I think the one place where it might break down is in high profile, academically excellent private institutions. I'd say in their case, quite often it is the higher standards they set for themselves than the state schools do in recruitment that hurts more than size.
I'd use the following as examples: Stanford and Northwestern. With the massive populations in the Bay Area and Chicago, they're in great locations to draw fans and their recruitment can be national. They are, however, hampered by the type of student-athlete that they can recruit.
You're correct, bgdz. Certainly they qualify as exceptions to the rule. It could also be defined as smaller institutions that are considered defining of thier area, ones with perhaps the slight edge in athletic history that has allowed them to become THE college program for an area; Boston College, Syracuse, and Miami come to mind.
Perhaps the point can be made more clearly using a converse approach; Smaller schools without established 1-A programs have a much, much larger hill to climb in selling the value of their athletics because they simply cannot offer the broader commercial appeal of larger schools and/or those with nationally recognized athletic programs. IMO.
Key "battle grounds" for this war to keep watch over;
Cincinatti vs. Xavier, if the Bearcat football program does become a more marketable attraction. Would it be ironic or simply sad to see Cincinatti, instead of Xavier, affiliated with Marquette, Notre Dame, BC and Villanova!
Temple vs. Villanova, if the Temple program drops from 1-A