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The Myths Of Big Ten Expansion

At this time in history, I think numbers have never been more misunderstood. The misunderstanding of numbers permeates every level of politics, business, mutual funds... everything.

You don't have to go far to find examples, either. Look at Lehman Brothers, who three years ago thought that getting wholesale into the business of subprime loans and issuing bonds against them was a great idea because there would always be suckers to buy their bonds and real estate would have nowhere to go but up.  Look at Washington, where we've been promised a 1 trillion dollar new spending package without any form of revenue to offset this gargantuan new cost coming up in the next decade.  And not all that long ago came the book "Dow 36,000", a book which actually argued that stocks were undervalued since their valuations of "perfectly reasonable prices" showed that it was so. 

Now Jim Delany, commissioner of the Big 10, and a gaggle of breathless sportswriters would like you to believe the same thing about college sports.  Expansion, "driven by TV cash", is coming soon!  Hide your Rutgers', your Nebraska's, your Syracuses'. The Big Ten is coming!

The problem is, such dreams could easily be just as fleeting as those promises that real estate boom "will not bust". Especially if the Big 10 becomes a 16 team conference like many are daring to predict. The numbers are not nearly as rosy as most seem to think they are.  (more)


The number Jim Delany would like you to focus on is 22 million dollars.  That's the amount of money that is currently doled out to each Big 10 member, thanks to the money brought in by the Big Ten Network.  The funny thing is: as recently as three years ago, the Big Ten Network was fighting for its life.

BTN is a cable network that makes its money in two ways: having advertising sponsor the live conference events on their network, and having cable companies pay for the privilege of broadcasting the BTN on their cable systems.

This blog posting does a nice job netting it out:

How did this happen? It’s the fact that the TV landscape has tipped completely in favor of cable over the past decade. Cable channels have a dual revenue stream, where they make a certain amount of money for each subscriber it has every month plus advertising on top of that. In contrast, over-the-air networks can only rely on advertising. For instance, about $3 of your monthly cable bill goes to ESPN whether or not you watch it. ESPN is in over 100 million households, which means that it’s making $300 million per month and $3.6 billion per year in subscriber fee revenue… and that’s before the network sells a single ad… and that’s not counting its revenue from ESPN2, ESPNEWS, ESPNU and ESPN Classic.

Sounds interesting.  But there is a catch: that Fox has their fingerprints all over BTN as the ultimate financier of the BTN:

Ever since the Big Ten Network first went on the air, network President Mark Silverman has been answering a lot of questions. Most of those questions have been about cable company negotiations.

But WISC-TV looked into how the network will pay rights fees -- tens of millions of dollars a year -- to its 11 partner schools.

"You know, it's really a Fox corporate question -- and Fox is obviously a multibillion-dollar company," Silverman said. "From all my conversations with them, they are incredibly supportive and confident in the success of this network."

Oho, that's damned interesting!  The "guaranteed revenue stream" of (at that time) 6.1 million dollars, when pressed by the president of BTN's operations, insisted on punting the question to Fox instead.  (Makes you wonder who is really running the show: the 51% stakeholder Big Ten, or the 49% Fox side of the house.)

Matter of fact, three years ago the discussion wasn't about how to grow the BTN but the war between Fox/BTN and the cable companies and if Wisconsin's legislature was going to force cable companies to carry it:

Representatives from the Big Ten and NFL networks, Green Bay Packers officials and the Big Ten commissioner as well as the local cable TV providers spoke at the hearing before the Senate Committee on Commerce, Utilities and Rail at the state Capitol.

The hearing addressed whether the Big Ten and NFL networks could negotiate a longstanding dispute with local cable companies so that Wisconsin sports fans aren't shut out from watching their favorite teams.

But the cable companies called the bill one-sided and unfair and argued it will pass on costs to consumers. The state's cable industry said the Legislature shouldn't interfere with the free marketplace.
And not just in Wisconsin:

“Fox is utilizing deplorable anti-competitive tactics by depriving Iowa State students, alumni and fans their football season opener on cable television,” said Ed Pardini, senior vice president of Mediacom’s North Central Division. “Given that Iowa State is not a member of the Big Ten Conference, Cyclone fans should not be used as pawns in the Big Ten Network negotiations. We believe that Mediacom customers, particularly Cyclone supporters, will be outraged once they become aware that they are being held hostage to the unilateral demands of Fox.”


So, to recap: BTN is a large subsidiary of Fox, who has "grown" its market share at least in part through litigation and charging sky-high rates for basic cable carriers to show their product.  It's not something financed by the Big 10.  It's financed by a global media giant.
 
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So far, the Big Ten has benefited from this arrangement.  They get an $11 million dollar check from Fox the Big Ten Network, and get another $11 million dollar check from ABC/ESPN for their broadcast games and select ESPN games.

Pretty compelling revenue streams - at the moment.  But what's very interesting is those gosh-darned numbers again.  How secure is that revenue stream, anyway?


It's hard to get over that the revenue stream from BTN has gone from 6.1 million dollars to over 11 million dollars per year in the span of 3 years.  I found myself asking the question: do these numbers add up?

In 2007, BTN had a reach of 31 million American households and were paying off its members 6.1 million dollars a year.  That would mean that - doing second grade math - the total amount of payout was 6.1 million X 11, or 67.1 million dollars.

In 2010, BTN had a reach of 40 million American households (and 33 million households, it claims, in Canada), and were paying off its members 11 million dollars per year, or a grand total of 121 million dollars.

Let's assume for just a moment that all these numbers are genuine for a moment.  If you just take these numbers on the face, you have to believe that BTN has doubled their revenue in the last three years but only by adding 9 million subscribers and the Great White North to their base three years ago.  That means the big jump in revenue could only be coming from one-time revenue jumps, like forcing negotiating to have their services put on basic cable packages for gigantic sums, with the cable companies passing on the costs directly to all their subscribers.

Or Fox might be adding more money to the BTN agreement.

Make no mistake: Fox is pumping a giant spigot of money into the BTN.  This isn't something that should be glossed over as the lunatic rantings of a blogger, either. That's a documented fact: you just need to look at the Sports Business Journal:

News Corp. projects that the Big Ten Network could pay $2.8 billion to the Big Ten Conference over the 25-year life of its deal to operate the channel, according to the media company’s most recent 10-Q federal filing, which provided the first glimpse of its agreement with the conference.

The total payout over the term of the 25-year agreement is based on profit projections by News Corp., and the money distributed to the schools on the front end will be significantly less than the average over the life of the deal. 

If News Corp. hits its financial projections, which are based on a guaranteed rights fee, an equity share agreement with the league, the full 25-year life of the deal and hitting all sales thresholds, it would translate into an average of $112 million annually paid to the conference and $10.18 million to each school.
Sound familiar?  "If real estate prices keep rising..."  IF News Corp makes its financial projections, IF advertising stays the same, IF subscribers keep paying all these fees for BTN to be on basic cable and IF it keeps growing... we'll make $10.2 million a year.  On average.  Over the course of 25 years.

Intriguing, isn't it, that it was this year when the payout was $11 million - more than the $10.2 average - the year when The Big Ten is making their big noises about expansion?


Importantly, too, what if you add five new teams to this Big 10 mixture, including Rutgers, Syracuse, UConn, Missouri, and Notre Dame?  What can the new schools hope to get in terms of payout?

The pot of money is 121 million dollars, split 11 ways.  Let's assume this number stays the same - already at odds with the 2008 estimate.  Now - sixth grade math, now - $121 million dollars are now split sixteen ways.  That's $7.56 million per team from the Big Ten Network.  Add in roughly the same numbers from the ABC/ESPN contract, and that's roughly $15 million per team, not $22 million. 



To get to $11 million (or more) per year for sixteen teams, you have to believe that BTN will generate so much revenue from the new "markets" that they will be making enough money to generate a $176 million dollar payout per year - and oh by the way, renegotiate with ABC/ESPN as well so that their side of the payout is $176 million as well.

Fox might have to turn the spigot of money on just a little higher.  That appears to be how they've made this work right now.  Will they?

In addition, this projection is in direct odds to the estimates made by Sports Business Journal, which said the 25 year *average* would be 10.1 million a year for 11 teams.  That means at a bare minimum if the thought that this number would get much bigger than the sixth-grade math problem of $7.56 million, something fundamental would have to change that vastly changes the predictions made in 2008.

It's hardly a foregone conclusion that Rutgers fans, already with fees on their cable services to pay for things like the Yankees and Nets, will happily shell out extra money for Rutgers football and basketball.  They never have before.

And if the Big Ten expands with schools already are in the BTN footprint, that results in no money for Fox - something that's unlikely to mean that this fee will increase, unless Fox likes spending money on what they already have.

An additional nagging doubt in the figure of $22 million is that the delicate dance between Fox and ESPN for rights to the Big 10 will not last forever until the end of time.

Suppose ESPN just says that they won't renew their contract for the Big 10.  What then?

Don't laugh.  It would be an interesting gambit if they just took their ball, and went home with a full deal with the Big XII and let Fox take the whole thing.  Would Fox be so willing to pump money into the Big Ten's coffers if they're the sole owner of Big Ten Sports?  And would that mean that the guaranteed revenue stream would dry up?

What if the opposite happened - that ESPN negotiated, say, broadcast of the brand-new Big 10 championship game, shutting Fox out of a lucrative contract?  It's something Delany can do - he's the commissioner.  If it were to happen, might Fox pull the plug - making the Big Ten now need to actually pay out 100% of the money that they promised to pay out, without all that spigot of cash coming from Fox?

What if some new legislation comes out in congress that bans the tightly-coupled relationship that Fox and the Big Ten currently are consummating?  If it troubles me that a media giant and a conference can be so closely tied together in what seems to be an open-ended agreement without significant oversight from the NCAA, surely there are not a few congressfolk that might agree with that as well?

None of these might happen tomorrow.  But the horizon is fraught with potential risk, and requires a bunch of different bedfellows to get along.  How long will that last?

In the end, it's hard to escape that the Big Ten's peculiar success comes from having two media companies compete for their wares internally.  It's a lot more fragile - and a lot less of a payout - than Mr. Delany would like you to believe.

*****

You'll note that in no part of this blog posting did I mention the words "fans", "rivalries", "research universities" or any B.S. like that.  The proposed Big 10 expansion has nothing to do with those things at all.  It has everything to do with money, market share, Fox, and ABC/ESPN.

I'm not so naive to think that sports and TV cannot intersect.  The NCAA and the conferences have something TV and media companies want, and they're willing to allow these entities to bid for their services and pay them gobs of money to do so.  But there needs to be an overseer to this whole thing to make sure that the fans' interests are represented.  In this debate over Big Ten expansion, I've heard a lot of arguments about moolah and TV, and even some million dollar coaches and University presidents have weighed in.  But I haven't heard crap from Rutgers fans to find out if they would rather play Army or Michigan State in November - or if they'd appreciate spending less money on their cable bills.

(The closest thing we have to fan thoughts on this matter was an informal poll made by CNBC - in which 72% said that they thought BTN should be on a sports tier and not on basic cable, which had over 1,000 respondents.)

In addition, 16-team conferences has no place in collegiate athletics.  It guarantees that football teams will not play every other member of their division, and guarantees that basketball teams will not play teams in the other "division" twice.  In my mind, mega-conferences are merely scheduling arrangements that have nothing to do with conferences and rivalries.  It's - again - "math" that can never be made to work in the confines of collegiate schedules.  The 16-team conference is the perfect poster child of money's corrupting influence on collegiate sport.

The sad thing is that schools, dazzled by the incorrect $22 million figure, think that it's a worthwhile idea for them to make a run at that money, possibly laying waste to their existing sport rivalries and presidential relationships as a result. 

It's no secret that I'm on the same page as the Washington Post on this one:


The ACC, for example, hasn't exactly converted Boston to college basketball's Tobacco Road North just by adding Boston College. Boston remains a resolute pro town, and Boston College basketball has suffered for its flight south.

Also overlooked in the financial models driving expansion is the notion that conferences should be rooted in a commonality of purpose and geography.

"In the Big East, the attraction was always that the schools were very similar, they were close by, and you had some real characters as coaches -- Rollie [Massimino], John [Thompson Jr.], Lou Carnesecca," says Father Charles L. Currie, president of the Association of Jesuit and Catholic Universities and a former Georgetown professor. "It was almost a family experience with those folks. Now, everything seems to be driven by what generates the most revenue, and the names seem to go by the board. To have a Big Ten that has 11 members? A Big East that's [geographically] all over the place? The criteria for a conference seem to be more, 'How can we maximize the revenue?' rather than 'Do these schools fit together?' "

Comments

Matt Peloquin said…
Hey Lehigh. Not sure if I read this all correctly. It seems that you're stressing the fact that Big Ten expansion is being triggered by the drive to generate more revenue via the BTN. Which we know is the case since more teams equal more mouths to feed. This drive is the primary reason why you are hearing various Big Ten admins mention 4 current Big East football schools (Rutgers, Syracuse, Pitt, Uconn), along with "national/east coast media team" Notre Dame, St. Louis boosting/KC market attaining Mizzou and national program Nebraska...because these are the markets that will help boost subscriber numbers (and advertising revenue).
Douglas said…
The reach of BTN has reached into Florida but BTN lives on a sports tier that only subscribers that get everything get. It used to be the sports tier had NFL Network and a couple of other pro networks on it but when the NFL and Comcast cut a deal last year to get NFL Network wider exposure, it left very little on the Sport Tier ( though it does contain Fox College Sports so I can watch Lehigh football and wrestling!!!)... I have no idea how BTN can drive expansion frankly..
Anonymous said…
I read somewhere, I can't remember where, that the BTN get's 10c per subscriber in "non B10" markets, and 70c a subscriber in B10 markets. So if they can convert NE, MO, CT, NY, and NJ into B10 markets and get the higher subscriber fee, they will be bringing in so much more cash, that it would seem they could still generate the 22M or so per university.

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