO Group is the “the largest such donation in Florida Atlantic’s athletic history.” It is unlikely that FAU could find another partner that would be willing to pay that much money for such rights.

FAU, however, might still have found other sources of revenue that would accomplish the same goal as the new naming rights deal. The GEO Group’s $6 million per year deal will be paid out over 12 years creating an average annual stream of $500,000 for FAU.  As discussed in yesterday’s B6A post, FAU is now a prime candidate for “paycheck” games. These are games in which Bowl Championship Series automatic qualifying schools from the top conferences, such asthe Big Ten, SEC, and PAC-12, pay smaller schools to compete at their venues. For example, Northern Iowa received $1 million to play the University of Iowa and University of Wisconsin - $500,000 per game. With the Big Ten voting to eliminating paycheck games versus Football Championship Subdivision Colleges, that means there is a smaller number schools who could qualify for paycheck games. FAU, especially with its impending move to Conference USA, becomes a prime candidate for more of these games (the school played Alabama and Georgia in 2012).

Over the past decade, college athletic programs have increasingly sought to maximize all possible revenue. From individual media rights agreements and naming rights deals to conference re-alignments,, academic institutions have overwhelmingly favored whichever approach generates the most money. There are good reasons to both support and criticize this new reality in collegiate sports, and this debate has been covered in many other places.

The FAU case shows that making an ethically questionable decision does not have to be the only way to generate more revenue. By fully understanding and observing the competitive landscape, FAU could have avoided the negative publicity that came with the GEO Group’s naming rights deal and made a comparable amount of money through a different channel. The program then could have signed a naming rights deal for a lower amount of money with another corporate partner that had fewer ethical question marks. In fact, placing more emphasis on ethical considerations may have even led FAU to a different and more ethical approach in maximizing its revenue.

Note: “Paycheck” games may also be considered by many to be unethical. This criticism has some validity in that smaller schools are receiving money to play in football games against teams where they are likely to lose. However, both BCS and non-BCS schools need non-conference opponents to play during the season. In addition, playing a BCS school does not guarantee a loss. In fact, many people remember the Appalachian State and Michigan “paycheck” game in 2007 for this reason. Therefore, the uncertain outcome makes the guaranteed payments less ethically questionable than accepting money from company facing serious ethical issues such as the GEO Group.         

Is It The End Of The World As We Know It For Collegiate Athletics?

            In almost every “David versus Goliath” college football matchup, Goliath wins. But those types of games may soon be a thing of the past. The Big Ten Conference recently announced that its schools had voted to no longer schedule games with non-Football Bowl Subdivision (FBS) members. Many followers of the Big Ten applauded this move. Not only would it increase the competiveness of Big Ten programs, in terms of their national strength of schedule, but also it would eliminate games with lopsided scores, such as the beatings Savannah State suffered against Oklahoma and Florida State (where the school lost by a combined score of 139-0).

            Yet this impending decision means there are bigger losers off the field than Savannah State was on the field. In a Forbes article entitled “Elimination Of Guarantee Games Increases Likelihood Of NCAA Breakup,” Jason Belzer does an excellent job highlighting how many Football Championship Subdivision (FCS) teams need these “paycheck” games to survive. For example, he points out, “Northern Iowa (UNI) collected almost $1 million in guarantees from playing Iowa and Wisconsin, which accounts for almost 1/3 of the school’s $3.3 million dollar football budget.” More importantly, Belzer notes that the Big Ten’s decision would reverberate throughout the rest of the FBS. He argues that conferences such as the SEC, ACC, Pac-12, Big 12 and Big East will follow the Big Ten’s lead and stop scheduling FCS opponents. In addition, Belzer then suggests that schools in these conferences may limit the amount of games they play against smaller schools in basketball because these programs face similar competitive pressures as their football counterparts. 

            Belzer then argues that FBS schools’ impending decisions to eliminate games with FCS schools leaves these smaller schools in a very perilous competitive situation. Losing this substantial revenue will force these schools to generate revenue in other ways or “essentially be forced to stop competing at the same level as the larger institutions.” But according to Belzer, there is no real way for FCS schools to make up this revenue. The resulting gap between FCS and FBS will ultimately lead to the “eventual breakup of the approximately 340 school’s that compete at the NCAA Division I level.”

            B6A disagrees with virtually every point with Belzer’s analysis in the last paragraph. First, paycheck games are not going to be eliminated. In fact, non-BCS conferences have potentially new lucrative revenue generating opportunity. BCS schools still need to schedule games but have fewer schools to compete against in these games. Therefore, schools in conferences such as the MAC, Mountain West, Sun Belt, and Conference USA are going to have the opportunity to charge more money to play in these paycheck games. This means that at least some NCAA Division I schools not in BCS conferences should actually be in a economically healthier position then they were before this decision.
            Second, FCS schools can take steps to enhance revenue streams outside of the on-field competitions with big schools. For example, very few schools FCS schools have media rights deals. Yet there are an increasing number of regional sports networks (RSNs) and national networks that are looking for programming. In fact, NBC Sports Network signed a media rights deal with the FCS Ivy League to “broadcast football, men's basketball. and lacrosse.” FCS schools can and should continue to pursue these deals to be less dependent on paycheck changes.

            Even outside of traditional revenue streams, FCS schools have opportunities to attract subsidies. One of the reasons that the Bowl Championship Series schools are in such a strong competitive position is that it has spent $670,000 in federal government lobbying since 2003. Because of its lobbying efforts, the BCS has helped defeat legislation ranging from preventing BCS bowls from losing their nonprofit status to reducing federal funding to “colleges participating in a Division IA college football season that lacks a head-to-head playoff.” And it is not just BCS schools that lobby Congress. The Mountain West Conference has spent $250,000 in federal lobbying over the same time period.

While FCS schools have limited resources, many of these institutions rely on public funds to subsidize their athletic programs. Yet many institutions do not lobby at the federal or state level for their athletic programs or rely the schools’ lobbyists for their athletic programs. As schools like UNI receive more state funding, it is unclear how much of that funding will go to its athletic department. Therefore, FCS can and should make larger commitments to lobby on their athletic programs’ behalf, especially if paycheck games are eliminated.

The primary problem with Belzer’s article, however, is his assertion that the elimination of paycheck games will lead to the elimination of NCAA Division I athletics. It is critical to remember that the BCS is not part of the NCAA. Instead the BCS is “a partnership among 11 college football conferences, the University of Notre Dame and four major bowls – Fiesta, Orange, Rose and Sugar.” Therefore, revenue generated by BCS games goes to NCAA schools but not the NCAA. According to the NCAA, “Most NCAA revenue comes from a 14-year, $10.8 billion agreement with Turner Broadcasting and CBS Sports for rights to the Division I Men’s Basketball Championship.”

One may argue that it is madness to have such a seemingly large organization completely dependent on one deal. However, this deal also means the NCAA will do everything in its power to ensure that there are enough Division I basketball programs to continue “March Madness” (also known as the Division I Men’s Basketball Championship). This requires that schools outside of the BCS have basketball programs that compete at the Division I level. In addition, this dynamic may allow smaller schools to actually ask for an increased amount of subsidies from the NCAA – especially given the elimination of paycheck games.

Belzer is correct that the elimination of lucrative football games will cause problems for smaller schools. It is a stretch, however, to say that this means the elimination of the NCAA as we know it. Instead, smaller schools need to examine non-traditional revenue streams and sources of financing to subsidize their athletic programs.    

Note: The current BCS will be replaced by a new post season structure in 2014. This includes a six bowl games and four team playoff to determine the national champion. The current system has five BCS bowl games and a national championship game between teams rated number one and number two in the BCS Standings.