IP in college basketball: NCAA 1, student-athletes NIL

IP in college basketball: NCAA 1, student-athletes NIL
Image credit: Getty Images

Intro

8 April marked the end of the 2019 NCAA Division I Men’s Basketball Tournament, concluding with the national championship game between the Texas Tech Red Raiders (Texas Tech University) and the Virginia Cavaliers (University of Virginia). To get there, both teams had to battle their way through a single-elimination tournament of 68 teams, successfully progressing past the “sweet sixteen”, “elite eight”, and “final four” rounds. The tournament is a long-established fixture in the US sports calendar with fans tuning in by the millions to see the drama unfold. The broadcasting leans heavy into the amateur ethos of the competition, waxing lyrical about the student-athletes and their endeavours in balancing academic pursuits with the rigorous demands of competitive sport. However, don’t be fooled, the lifeblood of this competition isn’t school spirit, it’s money.

The National Collegiate Athletic Association (NCAA) is a member-led non-profit organization which acts as the administrative and legislative body for intercollegiate athletics in the US. The NCAA decides upon and enforces the rules for each sport and the eligibility criteria for individuals to qualify as student-athletes. It also organizes and conducts 90 championships across 24 different sports, the most important being the Division I Men’s Basketball Tournament, which it brands as NCAA March Madness. During the 2016-2017 academic year the NCAA declared over $1 billion in revenue, with over 80% of this figure being generated from March Madness through media rights, ticket sales, advertising and sponsorships. In 2010, the NCAA signed a 14-year $10.8 billion deal with CBS Sports and Turner Sports, leveraging its most valuable IP asset, the March Madness broadcasting rights! This agreement was extended in 2016 for a further 8 years and $8.8 billion.  The majority of the NCAA’s annual revenue is distributed to the division Conferences and member institutions, which use the money to fund their programmes, pay staff and provide scholarships.  The only people who do not receive a cut of the tournament takings are the very people who the spectators pay to see, the student-athletes.

In recognition of the substantial revenues that certain athletes generate for parties affiliated with intercollegiate athletics, should they not be entitled to receive a commensurate financial benefit? The NCAA doesn’t think so. Current rules prohibit athletes from receiving cash compensation or sponsorship money, arguing that this would undermine the fundamental educational principles of the collegiate model. Many would disagree with this rationale, including Congressman Mark Walker who recently introduced a bill which would effectively allow NCAA athletes to profit from the commercialisation of their name, image or likeness (NILs).   As pressure grows upon the NCAA to rethink their approach to player remuneration, could allowing student-athletes to profit from their own personal brand image be a viable solution moving forward?

The rules and the current position

At the very core of the NCAA’s rules and regulations is the concept of the “amateur student-athlete”. Article 12 of the NCAA Division 1 Manual sets out to define the boundaries of amateurism by stating who can be considered an amateur and clarifying conduct which would cause an athlete to be deemed a professional. Essentially, student athletes are not allowed to receive remuneration of any kind which arises from their status as an athlete, except those tied to a grant-in-aid (athletic scholarships) or educational pursuits, if they wish to remain eligible to compete.

The restrictions put in place by the NCAA rules go beyond standard pay-for-play scenarios and also cover what student-athletes can do with their own proprietary NILs. For the privilege of competing, athletes are required to consent to the NCAA, and any third party acting on its behalf, using their name or picture to promote NCAA championships and other events. At events like NCAA March Madness, athletes’ names and images are used, which in turn help the NCAA generate revenue through increased viewership and broadcast rights. Although the athletes’ NILs cannot be used for ‘strictly commercial purposes’, this nonetheless allows the NCAA to profit from the athletes. Furthermore, rule 12.5.2.1 explicitly prohibits student-athletes from receiving payment for endorsing a commercial product or permitting third parties to use his/her name or picture to advertise or promote a commercial product.

The issue of student-athletes receiving remuneration for the use of their NILs is one which is particularly interesting and has been challenged in the courts, the most high-profile of which has been the case of O’Bannon v NCAA. Ed O’Bannon, a former college basketball player, challenged the NCAA’s use of student-athletes’ likeness for commercial purposes and argued that they should be entitled to compensation following graduation. The District Court found in favour of O’Bannon stating that the NCAA’s practices were in breach of antitrust laws, even going as far to suggest that colleges could pay student-athletes $5,000 annually in deferred compensation. However, this position was somewhat diminished on appeal to the US Court of Appeals for the Ninth Circuit, where the panel determined that the amateurism model allows the NCAA to limit the compensation for using an athlete’s NILs to the cost of the grant-in-aid.  Whilst the NCAA may chalk this decision up as a victory, the case nonetheless identifies the issue of student-athletes commercially benefitting from the use of their NILs as potential focal point for advocates of greater student-athlete rights to exploit.

Zion Williamson and the power of personal brands.

The inadequacies of the current system have been emphasised during the 2018-2019 college basketball season through the introduction of Zion Williamson onto the collegiate scene. The 6-foot-7, 285-pound Duke University freshman is widely considered a once-in-a-generation talent who is all but certain to be drafted as the first overall pick in the 2019 NBA draft come June. Growing up as one the most entertaining high school athletes in the social media era, Zion was already an established name before starting college. The demand to watch Zion play is so high that in the run up to the Duke v North Carolina rivalry match in February, ticket prices were listed at an average price of $4,670 on the secondary market.

In a time where the top professional basketball players like Lebron James and Steph Curry make more money from off-court activities such as endorsement deals than they do from their professional salaries, personal image rights for athletes can be extremely valuable.  Even at the collegiate level Zion Williamson was already a brand in himself and it is an uncontroversial statement to say that Zion could earn $1 billion over the course of his career in the NBA.  Zion’s freakish athletic abilities paired with a humble “nice-guy” demeanour make him a sought-after commodity and the endorsement opportunities available to him will be endless once he has signed his rookie contract. Some sports analysts predict that a bidding war between shoe companies could potentially secure Zion a rookie shoe deal worth over $100m, eclipsing the previous record set by Lebron James and Nike back in 2003.

The value that these large entities hope to tap into through collaborations with athletes such as Zion does not magically come into existence once they turn professional. This personal brand value often exists, admittedly to a lesser extent, during their time as NCAA student-athletes, they just aren’t allowed to engage in licensing or sponsorship opportunities. The power of Zion Williamson’s personal brand image is extremely valuable and large entities such as the NCAA, Duke University, CBS Sports and Nike are more than happy to exploit it at his expense.

Student-Athlete Equity Act, the Olympic Model and beyond.

If we accept that the NCCA amateur model should be amended to allow student-athletes access to a share of the financial spoils, the question remains as to what form this evolution should take. Whilst public opinion is definitely shifting, payment of a salary or direct cash contribution from the NCAA or the athlete’s college in exchange for their athletic services would likely go too far. At the end of the day, the relationship between each student athlete and their college is academic in nature and the provision of an athletic scholarship covering the cost of university education is sufficient for that purpose.

A more palatable alternative could be something akin to what has been proposed by Congressman Mark Walker in the Student-Athlete Equity Act. Although the bill approaches the issue from a tax law perspective, its core aim is to allow student-athletes the opportunity to monetize their talents whilst at college through the unconstrained use of their individual publicity rights.  The legislation would stop amateur sports organisations, such as the NCAA, from preventing student athletes being compensated for the use of the use of their NILs. Players like Zion Williamson would be free to have their NILs used in advertisements, promotional activities and video games and be paid fair compensation based on market rates. Whilst critics of this proposal argue that it could lead to the creation of non-legitimate endorsement contracts facilitated by college recruiters as a tool to attract quality athletes, the system as whole would be governed by free-market principles.

Changes to the current system could also be styled after the current Olympic model which allows athletes to profit from commercial activities relating to their NILs whilst still remaining eligible to compete in the Olympic Games. The Olympics’ definition of amateurism is less restrictive than the NCAA’s, allowing athletes far greater freedom to explore the value of their personal brands. Whatever form the change comes in, it cannot come soon enough for the student-athletes who are looking to receive the financial remuneration they rightly deserve.

Stuart Craig

Valuation Analyst

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