I Paid Too Much to Be This Disappointed
With Mizzou still keeping everything on the table this season (big game Saturday against ‘Bama), we’ve all been paying pretty close attention to college football. So we were watching when former Alabama football coach Nick Saban said the quiet part out loud on College GameDay about NIL: “You guys keep talking about a $20M roster, but if you pay the wrong guys, you’re shit out of luck.”
Kirk Herbstreit laughed that Saban “just broke the internet” (because who doesn’t love unexpected profanity). What someone might have added is that if you pay the wrong guys to assemble a $20M roster, you’re also shit out of $20M.
Something we believe at Permanent Equity is that overpaying for an asset is functionally the same as leveraging it up. In both cases, expectations rise and margin for error shrinks. That’s how even good businesses can become disappointing investments, a lesson the cabal behind college sports today might stand to heed.
Amid all of this NIL madness, Congress is debating the Student Compensation and Opportunity through Rights and Endorsements (SCORE) Act (shoutout to the Washington, DC, brain trust that tortured that clever acronym into existence). As drafted, it would let schools “pay up to 22% of annual athletic revenue to student-athletes” and provide an antitrust exemption.
And the biggest schools seem to love that idea.
Because by tying spending to a percentage of revenue rather than fixing a hard dollar amount and also protecting them from antitrust lawsuits, they get a flywheel: spend to grow revenue and then spend more to grow revenue more. The result should be a top-heavy college athletics landscape where only a handful of schools have the resources to really compete.
There are, however, inescapable realities in play. One: sports is pain. Two: as capital floods a sector, returns go down. So as the marginal athletic department dollar chases the same pool of talent to pay to compete in the same zero sum league, valuations will rise and ROICs will plummet. In other words, the disappointing 6-6 season that got you sent to the lowly Boca Raton Bowl just got that much more expensive.
Plus, as Saban pointed out, no matter how much capital you have, there is also always underwriting risk. Pay the wrong guys and…nevermind…I’m sure football boosters will be patient LPs.
– Tim
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