Outcry over Grand Canyon leaves NCAA with difficult look in mirror
It's a good time to be an investor in the NASDAQ-traded company with the ticker symbol LOPE. As of Friday its share price had risen more than 48 percent this calendar year, and more than 80 percent over the past 12 months. In its first quarter earnings call held May 7, a Deutsche Bank analyst asked the company's CEO how a recent initiative might affect its marketing strategy going forward.
"It really won't impact anything short-term. I think it will give us a lot more visibility," Brian Mueller told the analyst. "We are talking about TV contracts right now, mostly regional TV contracts, mostly around our men's basketball program, but we are going to be on the Pac-12 Network because our soccer team is playing Stanford to open the season next year."*
It's impossible to say whether this was the first-ever reference to a televised college soccer match on a Wall Street earnings call. But Mueller's company, Grand Canyon University, in Phoenix, is in the process of becoming the first-ever for-profit university to join the NCAA's Division I ranks. The Antelopes (hence, the ticker symbol) accepted an invitation to the WAC last December when the oft-raided league was on life support. On July 1 they became official members, beginning a four-year transition period from Division II to Division I
The presidents of the Pac-12 -- including one in particular -- are none too pleased about it.
The conference's 12 presidents signed and delivered a letter dated July 10 urging the NCAA's Executive Committee to "engage in further, careful consideration" about allowing for-profit universities to become Division I members at the committee's August meeting. In the meantime, Pac-12 presidents decided at a league meeting last month not to schedule future contests against Grand Canyon while the issue is under consideration.
"A university using intercollegiate athletics to drive up its stock value -- that's not what we're about," Arizona State president Michael Crow said in a phone interview over the weekend. "... If someone asked me, should we play the Pepsi-Cola Company in basketball? The answer is no. We shouldn't be playing for-profit corporations."
It's a fascinating issue within the realm of higher education, where for-profit institutions -- most of which emphasize online-only curriculums -- have become increasingly popular as an alternative to skyrocketing tuition at most traditional universities. Ads for the University of Phoenix and DeVry University are ubiquitous. However, these schools are also widely mocked as de facto diploma mills. A two-year investigation by a U.S. Senate committee concluded that for-profit schools are a drain on federal taxpayers due to high dropout rates among its heavily subsidized students.
"Our presidents have a pretty clear view that athletics works for the broader benefit of the university," said Pac-12 commissioner Larry Scott. "There's a discomfort with the idea that the sole accountability around athletics would be to a company that might use athletics as a marketing tool to drive stock price. There's a sense that changes the dynamics and accountability around athletics."
In regards to Grand Canyon specifically, though, it would certainly appear that Crow, who's been spearheading the effort, is driven in part by protecting his own turf. Arizona State has long been the only Division I university in the Phoenix market. And in the bigger picture, it seems a bit self-righteous that the same group of presidents that in 2011 signed a $3 billion contract with ESPN and FOX -- and which last year launched a profitable television network of their own -- would play the "non-profit" card in calling out someone else's motives.
"It's different in the following sense," Crow said of the comparison. "Whatever income we generate from a television network goes to support the swimming team, the rowing team at Cal. We support thousands of athletes and their scholarships, their room-and-board, as part of the intercollegiate spirit of athletics. ... In the case of a for-profit corporation, those profits go to the shareholders."
While it's true that non-profit universities reinvest their revenues from the major sports, they also rely heavily on outsiders' donations. Is it inherently more noble for Oregon to accept $68 million from mega-booster Phil Knight to build a new "Darth Vaderish Death Star" football complex than it is for Grand Canyon to spend its stockholder-generated capital on a "$300 million investment in state-of-the-art classrooms, laboratories, dormitories and athletic facilities?"
"When you have an investment base because you're publicly traded, the good thing is, if someone doesn't like what you're doing, they sell their stock. You're not beholden to them in any way," said Grand Canyon CEO and President Mueller. "Traditional universities with big football programs, they have investors, too. They're called donors. And the donors sometimes have input on what those universities do."
Grand Canyon -- founded as a traditional Baptist university in 1949 and an NCAA member since 1991 -- went to a for-profit model in 2004 because it was $20 million in debt and close to shutting its doors. A group of private investors bought it and began emphasizing online continuing education. Total enrollment soon skyrocketed from just 1,200 to more than 20,000, though a whistle-blower alleged in a lawsuit that the school inflated those numbers by letting in pretty much anyone. (The school settled with the federal government for $5.2 million.)
In late 2008, the company went public and is now well above 50,000 in enrollment. Infused with investors' cash, the school went on a building spree, and this fall it will host 8,500 on-campus undergrads with plans to go to 15,000 in three years. In stark contrast to most of academia, the school's published tuition of $16,500 has not increased in four years, thanks to a reported $180 million after-tax profit from 2009-12. (The average cost after scholarships is $7,800.)
At the same time, notes Mueller, Arizona State has had to raise tuition in the face of deep cuts in state funding. One of ASU's counter-strategies, like Grand Canyon, was to greatly increase its online offerings. According to a 2011 Arizona Republic article, the school was projecting to have 30,000 online students generating $200 million in profit by 2020. In that sense, the two schools might be seen as competitors, though Crow says Grand Canyon is "not really in our niche. Our comments relative to this are entirely about sports.
"It's our right to have our view, and we're expressing our view that colleges motivated by profit do not hold the same values as those of us that don't profit," said Crow. "These guys can now start athletic teams to compete against regular colleges, all as part of their income-generation strategies. That's fine, but then they should start a league of their own."
Mueller said the Division I move is driven in part to give its new influx of traditional students "a more vibrant campus experience" by affording them the chance to cheer on a big-time sports team. Last spring it hired former Phoenix Suns star and assistant coach Dan Majerle as its new men's basketball coach. (Grand Canyon does not field a football team.) It will be eligible for the NCAA Tournament beginning in 2017-18.
"We are moving into Division I for the same reason other universities want to compete in Division I," said Mueller. "Any notion that we're going to use athletics to build the share price -- it certainly has not been done for that reason. Is it part of reason we're hoping to build the brand of the university? Absolutely. Every university does that."
One need only look at Florida Gulf Coast's Cinderella run to the Sweet 16 last March as proof of how dramatically sports can boost a school's brand. The previously obscure Fort Myers, Fla., school, will surely see a spike in applications next year and will likely attract more students from other parts of the country. Grand Canyon is hoping for much the same.
The difference, of course, is that the Antelopes don't just have fans; they have shareholders. People with no affiliation to the university have a financial stake in the team's success. And so, the question Pac-12 presidents want NCAA leaders to contemplate is: Are you sure you're OK with this?
Interestingly, according to Mueller, NCAA President Mark Emmert played a direct role in Grand Canyon's ascension. Former Phoenix Suns owner and Grand Canyon board member Jerry Colangelo, who helped launch the school's sports business program, arranged a meeting at the Final Four between Mueller and Emmert, and last year the NCAA czar visited campus. Apparently impressed, the former Washington University president called Seattle University counterpart Stephen V. Sundborg, chairman of the board for the WAC, which extended an invite shortly thereafter.
At this point, it's hard to imagine the NCAA essentially de-inviting Grand Canyon from Division I, so long as the school meets the necessary requirements. Academically, its athletes have performed on par with their future WAC counterparts. On the other hand, if enough of the Pac-12's colleagues around the country become convinced of a potentially troubling trend, they may need to take a hardline stance. "It would be wrong just to focus on Grand Canyon," said Scott. "If you let one for-profit become Division I, then you have to let them all. It would be very difficult to change policy at that time."
Ultimately, they're probably delaying the inevitable. The future model for higher education is likely to look more like Grand Canyon's than Harvard's, as nearly all schools now offer both traditional and online curriculums. It then becomes a matter of whether the NCAA would attempt to legislate a school's operating structure and/or how it distributes its profits.
The answer isn't an easy one, especially when one need only look at Alabama's new football locker room, featuring two 30-foot hydrotherapy pools complete with waterfalls, for an example of how a "non-profit" school uses its resources. Of course, there are no shareholders in Crimson Tide, Inc., to gauge reaction as to whether that's a sound investment.
*Note: The Pac-12 Network is not broadcasting Grand Canyon's soccer match at Stanford, as was cited by Mueller in his May earnings call.