Creative Destruction: The Business of Collegiate Sports in the NIL Era

The concept of creative destruction, introduced by Austrian economist Joseph Schumpeter, serves as a foundational framework in understanding market evolution within economies and industries. It highlights the relentless cycle of innovation and obsolescence that drives the economic progress forward. This essay explores the implications of creative destruction, particularly focusing on the disruptive shifts in college athletics brought about by the Name, Image, and Likeness (NIL) regulations. Through examining the NCAA's regulatory landscape, the emergence of NIL opportunities, and the resulting market dynamics, I aim to uncover the strategic insights for businesses navigating these changes, emphasizing the importance of adaptability and strategic foresight in seizing new venture opportunities and enhancing competitiveness. I further aim to shed light on a potential startup strategy to capture the emerging market.

Theoretical Frameworks: The Role of Creative Destruction

Creative destruction, as proposed by Joseph Schumpeter, provides a critical lens for examining the transformational forces at play in economies and industries. This theory argues that the constant flux of innovation and technological advancement leads to the decline of erstwhile dominant industries, products, or services, paving the way for new entrants. In the context of contemporary markets, this framework aids businesses, including startups, in pinpointing strategic opportunities for innovation, guiding them through the timing and methodology of market entry, and informing strategies to effectively navigate market transitions.

Creative Destruction in Practice: The NCAA and NIL Regulations

The enactment of NIL regulations marks a pivotal instance of creative destruction in college athletics, challenging the long-standing NCAA regime. Historically, the NCAA prohibited student-athletes from profiting from their name, image, and likeness, directing all related revenues to the institutions and the NCAA itself. This model has been disrupted by regulatory changes, now permitting athletes to engage in their own endorsement deals. This shift not only alters the financial landscape of college sports but also serves as a case study in understanding the broader implications of market evolution and the strategic recalibration required for businesses to thrive in a dynamically changing environment.

Early Market Dynamics and NIL Collectives

The initial response to the NIL market underscores a significant polarization in earnings potential, with a few top athletes landing lucrative deals, while the majority of athletes struggle to monetize their NILs effectively. This disparity raises concerns about the sustainability of athlete endorsements as a primary focus, potentially detracting from their athletic and academic pursuits. Furthermore, the emergence of NIL collectives, designed to support student-athletes in managing their NIL opportunities, faces scrutiny under IRS regulations, challenging their tax-exempt status and highlighting the complexities inherent in navigating the evolving NIL landscape.

The NCAA's Financial Dynasty and Its Disruption

The NCAA's stringent regulations created a financial empire, channeling revenues from college sports directly to the institutions and the NCAA, bypassing the student-athletes. This system, built on the premise of amateurism, has recently been challenged, leading to a seismic shift in the collegiate sports landscape. The introduction of NIL rights represents a form of creative destruction, dismantling the traditional revenue model and forcing a reevaluation of value distribution within college athletics. This change may not only democratize earning potential among athletes, but also prompts a rethinking of the role of regulations and the importance of innovation in maintaining competitive relevance.

Feast or Famine: The NIL Market's Early Challenges

The diversification of income through NIL rights has not been uniform, creating a "feast or famine" scenario. A handful of athletes have secured significant endorsements, while many others have found monetizing their NILs a daunting task. This polarization raises questions about the long-term viability of the NIL market and its impact on the collegiate athlete experience. Moreover, the responsibility placed on athletes to navigate endorsements may detract from their primary objectives, namely sports and education. Such disparities necessitate a strategic approach to ensure equitable opportunities within the NIL ecosystem, underscoring the importance of innovation and adaptability in this new market paradigm.

The Rise and Scrutiny of NIL Collectives

NIL collectives emerged as intermediaries to facilitate NIL transactions, aiming to ease the burden on student-athletes. However, the IRS's scrutiny regarding their tax-exempt status reveals the complexities of integrating new economic models within existing regulatory frameworks. This scenario exemplifies the broader theme of creative destruction, where innovation challenges traditional structures, prompting legal and economic adjustments.

The IRS memorandum concludes that due to their primary operation of compensating student-athletes and providing them with significant private benefits, many NIL collectives do not meet the criteria for tax exemption under Section 501(c)(3). It suggests that such collectives are not organized and operated exclusively for exempt purposes, as they primarily serve the private interests of student-athletes.

Overall, NIL collectives have played a role in providing compensation and support to student-athletes for the use of their NILs, but their tax-exempt status and compliance with IRS regulations have raised questions and scrutiny.

The document, "AM 2023-004”, from the Office of Chief Counsel of the IRS addresses the issue of whether operating an NIL collective furthers an exempt purpose under Section 501(c)(3) of the Internal Revenue Code. This question arises in the context of collegiate student-athletes receiving compensation for the use of their NIL without impacting their NCAA eligibility, a policy adopted by the NCAA in 2021.

The uncertainty of non-profit status has lead to an opportunistic, if not very shady, mutation in the NIL arena, whereby a handful of companies such as FirstTeam Sports, Blueprint, and SANIL, have emerged as willing backstops to take on the business of raising non-profit money on behalf of the collectives, and then funneling the money raised to athletes. For example, journalist Daniel Libit revealed that according to Blueprint’s 2022 tax return “some of the $1M in grants it paid out that year went to compensate over 100 University of Arizona football players for doing promotional appearances with local police and fire departments in Tucson.”

Learfield and the Incumbent's Struggle for Relevance

Learfield Sports, once a central figure in collegiate sports marketing, illustrates an incumbent's struggle amidst market upheaval. The introduction of NIL rights and the resulting market shifts threaten Learfield's established business model, compelling a strategic pivot towards embracing NIL opportunities. This case study underscores the essence of creative destruction, where established players must innovate or face obsolescence. Learfield's adaptation efforts reflect the broader market's struggle to balance traditional revenue models with emerging opportunities, highlighting the ongoing tension between innovation and tradition in dynamic markets.

The company, which started as the radio rights holder for the University of Missouri in 1975, slowly expanded its offerings to include a diverse range of sponsorship opportunities for its sponsors and advertisers.

For years, Learfield made money from doing lucrative multi-media rights deals with the athletic institutions that were profiting from the “indentured” student-athletes.

Studying the history of Learfield’s market messaging reveals a fascinating case study of an incumbent trying desperately to hold on to the golden goose, trying desperately to remain relevant amid the unfolding erosion of the NCAA financial empire on which Learfield has previously depended.

In 2004, Learfield’s management team described the company as “a diverse media enterprise that manages multi-media rights for nineteen of the country's premier collegiate athletic programs.” More specifically, Learfield specialized in managing, packaging and selling marketing and sponsorship opportunities connected with “America's favorite collegiate teams.”

Learfield’s basic offering was outsourced multi-media solutions for college athletic programs that were transitioning amid the Internet revolution.

In 2011, Shamrock Capital purchased an 80% stake in Learfield for $80M. Two years later, Shamrock flipped its asset to Providence Equity for $570M, creating a tidy return on its investment. Providence Equity was a full supporter of the potential future as Learfield evolved from a company that could help NCAA sports teams develop a multi-media strategy to a company that provided an end-to-end outsourcing option for school programs, burrowing a little deeper into the P&L risk of sports multi-media. It was a clean strategy that was working pretty well and showed no signs of needing a radical overhaul.

Fast forward to 2024 and witness the incumbent response to creative destruction. Likely sensing the risk of extinction, Learfield made a radical pivot. Learfield dove head first into multi-media “productization”. The strategy they chose was to use the foundation of multi-media rights to capture the wild horse of NIL sponsorship. Learfield reasoned that if it could draw the sponsorship dollars into the school programs it could magically capitalize on an athlete’s new right to monetize his/her NIL. This was no doubt influenced by the threat of private competitors that had entered the market serving to operate the more than 225 non-profit collectives for Division I schools across the country. Learfield’s golden goose was threatened by firms capable of raising hundreds of millions via non-profit tax shelters, doing very little actual work in order to profit from the shifting economic landscape.

To protect its position from new market entrants, Learfield took promised cash flow to schools in exchange for further entrenching their exclusivity, this time through NIL sponsorship rights.

To clear the way for this strategy, in 2018, the company merged with its top competitor in the business. Combined, Learfield owned the media rights to over 1,000 schools.

The Light at the End of the Tunnel was a Dumpster Fire

Sensing the perfect opportunity to achieve hyper-growth by collateralizing revenue, the post acquisition strategy for Learfield centered on partnering with private equity debt providers.

But by 2023 the company was being crushed by $1.1B in debt obligations that it could not repay - a process that started with Shamrock Ventures and was amplified by Providence Equity. This forced the restructuring of the company, a transaction through which the primary debt providers became the majority owners of the business.

This is a critical marker for potential competitors - particularly startups.

Private equity investors have a long history of investing in businesses with the primary goal of maximizing financial returns in the short- to medium-term, often at the expense of innovation. They achieve this through a variety of financial engineering strategies such as cost cutting, restructuring, and debt loading. While these strategies can improve the financial performance of the business in the short-term, they often result in reduced investment in innovation, which can harm the long-term prospects of the business.

Predictably, the new private equity overlords at Learfield began to focus on restructuring contracts away from guaranteed payments and toward more revenue sharing arrangements. While potentially slowing the bleeding, management was merely treating symptoms and not fixing problems.

The short- to medium-term focus of private equity investors often means they prioritize delivering quick financial returns over fostering a culture of innovation. This can result in a lack of long-term strategic planning and investment in innovation, which harms the company's ability to adapt to changing market conditions and stay competitive.

What they all fail to realize is that in the process of creative destruction the notion of “who is the customer” often changes. This is true of the NIL market. Learfield and the NIL collective operators have traditionally served the athletic programs and schools. But they are no longer the customers. The customers are now the fans and the athletes themselves.

The Last Gasp of the NCAA?

The NCAA has officially proposed a rule change allowing Division I schools to enter into NIL deals with athletes, potentially paying them in non-educational ways. A new subdivision with different recruiting, roster, and policy rules is being proposed, with schools contributing to a trust fund for athletes.

This shift from the NCAA's non-academic compensation stance aims to address growing legal pressures and revenue disparities. However, this change could disadvantage athletes in the long- run by potentially increasing financial disparities between schools and creating an uneven playing field in college sports, possibly leading to less focus on education and more on financial incentives.

Consider the following example scenarios:

Scenario 1: A school enters into a multi-million dollar multi-media transaction with, for example, a television broadcast company. The school receives significant proceeds from this transaction and utilizes a portion of those funds to directly compensate the players.

Scenario 2: The ruling paves the way for football and basketball programs at the collegiate level to become private for-profit businesses like professional teams whereby private equity enters the market to underwrite athlete compensation and business operations.

Either way, by implementing such a resolution, the market size of the school would become directly tied to the potential for NIL monetization. The sharing of multi-million dollar multi-media transactions or the inclusion of private equity represents a substantial injection of funds into the market, increasing the overall size of available cash flows. This, in turn, exacerbates the polarity of NIL cash flows, as players that play in bigger markets will receive significantly more compensation while others may receive lesser amounts or none at all, depending on their individual market value and overall marketability.

The concept of a top-down distribution of funds is too susceptible to macro market dynamics, including the value of media rights rather than the potential NIL value of a particular athlete.

The Future of NIL: Innovation and Market Evolution

As the NIL market matures, the potential for startup innovation becomes increasingly evident. Startups, with their agility and innovative capacity, are well-positioned to exploit gaps left by the restructuring of traditional markets. The NIL space, ripe for technological and business model innovation, offers a unique playground for startups to redefine athlete endorsements and fan engagement. This wave of innovation is not just about capturing new opportunities but also about redefining the market landscape, illustrating the transformative power of creative destruction in action.

The NIL market opportunity has produced countless new market entrants. These companies vary in their focus areas, including marketplaces for athlete endorsements, digital platforms for brand collaborations, and services that facilitate legal and compliant monetization of athletes' NIL rights. Here are some of the companies competing in the space:

CleanKonnect: Focused on high school and college athletes, CleanKonnect offers a platform to help athletes get paid legally and efficiently, providing unique insights into athlete demographics for targeted brand campaigns. They also offer end-of-year tax guidance and NFT creation for digital assets.

Dreamfield: Specializes in connecting collegiate athletes with talent booking opportunities, with a primary focus on in-person appearances and live events. Dreamfield integrates with compliance third parties to ensure transactions are safe and compliant.

Gifted: A mobile application designed not just for athletes but for individuals with "Gifted" skills. It provides a range of services from contract vetting, to personal brand portfolio building, and compliance reporting and tax assistance.

Icon Source: Created by athletes for athletes, Icon Source aims to protect and bring more opportunities to athletes and their agents. It offers a proven marketplace with a track record of working with big athletes and brands, emphasizing real-world deal processes and compliance integration.

Inked Sports: Another platform that facilitates NIL deals, although specific details about its offerings and unique attributes were not provided in the source.

Athletes.org: Athletes.org is a non-profit organization that was launched to support athletes navigating the college experience and to provide a platform for their voices on the future of college sports. It aims to maximize athletes' incomes, amplify their voices, and support them in key decisions on and off the field, focusing on unlocking income opportunities through group licensing and non-traditional avenues. The organization is structured similarly to players' associations, with chapters based on sports and conferences, and emphasizes collaboration among stakeholders to create a new system that includes athletes at the decision-making table.

In Strategy, Timing is Everything

There is such a thing as being “too early”. Its a common mistake for founders and investors to overestimate the value of first-mover advantage when new market opportunities emerge. Building new companies and investing in first-generation business models in the early beginnings of creative destruction is rife with uncertainty. In fact, the only certainty amid a major industry upheaval is a constantly shifting playing field as the docket I’ve entered in this paper illustrates.

Being too early as a startup in a market undergoing creative destruction often leads to capital inefficiency and the likelihood of costly pivots. Founders and investors may rush to seize the perceived first-mover advantage, but this can lead to premature scaling or investment in business models that are not yet fully understood or validated.

In the early stages of market upheaval, the landscape is often characterized by high levels of uncertainty and volatility. Market norms and customer preferences are yet to be established, the regulatory environment may still be evolving, and the competitive landscape is often fluid with new entrants and exits. In such a scenario, startups that invest heavily in scaling operations or developing product lines risk making costly mistakes. They may find that the product-market fit they assumed does not materialize, or that their business model is not sustainable under the evolving market conditions.

Additionally, being too early often means having to educate the market, a costly and time-consuming process. Startups may need to invest heavily in marketing and customer education to create awareness and demand for their new solution, which can quickly drain financial resources.

Furthermore, pivots in response to market feedback or changes are common for early-stage startups but can be particularly costly and disruptive for companies that have already invested heavily in a particular direction. Pivots often involve significant changes to the product, business model, target market, or all of these, requiring additional investment and potentially leading to loss of the initial capital.

Unfortunately, many of the first wave of startups in the current NIL market will not survive.

Striking with the Second or Third Startup Waves

Patiently observing incumbent behavior and learning from the inevitable mistakes of first wave startup entrants can reveal a better strategy to capture emerging markets. This approach leverages the luxury of cognition, that is, the ability to thoughtfully analyze and interpret the market dynamics and behavior of existing players.

Incumbents, especially in markets undergoing creative destruction, are often slow to adapt and tend to cling to their established business models and strategies. This can lead to missteps and inefficiencies as they grapple with the changing market dynamics.

Similarly, early startup entrants, eager to seize the perceived first-mover advantage, often rush into the market without fully understanding it. This can lead to mistakes such as premature scaling, misjudged product-market fit, or investing in unvalidated business models.

By patiently observing these players, the second or third wave of startups can gain valuable insights into the market. They can identify the gaps in the incumbents’ offerings, understand the pain points of the customers, and learn from the mistakes of early entrants. This allows them to develop a more informed and effective strategy to capture the market.

The Next Wave of NIL Innovation

The cognitive breakthrough in the NIL landscape is the paradigm shift in identifying who the primary customers really are. The traditional model primarily served the athletic programs and schools. However, in the new dynamic brought about by the changes in NIL policies, the focus has shifted to the fans and the athletes themselves.

This necessitates a complete redesign of NIL platforms and businesses to cater to these new customer groups. Fans are the primary consumers of the sports content, merchandise, and endorsements that athletes offer. Therefore, the platforms need to be designed to enhance fan engagement, facilitate easy access to favored athletes' content, and offer personalized experiences based on fan preferences.

On the other hand, athletes are the primary providers of NIL assets. Platforms should provide them with tools to easily manage their NIL assets, connect with potential endorsers, and effortlessly monetize their name, image, and likeness.

Recognizing and serving these new customer groups is critical for the success of NIL platforms and businesses in this evolving landscape.

An Internet advertising model could provide a viable solution to the polarized distribution of NIL cash flows. This model would effectively price the supply and demand between consumers and corporate advertising sponsors, creating a more balanced and fair market.

Just as Internet advertising platforms connect advertisers with target audiences, an online platform could connect with corporate sponsors with potential customers, leveraging student-athletes as the primary advertising vehicle. On this platform, sponsors could bid for advertising space on an athlete's social media profiles, apparel, or other NIL assets. The price would be determined by the market's supply and demand dynamics, ensuring fair compensation for athletes.

This model would also allow a more granular and dynamic pricing strategy. Rather than locking into long-term agreements, advertisers and athletes could adjust their pricing and partnerships based on performance, market shifts, and other factors. This flexibility would allow more athletes to monetize their NIL and reduce the risk for advertisers.

Moreover, such a model could potentially democratize the NIL market, as even athletes from smaller schools or less popular sports could attract advertisers interested in reaching specific target audiences. This would help reduce the earnings disparity among athletes and ensure a more equitable distribution of NIL revenues.

The Future of NIL and the Sixth Wave of Innovation

Sixth Wave technologies, including AI and digital experience platforms, shed light on the future of the NIL market ecosystem. These technologies can offer solutions for transparent and efficient transaction processing and data-driven insights for personalized marketing strategies. Startups at the forefront of leveraging these technologies will drive the next wave of innovation in sports marketing, creating new opportunities for athlete monetization while enhancing fan engagement and participation.

AI can analyze vast amounts of data to understand consumer behavior, preferences, and trends. For NIL monetization, this means that ads featuring student-athletes can be more effectively targeted to audiences that are most likely to engage with them. AI can help in crafting personalized messages that resonate with specific demographics, increasing the effectiveness of campaigns.

AI algorithms can predict future consumer trends and behaviors by analyzing historical data. This capability allows brands and athletes to stay ahead of the curve, tailoring their advertising strategies to meet anticipated market demands. For the NIL arena, this could mean identifying emerging sports stars or trends before they become mainstream, giving advertisers a competitive edge.

AI can generate creative content, including text, images, and videos, reducing the time and cost associated with content production. For NIL endorsements, this means that athletes and brands can quickly produce high-quality, engaging content for advertising campaigns, ensuring timely and relevant outreach to potential customers.

3D Retail technology will open the door to the creation of virtual storefronts and products, offering an immersive shopping experience. In the context of NIL monetization, this could enable fans to virtually try on merchandise endorsed by their favorite athletes, increasing engagement and the likelihood of purchase.

Incorporating 3D Retail into Internet advertising models enables the creation of interactive ads that allow consumers to engage with products in a virtual environment. For NIL endorsements, this means creating more engaging and memorable advertising campaigns that allow fans to interact with products associated with athletes, enhancing brand loyalty and conversion rates.

Closing Thoughts: The Strategic Implications of NIL Monetization

The advent of NIL monetization presents a paradigm shift in the economics of college sports, introducing both opportunities and challenges for athletes, institutions, and market entrants. This shift necessitates a strategic reassessment of how value is created, distributed, and captured in the collegiate sports ecosystem. For athletes, it underscores the importance of personal brand management and strategic partnerships. For startups and new market entrants, it highlights the potential for disruptive innovation in sports marketing, athlete representation, and fan engagement.

The initial polarization in the NIL market, characterized by significant disparities in income among athletes, points to underlying market inefficiencies. Addressing these requires innovative business models and technologies that democratize access to monetization opportunities. Platforms that offer scalable, transparent, and equitable solutions for NIL transactions can reduce the burden on athletes, ensuring that focus remains on athletic performance and academic commitments.

The concept of creative destruction, as witnessed in the evolution of the NIL landscape, offers profound insights into the dynamics of change, innovation, and adaptation in collegiate sports. This process, while disruptive, paves the way for new forms of value creation, challenging traditional paradigms and fostering a more inclusive and equitable market. As stakeholders navigate this evolving landscape, the keys to success will be strategic foresight, agility, and a commitment to innovation. The future of college sports, in the era of NIL monetization, will be shaped by those who can effectively harness the transformative potential of creative destruction, turning challenges into opportunities for growth and advancement.