11-17-2012, 10:59 PM
I wrote this almost a month ago recovering from a hernia operation. It is not finished mainly because I got an infection from the surgery and I have been dealing with it instead. I thought I had a little more time to finish it but the Maryland news makes the main premise self evident. If you got a spare few minutes I hope you enjoy it.
Lurker Above
It’s the Networks, Stupid. Conference Realignment Is Not Over.
Part 1: A Storm Approaches.
The B1G just announced each school will make an impressive $23.67 million in 2012, and the initial terms of the SECN is set to be announced by the SEC and ESPN before the end of the year. The winds of change are likely returning to college football.
Over the last several months there has been a great deal of speculation whether the ACC, and before it, the Big 12, would fall apart and its members be snatched up by the other major conferences. The Big 12 was wounded after the loss of 4 quality universities with strong academic and athletic histories, Nebraska, Colorado, Texas A&M and Missouri. Speculation ran rampant as to whether Texas would go independent or head off to the then PAC 10 with Oklahoma, Oklahoma State and Texas Tech. The Tex-ahoma 4 stayed and the Big 12 regrouped by getting new media deals and seemingly found stability by having all teams convey a “Grant of Rights” to the Big 12, which apparently means if a school were to leave the Big 12 before the conference’s media contract ends that school’s share of the conference’s media revenue remains with the conference. After reaching such agreement the Big 12 proclaimed itself stable. And everyone believed it.
After the Big 12 appeared stable attention turned to the ACC because they then appeared vulnerable because their media deal appeared to be a few million below what the Big 12 was expected to, and eventually did, receive. The ACC answered by adding Notre Dame for all sports but football and hockey and the members schools agreed to a $50 million exit fee. Immediately after making these deals, the ACC proclaimed itself also stable. And everyone believed it.
The truth is both conferences are unstable and are in danger of being raided in the near future. The purpose of this writing is to show that with the advent of the B1G’s, the Pac 12’s and the SEC’s networks, and the enormous amount of money they will eventually generate, these three conferences are the only elite and stable conferences. Additionally, because of the inability of the Big 12 and the ACC to secure an all-member, dedicated cable/satellite conference network it is entirely possible that both of these conferences will not exist in a few short years, or at least not as they are largely presently comprised, and all of the recent discussions about whether there are 6, 5 or 4 elite conferences will seem silly in retrospect.
Now I do not claim to possess a crystal ball that enables me to predict the future, and I am not a dude claiming connections to any conference or university, and I do not own a blog, so please forgive the long post, but if one takes the time to analyze the numbers discussed below, it should become readily apparent that the B1G, the Pac 12 and the SEC will soon be making tens of millions of dollars more per year than any other conference. When three conferences make that much more than teams in the other conferences, and if any of those three more profitable conferences could make even more money if they were to expand, then expansion happens. No liquidated damages provision can prevent it, and those who believe otherwise do not understand liquidated damages and the concept of an efficient breach.
Part 2: The Efficient Breach
Contracts were made to be broken; the one who breaches the contract just haves to pay damages to the other party. Exit fees and grant of rights are just liquidated damage clauses which are entered into by parties so that they know how much it will cost to break the contract. If such amounts were reasonable at the time they were created then that is the cost of leaving one business opportunity for another. If they are deemed to be unreasonable, or otherwise unenforceable, then they are punitive and are routinely struck down and actual damages must then be determined. Parties often settle because they do not know if the liquidated damages would be upheld, the uncertainty of a judge or jury awarding actual damages, and the cost of litigation.
The most important thing is not whether or not the liquidated damages provision is enforceable because liquidated damage provisions often make breaching easier because the breaching party knows how much he has to pay, of even less if he has a basis to negotiate down. The real issue is whether the new business opportunity would generate enough revenue to clearly cover the costs associated with the breach and still make a sizeable profit because the law allows, even encourages, a party to efficiently breach a contract to enter into a new more profitable business dealing if the new business venture would be significantly more profitable than the other. When a party can make many millions per year more per year by breaching a contract after paying the damages caused by the breach, it is more than good business economic to do so; it is economic malfeasance not to make such a move.
As to the ACC’s $50 million exit fee, which continues to escalate each year as it is determined by multiplying the yearly per school conference payout by three, if another conference will be paying its members $25 million more per year than your school, which is very conservative as detailed below, how is a $50 million exit fee going to stop the efficient breach? This is especially true since the exit fee could always by financed over ten years and the new conference could lend the money and be repaid by withholding future conference payouts.
As to the Big 12’s Grant of Rights, if such agreement is any more onerous than a pure exit fee then it is likely an unreasonable restriction of a party’s ability to efficiently breach a contract and is therefore voidable as being punitive. If such grant of rights is nothing more than a complex way of determining a cost of breach by measuring the value of the breaching party’s sports inventory to the Big 12, then that is nothing more than saying a breaching party must pay the conference how much revenue the conference looses if the school leaves. If that is the case you just determine the cost to the conference if a school leaves and that is your cost to breach. This second possibility seems to punish the more valuable members of a conference more than the others. Something tells me Texas’s attorneys would not have entered into a contract that would punish them more than the other schools if they wanted out, or if they did, then they might have known such a provision would be struck down. It is important to remember that the Big 12 conference headquarters is in Texas. It would be interesting to know if the Big 12 contract has a jurisdiction clause, which most contracts to contain, whether such jurisdiction is the State of Texas, and whether a court in Texas has ruled a similar agreement void. If so, I suspect the Big 12 got played. However, the bigger point is if it is in a Big 12 school’s economic interests to breach in order to make substantially more money after paying the cost of such breach then it will likely happen. That is business.
Part 3: How Much Money Can the College Networks Make?
How much money will the SEC Network generate? After the most recent expansion with Texas A&M and Mizzou there are now $30 million cable/satellite homes in the current SEC footprint, which is more than within the B1G footprint. A new SEC Network with the substantial amount of content of over 40 football games, plus an ample supply of basketball, baseball and all of the other men’s and women’s sports, will command at least an initial $1.00 per household within the 11 state SEC footprint. That per household average will only grow from $1.00 to $2.00 and then possibly to $3.00 within the next few years.
Now let’s now crunch some numbers. Now remember, these first numbers only include carriage rights for households in the 11 state SEC foot print.
If the SEC Network gets $1.00 per household that equals $360 million per year ($1.00 x 30 million homes x 12 months per year.) If that sum is divided 50/50 with ESPN, that is $190 million per year, and if this is divided by the number of schools at 14 that equals $13.57 million per year, per school.
If the SEC Network gets $2.00 per household, that equals $720 million per year. If that sum is divided 50/50 with ESPN, that is $360 million per year, and if this is divided by the number of schools at 14 that equals $25.71 million per year, per school.
If the SEC Network gets $3.00 per household, that equals $1.08 billion per year. If that sum is divided 50/50 with ESPN, that is $540 million per year, and if this is divided by the number of schools at 14 that equals $38.57 million per year, per school.
There is little reason to doubt that the SECN would command these numbers over the next seven to ten years. Do not forget how much southerners love their college football. Additionally, such household averages could be reached by having a main SECN channel, plus another channel that focuses on one or two teams within a one or two state footprint as part of a basic cable package, while the other 7 or more SEC channels that focus one or two other SEC schools could be purchased as part of a more expensive sports package tier for those fans living in another state, not only within the SEC footprint, but nationwide, or beyond. Do not doubt this kind of money could be made within seven to ten years.
Again, the above numbers only include carriage rights for households within the 11 state SEC foot print. If the SECN gets .25 cents per household of the remaining 70 million cable/satellite households in America that is another $210 million, and 50% of that after splitting with ESPN, that is $105 million, or $7.5 million per school, per year. If the SEC gets 50 cents per household out of the SEC footprint that is another $7.5 million, or $15 million, per school, per year.
So if the SECN only gets $1.00 per household in its foot print, and .25 cents per household outside of it, that is approximately $20 million per year, per team from the SECN alone ($13.57 +$ 7.5), or $27.5 million if the out of footprint carriage rate is .50 cents per household. ($13.57 + $15). That is more than the Big 12’s entire current tier 1 and 2 media deal. At $2.00 per household in the SEC footprint and .25 cents outside of it that comes to over $33 million ($25.71 + $7.5) per year, per school, or over $40 million if the out of footprint carriage rate is .50 cents per household. ($25.71 + $15). At $3.00 per household in the SEC footprint and .25 cents outside of it that comes to over $46 million per school, per year ($38.57 + $7.5). The total goes to $53.5 million if out of network carriage rate is .50 cents per household ($38.57 + $15).
The SEC is also currently renegotiating its tier 1 and tier 2 contracts with CBS and ESPN and such renegotiations are expected to net the conference between $22 and $25 million, or more, per year to each school. When these tier one and tier two contracts are added to the above projected network revenue, at $1.00 per household in its foot print and 25 cents per household outside of it, this will come to $42 to $45 million ($20 + $22 to $25), or more, per school, per year. At .50 cents per out of footprint household that is $49.5 to $52.5 million. When the tier one and tier two contracts are added to the $2.00 per household in the SEC footprint and 25 cents per household outside of it estimates, the total comes to over $55 to $58 million ($33 + $22 to $25), or more, per school, per year. At .50 per out of footprint household that comes to $62.5 to $65 million per school, per year. When the tier one and tier two contracts are added to the $3.00 per household in the SEC footprint and the 25 cents per household outside of it estimates, the total comes to over comes to $68 to $71 million ($46 + $22 to $25), or more, per school, per year. That would be $75.5 to $78.5 million if the out of footprint carriage rate is .50 cents per household per school, per year. This is what each SEC school could be receiving in ten years.
Now the above are estimates for the SEC because that conference is creating a new network and will start bidding carriage fees in the near future. The SEC stands to benefit from the BTN’s success just like the other conferences benefitted from the SEC’s original tier one and two contract with CBS and ESPN. However, the B1G just announced each school will make an impressive $23.67 million from the BTN in 2012, and there is no reason this yearly payout will not continue to increase in the future. While the PAC 12 Network is not expected to quite keep up with the other two without further expansion or alliances, as discussed below, it will allow the PAC 12 to remain closer to the SEC and B1G than to all of the other conferences.
Now considering all that has been discussed above, how would every school not in the SEC, B1G or PAC react? The answer is every single one of them would want to be in one of these three conferences. One only has to remember how the ACC was seriously threatened with defections when the difference between the ACC and the Big 12 was thought to be approximately $7 million per school, per year. Conference network money dwarfs any contemplated difference in conference media contract revenue. How big does the ACC’s $50 million exit fee look now? Does the Big 12’s Grant of Rights still seem iron clad? How does Texas react when confronted with the prospect of Mississippi State’s television revenue exceeding that of the Longhorns’? How important does Oklahoma’s ties to both Texas and Oklahoma State look then? Does anyone really believe that political ties would continue to bind with that much money at stake? There can be no doubt that big brothers may try to get their little brothers a ticket to one of the big shows, and they will likely feel political pressure to do so, but if push comes to shove no school desired by one of the new “Big Three”, especially if such school was only being courted by one of the “Big Three”, would choose to be left outside and no politician would allow it.
Part 4: When Will the Change Occur?
Why are not more schools clamoring to join these new “Big Three” conferences? The answer is multifaceted. First, some schools want an invitation, but invitations are just not being extended at this time. This is understandable for a number of reasons. These include the turmoil associated with recent expansions, the creation of the new 4 team playoff, how such 4 teams are going to be determined, and how the playoff revenue is going to be split. Additional questions about whether such conferences benefit from expanding if a larger conference makes it harder to get into the extremely lucrative 4 team playoff, the ongoing analysis as to which teams brings the most long term revenue to the conferences, and how much more money per member school would each conference receive after adding the additional mouths to feed. Additionally, the “Big Three” have not yet started making the really big bucks yet with their conference networks, though the B1G is doing quite well for its fifth year of existence. Until just about now, this much money must have appeared theoretical to some university presidents and other academic suits that have been so intensely focused on tier one and two contract negotiations and keeping their conferences together. Finally, these decision makers are conservative, tradition minded individuals who usually seek to maintain the status quo, which must seem desirous in an era of flux and turmoil. The self lacerating perpetuation of the prior bowl system is the best example of this mind set. That being said, a lot of suits should be fired over their recent decisions to not create a network and then up the exit fee thereby making it, potentially, more expensive to move to one of the “Big Three”.
All of this changes once the “Big Three” networks start to make serious money, or such revenue generation becomes imminent. Such a rush may start once the SEC and ESPN finish negotiating the terms of the SECN and ESPN announces its proposed carriage rates. It might start once Comcast, Time Warner Cable or Direct TV accepts such rates. Whenever the light comes on for the expansion candidates and the first of the “Big Three” conferences decides it is ready and makes their next invite (after being first being eagerly sought after by such candidates to avoid tortuous interference claims, of course), such change will be swift and substantial. Imagine the disruption if Texas, Oklahoma, North Carolina, Virginia Tech, FSU and just a few other major programs changed conferences.
Part 5: What Do the “Big Three” Want?
What must a school bring to the table to get an invite from the new “Big Three”? The answer is a little more complicated than just being in a big market. The school must be a new and sizeable profit source for the conference after considering two important criteria; whether the school could command carriage fees in a new and sizeable footprint such a school would bring to the conference and whether such school would provide quality content needed for the network. The first is relatively easy to determine by estimating how many new cable/satellite households the conference network could expect to charge inside the footprint carriage rates. Ideally, the new addition would bring in an entire state into the conference footprint.
The other consideration, content, is at least as important. Would the addition of a particular school provide quality content for the network? For a conference network to be really successful the conference must have at least 4, and ideally 5, quality conference games every weekend. I will again use the SEC as the perfect example. If on a particular week end CBS is broadcasting its first choice game, and ESPN is broadcasting two games on ESPN and another on ESPN 2, the network would want at least its fifth best game broadcast on the SECN to be a quality match-up between two teams that are both really good that year, and ideally, at least one of the two schools being a traditional power. If such match-up was between two traditional fierce rivals.
Here is where teams like FSU, and to a little lesser extent Clemson, bring more to the table than teams like North Carolina State, because they are national brands and natural rivals to many current SEC programs. FSU versus more than half of the members of the current SEC would be one of the top 4 or 5 games any particular weekend. That means such game, or another SEC game that would have otherwise been the 4th best SEC game one any particular weekend without FSU in the conference gets broadcasts by the SEC Network, along with all of the other games that are not broadcast on CBS or ESPN. FSU versus Alabama, Auburn, LSU, Georgia and the in state rival Florida would have intense regional interest and substantial national interest and could be counted on to garner high ratings. Clemson with in state rival South Carolina, its fierce but dormant rivalry with Georgia, its history of playing Auburn, FSU and likely expansion candidate Virginia Tech, as well as the potential of being an instant natural rival of for Tennessee, all make Clemson a provider of quality content. Of course, if the SECN is to be broadcast on multiple channels, which is likely the case, then content will be even more important. If the SECN follows the PAC 12 Network example and pairs all of its schools with in-state rivals, then that helps potential expansion candidates that have as their main rival current SEC members. Of course, such teams must have a minimum level of academics, as discussed further below.
When considering the criteria of new footprint and quality content it is easy to understand why Virginia Tech would be so desirable to the SEC. VT provides the Virginia footprint and its quality football program would be instant rivals with Tennessee, Kentucky, and the rest of the SEC East, as well as FSU and Clemson if they were brought into the SEC. North Carolina is a giant as far as footprint; VT is a giant in both footprint and football content.
Part 6: The Role Academics Will Play.
Who are the candidates for expansion by the “Big Three”? The first thing that must be addressed is academics. Because of the amount of money at stake schools with less than ideal academic credentials will be considered, but only to a certain extent. The conference with the most flexibility in this regard is the PAC 12. This may seem surprising but this flexibility is born from necessity. There just are not that many candidates to choose from our west that have both stellar academics and athletics. That is why the PAC 12, and the PAC 10 before that, was willing to take Texas Tech and Oklahoma State to get Texas and Oklahoma. It is highly doubtful the B1G would take OSU to get Oklahoma. It is not a certainty they would invited Oklahoma due to its less than stellar academics.
So where is the academic threshold for the Big Three conferences? I believe the line of academic acceptability is somewhere around being tied for 101st place on the USNWR list of the top U.S. Universities, and that is only if such school both expands the conference network footprint and such school is paired with a more desired school because of its footprint, quality of its athletics and likely its academics. I picked teams ranked tied at 101 in the USNWR’s rankings because that is where you find Oklahoma and North Carolina State, two teams frequently mentioned recently as expansion targets. Interestingly, that is where you also find geographically centered, basketball power, and AAU member Kansas.
Part 7: The Texas Prize
Texas: Any analysis of desired schools must start with the Longhorns. This is true not only because it is by far the most popular football program in the football crazy State of Texas, and that the State of Texas is the largest collegiate footprint in the nation, but because UT is geographically centered so that it could be taken in by all three of the “Big Three”. Now if conference networks were not going to blow up the status quo UT would be quite content in the Big 12. Independence is not really an option because a) with conferences soon to be playing 9, and possibly 10 in the future, conference games it would be very hard to schedule 12 quality games, b) the members of the “Big Three” will make more money than the Longhorns as an independent, which is a crazy thought considering the splash Texas made with its Longhorn Network, 3) playoff access guarantees in the future, and 4) Texas must have a marquee conference to place their superb Olympic sports. This last reason alone made Texas as an independent really unfeasible.
Would the Longhorns go to the PAC 12? Many may think UT will likely go to the PAC 12 since Texas, Oklahoma, Oklahoma State and Texas Tech almost went out west two years ago, and the Pac 12 was then willing to allow these two big brothers to take their little brothers, Texas Tech and Oklahoma State, despite their poor academic credentials. This is a huge factor, especially with the Oklahoma schools. In fact that is the biggest advantage that the PAC 12 has in acquiring Texas it may be the only “Big Three” conference willing to take Texas Tech and Oklahoma State. If the Pac 12 is the only conference that allows the little brothers then that is where they may go, especially if the Oklahoma Legislature insists on it. However, my best guess is both UT and OU end up elsewhere. While these two schools were California dreaming in 2010 there are two big negatives that make such a move unlikely. First, travel would be a bear, which is really unnecessary when there are two more profitable conferences much closer, and while traveling by airplane is no big deal for the football teams it is quite uneconomical for all of their other sports. The second and bigger reason is the two hour time change from Central to Pacific. That means the occasional really late game.
The B1G is a distinct possibility, with its chances largely conditioned on whether the little brothers would receive an invite. The B1G could invite AAU members Kansas with their tremendous basketball program to go along with Texas and Oklahoma and have a contiguous western half of their conference stretching down from Wisconsin, through Nebraska, south to Kansas, Oklahoma and Texas. The Nebraska / Oklahoma rivalry would be renewed, as well as the Cornhuskers rivalry with Kansas. Under this scenario the little brothers TT, OSU and KSU likely get left behind, with the B1Glikely gabbing Notre Dame or a school located in populous eastern state, like Syracuse or Rutgers. Staying the Central Time Zone is an important consideration that should not be underestimated. Football games being played when it is late at night on the east coast, and Olympic sports teams returning home at 2:00AM, and that is not including the inevitable long airport delays, are two really huge negatives for heading west.
The SEC cannot be counted out as a possibility either. They are the hot property now, not only because of its string of national championships, but because southern watch more college football and SEC games receive higher ratings on national broadcasts. Culturally they are a better fit than either the B1G or Pac 12 member schools, and this could be more important as the years go by and the newness of the new conference wears off. The academic argument against joining the SEC was always a red herring, and with the additions of Texas A&M and Missouri the SEC on average is a stronger institution than the Big 12, especially after it added West Virginia and TCU. While there can be no denying the academic excellence of the California schools, the Pac 12’s average ranking in USNWR is lower than the SEC average. The SEC cannot not match the B1G’s average, of course, but that difference would be narrowed quite a bit if the SEC scored eastern academic powers UVA and UNC, as discussed below. The real reason Texas does not want to join the SEC is the perceived difficulty in winning
Part 8: North Carolina and Virginia
Part 9: What the “Big Three” May Do?
Part 10: The Ones Left Behind
As for all the schools in the all of the other conferences, the information contained herein will probably be unwelcome news. I understand that, but if it is important to realize that when conference realignment resumes there will be many valuable athletic institutions made available and those who are the quickest to realize these opportunities will have an advantage going forward. Know this; the recipe for conference success is as follows. 1) Start a conference network and negotiate contracts with as many cable/satellite carriers as possible no matter how little the initial profit; As long as you are on television and are able to compete there is an opportunity to prosper in a relatively short period of time. The real profits will come when your carriage fees are renegotiated at the end of contract terms; 2) Acquire as many schools in your conference that are the most likely to be able to play teams in the “Big Three” and beat them; 3) Have at least one half of your schools be located in metropolitan areas where they have, or could have, a following big enough to carry the metro footprint, or better still, be able to carry an entire state; 4) Support the inevitable move for conferences to have four divisions and conference semifinals. This will allow over a wider territory while reducing travel costs for the schools and the fans and promote regional rivalries; and 5) Lobby for an expansion of the college playoff as soon as possible. It will not stay four forever and the sooner it expands the better for all of the other conferences. What such a playoff may look like is a subject for another post.
Non-BCS teams should not despair, especially if you can get your own network. It matter not how much money could be generated in the short term, if your teams continue to win the network will eventually grow and make money. Plant the seed now or regret it later. What the non-BCS conference needs is good teams. No one watches bad teams play bad teams, no matter how big your metro markets are. Do not get me wrong, markets help, but quality football means much more. Alabama, West Virginia and Boise State say hi.
Lurker Above
It’s the Networks, Stupid. Conference Realignment Is Not Over.
Part 1: A Storm Approaches.
The B1G just announced each school will make an impressive $23.67 million in 2012, and the initial terms of the SECN is set to be announced by the SEC and ESPN before the end of the year. The winds of change are likely returning to college football.
Over the last several months there has been a great deal of speculation whether the ACC, and before it, the Big 12, would fall apart and its members be snatched up by the other major conferences. The Big 12 was wounded after the loss of 4 quality universities with strong academic and athletic histories, Nebraska, Colorado, Texas A&M and Missouri. Speculation ran rampant as to whether Texas would go independent or head off to the then PAC 10 with Oklahoma, Oklahoma State and Texas Tech. The Tex-ahoma 4 stayed and the Big 12 regrouped by getting new media deals and seemingly found stability by having all teams convey a “Grant of Rights” to the Big 12, which apparently means if a school were to leave the Big 12 before the conference’s media contract ends that school’s share of the conference’s media revenue remains with the conference. After reaching such agreement the Big 12 proclaimed itself stable. And everyone believed it.
After the Big 12 appeared stable attention turned to the ACC because they then appeared vulnerable because their media deal appeared to be a few million below what the Big 12 was expected to, and eventually did, receive. The ACC answered by adding Notre Dame for all sports but football and hockey and the members schools agreed to a $50 million exit fee. Immediately after making these deals, the ACC proclaimed itself also stable. And everyone believed it.
The truth is both conferences are unstable and are in danger of being raided in the near future. The purpose of this writing is to show that with the advent of the B1G’s, the Pac 12’s and the SEC’s networks, and the enormous amount of money they will eventually generate, these three conferences are the only elite and stable conferences. Additionally, because of the inability of the Big 12 and the ACC to secure an all-member, dedicated cable/satellite conference network it is entirely possible that both of these conferences will not exist in a few short years, or at least not as they are largely presently comprised, and all of the recent discussions about whether there are 6, 5 or 4 elite conferences will seem silly in retrospect.
Now I do not claim to possess a crystal ball that enables me to predict the future, and I am not a dude claiming connections to any conference or university, and I do not own a blog, so please forgive the long post, but if one takes the time to analyze the numbers discussed below, it should become readily apparent that the B1G, the Pac 12 and the SEC will soon be making tens of millions of dollars more per year than any other conference. When three conferences make that much more than teams in the other conferences, and if any of those three more profitable conferences could make even more money if they were to expand, then expansion happens. No liquidated damages provision can prevent it, and those who believe otherwise do not understand liquidated damages and the concept of an efficient breach.
Part 2: The Efficient Breach
Contracts were made to be broken; the one who breaches the contract just haves to pay damages to the other party. Exit fees and grant of rights are just liquidated damage clauses which are entered into by parties so that they know how much it will cost to break the contract. If such amounts were reasonable at the time they were created then that is the cost of leaving one business opportunity for another. If they are deemed to be unreasonable, or otherwise unenforceable, then they are punitive and are routinely struck down and actual damages must then be determined. Parties often settle because they do not know if the liquidated damages would be upheld, the uncertainty of a judge or jury awarding actual damages, and the cost of litigation.
The most important thing is not whether or not the liquidated damages provision is enforceable because liquidated damage provisions often make breaching easier because the breaching party knows how much he has to pay, of even less if he has a basis to negotiate down. The real issue is whether the new business opportunity would generate enough revenue to clearly cover the costs associated with the breach and still make a sizeable profit because the law allows, even encourages, a party to efficiently breach a contract to enter into a new more profitable business dealing if the new business venture would be significantly more profitable than the other. When a party can make many millions per year more per year by breaching a contract after paying the damages caused by the breach, it is more than good business economic to do so; it is economic malfeasance not to make such a move.
As to the ACC’s $50 million exit fee, which continues to escalate each year as it is determined by multiplying the yearly per school conference payout by three, if another conference will be paying its members $25 million more per year than your school, which is very conservative as detailed below, how is a $50 million exit fee going to stop the efficient breach? This is especially true since the exit fee could always by financed over ten years and the new conference could lend the money and be repaid by withholding future conference payouts.
As to the Big 12’s Grant of Rights, if such agreement is any more onerous than a pure exit fee then it is likely an unreasonable restriction of a party’s ability to efficiently breach a contract and is therefore voidable as being punitive. If such grant of rights is nothing more than a complex way of determining a cost of breach by measuring the value of the breaching party’s sports inventory to the Big 12, then that is nothing more than saying a breaching party must pay the conference how much revenue the conference looses if the school leaves. If that is the case you just determine the cost to the conference if a school leaves and that is your cost to breach. This second possibility seems to punish the more valuable members of a conference more than the others. Something tells me Texas’s attorneys would not have entered into a contract that would punish them more than the other schools if they wanted out, or if they did, then they might have known such a provision would be struck down. It is important to remember that the Big 12 conference headquarters is in Texas. It would be interesting to know if the Big 12 contract has a jurisdiction clause, which most contracts to contain, whether such jurisdiction is the State of Texas, and whether a court in Texas has ruled a similar agreement void. If so, I suspect the Big 12 got played. However, the bigger point is if it is in a Big 12 school’s economic interests to breach in order to make substantially more money after paying the cost of such breach then it will likely happen. That is business.
Part 3: How Much Money Can the College Networks Make?
How much money will the SEC Network generate? After the most recent expansion with Texas A&M and Mizzou there are now $30 million cable/satellite homes in the current SEC footprint, which is more than within the B1G footprint. A new SEC Network with the substantial amount of content of over 40 football games, plus an ample supply of basketball, baseball and all of the other men’s and women’s sports, will command at least an initial $1.00 per household within the 11 state SEC footprint. That per household average will only grow from $1.00 to $2.00 and then possibly to $3.00 within the next few years.
Now let’s now crunch some numbers. Now remember, these first numbers only include carriage rights for households in the 11 state SEC foot print.
If the SEC Network gets $1.00 per household that equals $360 million per year ($1.00 x 30 million homes x 12 months per year.) If that sum is divided 50/50 with ESPN, that is $190 million per year, and if this is divided by the number of schools at 14 that equals $13.57 million per year, per school.
If the SEC Network gets $2.00 per household, that equals $720 million per year. If that sum is divided 50/50 with ESPN, that is $360 million per year, and if this is divided by the number of schools at 14 that equals $25.71 million per year, per school.
If the SEC Network gets $3.00 per household, that equals $1.08 billion per year. If that sum is divided 50/50 with ESPN, that is $540 million per year, and if this is divided by the number of schools at 14 that equals $38.57 million per year, per school.
There is little reason to doubt that the SECN would command these numbers over the next seven to ten years. Do not forget how much southerners love their college football. Additionally, such household averages could be reached by having a main SECN channel, plus another channel that focuses on one or two teams within a one or two state footprint as part of a basic cable package, while the other 7 or more SEC channels that focus one or two other SEC schools could be purchased as part of a more expensive sports package tier for those fans living in another state, not only within the SEC footprint, but nationwide, or beyond. Do not doubt this kind of money could be made within seven to ten years.
Again, the above numbers only include carriage rights for households within the 11 state SEC foot print. If the SECN gets .25 cents per household of the remaining 70 million cable/satellite households in America that is another $210 million, and 50% of that after splitting with ESPN, that is $105 million, or $7.5 million per school, per year. If the SEC gets 50 cents per household out of the SEC footprint that is another $7.5 million, or $15 million, per school, per year.
So if the SECN only gets $1.00 per household in its foot print, and .25 cents per household outside of it, that is approximately $20 million per year, per team from the SECN alone ($13.57 +$ 7.5), or $27.5 million if the out of footprint carriage rate is .50 cents per household. ($13.57 + $15). That is more than the Big 12’s entire current tier 1 and 2 media deal. At $2.00 per household in the SEC footprint and .25 cents outside of it that comes to over $33 million ($25.71 + $7.5) per year, per school, or over $40 million if the out of footprint carriage rate is .50 cents per household. ($25.71 + $15). At $3.00 per household in the SEC footprint and .25 cents outside of it that comes to over $46 million per school, per year ($38.57 + $7.5). The total goes to $53.5 million if out of network carriage rate is .50 cents per household ($38.57 + $15).
The SEC is also currently renegotiating its tier 1 and tier 2 contracts with CBS and ESPN and such renegotiations are expected to net the conference between $22 and $25 million, or more, per year to each school. When these tier one and tier two contracts are added to the above projected network revenue, at $1.00 per household in its foot print and 25 cents per household outside of it, this will come to $42 to $45 million ($20 + $22 to $25), or more, per school, per year. At .50 cents per out of footprint household that is $49.5 to $52.5 million. When the tier one and tier two contracts are added to the $2.00 per household in the SEC footprint and 25 cents per household outside of it estimates, the total comes to over $55 to $58 million ($33 + $22 to $25), or more, per school, per year. At .50 per out of footprint household that comes to $62.5 to $65 million per school, per year. When the tier one and tier two contracts are added to the $3.00 per household in the SEC footprint and the 25 cents per household outside of it estimates, the total comes to over comes to $68 to $71 million ($46 + $22 to $25), or more, per school, per year. That would be $75.5 to $78.5 million if the out of footprint carriage rate is .50 cents per household per school, per year. This is what each SEC school could be receiving in ten years.
Now the above are estimates for the SEC because that conference is creating a new network and will start bidding carriage fees in the near future. The SEC stands to benefit from the BTN’s success just like the other conferences benefitted from the SEC’s original tier one and two contract with CBS and ESPN. However, the B1G just announced each school will make an impressive $23.67 million from the BTN in 2012, and there is no reason this yearly payout will not continue to increase in the future. While the PAC 12 Network is not expected to quite keep up with the other two without further expansion or alliances, as discussed below, it will allow the PAC 12 to remain closer to the SEC and B1G than to all of the other conferences.
Now considering all that has been discussed above, how would every school not in the SEC, B1G or PAC react? The answer is every single one of them would want to be in one of these three conferences. One only has to remember how the ACC was seriously threatened with defections when the difference between the ACC and the Big 12 was thought to be approximately $7 million per school, per year. Conference network money dwarfs any contemplated difference in conference media contract revenue. How big does the ACC’s $50 million exit fee look now? Does the Big 12’s Grant of Rights still seem iron clad? How does Texas react when confronted with the prospect of Mississippi State’s television revenue exceeding that of the Longhorns’? How important does Oklahoma’s ties to both Texas and Oklahoma State look then? Does anyone really believe that political ties would continue to bind with that much money at stake? There can be no doubt that big brothers may try to get their little brothers a ticket to one of the big shows, and they will likely feel political pressure to do so, but if push comes to shove no school desired by one of the new “Big Three”, especially if such school was only being courted by one of the “Big Three”, would choose to be left outside and no politician would allow it.
Part 4: When Will the Change Occur?
Why are not more schools clamoring to join these new “Big Three” conferences? The answer is multifaceted. First, some schools want an invitation, but invitations are just not being extended at this time. This is understandable for a number of reasons. These include the turmoil associated with recent expansions, the creation of the new 4 team playoff, how such 4 teams are going to be determined, and how the playoff revenue is going to be split. Additional questions about whether such conferences benefit from expanding if a larger conference makes it harder to get into the extremely lucrative 4 team playoff, the ongoing analysis as to which teams brings the most long term revenue to the conferences, and how much more money per member school would each conference receive after adding the additional mouths to feed. Additionally, the “Big Three” have not yet started making the really big bucks yet with their conference networks, though the B1G is doing quite well for its fifth year of existence. Until just about now, this much money must have appeared theoretical to some university presidents and other academic suits that have been so intensely focused on tier one and two contract negotiations and keeping their conferences together. Finally, these decision makers are conservative, tradition minded individuals who usually seek to maintain the status quo, which must seem desirous in an era of flux and turmoil. The self lacerating perpetuation of the prior bowl system is the best example of this mind set. That being said, a lot of suits should be fired over their recent decisions to not create a network and then up the exit fee thereby making it, potentially, more expensive to move to one of the “Big Three”.
All of this changes once the “Big Three” networks start to make serious money, or such revenue generation becomes imminent. Such a rush may start once the SEC and ESPN finish negotiating the terms of the SECN and ESPN announces its proposed carriage rates. It might start once Comcast, Time Warner Cable or Direct TV accepts such rates. Whenever the light comes on for the expansion candidates and the first of the “Big Three” conferences decides it is ready and makes their next invite (after being first being eagerly sought after by such candidates to avoid tortuous interference claims, of course), such change will be swift and substantial. Imagine the disruption if Texas, Oklahoma, North Carolina, Virginia Tech, FSU and just a few other major programs changed conferences.
Part 5: What Do the “Big Three” Want?
What must a school bring to the table to get an invite from the new “Big Three”? The answer is a little more complicated than just being in a big market. The school must be a new and sizeable profit source for the conference after considering two important criteria; whether the school could command carriage fees in a new and sizeable footprint such a school would bring to the conference and whether such school would provide quality content needed for the network. The first is relatively easy to determine by estimating how many new cable/satellite households the conference network could expect to charge inside the footprint carriage rates. Ideally, the new addition would bring in an entire state into the conference footprint.
The other consideration, content, is at least as important. Would the addition of a particular school provide quality content for the network? For a conference network to be really successful the conference must have at least 4, and ideally 5, quality conference games every weekend. I will again use the SEC as the perfect example. If on a particular week end CBS is broadcasting its first choice game, and ESPN is broadcasting two games on ESPN and another on ESPN 2, the network would want at least its fifth best game broadcast on the SECN to be a quality match-up between two teams that are both really good that year, and ideally, at least one of the two schools being a traditional power. If such match-up was between two traditional fierce rivals.
Here is where teams like FSU, and to a little lesser extent Clemson, bring more to the table than teams like North Carolina State, because they are national brands and natural rivals to many current SEC programs. FSU versus more than half of the members of the current SEC would be one of the top 4 or 5 games any particular weekend. That means such game, or another SEC game that would have otherwise been the 4th best SEC game one any particular weekend without FSU in the conference gets broadcasts by the SEC Network, along with all of the other games that are not broadcast on CBS or ESPN. FSU versus Alabama, Auburn, LSU, Georgia and the in state rival Florida would have intense regional interest and substantial national interest and could be counted on to garner high ratings. Clemson with in state rival South Carolina, its fierce but dormant rivalry with Georgia, its history of playing Auburn, FSU and likely expansion candidate Virginia Tech, as well as the potential of being an instant natural rival of for Tennessee, all make Clemson a provider of quality content. Of course, if the SECN is to be broadcast on multiple channels, which is likely the case, then content will be even more important. If the SECN follows the PAC 12 Network example and pairs all of its schools with in-state rivals, then that helps potential expansion candidates that have as their main rival current SEC members. Of course, such teams must have a minimum level of academics, as discussed further below.
When considering the criteria of new footprint and quality content it is easy to understand why Virginia Tech would be so desirable to the SEC. VT provides the Virginia footprint and its quality football program would be instant rivals with Tennessee, Kentucky, and the rest of the SEC East, as well as FSU and Clemson if they were brought into the SEC. North Carolina is a giant as far as footprint; VT is a giant in both footprint and football content.
Part 6: The Role Academics Will Play.
Who are the candidates for expansion by the “Big Three”? The first thing that must be addressed is academics. Because of the amount of money at stake schools with less than ideal academic credentials will be considered, but only to a certain extent. The conference with the most flexibility in this regard is the PAC 12. This may seem surprising but this flexibility is born from necessity. There just are not that many candidates to choose from our west that have both stellar academics and athletics. That is why the PAC 12, and the PAC 10 before that, was willing to take Texas Tech and Oklahoma State to get Texas and Oklahoma. It is highly doubtful the B1G would take OSU to get Oklahoma. It is not a certainty they would invited Oklahoma due to its less than stellar academics.
So where is the academic threshold for the Big Three conferences? I believe the line of academic acceptability is somewhere around being tied for 101st place on the USNWR list of the top U.S. Universities, and that is only if such school both expands the conference network footprint and such school is paired with a more desired school because of its footprint, quality of its athletics and likely its academics. I picked teams ranked tied at 101 in the USNWR’s rankings because that is where you find Oklahoma and North Carolina State, two teams frequently mentioned recently as expansion targets. Interestingly, that is where you also find geographically centered, basketball power, and AAU member Kansas.
Part 7: The Texas Prize
Texas: Any analysis of desired schools must start with the Longhorns. This is true not only because it is by far the most popular football program in the football crazy State of Texas, and that the State of Texas is the largest collegiate footprint in the nation, but because UT is geographically centered so that it could be taken in by all three of the “Big Three”. Now if conference networks were not going to blow up the status quo UT would be quite content in the Big 12. Independence is not really an option because a) with conferences soon to be playing 9, and possibly 10 in the future, conference games it would be very hard to schedule 12 quality games, b) the members of the “Big Three” will make more money than the Longhorns as an independent, which is a crazy thought considering the splash Texas made with its Longhorn Network, 3) playoff access guarantees in the future, and 4) Texas must have a marquee conference to place their superb Olympic sports. This last reason alone made Texas as an independent really unfeasible.
Would the Longhorns go to the PAC 12? Many may think UT will likely go to the PAC 12 since Texas, Oklahoma, Oklahoma State and Texas Tech almost went out west two years ago, and the Pac 12 was then willing to allow these two big brothers to take their little brothers, Texas Tech and Oklahoma State, despite their poor academic credentials. This is a huge factor, especially with the Oklahoma schools. In fact that is the biggest advantage that the PAC 12 has in acquiring Texas it may be the only “Big Three” conference willing to take Texas Tech and Oklahoma State. If the Pac 12 is the only conference that allows the little brothers then that is where they may go, especially if the Oklahoma Legislature insists on it. However, my best guess is both UT and OU end up elsewhere. While these two schools were California dreaming in 2010 there are two big negatives that make such a move unlikely. First, travel would be a bear, which is really unnecessary when there are two more profitable conferences much closer, and while traveling by airplane is no big deal for the football teams it is quite uneconomical for all of their other sports. The second and bigger reason is the two hour time change from Central to Pacific. That means the occasional really late game.
The B1G is a distinct possibility, with its chances largely conditioned on whether the little brothers would receive an invite. The B1G could invite AAU members Kansas with their tremendous basketball program to go along with Texas and Oklahoma and have a contiguous western half of their conference stretching down from Wisconsin, through Nebraska, south to Kansas, Oklahoma and Texas. The Nebraska / Oklahoma rivalry would be renewed, as well as the Cornhuskers rivalry with Kansas. Under this scenario the little brothers TT, OSU and KSU likely get left behind, with the B1Glikely gabbing Notre Dame or a school located in populous eastern state, like Syracuse or Rutgers. Staying the Central Time Zone is an important consideration that should not be underestimated. Football games being played when it is late at night on the east coast, and Olympic sports teams returning home at 2:00AM, and that is not including the inevitable long airport delays, are two really huge negatives for heading west.
The SEC cannot be counted out as a possibility either. They are the hot property now, not only because of its string of national championships, but because southern watch more college football and SEC games receive higher ratings on national broadcasts. Culturally they are a better fit than either the B1G or Pac 12 member schools, and this could be more important as the years go by and the newness of the new conference wears off. The academic argument against joining the SEC was always a red herring, and with the additions of Texas A&M and Missouri the SEC on average is a stronger institution than the Big 12, especially after it added West Virginia and TCU. While there can be no denying the academic excellence of the California schools, the Pac 12’s average ranking in USNWR is lower than the SEC average. The SEC cannot not match the B1G’s average, of course, but that difference would be narrowed quite a bit if the SEC scored eastern academic powers UVA and UNC, as discussed below. The real reason Texas does not want to join the SEC is the perceived difficulty in winning
Part 8: North Carolina and Virginia
Part 9: What the “Big Three” May Do?
Part 10: The Ones Left Behind
As for all the schools in the all of the other conferences, the information contained herein will probably be unwelcome news. I understand that, but if it is important to realize that when conference realignment resumes there will be many valuable athletic institutions made available and those who are the quickest to realize these opportunities will have an advantage going forward. Know this; the recipe for conference success is as follows. 1) Start a conference network and negotiate contracts with as many cable/satellite carriers as possible no matter how little the initial profit; As long as you are on television and are able to compete there is an opportunity to prosper in a relatively short period of time. The real profits will come when your carriage fees are renegotiated at the end of contract terms; 2) Acquire as many schools in your conference that are the most likely to be able to play teams in the “Big Three” and beat them; 3) Have at least one half of your schools be located in metropolitan areas where they have, or could have, a following big enough to carry the metro footprint, or better still, be able to carry an entire state; 4) Support the inevitable move for conferences to have four divisions and conference semifinals. This will allow over a wider territory while reducing travel costs for the schools and the fans and promote regional rivalries; and 5) Lobby for an expansion of the college playoff as soon as possible. It will not stay four forever and the sooner it expands the better for all of the other conferences. What such a playoff may look like is a subject for another post.
Non-BCS teams should not despair, especially if you can get your own network. It matter not how much money could be generated in the short term, if your teams continue to win the network will eventually grow and make money. Plant the seed now or regret it later. What the non-BCS conference needs is good teams. No one watches bad teams play bad teams, no matter how big your metro markets are. Do not get me wrong, markets help, but quality football means much more. Alabama, West Virginia and Boise State say hi.