The Pac-12′s financial future: Comparing TV revenue to the SEC and Big Ten

The Pac-12′s financial future: Comparing TV revenue to the SEC and Big Ten

"*** I should note at the top … and neglected to mention it in the series introduction … that the impetus for the Hotline’s examination of the Pac-12′s financial future was a recent comment by South Carolina athletic director Ray Tanner, who told his trustees that the SEC Network could distribute at least $5 million per school this year — their first year of existence.
My initial reaction: Whoa!!! $5 MILLION PER SCHOOL?!?!
That’s approx $4 million more than the Pac-12 Networks are expected to distribute to each school in this, their third year.
And that, in turn, got me thinking about the bigger picture, and how the Pac-12 will stack up on the revenue front to the SEC, with its network, and to the Big Ten, which will begin a new Tier 1 deal in a few years.
In this post, I’ll compare the Pac-12 projected TV revenues to those peer conferences.
It’s not a comforting situation for the league.

Let’s start with some background, because context is critical:
In 2011, the Pac-12 became the first major conference to renegotiate its Tier 1 contract (i.e., games televised nationally) in the era of soaring media rights.
With the vast majority of households having access to DVRs … and with so many viewers watching on a delayed basis and blasting right through the commercials … live sports became gold to advertisers and the TV rights soared.
Commissioner Larry Scott shrewdly expanded by two schools, brought more TV markets into the footprint, added inventory, increased flexibility for broadcast windows of football and men’s basketball games, and leveraged Comcast’s entry into the market into a 12-year, $3 billion deal with ESPN and FOX.
Scott also created the Pac-12 Networks, with one national and six regional feeds and wholly owned by the league, and secured carriage deals with Comcast, Time Warner, Bright House and Cox.
All told, the Pac-12 jumped from last to first in annual revenue among the major conferences.
But a funny thing happened: The other leagues went to market, and they’re cashing in.
The SEC has since re-negotiated its deal with ESPN and created its own network, which launched in August and is already a raging success.
In two years, the Big Ten will have a new Tier I deal, and it’s expected to be a whopper.
At that point, the cycle will be complete. All the leagues will have renegotiated their deals in the era of soaring rights, and the Pac-12 could very well be in the same position it was five years ago relative to the SEC and Big Ten:
That position is millions of dollars behind on a per-school basis.
Two notes on the information below:
1. I’ve focused on TV revenue because that is relatively fixed, whereas College Football Playoff and March Madness income varies annually based on on-field/court success.
2. I’m using 2017-18 as the target year, because that will be the first year of the Big Ten’s new deal and will provide an apples-to-apples comparison.
Let’s start with the Pac-12, which I’ve broken into four categories:
* Tier I revenue: The deal with ESPN and FOX works out to $20.8 million per school per year, but that’s an average. There’s an escalator clause of approximately 5%, meaning the payments in the early years are below $20.8M and those in the later years are well above.
According to the deal’s term sheet, which was unsealed as part of the O’Bannon lawsuit, the conference will receive $237.8 million in the 2017-18 fiscal year.
That breaks down to $19.8 million per school.
* Pac-12 Networks (excluding DirecTV): To that Tier 1 figure, we’ll add $1 million per school from the Pac-12 Networks, which is the approximate distribution the campuses are currently receiving.
(With incremental advances in distribution and advertising, the figure could be a bit higher.)
* Pac-12 Networks (DirecTV income): As noted in the second installment of the series, we’ll assume the AT&T takeover is eventually approved and the Pac12Nets are on DTV at some point in next 12-18 months …
And as noted, there are 3.9 million DTV homes in the Pac-12 footprint, according to media research firm SNL Kagan, and the Pac12Nets would be on a basic tier in approx 92 percent of those homes, or 3.6 million.
If the league received the same in-market sub fee with DTV as it does with Comcast and Time Warner — approximately $0.80 — that works out to $2.9 million per school per year in DirecTV-related income.
That number could change based on the negotiated sub fee and the number of in-market subs. But if my estimate is off, there’s a better chance that it’s high than low, according to Kagan.
But guess what: Even if we doubled the SNL estimate for basic tier homes, to 8 million, and the league received $0.80 per sub … a glowing scenario … the Pac-12 would still lag the Big Ten and SEC in media revenue.
* 3rd tier buybacks: Let’s be sure to include one significant expense:
When the league pooled all its media rights before sitting down to negotiate with ESPN and FOX, it was forced to buy back media rights that had been sold off to local sponsors and broadcast outlets.
The amount is different for each school, as is the duration of the buyback, and the conference withholds that money from each school’s revenue distribution.
Having reported on Cal’s finances many times over the years, I know the Bears have a $1.2 million annual buyback, for example.
At least nine schools are having money withheld — it might be 10 — and in most cases it’s in the $1 million range per year.
We’ll deduct $750,000 from the per-school average to account for the Tier 3 withholding and the fact that a few schools aren’t having money withheld.
All of which leaves us with this estimation for Pac-12 TV revenue in 2017-18:
Tier 1 (FOX/ESPN): $19.8 million
PacNets: $1 million
DirecTV: $2.9 million
Tier 3 buyback: $750,000 deduction
Total: $22,950,000 per school
How does that compare to the SEC and Big Ten projections for 2017-18?
Not well.
*** The Big Ten
The Big Ten TV figures are probably 18-24 months away from becoming official, but we can project.
We can project because the conference did it for us.
According to a report in the Journal & Courier, which used a public records request to obtain Big Ten internal documents from Purdue:
The conference estimates that each continuing member (excluding Maryland or Rutgers) will receive $33 million in TV revenue in 2017-18, through the new Tier 1 deal and the lucrative Big Ten Network.
How lucrative is the Big Ten Network?
Schools are already getting $7-8 million per year in revenue from the BTN, which has tens of millions more subscribers than the Pac-12 Networks and charges approx $0.50 more per in-market sub.
*** The SEC
The SEC partnered with ESPN to create the SEC Network, and distribution has not been an issue.
According to SNL Kagan, there are already 63 million subscribers, with the total projected to reach 69 million by the end of 2015.
Approximately half of those subs are in the SEC footprint, but we’ll use 30 million as the in-market total.
At roughly $1.30 per in-market sub (per the SportsBusiness Journal) … and taking into account ESPN’s cut (approx half) … and allocating a full share for the league office (per policy) …
That makes for a per-school split of $15.6 million annually.
But that’s only from the SEC Network. It doesn’t include the league’s Tier 1 deal.
The conference has not disclosed the terms of the new deal, but the old one paid each school approximately $15 million annually. The payout from CBS is not expected to change, but the ESPN portion is projected to have increased.
Not only have the right fees soared since the previous deal was negotiated in 2008, but the league has added Texas A&M and Missouri and all the TV homes they bring.
Navigate Research, a sports-marketing firm that counts both universities and conferences as clients, has pegged the SEC’s total media haul at $40 million per school for 2017-18.
Let’s be conservative and allocate $20 million per school from the new Tier 1 deal and $15.6 million from the SEC Network … for a total of $35.6 million per school.
So if you’re scoring at home, we have these projections for TV-related revenue for 2017-18, on a per-school basis:
SEC: $35.6 million
Big Ten: $33 million
Pac-12: $22.95 million
That’s a monumental gap, folks.
It’s reminiscent of the difference in revenue that existed under the Pac-12′s old Tier 1 deal.
It could impact the competitive balance, the ability to hire top-notch coaches and manage the looming increase in expenses due to legislative changes and the O’Bannon lawsuit.
The gap could be even larger if the DirecTV situation doesn’t unfold as projected above — if the league gets $0.60 per in-market sub, rather than $0.80.
And if the Pac12Nets aren’t on DTV in two years, for whatever reason, then the league could be $12 – $15 million behind its peers.
To some extent, there is nothing the Pac-12 can do:
The SEC and Big Ten are always going to command more Tier 1 money than the Pac-12. A quick check of the ESPN metered markets is proof:
Of the top-25 markets in 2014, only three were in the Pac-12 footprint and none were in the top 10:
No. 13 Salt Lake City
No. 17: Portland
No. 25 Phoenix
Meanwhile, eight of the top 10 were in the SEC, including perennial No. 1 Birmingham.
The looming TV revenue gap between the Pac-12 and its peers isn’t a Tier 1 issue. Scott got the best deal he could get.
The problem, as we’ll examine, is the Pac-12 Networks."