Tuesday, November 3, 2009

The Business of the College Sports

Why Did UVa Fire Dave Leitao?
On March 16, 2009, the head coach of the University of Virginia men's basketball team, Dave Leitao "resigned". As part of his severance package, Leitao was paid half of what he would have earned had he finished the 4 years left in his $1.05 million per year contract -- how would you like to get $2.1 million to quit your job? (The decision to fire Leitao came roughly 4 years after his predecessor, Pete Gillen was bought out of his contract for $2 million). Two weeks after Leitao's resignation, the athletics department hired Washington's Tony Bennett at $1.7 million per year to take his place. Oh, and they gave him half a million to sign (another half million if he finishes his 5 year contract). Since basketball is a zero-sum game, it might seem a little absurd to fire a losing coach (half of all coaches are going to be losing coaches). This article will try to figure out if the decision to fire Dave Leitao made financial sense.

Keeping Leitao another 4 years would have cost the athletics department $4.2 million (1.05 million per year). Over that same time period, Tony Bennett will cost UVa $9.4 million ($2.35 million per year when his signing bonus & Leitao's buyout are included). That's an extra $5.2 million dollars -- $1.3 million a year! (I'm not considering Bennett's 5th year because UVa would have had to draw up another contract when Leitao's ended). Since the athletics department is a business (in spite of its dubious ties to the university), the decision to fire Leitao must have been made with money in mind. So how does a $1.3 million per year loss translate into a good business practice?

For the past 4 years, the athletics department has produced an annual report, which among other things, contains a financial report. These reports list revenues and expenses.

The top 4 sources of revenue (each bringing in about $10 million per year) are: student fees, NCAA + ACC conference distributions, football ticket sales, and Virginia Athletics Foundation scholarship support.

These student fees are quite contentious. To quote from the 2007-2008 Annual Report:
"The athletics department receives no funding from the Commonwealth of Virginia or the University. Student fees account for approximately 17% of its budget and allow students free admission to all athletics events."
Free admission for a mandatory fee? That's generous. A fee that is mandatory for all students (but has nothing to do with education)? That sounds like they're trying to get around not being funded by the state. Until recently, all full-time graduate students paid a part of those fees, but could not attend events (taxation without representation?) But that's not the point of this article.

Back on topic, the next major sources of revenue are corporate sponsorships, gifts, football stadium suites, and men's basketball ticket sales (each bringing in between $2 and $4 million a year). (In case you're wondering, ticket sales for all other "non-revenue" sports combine to less than $1 million a year). My hypothesis is that men's basketball ticket sales fell off enough in Leitao's last year that firing him made financial sense. To that end, I present the following plot:
The above plot shows Men's Basketball Ticket Revenue (in millions of dollars) for the last 4 academic years. For the 2006-07 academic year, the John Paul Jones Arena opened, nearly doubling the number of available seats. That same year, despite being picked to finish 8th in the ACC, they shared the title (of regular season champion) with UNC and won every ACC home game. Ticket sales understandably rose for the 2007-08 season, especially when UVa star Sean Singletary decided to not declare for the NBA draft; however, 2007-08 was a disappointment with Virginia finishing 10th. With the departure of Singletary, UVa was picked to finish last in the 2008-09 season. They managed to finish second-to-last instead, but still had their worst season in 42 years.

A big feature of the graph is that is seems to based on the previous season's performance. If ticket sales really reflect the previous season, then the athletics department had to take drastic measures to avoid a really dismal 2009-10 fiscal year. The difference in ticket revenue between the last two seasons was $1.5 million (remember how hiring Bennett is costing UVa an extra $1.3 million...? If Bennett sells seats like Leitao did in 2007-08, the department will make $0.2 million off of him).
UVa is gambling that Tony Bennett can fill the arena and sell more tickets to offset his big price tag. The decision had nothing to do with wanting a winning team -- it had everything to do with making money (which, admittedly is a consequence of a winning team). If men's basketball were a non-revenue sport, Dave Leitao would still have his job.
Football Aside
So why does UVa football coach Al Groh still have his job?
Based on the above graph, Groh still has his job because UVa football fans are less critical (or more loyal) and keep going to games. But, that graph doesn't include the numbers for the 2009-2010 academic year (which is probably the most relevant one); based on recent events (record low attendance, team booed off the field), it looks as though Groh will indeed Go.

Copyright © 2009 Peter Dolph


Anonymous said...

I think you're confused. Yes, ticket sales drop when you're losing. However, if all UVa wanted to do was maximize ticket sales, they'd put the cheerleaders in skimpier outfits, have the dance team practice in strip clubs, lower their academic (and ethical) standards for athletes, and hire a scumbag coach who could recruit our way to a tainted National Championship.

But they don't. So it's not just ticket sales. Do you know what they want more than ticket sales? They want to win.

Leitao was an abrasive personality that, like Bobby Knight and other jackass coaches, you tolerate if you're winning. But a jerk like Leitao wears out his welcome pretty fast when losing.

Jason said...

For All Intents And Purposes

I hope your title is a joke, not an egg corn.

b. f. said...

what about cost of ticket increase?

UVa Blogger said...

Good stuff man. This is just one of the (probably) many reasons DL was fired. The ratio of wins to degree of abrasiveness is quite real and you know a lot of the blue bloods who own seats in the lower bowl but fail to show up for games hated him. I hope Bennett has a more successful tenure, but it will be interesting to see how long he stays if he does not.